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EX-32.1 - EXHIBIT 32.1 - U S GLOBAL INVESTORS INCex_202825.htm
EX-31.1 - EXHIBIT 31.1 - U S GLOBAL INVESTORS INCex_202824.htm
EX-23.1 - EXHIBIT 23.1 - U S GLOBAL INVESTORS INCex_202823.htm
EX-21 - EXHIBIT 21 - U S GLOBAL INVESTORS INCex_202822.htm
EX-10.11 - EXHIBIT 10.11 - U S GLOBAL INVESTORS INCex_202821.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended June 30, 2020

 

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.

Incorporated in the State of Texas

 

IRS Employer Identification No. 74-1598370

 

Principal Executive Offices:

7900 Callaghan Road

San Antonio, Texas 78229

Telephone Number: 210-308-1234

 

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐       No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes ☐       No ☒

 

Indicate by check mark whether the Company (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 Regulations 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, a 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 Act).

Yes ☐       No ☒

 

The aggregate market value of the 10,607,711 shares of nonvoting class A common stock held by nonaffiliates of the registrant was $15,275,104, based on the last sale price quoted on NASDAQ as of December 31, 2019, the last business day of the registrant’s most recently completed second fiscal quarter. Registrant’s only voting stock is its class C common stock, par value of $0.025 per share, for which there is no active market. The aggregate value of the 4,177 shares of the class C common stock held by nonaffiliates of the registrant on December 31, 2019 (based on the last sale price of the class C common stock in a private transaction) was $1,044. For purposes of this disclosure only, the registrant has assumed that its directors, executive officers, and beneficial owners of 5 percent or more of the registrant’s common stock are affiliates of the registrant.

 

On August 28, 2020, there were 13,866,913 shares of Registrant’s class A nonvoting common stock issued and 13,011,860 shares of Registrant’s class A nonvoting common stock issued and outstanding, no shares of Registrant’s class B nonvoting common stock outstanding, and 2,068,635 shares of Registrant’s class C voting common stock issued and outstanding.

 

Documents incorporated by reference: None 

 

 

 

 

Table of Contents

 

Part I of Annual Report on Form 10-K

1

Item 1. Business

1

Item 1A. Risk Factors

5

Item 1B. Unresolved Staff Comments

10

Item 2. Properties

10

Item 3. Legal Proceedings

10

Item 4. Mine Safety Disclosures

10

 

 

Part II of Annual Report on Form 10-K

11

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

11

Item 6. Selected Financial Data

13

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

24

Item 8. Financial Statements and Supplementary Data

26

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

54

Item 9A. Controls and Procedures

54

Item 9B. Other Information

54

 

 

Part III of Annual Report on Form 10-K

55

Item 10. Directors, Executive Officers and Corporate Governance

55

Item 11. Executive Compensation

57

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

62

Item 13. Certain Relationships and Related Transactions, and Director Independence

64

Item 14. Principal Accounting Fees and Services

64

 

 

Part IV of Annual Report on Form 10-K

65

Item 15. Exhibits, Financial Statement Schedules

65

 

 

Signatures

67

 

 

Exhibit 10.11 — Promissory Note

 

Exhibit 21 — Subsidiaries of the Company, Jurisdiction of Incorporation, and Percentage of Ownership

 

Exhibit 23.1 — Consent of BDO USA, LLP

 

Exhibit 31.1 — Rule 13a – 14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002)

 

Exhibit 32.1 — Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002)

 

 

 

 

 

 

 

Part I of Annual Report on Form 10-K

 

Item 1. Business

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, U.S. Global Investors, Inc. and its subsidiaries (collectively, “U.S. Global” or the “Company”) may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, future expectations of the Company, and other matters that do not relate strictly to historical facts and are based on certain assumptions by management. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of Company management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in Part I, Item 1A, Risk Factors, and elsewhere in this report and other documents filed or furnished by U.S. Global from time to time with the U.S. Securities and Exchange Commission (“SEC”). U.S. Global cautions readers to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date on which such statements are made. Except to the extent required by applicable law, U.S. Global undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

U.S. Global, a Texas corporation organized in 1968, is a registered investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”). The Company, with principal operations located in San Antonio, Texas, manages two business segments on a continuing operations basis:

 

 

1.

Investment Management Services, through which the Company offers, to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”) and exchange traded fund (“ETF”) clients, a range of investment management products and services to meet the needs of individual and institutional investors; and

 

2.

Corporate Investments, through which the Company invests for its own account in an effort to add growth and value to its cash position. The Company holds a significant amount of its total assets in investments.

 

As part of its investment management business, the Company provides: (1) investment advisory services and (2) administrative services to the mutual funds advised by the Company. The fees from these services, as well as investment income, are the primary sources of the Company’s revenue.

 

Prior to December 31, 2019, the Company also reported a business segment for investment management services in Canada. The Company, through its Canadian subsidiary U.S. Global Investors (Canada) Limited (“USCAN”), owned a 65 percent controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm which offers investment management products and services in Canada. USCAN entered into a binding letter of intent dated December 30, 2019, with Galileo whereby Galileo, pursuant to a capital restructuring, agreed to purchase back all of its common shares owned by the USCAN for $1.0 million (Canadian). The transaction was subject to the approval of Canadian securities regulatory authorities and to the satisfaction of other closing conditions. The transaction closed effective March 2, 2020. See further discussion of this former subsidiary in the Notes to the Consolidated Financial Statements at Note 3, Discontinued Operations, of this Annual Report on Form 10-K.

 

 

Lines of Business

 

Lines of business on a continuing operations basis are discussed below.

 

Investment Management Services

 

Investment Advisory Services. The Company furnishes an investment program for each of the clients it manages and determines, subject to overall supervision by the applicable board of trustees of the clients, the clients’ investments pursuant to an advisory agreement. Consistent with the investment restrictions, objectives and policies of the particular client, the portfolio team for each client determines what investments should be purchased, sold, and held, and makes changes in the portfolio deemed necessary or appropriate. In the advisory agreement, the Company is charged with seeking the best overall terms in executing portfolio transactions and selecting brokers or dealers.

 

As required by the Investment Company Act of 1940, as amended (“Investment Company Act”), the advisory agreement with USGIF is subject to annual renewal and is terminable upon 60-day notice. The Board of Trustees of USGIF will meet to consider the agreement renewal in September 2020. Management anticipates that the advisory agreement will be renewed.

 

In addition to providing advisory services to USGIF, the Company provides advisory services to two ETFs. U.S. Global Jets ETF commenced operations in April 2015, and U.S. Global GO GOLD and Precious Metal Miners ETF commenced operations in June 2017. The advisory agreement for the ETFs has been renewed through September 2021.

 

Net assets under management on June 30, 2020, and June 30, 2019, are detailed in the following table.

 

Assets Under Management (“AUM”)

 

Fund

 

Ticker

 

June 30, 2020

   

June 30, 2019

 

(dollars in thousands)

                   

U.S. Global Investors Funds

                   

Natural Resources

                   

Global Resources

 

PSPFX

  $ 45,899     $ 60,805  

World Precious Minerals

 

UNWPX

    87,275       72,144  

Gold and Precious Metals

 

USERX

    133,277       102,440  

Total Natural Resources

    266,451       235,389  

International Equity

                   

Emerging Europe

 

EUROX

    23,910       33,855  

China Region

 

USCOX

    12,640       15,247  

Total International Equity

    36,550       49,102  

Fixed Income

                   

U.S. Government Securities Ultra-Short Bond

 

UGSDX

    41,300       45,254  

Near-Term Tax Free

 

NEARX

    41,383       45,667  

Total Fixed Income

    82,683       90,921  

Domestic Equity

                   

Holmes Macro Trends

 

MEGAX

    28,453       36,224  

All American Equity

 

GBTFX

    11,760       13,969  

Total Domestic Equity

    40,213       50,193  

Total U.S. Global Investors Funds

    425,897       425,605  
                     

ETF Clients

                   

U.S. Global Jets ETF

 

JETS

    1,201,641       69,557  

U.S. Global GO GOLD and Precious Metal Miners ETF

 

GOAU

    86,210       14,907  

Total ETF Clients

    1,287,851       84,464  

Total AUM

  $ 1,713,748     $ 510,069  

 

Administrative Services. The Company also manages, supervises and conducts certain other affairs of USGIF, subject to the control of the Funds’ Board of Trustees pursuant to an administrative services agreement. The administrative services agreement with USGIF is subject to renewal on an annual basis and is terminable upon 60-day notice. The Board of Trustees of USGIF will meet to consider the agreement renewal in September 2020. Management anticipates that the administrative services agreement will be renewed.

 

 

Corporate Investments

 

Investment Activities. In addition to providing management and advisory services, the Company is actively engaged in trading for its own account. See segment information in the Notes to the Consolidated Financial Statements at Note 17, Financial Information by Business Segment, of this Annual Report on Form 10-K.

 

Additional Segment Information

 

See additional financial information about business segments in Part II, Item 8, Financial Statements and Supplementary Data at Note 17, Financial Information by Business Segment, of this Annual Report on Form 10-K.

 

Employees

 

As of June 30, 2020, U.S. Global and its wholly-owned subsidiaries employed 21 full-time employees and 2 part-time employees. The Company considers its relationship with its employees to be good.

 

Competition

 

The mutual fund industry is highly competitive. According to the Investment Company Institute, at the end of 2019 there were approximately 9,400 domestically registered open-end investment companies and approximately 2,200 exchange-traded funds of varying sizes and investment policies, whose shares are being offered to the public in the U.S. In addition to competition from other mutual fund managers and investment advisers, the Company and the mutual fund industry are in competition with various investment alternatives offered by insurance companies, banks, securities broker-dealers, and other financial institutions. Many of these institutions are able to engage in more liberal advertising than mutual funds and ETFs and may offer accounts at competitive interest rates, which may be insured by federally chartered corporations such as the Federal Deposit Insurance Corporation.

 

A number of mutual fund groups are significantly larger than the funds managed by U.S. Global, offer a greater variety of investment objectives and have greater resources to promote the sale of investments therein. However, the Company believes it has the resources, products, and personnel to compete with these other mutual funds. In particular, the Company is known for its expertise in the gold mining and exploration, natural resources and emerging markets. Competition for sales of fund shares is influenced by various factors, including investment objectives and performance, advertising and sales promotional efforts, distribution channels, and the types and quality of services offered to fund shareholders.

 

Success in the investment advisory business is substantially dependent on each fund’s investment performance, the quality of services provided to shareholders, and the Company’s efforts to market the Funds and ETFs effectively. Operating revenues from management and administrative services fees are based on the assets of the funds under management. Costs of distribution and compliance continue to put pressure on profit margins for the mutual fund industry.

 

Despite the Company’s expertise in gold mining and exploration, natural resources, and emerging markets, the Company faces the same obstacle many advisers face, namely uncovering undervalued investment opportunities as the markets face further uncertainty and increased volatility. In addition, the growing number of alternative investments, especially in specialized areas, has created pressure on the profit margins and increased competition for available investment opportunities.

 

Supervision and Regulation

 

The Company and the clients the Company manages and administers operate under certain laws, including federal and state securities laws, governing their organization, registration, operation, legal, financial, and tax status. Among the potential penalties for violation of the laws and regulations applicable to the Company are fines, imprisonment, injunctions, revocation of registration, and certain additional administrative sanctions. Any determination that the Company or its management has violated applicable laws and regulations could have a material adverse effect on the business of the Company. Moreover, there is no assurance that changes to existing laws, regulations, or rulings promulgated by governmental entities having jurisdiction over the Company and its clients will not have a material adverse effect on the Company’s business. The Company has no control over regulatory rulemaking or the consequences it may have on the mutual fund and investment advisory industry.

 

Regulatory pronouncements and oversight have significantly increased the burden of compliance infrastructure with respect to the mutual fund industry and the capital markets. This momentum of regulations has contributed significantly to the costs of managing and administering mutual funds.

 

 

U.S. Global is registered as an investment adviser with the SEC. As a registered investment adviser, it is subject to the requirements of the Advisers Act, and the SEC’s regulations thereunder, as well as to examination by the SEC’s staff. The Advisers Act imposes substantive regulation on virtually all aspects of the Company’s business and relationships with the Company’s clients. Applicable rules relate to, among other things, fiduciary duties to clients, transactions with clients, effective compliance programs, conflicts of interest, advertising, recordkeeping, reporting, and disclosure requirements. The Funds and the ETFs for which the Company acts as the investment adviser are registered with the SEC under the Investment Company Act. The Investment Company Act imposes additional obligations, including detailed operational requirements for both funds and their advisers. Moreover, an investment adviser’s contract with a registered fund may be terminated by the fund on not more than 60 days’ notice and is subject to annual renewal by the fund’s board after an initial two-year term. Both the Advisers Act and the Investment Company Act regulate the “assignment” of advisory contracts by the investment adviser. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from fines and censures to termination of an investment adviser’s registration. The failure of the Company, or the Funds and ETFs which the Company advises, to comply with the requirements of the SEC could have a material adverse effect on the Company. The Company is also subject to federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002 (“S-Ox Act”), as well as rules adopted by the SEC.

 

U.S. Global is required to keep and maintain certain reports and records, which must be made available to the SEC upon request.

 

U.S. Global manages clients’ portfolios on a discretionary basis, with the authority to enter into security transactions, select broker-dealers to execute trades, and negotiate brokerage commissions. The Company may receive soft dollar credits from certain broker-dealers that are used to pay for research and related services or products, which therefore has the effect of reducing certain operating expenses. These soft dollar arrangements are intended to be within the safe harbor provisions of the Securities Exchange Act of 1934. If the ability to use soft dollar arrangements were reduced or eliminated as a result of statutory amendments, new regulations or change in business practices, the Company’s operating expenses would increase.

 

Relationships with Clients

 

The business of the Company is to a very significant degree dependent on its association and contractual relationship with USGIF. In the event the advisory or administrative agreements with USGIF are canceled or not renewed pursuant to the terms thereof, the Company would be substantially adversely affected. U.S. Global considers its relationships with the Funds to be good, and management has no reason to believe that the management and service contracts will not be renewed in the future; however, there is no assurance that USGIF will choose to continue its relationship with the Company.

 

In addition, the Company is also dependent on its relationships with its exchange traded fund clients. Even though the Company views its relationship with its exchange traded fund clients as stable, the Company could be adversely affected if that relationship ended.

 

Available Information

 

Available Information. The Company’s Internet website address is www.usfunds.com. Information contained on the Company’s website is not part of this annual report on Form 10-K. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with (or furnished to) the SEC are available through a link on the Company’s Internet website, free of charge, as soon as reasonably practicable after such material is filed or furnished. (The link to the Company’s SEC filings can be found at www.usfunds.com by clicking “About Us,” followed by “Investor Relations.”) The Company routinely posts important information on its website.

 

The Company also posts its Corporate Governance Guidelines, Code of Business Conduct, Code of Ethics for Principal Executive and Senior Financial Officers and the charters of the audit and compensation committees of its Board of Directors on the Company’s website in the “Policies and Procedures” section. The Company’s SEC filings and governance documents are available in print to any stockholder that makes a written request to: Investor Relations, U.S. Global Investors, Inc., 7900 Callaghan Road, San Antonio, Texas 78229.

 

The Company files reports electronically with the SEC via the SEC’s Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”), which may be accessed through the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.

 

 

Investors and others should note that we announce material financial information to our investors using the website, SEC filings, press releases, public conference calls and webcasts. We also use social media to communicate with our customers and the public about our company. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on social media channels listed below. This list may be updated from time to time.

 

https://www.facebook.com/USFunds

https://twitter.com/USFunds

https://twitter.com/USGlobalETFs

https://www.linkedin.com/company/u-s-global-investors

https://www.instagram.com/usglobal

https://pinterest.com/usfunds

https://www.youtube.com/c/usglobalinvestorssanantonio

https://www.youtube.com/channel/UCDkX1zvbWPyWc99esHOhwRQ

 

Information contained on our website or on social media channels is not deemed part of this report.

 

Item 1A. Risk Factors

 

The Company faces a variety of significant and diverse risks, many of which are inherent in the business. Described below are certain risks that could materially affect the Company. Other risks and uncertainties that the Company does not presently consider to be material, or of which the Company is not presently aware, may become important factors that affect it in the future. The occurrence of any of the risks discussed below could materially and adversely affect the business, prospects, financial condition, results of operations, or cash flow.

 

The investment management business is intensely competitive.

 

Competition in the investment management business is based on a variety of factors, including:

Investment performance;

Investor perception of an investment team’s drive, focus, and alignment of interest with them;

Quality of service provided to, and duration of relationships with, clients and shareholders;

Business reputation; and

Level of fees charged for services.

 

The Company competes with a large number of investment management firms, commercial banks, broker-dealers, insurance companies, and other financial institutions. Competitive risk is heightened by the fact that some competitors may invest according to different investment styles or in alternative asset classes which the markets may perceive as more attractive than the Company’s investment approach. If the Company is unable to compete effectively, revenues and earnings may be reduced, and the business could be materially affected.

 

Poor investment performance could lead to a decline in revenues.

 

Success in the investment management industry is largely dependent on investment performance relative to market conditions and the performance of competing products. Good relative performance generally attracts additional assets under management, resulting in additional revenues. Conversely, poor performance generally results in decreased sales and increased redemptions with a corresponding decrease in revenues. Therefore, poor investment performance relative to the portfolio benchmarks and to competitors could impair the Company’s revenues and growth. The equity funds within USGIF have a performance fee whereby the base advisory fee is adjusted upwards or downwards by 0.25 percent if there is a performance difference of 5 percent or more between a Fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

 

The Company’s clients can terminate their agreements with the Company on short notice, which may lead to unexpected declines in revenue and profitability.

 

The Company’s investment advisory agreements are generally terminable on short notice and subject to annual renewal. If the Company’s investment advisory agreements are terminated, which may occur in a short time frame, the Company may experience a decline in revenues and profitability.

 

 

Natural disasters, global pandemics and other unpredictable events could adversely affect our operations.

 

Natural disasters, outbreaks of epidemics, terrorist attacks, extreme weather events or other unpredictable events could adversely affect our revenues, expenses, and net income by:

 

decreasing investment valuations in, and returns on, the investment portfolios that we manage and our corporate portfolio, thus causing reductions and volatility in revenue,

 

causing disruptions in national or global economies that decrease investor confidence and make investment products generally less attractive,

 

incapacitating or reducing the availability of key personnel necessary to conduct our business activities,

 

interrupting the Company’s business operations or those of critical service providers,

 

triggering technology delays or failures, and

 

requiring substantial capital expenditures and operating expenses to remediate damage, replace our facilities, and restore our operations.

 

The Company’s business operations are concentrated in San Antonio, Texas. The Company has developed various backup systems and contingency plans but cannot be assured that those preparations will be adequate in all circumstances that could arise, or that material interruptions and disruptions will not occur. The Company also relies to varying degrees on outside vendors for service delivery in addition to technology and disaster contingency support, and there is a risk that these vendors will not be able to perform in an adequate and timely manner. If the Company loses the availability of employees, or if it is unable to respond adequately to such an event in a timely manner, revenues, expenses, and net income could be negatively impacted.

 

Specifically, the effects of the outbreak of the novel coronavirus (COVID-19) since December 2019 have negatively affected the global economy, the United States economy and the global financial markets, and may disrupt the Company’s operations and the Company’s clients' operations, which could have an adverse effect on the Company’s business, financial condition and results of operations. Although the long-term effects of the current pandemic cannot currently be predicted, previous occurrences of other pandemic and epidemic diseases had an adverse effect on the economies of those countries in which they were most prevalent. A recurrence of an outbreak of any kind of epidemic, communicable disease or virus or major public health issue could cause a slowdown in the levels of economic activity generally, which would adversely affect the Company’s business, financial condition and operations.

 

Difficult market conditions can adversely affect the Company by reducing the market value of the assets we manage or causing shareholders to make significant redemptions.

 

Changes in economic or market conditions may adversely affect the profitability, performance of and demand for the Company’s investment products and services. Under the Company’s advisory fee arrangements, the fees received are primarily based on the market value of assets under management. Accordingly, a decline in the price of securities held in funds under management would be expected to cause revenues and net income to decline, which would result in lower advisory fees, or cause increased shareholder redemptions in favor of investments they perceive as offering greater opportunity or lower risk, which redemptions would also result in lower advisory fees. The ability of the Company to compete and grow is dependent on the relative attractiveness of the types of investment products the Company offers and its investment performance and strategies under prevailing market conditions.

 

Market-specific risks may negatively impact the Company’s earnings.

 

The Company manages certain funds in the emerging market and natural resources sectors, which are highly cyclical. The investments in the funds are subject to significant loss due to political, economic and diplomatic developments, currency fluctuations, social instability, and changes in governmental policies, including trading policies, regulatory requirements, tariffs and other barriers. Foreign trading markets, particularly in some emerging market countries, are often smaller, less liquid, less regulated and significantly more volatile than the U.S. and other established markets.

 

 

The market price and trading volume of the Company’s class A common stock may be volatile, which could result in rapid and substantial losses for the Company’s stockholders.

 

The market price of the Company’s class A common stock may be volatile and the trading volume may fluctuate, causing significant price variations to occur. If the market price of the Company’s class A common stock declines significantly, stockholders may be unable to sell their shares at or above their purchase price. The Company cannot assure that the market price of its class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of the Company’s class A common stock, or result in fluctuations in price or trading volume, include:

Decreases in assets under management;

Variations in quarterly and annual operating results;

Volatility in realized and unrealized gains or losses on corporate investments;

Publication of research reports about the Company or the investment management industry;

Departures of key personnel;

Adverse market reactions to any indebtedness the Company may incur, acquisitions or disposals the Company may make, or securities the Company may issue in the future;

Changes in market valuations of similar companies;

Changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting the business, or enforcement of these laws and regulations, or announcements relating to these matters;

Adverse publicity about the asset management industry, generally, or individual scandals, specifically; and

General market and economic conditions.

 

In addition, the Company has invested in a security in the cryptocurrency mining industry through its corporate investments and indirectly through an investment accounted for under the equity method of accounting. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. This volatility may materially impact the Company’s financial statements and thus affect the Company’s common stock market price. In addition, the price of the Company’s common stock may fluctuate to the extent that shareholders invest in the Company’s common stock as a proxy for cryptocurrency. The investing public may be influenced by future anticipated appreciation or depreciation in value of cryptocurrencies or blockchain generally, factors over which the Company has little or no influence or control. The Company’s stock price may also be subject to volatility due to supply and demand factors associated with few or limited public company options for investment in the segment, which may change over time.

 

Investment income and assets may be negatively impacted by fluctuations in the Company’s corporate investments.

 

The Company currently has a substantial portion of its assets in corporate investments. These investments are subject to investment market risk, and investment income could be adversely affected by the realization of losses upon disposition of investments or the recognition of significant unrealized losses or impairments. Fluctuations in investment income are expected to continue in the future.

 

The Company has exposure to the cryptocurrency markets through its investments.

 

The Company has invested in a security in the cryptocurrency mining industry through its corporate investments and indirectly through an investment accounted for under the equity method of accounting. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for significant volatility in the valuation of the Company’s cryptocurrency-related investments.

 

The market price of the Company’s class A common stock could decline due to the large number of shares of the Company’s class C common stock eligible for future sale upon conversion to class A shares.

 

The market price of the Company’s class A common stock could decline as a result of sales of a large number of shares of class A common stock eligible for future sale upon the conversion of class C shares, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for the Company to raise additional capital by selling equity securities in the future, at a time and price the Company deems appropriate.

 

 

Failure to comply with government regulations could result in fines, which could cause the Company’s earnings and stock price to decline.

 

The Company is subject to a variety of federal securities laws and agencies, including, but not limited to, the Advisers Act, the Investment Company Act, the S-Ox Act, the Gramm-Leach-Bliley Act of 1999, the Bank Secrecy Act of 1970, as amended, the USA PATRIOT Act of 2001, the SEC, FINRA, and NASDAQ. Moreover, financial reporting requirements and the processes, controls, and procedures that have been put in place to address them, are comprehensive and complex. While management has focused attention and resources on compliance policies and procedures, non-compliance with applicable laws or regulations could result in fines, sanctions or censures which could affect the Company’s reputation, and thus its revenues and earnings.

 

Our business is subject to substantial risk from litigation, regulatory investigations and potential securities laws liability.

 

Many aspects of U.S. Global’s business involve substantial risks of litigation, regulatory investigations and/or arbitration. The Company is exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC and other regulatory bodies. U.S. Global, its subsidiaries, and/or officers could be named as parties in legal actions, regulatory investigations and proceedings. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against the Company could result in substantial costs or reputational harm to the Company, and have a material adverse effect on the Company’s business, financial condition or results of operations, which, in turn, may negatively affect the market price of the Company’s common stock and U.S. Global’s ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management’s attention from operations.

 

Higher insurance premiums and related insurance coverage risks could increase costs and reduce profitability.

 

While U.S. Global carries insurance in amounts and under terms that it believes are appropriate, the Company cannot assure that its insurance will cover most liabilities and losses to which it may be exposed, or that our insurance policies will continue to be available at acceptable terms and fees. U.S. Global is subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. There has been increased incidence of litigation and regulatory investigations in the financial services industry in recent years, including customer claims and class action suits alleging substantial monetary damages. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As U.S. Global’s insurance policies come up for renewal, the Company may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase the Company’s expenses and reduce net income.

 

Increased regulatory and legislative actions and reforms could increase costs and negatively impact the Company’s profitability and future financial results.

 

The Company is subject to financial services laws, regulations, corporate governance requirements, administrative actions and policies. During the past two decades, federal securities laws have been substantially augmented and made significantly more complex by the S-Ox Act, the USA PATRIOT Act of 2001, and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). With new laws and changes in interpretations and enforcement of existing requirements, the associated time the Company must dedicate to, and related costs the Company must incur in, meeting the regulatory complexities of the business have increased. In order to comply with these requirements, the Company has had to expend additional time and resources. Future changes in financial institution regulation may increase the costs of compliance and the complexity of operations.

 

Further, adverse results of regulatory investigations of mutual fund, investment advisory, and financial services firms could tarnish the reputation of the financial services industry generally, and mutual funds and investment advisers more specifically, causing investors to avoid further fund investments or redeem their balances. Redemptions would decrease the Company’s assets under management, which would reduce its advisory revenues and net income.

 

The Company intends to pay regular dividends to its stockholders, but the ability to do so is subject to the discretion of the Board of Directors.

 

The Company intends to pay cash dividends on a monthly basis, but the Board of Directors, at its discretion, may decrease the level or frequency of dividends or discontinue payment of dividends entirely based on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions.

 

 

One person beneficially owns substantially all of our voting stock and controls the outcome of all matters requiring a vote of stockholders, which may influence the value of our publicly traded non-voting stock.

 

Frank Holmes, CEO, is the beneficial owner of over 99 percent of our class C voting convertible common stock and controls the outcome of all issues requiring a vote of stockholders. All of our publicly traded stock is nonvoting stock. Consequently, except to the extent provided by law, stockholders other than Frank Holmes have no vote with respect to the election of directors or any other matter requiring a vote of stockholders. This lack of voting rights may adversely affect the market value of the publicly traded class A nonvoting common stock.

 

The loss of key personnel could negatively affect the Company’s financial performance.

 

The success of the Company depends on key personnel, including the portfolio managers, analysts, and executive officers. Competition for qualified, motivated, and skilled personnel in the asset management industry remains significant. Moreover, in order to retain certain key personnel, the Company may be required to increase compensation to such individuals, resulting in additional expense. The loss of key personnel or the Company’s failure to attract replacement personnel could negatively affect its financial performance.

 

The Company could be subject to losses if it fails to properly safeguard sensitive and confidential information.

 

As part of the Company’s normal operations, it maintains and transmits certain confidential information about the Company and its clients as well as proprietary information relating to its business operations. These systems could be victimized by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information. Such a breach could subject the Company to liability for a failure to safeguard client data, result in the termination of relationships with our existing customers, require significant capital and operating expenditures to investigate and remediate the breach and subject the Company to regulatory action.

 

We rely upon certain critical information systems for the operation of our business, and the failure of any critical information system, including a cyber-security breach, may result in harm to our business.

 

We are heavily dependent on technology infrastructure and rely upon certain critical information systems for the effective operation of our business. These information systems include data network and telecommunications, internet access and our websites, and various computer hardware equipment and software applications. These information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks and other events to the extent that these information systems are under our control. We have implemented measures, such as virus protection software, intrusion detection systems and emergency recovery processes to address the outlined risks. However, security measures for information systems cannot be guaranteed to be failsafe. Any compromise of our data security or our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business and subject us to additional costs and liabilities, which could adversely affect our results of operations. Finally, federal legislation relating to cyber-security threats could impose additional requirements on our operations.

 

Adverse changes in foreign currencies could negatively impact financial results.

 

We have certain corporate investments held in foreign currencies. Adverse changes in foreign currency exchange rates would also lower the value of those corporate investments. Certain assets under management also have exposure to foreign currency fluctuations in various markets, which could impact their valuation and thus the revenue we receive.

 

Acquisitions involve inherent risks that could compromise the success of the combined business and dilute the holdings of current stockholders.

 

As part of our business strategy, we may pursue corporate development transactions, including the acquisition of asset management firms. These transactions involve assessing the value, strengths, weaknesses, liabilities and potential profitability of the transactions, and if our assessment is incorrect, the success of the combined business could be jeopardized. In addition, such transactions are subject to acquisition costs and expenses, are likely to divert the attention of management’s time, and can dilute the stockholders of the combined company if the acquisition is made for stock of the combined company.

 

 

Item 1B. Unresolved Staff Comments

 

Not applicable for smaller reporting companies.

 

Item 2. Properties

 

The Company presently owns and occupies an office building as its headquarters in San Antonio, Texas. The office building is approximately 46,000 square feet on approximately 2.5 acres of land.

 

Item 3. Legal Proceedings

 

There are no material legal proceedings in which the Company is involved.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

 

Part II of Annual Report on Form 10-K

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

U.S. Global Investors, Inc. (“U.S. Global” or the “Company”) has three classes of common equity: class A, class B, and class C common stock, par value $0.025 per share.

 

The Company’s class A common stock is traded over-the-counter and is quoted daily under NASDAQ’s Capital Markets. Trades are reported under the symbol “GROW.”

 

There is no established public trading market for the Company’s class B and class C common stock.

 

The Company’s class A and class B common stock have no voting privileges.

 

Holders

 

On August 28, 2020, there were approximately 147 holders of record of class A common stock, no holders of record of class B common stock, and 24 holders of record of class C common stock.

 

Securities authorized for issuance under equity compensation plans

 

Information relating to equity compensation plans under which our stock is authorized for issuance is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”

 

Purchases of equity securities by the issuer

 

The Company has a share repurchase program, approved by the Board of Directors, authorizing the Company to annually purchase up to $2.75 million of its outstanding common shares, as market and business conditions warrant, on the open market in compliance with Rule 10b-18 of the Securities Exchange Act of 1934 through December 31, 2020. The repurchase program has been in place since December 2012, and the Board of Directors has annually renewed the repurchase program each calendar year.

 

 

For the quarter ended June 30, 2020, the Company purchased a total of 32,901 class A shares using cash of $39,000. The Company may repurchase class A stock from employees; however, none were repurchased from employees during the quarter ended June 30, 2020. The Company did not repurchase any classes B or C common stock during the quarter ended June 30, 2020.

 

(dollars in thousands, except price data)

Period

 

 

Total Number of

Shares Purchased1

 

 

Total Amount

Purchased

 

 

Average Price

Paid Per Share

 

 

Total Number of

Shares Purchased as

Part of Publicly

Announced Plan3

 

 

Approximate Dollar

Value of Shares that

May Yet Be

Purchased Under

the Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

04-01-20 to 04-30-20

 

 

 

28,901

 

 

$

30

 

 

$

0.98

 

 

 

28,901

 

 

$

2,652

 

05-01-20 to 05-31-20

 

 

 

1,000

 

 

 

2

 

 

$

1.02

 

 

 

1,000

 

 

$

2,650

 

06-01-20 to 06-30-20

 

 

 

3,000

 

 

 

7

 

 

$

1.85

 

 

 

3000

 

 

$

2,643

 

Total

 

 

 

32,901

 

 

$

39

 

 

$

1.18

 

 

 

32,901

 

 

 

 

 

 

1.

The Board of Directors of the Company approved on December 7, 2012, and renewed annually, a repurchase of up to $2.75 million in each of calendar years 2013 through 2020 of its outstanding class A common stock from time to time on the open market in accordance with all applicable rules and regulations.

2.

The average price paid per share of stock repurchased under the stock repurchase program includes the commissions paid to brokers.

3.

The repurchase plan was approved on December 7, 2012, renewed annually, and will continue through calendar year 2020. The total dollar amount of shares that may be repurchased in 2020 under the renewed program is $2.75 million.

 

 

Item 6. Selected Financial Data

 

Not applicable for smaller reporting companies.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion reviews and analyzes the consolidated results of operations of U.S. Global Investors, Inc. and its subsidiaries (collectively, “U.S. Global” or the “Company”) for the past two fiscal years and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

Recent Trends in Financial Markets

 

The Company’s operating revenues are highly correlated to the level of assets under management (“AUM”) and fees associated with various investment products. While AUM is directly impacted by changes in the financial markets, it is also impacted by cash inflows or outflows due to shareholder activity. Performance fees on certain equity fund products may also impact revenues, either positively or negatively. Various products may have different fees, so changes in our product mix may also affect revenues. For example, international equity products will generally have a higher fee than fixed income products, so changes in assets in those products will have a larger impact on revenues.

 

While products are offered for a wide variety of markets, the Company has traditionally focused on gold mining and exploration, natural resources and emerging markets. These markets are volatile and cyclical.

 

Spot gold finished the fiscal year ended June 30, 2020, at $1,780.96, up slightly more than 26 percent from June 30, 2019. The price climb was fairly steady with only four down price months but tended to accelerate its gains as the COVID-19 virus took hold of the world’s economic outlook in the second half of the year. Unemployment has spiked with the various lockdowns across the U.S. to try and avoid spreading the virus. Some consumers can work from home but a host of other business in retail and particularly travel have been decimated. Relief in the form of direct cash to businesses and consumers from the government has been mobilized to try and shore up the economy, but it is not known how long this can be sustained. Coinciding with the virus wave, Saudi Arabia sought to kill off the lucrative U.S. oil fracking industry, which has essentially given the U.S. energy independence from imports, by flooding the market with oil. Oil futures for physical delivery went negative for several days as storage capacity around the world filled and there was nowhere left to physically store the oil. With the reduced driving from people desiring to stay at home, energy demand has tumbled. Job losses and bankruptcies in the oil and gas industry and others may push the Federal Reserve to test the limits of Modern Monetary Theory. The uncertainty associated with all this financial disruption has investors turning to gold to protect their purchasing power as government spending to shore up the economy is expanding dramatically.

 

The Company’s emerging markets products saw diverging trends. Eastern European markets were only able to recover about half their losses after the initial COVID-19 wave that swept through, leaving them down almost 19 percent for the year. Despite all the trade tension between the U.S. and China, our China Region Fund finished the year with a slight gain. Much of their region has already come out of the first virus wave, and they have vastly more financial resources than Eastern Europe to weather the disruption.

 

The COVID-19 virus has created significant political tension in the U.S. with China as the upcoming presidential election approaches. With an annualized 32.9 percent decline in GDP for the June 2020 quarter, the current administration is eager to get the economy growing again and pushed to reopen the economy. Civil unrest has also increased, which has only helped to crystallize the divide over inequality, racial and social injustice. There is likely to be a demand for expanded social services that will be funded through taxes at a time when there is great financial stress. We would expect the U.S. dollar to decline in value, which will lead to a rise in commodity prices and be a boost to emerging markets currencies.

 

In addition to its gold, natural resources and emerging markets funds, the Company has domestic equity and fixed income funds in the U.S. While these products do not drive the Company’s profitability as much as the more specialized products, they provide an opportunity to offer shareholders diversification and less volatility than the niche markets.

 

Mutual funds in general continued to see outflows compared to other investment alternatives, including ETFs. The Company has two ETF products listed on the New York Stock Exchange: the U.S. Global Jets ETF (ticker JETS), which concentrates on the U.S. and international airline industry, and the U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU), which invests in companies engaged in the production of precious metals either through active (mining or production) or passive (owning royalties or production streams) means.

 

 

The rapid spread of the global COVID-19 outbreak and actions taken in response have 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. It is early to determine the long-term impact of current circumstances on the Company’s business. Should this emerging macro-economic risk 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) have not adversely affected the Company’s ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.

 

Assets in the U.S. Global Jets ETF (“Jets ETF”) (ticker JETS) started to accelerate in the latter part of March 2020, continuing through fiscal year-end. Assets in the Jets ETF were $1.2 billion and $70.0 million at June 30, 2020, and 2019, respectively. The Jets ETF invests in airline-related stocks, including global airline carriers, airport operators and aircraft manufacturers. While global financial markets have declined, including stocks in which the Jets ETF invests, this ETF has attracted inflows.

 

To manage expenses, the Company maintains a flexible structure for one of its largest costs, compensation expense, by setting relatively low base salaries with bonuses that are tied to fund and Company performance. Thus, the Company’s expense model somewhat expands and contracts with asset swings and performance.

 

Business Segments

 

The Company, with principal operations located in San Antonio, Texas, manages two business segments on a continuing operations basis:

 

 

1.

Investment management services, through which the Company offers, to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”) and ETF clients, a range of investment management products and services to meet the needs of individual and institutional investors; and

 

 

2.

Corporate investments, through which the Company invests for its own account in an effort to add growth and value to its cash position. The Company holds a significant amount of its total assets in investments.

 

Assets Under Management (“AUM”)  

(dollars in thousands)

 

June 30, 2020

   

June 30, 2019

 

Investment Management Services

               

USGIF

  $ 425,897     $ 425,605  

ETF Clients

    1,287,851       84,464  

Total AUM

  $ 1,713,748     $ 510,069  

 

On June 30, 2020, total AUM as of period end was $1.7 billion compared to $510 million on June 30, 2019, an increase of $1.2 billion, or 236.0 percent. The increase was primarily due to inflows into ETF clients, primarily the U.S. Global Jets ETF (“Jets ETF”).

 

During fiscal year 2020, average AUM was $699.5 million compared to $529.0 million in fiscal year 2019, an increase of 32.2 percent. The increase was primarily due to inflows into the Jets ETF, resulting in an increase in assets, that accelerated starting in the latter part of March 2020, continuing through the June 2020 fiscal year-end. The Jets ETF invests in airline-related stocks, including global airline carriers, airport operators and aircraft manufacturers. While global financial markets have experienced declines and volatility, including stocks in which the Jets ETF invests, this ETF has attracted inflows. The increase in average assets in Jets ETF in the current year was partially offset by lower average assets in USGIF, as discussed in more detail below.

 

The following is a brief discussion of the Company’s two business segments on a continuing operations basis.

 

 

Investment Management Services

 

In fiscal year 2020, the Company generated a majority of its operating revenues from managing and servicing the Funds. The Company recorded advisory and administrative services fees from USGIF totaling approximately $2.7 million and $2.9 million in fiscal 2020 and fiscal 2019, respectively. These revenues are largely dependent on the total value and composition of assets under its management. Fluctuations in the markets and investor sentiment directly impact the Funds’ asset levels, thereby affecting income and results of operations. 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, and the USGIF funds do not currently charge a redemption fee.

 

Investment base advisory fees from USGIF are calculated as a percentage of average net assets, ranging from 0.375 percent to 1.25 percent, and are paid monthly. The base advisory fee on the equity funds within USGIF is adjusted upward or downward based on performance. For the years ended June 30, 2020 and 2019, the Company adjusted its base advisory fees downward by $525,000 and $544,000, respectively. USGIF advisory fees in total, including performance adjustments, decreased by approximately $118,000, or 4.4 percent, in fiscal year 2020 compared to fiscal year 2019, primarily as a result of a decrease in average assets under management primarily driven by shareholder redemptions.

 

Mutual fund investment advisory fees are also affected by changes in assets under management, which include:

market appreciation or depreciation;

the addition of new fund shareholder accounts;

fund shareholder contributions of additional assets to existing accounts;

withdrawals of assets from and termination of fund shareholder accounts;

exchanges of assets between accounts or products with different fee structures; and

the amount of fees voluntarily reimbursed.

 

The following tables summarize the changes in assets under management for USGIF for fiscal years 2020 and 2019.

 

   

2020

 

(dollars in thousands)

 

Equity

   

Fixed Income

   

Total

 

Beginning Balance

  $ 334,684     $ 90,921     $ 425,605  

Market appreciation

    53,103       1,535       54,638  

Dividends and distributions

    (2,973 )     (984 )     (3,957 )

Net shareholder redemptions

    (41,600 )     (8,789 )     (50,389 )

Ending Balance

  $ 343,214     $ 82,683     $ 425,897  

Average investment management fee

    0.96 %     0.01 %     0.76 %

Average net assets

  $ 322,452     $ 86,572     $ 409,024  

 

   

2019

 

(dollars in thousands)

 

Equity

   

Fixed Income

   

Total

 

Beginning Balance

  $ 389,442     $ 106,231     $ 495,673  

Market appreciation (depreciation)

    (17,957 )     1,769       (16,188 )

Dividends and distributions

    (20,774 )     (1,275 )     (22,049 )

Net shareholder redemptions

    (16,027 )     (15,804 )     (31,831 )

Ending Balance

  $ 334,684     $ 90,921     $ 425,605  

Average investment management fee

    0.97 %     0.01 %     0.75 %

Average net assets

  $ 332,833     $ 98,063     $ 430,896  

 

As shown above, average assets under management for USGIF decreased in fiscal year 2020 compared to fiscal year 2019. The decrease in average assets under management in fiscal year 2020 was primarily due to shareholder redemptions across all sectors of funds. A significant portion of the dividends and distributions shown above are reinvested and included in net shareholder purchases (redemptions).

 

 

Period-end assets in USGIF increased slightly in total. The gold and precious minerals funds increased in net assets since the prior year-end, primarily due to market appreciation, while fixed income and other equity funds declined.

 

The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 76 basis points in fiscal year 2020 and 75 basis points in fiscal year 2019. The average investment management fee for equity funds in fiscal year 2020 and 2019 was 96 and 97 basis points, respectively. The average investment management fee for the fixed income funds was 1 basis point for both fiscal year 2020 and 2019. The low fee rate for the fixed income funds is due to voluntary fee waivers on these funds as discussed in Note 5, Investment Management and Other Fees, in the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

The Company also serves as investment advisor to two exchange-traded fund clients: U.S. Global Jets ETF and U.S. Global GO GOLD and Precious Metal Miners ETF. The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs. The Company recorded advisory fees from the ETF clients totaling $1.7 million and $588,000 in fiscal 2020 and fiscal 2019, respectively. As noted above, assets in both ETFs increased in fiscal 2020, primarily in the Jets ETF. Information on the ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. The ETFs’ authorized participants are not required to give advance notice prior to redemption of shares in the ETFs, and the ETFs do not charge a redemption fee.

 

Corporate Investments

 

Management believes it can more effectively manage the Company’s cash position by maintaining certain types of investments utilized in cash management and continues to believe that such activities are in the best interest of the Company.

 

The following summarizes the cost, unrealized gain or loss, and fair value on investments recorded at fair value as of June 30, 2020, and June 30, 2019.

 

Securities at Fair Value

 

Cost

   

Unrealized Gain (Loss)

   

Fair Value

 

(dollars in thousands)

                       

Securities at fair value1

  $ 12,928     $ (1,464 )   $ 11,464  

Total at June 30, 2020

  $ 12,928     $ (1,464 )   $ 11,464  
                         

Securities at fair value1

  $ 14,640     $ 547     $ 15,187  

Total at June 30, 2019

  $ 14,640     $ 547     $ 15,187  

 

1.

Changes in unrealized and realized gains and losses on securities at fair value are included in earnings in the statement of operations.

 

The investments shown above include investments at fair value of $7.0 million and $8.8 million, as of June 30, 2020, and 2019, respectively, invested in USGIF funds the Company advised.

 

Investment income (loss) from the Company’s investments includes:

realized gains and losses on sales of securities;

unrealized gains and losses on fair valued securities;

realized foreign currency gains and losses;

realized gains and losses on sale of subsidiary;

impairments and observable price changes on equity investments without readily determinable fair values; and

dividend and interest income.

 

Investment income can be volatile and may vary depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. A significant portion of the unrealized gains and losses is concentrated in a small number of issuers. For fiscal year 2020, the Company had a total investment loss of $2.2 million, compared to a $1.6 million investment loss in fiscal year 2019. Due to market volatility, the Company expects that gains or losses will continue to fluctuate in the future.

 

 

A significant portion of the securities recorded at fair value in the above table is an investment in HIVE Blockchain Technologies Ltd. (“HIVE”), which was valued at $2.4 million at June 30, 2020, and $3.6 million at June 30, 2019. HIVE is discussed in more detail in Note 4, Investments, to the Consolidated Financial Statements of this Annual Report on Form 10-K. HIVE is a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland, Sweden, and Canada. Frank Holmes, CEO, is the non-executive chairman of HIVE. Effective August 31, 2018, Mr. Holmes was named Interim Executive Chairman of HIVE while a search for a new CEO is undertaken. 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.

 

In addition to the investments above, as of June 30, 2020, and 2019, the Company owned other investments of approximately $1.3 million and $1.4 million, respectively, classified as securities without readily determinable fair values. The Company also held notes receivable of approximately $199,000 at June 30, 2019.

 

The Company also held an investment of approximately $158,000 and $309,000 as of June 30, 2020, and 2019, respectively, accounted for under the equity method of accounting. This investment was in the Galileo Technology and Blockchain LP, a Canadian limited partnership managed by Galileo Global Equity Advisors Inc. (“Galileo”). During fiscal 2019, the Company was also invested in the Galileo Technology and Blockchain Fund, a Canadian unit trust investment fund managed by Galileo. Under the equity method, the Company’s proportional share of the fund’s net income or loss, which primarily consists of realized and unrealized gains and losses on investments offset by fund expenses, is recognized in the Company’s earnings. Income (loss) from these equity method investments was ($142,000) and $23,000 for fiscal years 2020 and 2019, respectively. See further discussion on these equity method investments in Note 4, Investments, to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

Consolidated Results of Operations

 

The following is a discussion of the consolidated results of operations of the Company and a detailed discussion of the Company’s revenues and expenses.

 

   

Year Ended June 30,

 

(dollars in thousands, except per share data)

 

2020

   

2019

 

Loss from Continuing Operations

  $ (4,464 )   $ (3,292 )
                 

Loss from Discontinued Operations

    (338 )     (147 )

Less: Net Loss Attributable to Non-Controlling Interest from Discontinued Operations

    (118 )     (51 )

Net Loss Attributable from Discontinued Operations to U.S. Global Investors, Inc.

    (220 )     (96 )
                 

Net Loss Attributable to U.S. Global Investors, Inc.

  $ (4,684 )   $ (3,388 )
                 

Weighted average number of outstanding shares

               

     Basic

    15,108,394       15,138,351  

     Effect of dilutive securities :

               

     Employee stock options

    -       -  

     Diluted

    15,108,394       15,138,351  
                 

Earnings Per Share Attributable to U.S. Global Investors, Inc.

               

Basic Net Loss per Share

               

Loss from continuing operations

  $ (0.30 )   $ (0.22 )

Loss from discontinued operations

  $ (0.01 )   $ -  

Net loss

  $ (0.31 )   $ (0.22 )

Diluted Net Loss per Share

               

Loss from continuing operations

  $ (0.30 )   $ (0.22 )

Loss from discontinued operations

  $ (0.01 )   $ -  

Net loss

  $ (0.31 )   $ (0.22 )

 

 

Year Ended June 30, 2020, Compared with Year Ended June 30, 2019

 

The Company posted a net loss attributable to U.S. Global Investors, Inc., as shown in the Consolidated Statements of Operations, of $4.7 million ($0.31 per share loss) for the year ended June 30, 2020, compared with a net loss attributable to U.S. Global Investors, Inc. of $3.4 million ($0.22 per share loss) for the year ended June 30, 2019, an increase in loss of approximately $1.3 million. The increase in loss is primarily due to a decrease in tax benefit, an increase in investment loss resulting from unrealized losses and a decrease in income from equity method investments, somewhat offset by a decrease in operating loss due to an increase in assets under management, as discussed further below.

 

Operating Revenues 

 

(dollars in thousands)

 

2020

   

2019

   

$
Change

   

%
Change

 

Investment advisory fees - USGIF:

                               

Natural resources funds

  $ 1,779     $ 1,812     $ (33 )     (1.8 %)

International equity funds

    464       450       14       3.1 %

Domestic equity funds

    316       418       (102 )     (24.4 %)

Fixed income funds

    9       6       3       50.0 %

Total investment advisory fees - USGIF

    2,568       2,686       (118 )     (4.4 %)

ETF advisory fees

    1,743       588       1,155       196.4 %

Total advisory fees

    4,311       3,274       1,037       31.7 %

USGIF administrative services fees

    165       185       (20 )     (10.8 %)

Total Operating Revenues

  $ 4,476     $ 3,459     $ 1,017       29.4 %

 

Total consolidated operating revenues for the year ended June 30, 2020, increased $1.0 million, or 29.4 percent, compared with the year ended June 30, 2019. This increase was primarily attributable to the following:

Advisory fees increased by $1.0 million, or 31.7 percent, primarily as the result of higher ETF assets under management. Advisory fees are comprised of two components: a base management fee and a performance fee.

 

o

Base management fees increased approximately $1.0 million. ETF unitary management fees increased due to an increase in ETF average assets under management, primarily in the Jets ETF. The Jets ETF invests in airline-related stocks, including global airline carriers, airport operators and aircraft manufacturers. While global financial markets have experienced declines and volatility, including stocks in which the Jets ETF invests, this ETF has attracted inflows. Base fees for USGIF decreased primarily as a result of lower average assets under management, primarily due to shareholder redemptions.

 

o

Performance fee adjustments for USGIF paid out in the current year were $525,000 compared to $544,000 paid out in the prior year, a positive change of $19,000. The USGIF performance fee, which applies to the equity funds only, is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

Administrative services fees decreased by $20,000, or 10.8 percent, primarily as a result of lower net assets under management upon which these fees are based in the current period. These fees are paid by USGIF based on average daily net assets for administrative services provided by the Company to the Funds.

 

Advisory Fees. Advisory fees, the largest component of the Company’s operating revenues, are derived from two sources: USGIF advisory fees and exchange-traded fund advisory fees. In fiscal year 2020, these sources accounted for 57.4 percent and 38.9 percent, respectively, of the Company’s operating revenues.

 

Investment base advisory fees from USGIF are calculated as a percentage of average net assets, ranging from 0.375 percent to 1.25 percent, and are paid monthly. The base advisory fee on the equity funds within USGIF is adjusted upward or downward based on performance. For the years ended June 30, 2020 and 2019, the Company adjusted its base advisory fees downward by $525,000 and $544,000, respectively. USGIF advisory fees in total, including performance adjustments, decreased by approximately $118,000, or 4.4 percent, in fiscal year 2020 compared to fiscal year 2019, primarily as a result of a decrease in average assets under management driven by shareholder redemptions.

 

 

Mutual fund investment advisory fees are also affected by changes in assets under management, which include:

market appreciation or depreciation;

the addition of new fund shareholder accounts;

fund shareholder contributions of additional assets to existing accounts;

withdrawals of assets from and termination of fund shareholder accounts;

exchanges of assets between accounts or products with different fee structures; and

the amount of fees voluntarily reimbursed.

 

The Company also serves as investment advisor to two exchange-traded fund clients: U.S. Global Jets ETF and U.S. Global GO GOLD and Precious Metal Miners ETF. The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs. The Company recorded advisory fees from the ETF clients of $1.7 million and $588,000 in fiscal years 2020 and 2019, respectively, due to an increase in assets as discussed above

 

Operating Expenses

 

(dollars in thousands)

 

2020

   

2019

   

$
Change

   

%
Change

 

Employee compensation and benefits

  $ 2,840     $ 2,884     $ (44 )     (1.5 %)

General and administrative

    3,663       2,920       743       25.4 %

Advertising

    174       198       (24 )     (12.1 %)

Depreciation and amortization

    202       214       (12 )     (5.6 %)

Total

  $ 6,879     $ 6,216     $ 663       10.7 %

 

Total operating expenses increased $663,000, or 10.7 percent, compared with the previous fiscal year. This increase was primarily attributable to an increase in general and administrative expenses, somewhat offset by decrease in employee compensation and benefits, as described below.

 

Employee Compensation and Benefits. Employee compensation and benefits decreased $44,000, or 1.5 percent, in fiscal year 2020, primarily as a result of a decrease in employee salaries, somewhat offset by higher performance bonuses.

 

General and Administrative. General and administrative expenses increased $743,000, or 25.4 percent, in fiscal year 2020, primarily due to increased fund and sales promotion expenses, primarily related to the ETFs.

 

Other Income (Loss)

 

(dollars in thousands)

 

2020

   

2019

   

$
Change

   

%
Change

 

Investment loss

  $ (2,211 )   $ (1,582 )   $ (629 )     (39.8 %)

Income (loss) from equity method investments

    (142 )     23       (165 )     (717.4 %)

Other income

    117       47       70       148.9 %

Total Other Income (Loss)

  $ (2,236 )   $ (1,512 )   $ (724 )     (47.9 %)

 

Total consolidated other income (loss) for the year ended June 30, 2020, decreased $724,000, or 47.9 percent, compared with the year ended June 30, 2019. The decrease was primarily due to the following components and factors:

 

Investment loss was $2.2 million for the year ended June 30, 2020, compared to investment loss of $1.6 million for the year ended June 30, 2019, an increase in loss of approximately $629,000. Investment income (loss) is dependent on market fluctuations and does not remain at a consistent level.

 

o

The current year had net unrealized losses of $2.0 million, realized gains from sales of $151,000, and $285,000 in impairment losses compared to the prior year, which had net unrealized losses of $1.8 million, realized gains from sales of $23,000, and $114,000 in impairment losses.

 

o

The $151,000 realized gain in the current year was from the sale of Galileo. As noted previously, USCAN had held a 65 percent controlling interest in Galileo. Galileo, pursuant to a capital restructuring, agreed to purchase back all of its common shares owned by the USCAN. This transaction closed in March 2020. See further information on this transaction in Note 3, Discontinued Operations, to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

 

 

o

Also, realized foreign currency loss was $232,000 and $26,000 in the current and prior fiscal year, respectively. The current year foreign currency loss includes $228,000 in foreign currency losses released from other comprehensive income (loss) upon the sale of Galileo.

 

o

Dividend and interest income decreased from the prior period by $158,000, primarily due to certain interest-producing investments being redeemed or paid off.

 

o

Note that a significant portion of corporate investments is held in an equity security in the business of mining cryptocurrency. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. See further discussion of this security and other investments in Note 4, Investments, to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

The Company recorded a loss from equity method investments of $142,000 for the year ended June 30, 2020, compared to $23,000 income for the year ended June 30, 2019, a negative change of approximately $165,000. The investments were in Galileo offerings and concentrated in technology and cryptocurrency mining stocks. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for continued significant volatility in the valuation of the equity method investment currently held, and thus the portion of the entity’s net income or loss that is included in the Company’s earnings. See further discussion on these equity method investments in Note 4, Investments, to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

Provision for Income Taxes

 

A tax benefit from continuing operations of $175,000 was recorded for the year ended June 30, 2020, compared to a tax benefit of $977,000 for the year ended June 30, 2019. The tax benefit in the current period is primarily the result of a decline in valuation of certain investments held by U.S. Global Investors (Canada) Limited, somewhat offset by an increase in valuation allowance.

 

The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. USCAN files a separate tax return 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. Note that the Company currently has net operating loss carryovers in most jurisdictions, including the U.S.

 

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. A valuation allowance to fully reserve for the net operating loss carryforward, other carryovers and certain book/tax differences in the balance sheet is included in the net deferred tax balances in the amount of $2.8 million at June 30, 2020, and $1.9 million at June 30, 2019. In assessing the valuation allowance, the Company considered, among other matters, the nature, frequency and severity of recent losses, forecast of future profitability, and the duration of statutory carry back and carry forward periods.

 

Loss from Discontinued Operations

 

Loss from discontinued operations represents results of the Company’s subsidiary Galileo, which was sold on March 2, 2020. Loss from discontinued operations, net of tax, was $338,000 and $147,000 for the years ended June 30, 2020, and 2019, respectively. See Note 3, Discontinued Operations, to the Consolidated Financial Statements of this Annual Report on Form 10-K, for further information on this transaction and the results from Galileo operations. Galileo’s advisory fee revenue, which consisted of base advisory fees and performance fees, decreased from approximately $1.5 million in fiscal 2019 to $235,000 for the eight months through the March 2, 2020, closing date of sale. Galileo’s revenue from base advisory fees was lower in the current period due to the closure in July 2019 of one of the mutual funds managed by Galileo, the closure in September 2019 of the ETF managed by Galileo, and the current period including only eight months of revenue prior to closing of the sale. Performance fees also declined as there were no performance fees for Galileo clients received in the current period compared to $921,000 received in the corresponding period in the prior year. Galileo received performance fees from certain clients when market appreciation or realized net gains exceeded established benchmarks. The decrease in revenue from the prior period was somewhat offset by lower expenses, primarily due to lower fund expenses, lower compensation due to a decrease in employees, and the current period including only eight months of expenses prior to closing of the sale.

 

Off Balance Sheet Arrangements

 

The Company does not have any off balance sheet arrangements.

 

 

Contractual Obligations

 

A summary of contractual obligations of the Company as of June 30, 2020, is as follows:

 

   

Payments due by period

 

Contractual Obligations

 

Total

   

Less than
1 year

   

1-3
years

   

4-5
years

   

More than
5 years

 

(dollars in thousands)

                                       

Operating lease obligations

  $ 97     $ 53     $ 44     $ -     $ -  

Contractual obligations

    414       346       68       -       -  

Total

  $ 511     $ 399     $ 112     $ -     $ -  

 

Operating leases consist of office equipment. Contractual obligations primarily consist of agreements for services used in daily operations and for marketing and distribution. Other contractual obligations not included in this table consist of agreements to waive or reduce fees and/or pay expenses on certain funds. Future obligations under these agreements are dependent upon future levels of fund assets.

 

The Board of Directors has authorized a monthly dividend of $0.0025 per share from July 2020 through September 2020, at which time the Board of Directors will consider continuation of the dividend. 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 to be paid to class A and class C shareholders from July 2020 to September 2020 will be approximately $113,000, which is included as dividends payable in the Consolidated Balance Sheets at June 30, 2020.

 

Liquidity and Capital Resources

 

At June 30, 2020, the Company had net working capital (current assets minus current liabilities) of approximately $8.5 million and a current ratio (current assets divided by current liabilities) of 5.2 to 1. With approximately $1.9 million in cash and cash equivalents and $11.4 million in unrestricted securities recorded at fair value, which together comprise approximately 71 percent of total assets, the Company has adequate liquidity to meet its current obligations. Total shareholders’ equity attributable to U.S. Global Investors, Inc. was approximately $16.8 million.

 

Effective April 12, 2020, the Company was approved for a loan of approximately $442,000 under the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Company has under 25 employees and is considered a small business. The interest rate on the loan is one percent fixed, and the maturity date is April 12, 2022. Payment terms are to make seventeen consecutive monthly payments of principal and interest in an amount sufficient to fully amortize the loan over the remaining term, commencing six months after the effective date, and a final payment on the earliest of the acceleration of the promissory note; or the maturity date. The PPP Loan contains events of default and other provisions customary for a loan of this type.

 

A key feature of the PPP is that loan proceeds used by borrowers to pay certain expenses during a specified period following origination of the loan may qualify to be forgiven. The Company is not yet able to determine the amount that might be forgiven due to evolving guidance. As of June 30, 2020, the Company was in full compliance with all covenants with respect to the PPP Loan.

 

The Company’s primary commitment going forward is for operating expenses. The Company also has access to a $1 million credit facility, which can be utilized for working capital purposes. The credit facility is collateralized by approximately $1 million, 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 June 30, 2020, this credit facility remained unutilized by the Company.

 

Investment advisory contracts pursuant to the Investment Company Act of 1940 and related affiliated contracts in the U.S., by law, may not exceed one year in length and, therefore, must be renewed at least annually after an initial two-year term. The investment advisory and related contracts between the Company and USGIF expire in September 2020. The Board of Trustees of USGIF will meet to consider the agreement renewals in September 2020. Management anticipates that these agreements will be renewed. The advisory agreement for the ETFs has been renewed through September 2021.

 

 

The primary cash requirements are for operating activities. The Company also uses cash to purchase investments, pay dividends and repurchase Company stock. The cash outlays for investments and dividend payments are discretionary and management or the Board may discontinue as deemed necessary. The stock repurchase plan is approved through December 31, 2020, but may be suspended or discontinued at any time. Cash and unrestricted marketable securities of approximately $13.4 million are available to fund current activities.

 

Management believes current cash reserves, investments, and financing available will be sufficient to meet foreseeable cash needs for operating activities.

 

The rapid spread of the global COVID-19 outbreak and actions taken in response have 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. It is early to determine the long-term impact of current circumstances on the Company’s business. Should this emerging macro-economic risk 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.

 

Critical Accounting Estimates

 

The discussion and analysis of financial condition and results of operations are based on the Company’s financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. Management reviews these estimates on an ongoing basis. Estimates are based on experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While significant accounting policies are described in more detail in Note 2 to the consolidated financial statements, the Company believes the accounting policies that require management to make assumptions and estimates involving significant judgment are those relating to valuation of investments, income taxes, and valuation of stock-based compensation.

 

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: U.S. Global Investors (Bermuda) Limited (“USBERM”), U.S. Global Brokerage, Inc. (“USGB”), U.S. Global Investors (Canada) Limited (“USCAN”) and U.S. Global Indices, LLC. On July 27, 2018, USGB was dissolved.

 

Until March 2, 2020, the Company, through USCAN, owned 65 percent of the issued and outstanding shares of Galileo and represented controlling interest of Galileo. Galileo was consolidated with USCAN and the non-controlling interest in this subsidiary is included in “non-controlling interest in subsidiary” in the equity section of the Consolidated Balance Sheets.

 

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 USGIF. The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. 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 5 Investment Management and Other Fees to the Consolidated Financial Statements of this Annual Report on Form 10-K for information regarding fee waivers). The Company has not provided financial support to any of these entities outside the ordinary course of business. The Company’s risk of loss with respect to these VIEs is limited to the carrying value of its investments in, and fees receivable from, the entities. The Company does not consolidate these VIEs because it is not the primary beneficiary.

 

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

 

 

The Company currently holds a variable interest in a fund organized as a limited partnership advised by Galileo, and during fiscal year 2019 held a variable interest in another fund advised by Galileo, but these entities do not qualify as VIEs. Since they are not VIEs, the Company evaluated if it should consolidate them under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of the entities and, therefore, does not consolidate them. However, the Company was considered to have the ability to exercise significant influence. Thus, the investments have been accounted for under the equity method of accounting.

 

Investments. The Company records security transactions on trade date. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable, and are recorded in earnings on the date of sale.

 

Investments in Equity Securities. Equity securities are generally carried at fair value on the Consolidated Balance Sheets with changes in the fair value recorded through earnings within investment income (loss).

 

Investments in Debt Securities. The Company classifies debt investments as available-for-sale or held-to-maturity based on the Company’s intent to sell the security or, its intent and ability to hold the debt security to maturity. Available-for-sale debt securities are reported at fair value, and changes in unrealized gains and losses are reported net of tax in accumulated other comprehensive income. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income to investment income (loss). Held-to-maturity debt securities are purchased with the intent and ability to hold until maturity and are measured at amortized cost.

 

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 will be 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).

 

Equity Method Investments. Investments classified as equity method consist of investments in companies in which the Company is able to exercise significant influence but not control. Under the equity method of accounting, the investment is initially recorded at cost, then the Company’s proportional share of investee’s underlying net income or loss is recorded as a component of “other income” with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce the Company’s carrying value of the investment. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable.

 

Fair Value of Financial Instruments. The financial instruments of the Company are reported on the Consolidated Balance Sheets at market or fair values or at carrying amounts that approximate fair values.

 

Non-Controlling Interests. The Company reports “non-controlling interest in subsidiary” as equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”

 

Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. Forfeitures are recognized as they occur.

 

The Company believes that the estimates related to stock-based compensation expense are critical accounting estimates because the assumptions used could significantly impact the timing and amount of stock-based compensation expense recorded in the Company’s Consolidated Financial Statements.

 

Income Taxes. The Company’s annual effective income tax rate is based on the mix of income and losses in its U.S. and non-U.S. entities which are part of the Company’s Consolidated Financial Statements, statutory tax rates, and tax-planning opportunities available to the Company in the various jurisdictions in which it operates. Significant judgment is required in evaluating the Company’s tax positions.

 

 

Tax law requires certain items to be included in the tax return at different times from when these items are reflected in the Company’s Consolidated Statements of Operations. As a result, the effective tax rate reflected in the Consolidated Financial Statements is different from the tax rate reported on the Company’s consolidated tax return. Some of these differences are permanent, such as expenses that are not deductible in the tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates.

 

The Company assesses uncertain tax positions in accordance with ASC 740, Income Taxes. Judgment is used to identify, recognize, and measure the amounts to be recorded in the financial statements related to tax positions taken or expected to be taken in a tax return. A liability is recognized to represent the potential future obligation to the taxing authority for the benefit taken in the tax return. These liabilities are adjusted, including any impact of the related interest and penalties, in light of changing facts and circumstances such as the progress of a tax audit. A number of years may elapse before a particular matter for which a reserve has been established is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction.

 

The Company assesses whether a valuation allowance should be established against its deferred income tax assets based on consideration of available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecast of future profitability, the duration of statutory carry back and carry forward periods, the Company’s experience with tax attributes expiring unused, and tax planning alternatives.

 

Assessing the future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements or tax returns requires judgment. Variations in the actual outcome of these future tax consequences could materially impact the Company’s financial position, results of operations or cash flows.

 

Foreign Exchange. The balance sheets of certain foreign subsidiaries of the Company and certain foreign-denominated investment products are translated at the current exchange rate as of the end of the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange gains and losses resulting from balance sheet translations of foreign subsidiaries are excluded from income and are recorded in “accumulated other comprehensive income (loss)” on the Consolidated Balance Sheets. Net exchange gains and losses resulting from income or loss translations are included in income and are recorded in “investment income (loss)” on the Consolidated Statements of Operations. Investment transactions denominated in foreign currencies are converted to U.S. dollars using the exchange rate on the date of the transaction and any related gain or loss is included in “investment income (loss)” on the Consolidated Statements of Operations.

 

Recent Accounting Pronouncements. See information regarding accounting pronouncements that have been issued but not yet adopted by the Company in Note 2, Significant Accounting Policies, to the Consolidated Financial Statements of this Annual Report on Form 10-K.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Market Risk Disclosures

 

The following information, together with information included in other parts of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, describes the key aspects of certain financial instruments that have market risk to the Company.

 

The effects of the global COVID-19 pandemic are still evolving. There has been an adverse effect on global and domestic financial markets, which may continue for an undetermined period. This may adversely affect assets under management and thus the Company’s revenues and operating results. Market declines also affect the valuation of the Company’s corporate investments, which also adversely affects the Company’s balance sheet and results of operations.

 

Investment Management and Administrative Services Fees

 

Revenues are generally based upon a percentage of assets under management in accordance with contractual agreements. Accordingly, fluctuations in the financial markets have a direct effect on the Company’s operating results. A significant portion of assets under management in equity funds have exposure to international markets and/or natural resource sectors, which may experience volatility. In addition, fluctuations in interest rates may affect the value of assets under management in fixed income funds.

 

 

Performance Fees

 

USGIF advisory fees are comprised of two components: a base management fee and a performance fee. The performance fee is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

 

As a result, the Company’s revenues are subject to volatility beyond market-based fluctuations discussed in the investment management and administrative fees section above. For the years ended June 30, 2020 and 2019, the Company realized a decrease in its USGIF base advisory fee of $525,000 and $544,000, respectively, due to these performance adjustments.

 

Corporate Investments

 

The Company’s Consolidated Balance Sheets include assets whose fair value is subject to market risk. Due to the Company’s investments in securities recorded at fair value, price fluctuations represent a market risk factor affecting the Company’s consolidated financial position. The carrying values of investments subject to price risks are based on quoted market prices or, if not actively traded, management’s estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported fair value.

 

The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices.

 

The table below summarizes the Company’s price risks in securities recorded at fair value as of June 30, 2020, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.

 

(dollars in thousands)

 

Fair Value at
June 30, 2020

 

Hypothetical

Percentage

Change

 

Estimated Fair Value

After Hypothetical

Price Change

 

Securities at fair value1

  $ 11,464  

25% increase

  $ 14,330  
         

25% decrease

  $ 8,598  

 

1.

Changes in unrealized and realized gains and losses on securities at fair value are included in earnings in the Consolidated Statements of Operations.

 

The selected hypothetical changes do not reflect what could be considered best- or worst-case scenarios. Results could be significantly different due to both the nature of markets and the concentration of the Company’s investment portfolio.

 

A significant portion of the securities recorded at fair value in the above table is an investment in HIVE Blockchain Technologies Ltd. (“HIVE”), which was valued at $2.4 million at June 30, 2020. HIVE is discussed in more detail in Note 4, Investments, to the Consolidated Financial Statements of this Annual Report on Form 10-K. HIVE is a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland, Sweden and Canada. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for significant volatility in the market price of HIVE, which could materially impact the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income.

 

The Company also has an equity method investment in Galileo Technology and Blockchain LP in the amount of $158,000 at June 30, 2020, which has investments in the technology and cryptocurrency mining industries. As noted above, exposure to cryptocurrency industry may result in volatility in the valuation of this fund. Under the equity method, the Company’s proportional share of the fund’s net income or loss, which primarily consists of realized and unrealized gains and losses on investments offset by fund expenses, is recognized in the Company’s earnings. The potential significant volatility in the valuation of the fund’s investments could cause the fund’s net income or loss to vary significantly from period to period, which in turn would be reflected in the Company’s earnings.

 

Foreign currency risk

 

Certain corporate investments are held in foreign currencies. Adverse changes in foreign currency exchange rates would also lower the value of those corporate investments. Certain assets under management also have exposure to foreign currency fluctuations in various markets, which could impact their valuation and thus the revenue received by the Company.

 

 

Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

Shareholders and Board of Directors

U.S. Global Investors, Inc.

San Antonio, Texas

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying Consolidated Balance Sheets of U.S. Global Investors, Inc. (the “Company”) and subsidiaries as of June 30, 2020 and 2019, the related Consolidated Statements of Operations, Comprehensive Income (Loss), Shareholders’ Equity, and Cash Flows for each of the two years in the period ended June 30, 2020, and the related notes (collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company and subsidiaries at June 30, 2020 and 2019, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s Consolidated Financial Statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ BDO USA, LLP

 

We have served as the Company's auditor since 2004.

 

Dallas, Texas

September 10, 2020

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

 

Assets

 

June 30, 2020

   

June 30, 2019

 

(dollars in thousands)

               

Current Assets

               

Cash and cash equivalents

  $ 1,936     $ 1,466  

Restricted cash

    1,025       1,025  

Investments in securities at fair value

    6,322       8,021  

Accounts and other receivables

    974       309  

Note receivable

    -       199  

Prepaid expenses

    285       293  

Total assets held related to discontinued operations

    -       1,780  

Total Current Assets

    10,542       13,093  
                 

Net Property and Equipment

    1,506       1,708  
                 

Other Assets

               

Investments in securities at fair value, non-current

    5,142       7,166  

Other investments

    1,283       1,404  

Equity method investments

    158       309  

Right of use assets

    93       -  

Other assets, non-current

    92       64  

Total Other Assets

    6,768       8,943  

Total Assets

  $ 18,816     $ 23,744  

Liabilities and Shareholders’ Equity

               

Current Liabilities

               

Accounts payable

  $ 29     $ 31  

Accrued compensation and related costs

    360       311  

Dividends payable

    113       113  

Lease liability, short-term

    50       -  

Other accrued expenses

    1,015       496  

Note payable, current

    442       -  

Total liabilities held related to discontinued operations

    -       481  

Total Current Liabilities

    2,009       1,432  
                 

Long-Term Liabilities

               

Deferred tax liability

    -       133  

Lease liability, long-term

    43       -  

Total Long-Term Liabilities

    43       133  

Total Liabilities

    2,052       1,565  
                 

Commitments and Contingencies (Note 19)

               
                 

Shareholders’ Equity

               

Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,866,913 shares and 13,866,751 shares at June 30, 2020, and June 30, 2019, respectively

    347       347  

Common stock (class B) - $0.025 par value; nonvoting; authorized, 4,500,000 shares; no shares issued

    -       -  

Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,068,635 shares and 2,068,797 shares at June 30, 2020, and June 30, 2019, respectively

    52       52  

Additional paid-in-capital

    15,623       15,646  

Treasury stock, class A shares at cost; 855,432 shares and 804,959 shares at June 30, 2020, and June 30, 2019, respectively

    (1,879 )     (1,888 )

Accumulated other comprehensive income (loss), net of tax

    (4 )     (206 )

Retained earnings

    2,625       7,761  

Total U.S. Global Investors Inc. Shareholders’ Equity

    16,764       21,712  

Non-Controlling Interest in Subsidiary

    -       467  

Total Shareholders’ Equity

    16,764       22,179  

Total Liabilities and Shareholders’ Equity

  $ 18,816     $ 23,744  

 

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

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

Year Ended June 30,

 

(dollars in thousands, except per share data)

 

2020

   

2019

 

Operating Revenues

               

Advisory fees

  $ 4,311     $ 3,274  

Administrative services fees

    165       185  
      4,476       3,459  

Operating Expenses

               

Employee compensation and benefits

    2,840       2,884  

General and administrative

    3,663       2,920  

Advertising

    174       198  

Depreciation and amortization

    202       214  
      6,879       6,216  

Operating Loss

    (2,403 )     (2,757 )

Other Income (Loss)

               

Investment loss

    (2,211 )     (1,582 )

Income (loss) from equity method investments

    (142 )     23  

Other income

    117       47  
      (2,236 )     (1,512 )

Loss from Continuing Operations Before Income Taxes

    (4,639 )     (4,269 )

Provision for Income Taxes

               

Tax benefit

    (175 )     (977 )

Loss from Continuing Operations

    (4,464 )     (3,292 )

Discontinued Operations

               

Loss from discontinued operations of investment management services in Canada before income taxes

    (338 )     (147 )

Tax benefit

    -       -  

Loss from Discontinued Operations

    (338 )     (147 )

Net Loss

    (4,802 )     (3,439 )

Less: Net Loss Attributable to Non-Controlling Interest from Discontinued Operations

    (118 )     (51 )

Net Loss Attributable to U.S. Global Investors, Inc.

  $ (4,684 )   $ (3,388 )
                 

Earnings Per Share Attributable to U.S. Global Investors, Inc.

               

Basic Net Loss per Share

               

Loss from continuing operations

  $ (0.30 )   $ (0.22 )

Loss from discontinued operations

  $ (0.01 )   $ -  

Net loss

  $ (0.31 )   $ (0.22 )

Diluted Net Loss per Share

               

Loss from continuing operations

  $ (0.30 )   $ (0.22 )

Loss from discontinued operations

  $ (0.01 )   $ -  

Net loss

  $ (0.31 )   $ (0.22 )
                 

Basic weighted average number of common shares outstanding

    15,108,394       15,138,351  

Diluted weighted average number of common shares outstanding

    15,108,394       15,138,351  

 

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

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 

 

   

Year Ended June 30,

 

(dollars in thousands)

 

2020

   

2019

 

Net Loss Attributable to U.S. Global Investors, Inc.

  $ (4,684 )   $ (3,388 )

Other Comprehensive Income (Loss), Net of Tax:

               

Foreign currency translation adjustment

    88       3  

Reclassification of foreign currency losses to net loss

    228       22  

Comprehensive Loss

    (4,368 )     (3,363 )

Less: Comprehensive Income Attributable to Non-Controlling Interest

    114       -  

Comprehensive Loss Attributable to U.S. Global Investors, Inc.

  $ (4,482 )   $ (3,363 )

 

 

 

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

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

(dollars in thousands)

 

Common
Stock
(class A)

   

Common Stock
(class C)

   

Additional Paid-in Capital

   

Treasury Stock

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Retained Earnings

   

Non-Controlling Interest

   

Total

 

Balance at June 30, 2018 (13,866,691 shares of class A; 2,068,857 shares of class C)

  $ 347     $ 52     $ 15,650     $ (1,878 )   $ 1,858     $ 9,513     $ 518     $ 26,060  

Reclassification pursuant to adoption of ASU 2016-01, net of tax of $1,049

    -       -       -       -       (2,089 )     2,089       -       -  

Balance at July 1, 2018

    347       52       15,650       (1,878 )     (231 )     11,602       518       26,060  

Purchases of 20,575 shares of Common Stock (class A)

    -       -       -       (24 )     -       -       -       (24 )

Issuance of stock under ESPP of 2,461 shares of Common Stock (class A)

    -       -       (2 )     6       -       -       -       4  

Conversion of 60 shares of class C common stock for class A common stock

    -       -       -       -       -       -       -       -  

Dividends declared

    -       -       -       -       -       (453 )     -       (453 )

Stock bonuses

    -       -       (4 )     8       -       -       -       4  

Stock-based compensation expense

    -       -       2       -       -       -       -       2  

Other comprehensive income, net of tax

    -       -       -       -       25       -       -       25  

Net loss

    -       -       -       -       -       (3,388 )     (51 )     (3,439 )

Balance at June 30, 2019 (13,866,751 shares of class A; 2,068,797 shares of class C)

    347       52       15,646       (1,888 )     (206 )     7,761       467       22,179  

Purchases of 105,721 shares of Common Stock (class A)

    -       -       -       (113 )     -       -       -       (113 )

Issuance of stock under ESPP of 1,648 shares of Common Stock (class A)

    -       -       (1 )     4       -       -       -       3  

Conversion of 162 shares of class C common stock for class A common stock

    -       -       -       -       -       -       -       -  

Dividends declared

    -       -       -       -       -       (452 )     -       (452 )

Stock bonuses

    -       -       (16 )     118       -       -       -       102  

Stock-based compensation expense

    -       -       (6 )     -       -       -       -       (6 )

Deconsolidation of non-controlling interest

    -       -       -       -       -       -       (463 )     (463 )

Other comprehensive income, net of tax

    -       -       -       -       202       -       114       316  

Net loss

    -       -       -       -       -       (4,684 )     (118 )     (4,802 )

Balance at June 30, 2020 (13,866,913 shares of class A; 2,068,635 shares of class C)

  $ 347     $ 52     $ 15,623     $ (1,879 )   $ (4 )   $ 2,625     $ -     $ 16,764  

 

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

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Year Ended June 30,

 

(dollars in thousands)

 

2020

   

2019

 

Cash Flows from Operating Activities:

               

Net loss

  $ (4,802 )   $ (3,439 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    202       214  

Net recognized loss on securities

    -       91  

Investment basis adjustment

    (49 )     (19 )

Gain on disposal of Galileo

    (151 )     -  

Net (income) loss from equity method investment

    142       (23 )

Net loss from discontinued operations, net of tax

    338       147  

Foreign currency transaction loss

    228       22  

Provision for deferred taxes

    (139 )     (966 )

Stock bonuses

    102       4  

Stock-based compensation expense

    -       2  

Changes in operating assets and liabilities:

               

Accounts receivable and notes receivable

    (665 )     805  

Prepaid expenses and other assets

    (113 )     (28 )

Investment securities

    4,008       2,571  

Accounts payable and accrued expenses

    659       (456 )

Total adjustments

    4,562       2,364  

Net cash used in operating activities

    (240 )     (1,075 )

Cash Flows from Investing Activities:

               

Purchase of investments in securities at fair value, non-current

    -       (1,588 )

Purchase of equity method investment

    -       (230 )

Purchase of other investments

    (125 )     (250 )

Proceeds from sale of Galileo

    746       -  

Proceeds on sale of equity method investment

    -       230  

Proceeds from note receivable

    199       35  

Return of capital on investments

    10       77  

Net cash provided by (used in) investing activities

    830       (1,726 )

Cash Flows from Financing Activities:

               

Proceeds from loan

    442       -  

Issuance of common stock

    3       4  

Repurchases of common stock

    (113 )     (24 )

Dividends paid

    (452 )     (454 )

Net cash used in financing activities

    (120 )     (474 )

Net increase (decrease) in cash, cash equivalents, and restricted cash

    470       (3,275 )

Beginning cash, cash equivalents, and restricted cash

    2,491       5,766  

Ending cash, cash equivalents, and restricted cash

  $ 2,961     $ 2,491  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid for income taxes

  $ 3     $ 124  

 

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

 

 

Notes to Consolidated Financial Statements

 

NOTE 1. ORGANIZATION

 

U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) serves as investment adviser to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”), a Delaware statutory trust that is a no-load, open-end investment company offering shares in numerous mutual funds to the investing public. The Company also provides administrative services to USGIF. For these services, the Company receives fees from USGIF. The Company also provides advisory services to SEC registered exchange traded funds (“ETFs”) and formerly provided advisory services to offshore clients. Until March 2020, the Company held a controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm.

 

The Company has the following subsidiaries utilized primarily for corporate investment purposes: U.S. Global Investors (Bermuda) Limited (“USBERM”), incorporated in Bermuda, and U.S. Global Investors (Canada) Limited (“USCAN”). The Company created U.S. Global Indices, LLC, a Texas limited liability company, of which the Company is the sole member, to provide indexing services to exchange-traded funds managed by the Company.

 

U.S. Global formed U.S. Global Brokerage, Inc. (“USGB”) to provide distribution services to USGIF. USGB ceased operations in December 2015. On July 27, 2018, USGB was dissolved.

 

Effective March 2, 2020, the Company sold its shares in Galileo back to Galileo. Through the date of sale, Galileo was consolidated with the operations of the Company. The non-controlling interest in this subsidiary was included in “Non-Controlling Interest in Subsidiary” in the equity section of the Consolidated Balance Sheets. Frank Holmes, CEO, and Lisa Callicotte, CFO, served as directors of Galileo through March 2, 2020, and Lisa Callicotte served as CFO of Galileo from June 2019 through March 2, 2020. See Note 3 below for further information. Results of operations of Galileo through the date of sale are presented in the consolidated financial statements as discontinued operations.

 

To limit the spread of the novel coronavirus (“COVID-19”), governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations, disrupting the global supply chain, and creating a reduction in demand for many products. This has negatively affected global financial markets and has caused significant financial market depreciation, thus reducing certain of the Company’s assets under management (“AUM”), the revenue related to those assets, and returns on corporate investments.

 

Should the negative effect on global financial markets continue for an extended period, there could be an adverse material financial impact on the Company’s results of operations, cash flows and financial position. At this time, the Company cannot reasonably estimate the future impact, given the uncertainty over the duration and severity of the economic crisis.

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: USGB, USBERM, USCAN and U.S. Global Indices, LLC.

 

Until March 2, 2020, the Company, through USCAN, owned 65 percent of the issued and outstanding shares of Galileo, which represents controlling interest of Galileo. Galileo was consolidated with USCAN and the non-controlling interest in this subsidiary is included in “non-controlling interest in subsidiary” in the equity section of the Consolidated Balance Sheets.

 

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 lacks 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 USGIF. The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. 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 5 for information regarding fee waivers). The Company has not provided financial support to any of these entities outside the ordinary course of business. The Company’s risk of loss with respect to these VIEs is limited to the carrying value of its investments in, and fees receivable from, the entities. The Company does not consolidate these VIEs because it is not the primary beneficiary. The Company’s total exposure to unconsolidated VIEs, consisting of the carrying value of investment securities and receivables for fees, was $7.0 million at June 30, 2020, and $8.8 million at June 30, 2019.

 

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

 

The Company currently holds a variable interest in a fund organized as a limited partnership advised by Galileo, and during fiscal year 2019 held a variable interest in another fund advised by Galileo, but these entities do not qualify as VIEs. Since they are not VIEs, the Company evaluated if it should consolidate them under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of the entities and, therefore, does not consolidate them. However, the Company was considered to have the ability to exercise significant influence. Thus, the investments have been accounted for under the equity method of accounting. See further information about these investments in Note 4.

 

All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes.

 

Cash and Cash Equivalents. Cash and cash equivalents include highly liquid investments with original maturities of three months or less.

 

Restricted Cash. Restricted cash represents cash invested in a money market account as collateral for credit facilities that is not available for general corporate use.

 

Investments. The Company records security transactions on trade date. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable, and are recorded in earnings on the date of sale.

 

Investments in Equity Securities. Equity securities are generally carried at fair value on the Consolidated Balance Sheets with changes in the fair value recorded through earnings within investment income (loss).

 

Investments in Debt Securities. The Company classifies debt investments as available-for-sale or held-to-maturity based on the Company’s intent to sell the security or, its intent and ability to hold the debt security to maturity. Available-for-sale debt securities are reported at fair value, and changes in unrealized gains and losses are reported net of tax in accumulated other comprehensive income (loss). Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to investment income (loss). Held-to-maturity debt securities are purchased with the intent and ability to hold until maturity and are measured at amortized cost.

 

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 will be 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).

 

Equity Method Investments. Investments classified as equity method consist of investments in companies in which the Company is able to exercise significant influence but not control. Under the equity method of accounting, the investment is initially recorded at cost, then the Company’s proportional share of investee’s underlying net income or loss is recorded as a component of “other income” with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce the Company’s carrying value of the investment. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. No impairment was recognized for the Company’s equity method investment during the years presented.

 

 

Fair Value of Financial Instruments. The financial instruments of the Company are reported on the Consolidated Balance Sheets at market or fair values or at carrying amounts that approximate fair values.

 

Receivables. Receivables other than notes receivable consist primarily of advisory and other fees owed to the Company by clients. The Company also may invest in notes receivable. Notes receivable are recorded in accordance with the terms of the agreement, and accrued interest is recorded when earned. Unearned fees are shown as a deduction from the related notes receivable and are amortized to interest income using the effective interest method. The Company reviews the need for an allowance for credit losses for notes and other receivables based on various factors including payment history, historical bad debt experience, existing economic conditions, aging and specific accounts identified as high risk. Uncollectible receivables, if any, are charged against the allowance when all reasonable efforts to collect the amounts due have been exhausted. The Company had no allowance for credit losses as of June 30, 2020, or 2019.

 

Property and Equipment. Fixed assets are recorded at cost. Depreciation for fixed assets is recorded using the straight-line method over the estimated useful life of each asset as follows: furniture and equipment are depreciated over 3 to 10 years, and the building and related improvements are depreciated over 14 to 40 years.

 

Leases. The Company leases equipment under various leasing arrangements. Leases may be classified as either financing leases or operating leases, as appropriate. The Company determines if a contract is a lease or contains a lease at inception. The Company accounts for its office facility leases as operating leases, which may include escalation clauses. The Company accounts for lease and nonlease components as a single component for its leases, except for real estate leases. The Company elected the short-term lease exception for leases with an initial term of 12 months or less. Consequently, such leases are not recorded on the Consolidated Balance Sheets. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain they will be exercised or not, respectively.

 

Fixed lease payments are included in right of use (“ROU”) assets and lease liabilities within other assets and liabilities, respectively, on the Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date using the Company’s incremental borrowing rate as the discount rate. Fixed lease payments made over the lease term are recorded as lease expense on a straight-line basis. Variable lease payments based on usage, changes in an index or market rate are expensed as incurred.

 

Upon adoption of ASU 2016-02, for existing leases, the Company elected to determine the discount rate based on the remaining lease term as of July 1, 2019. For new leases, the discount rates are based on the entire noncancelable lease term.

 

The Company is the lessor of certain areas of its owned office building under operating leases. The Company determines if a contract is a lease or contains a lease at inception. The Company elected not to separate lease and related non-lease components and account for the combined component as an operating lease.

 

Impairment of Long-Lived Assets. The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable. Impairment is indicated when the assets’ net book value is less than fair value of the asset. If this occurs, an impairment loss is recognized for the difference between the fair value and net book value. Factors that indicate potential impairment include: a significant decrease in the market value of the asset or a significant change in the asset’s physical condition or use. No impairments of long-lived assets were recorded during the years included in these financial statements.

 

Non-Controlling Interests. The Company reports “non-controlling interest in subsidiary” as equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”

 

Treasury Stock. Treasury stock purchases are accounted for under the cost method. The subsequent issuances of these shares are accounted for based on their weighted-average cost basis.

 

Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. Forfeitures are recognized as they occur.

 

 

Income Taxes. The Company and its non-Canadian subsidiaries file a consolidated federal income tax return. USCAN and Galileo file separate tax returns in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. The liability method requires that deferred tax assets be reduced by a valuation allowance in cases where it is more likely than not that the deferred tax assets will not be realized.

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2020, the Company did not have any accrued interest or penalties related to uncertain tax positions. The tax years from 2016 through 2019 remain open to examination by the U.S. Federal tax jurisdictions to which the Company is subject. The tax years from 2013 through 2019 remain open to examination by the non-U.S. Federal tax jurisdictions to which the Company is subject.

 

The Company has elected to treat the global intangible low-taxed income (GILTI) tax as a period expense. The Company also elected to use the tax law ordering approach when assessing the realization of net operating losses related to GILTI.

 

Revenue Recognition. The Company’s operating revenue is earned from investment advisory and administrative services provided to clients. Each distinct service promised in the agreements is considered a performance obligation and is the basis for determining when revenue is recognized. The fees are allocated to each distinct performance obligation and revenue is recognized when, or as, promises are satisfied. The consideration for services is generally variable and included in net revenues when it is improbable that a significant reversal could occur in the future. The timing of when clients are billed and related payment received varies in accordance with agreed-upon contractual terms. For current agreements, billing occurs after the Company has recognized revenue which results in accounts receivable and accrued revenue.

 

Investment Advisory Fees. The investment advisory agreements have a single performance obligation, since the promised services are not separately identifiable from other promises in the agreements and, therefore, are not distinct. Investment advisory fees are comprised of two components, a base fee and a performance fee, if applicable. Base investment advisory fees are recognized as the services are performed over time and are based upon agreed-upon percentages of average assets under management (“AAUM”), depending on contractual terms. These fees are received in cash after the end of each monthly period within 30 days. Investment advisory fees are affected by changes in assets under management, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Investment advisory fees are reported net of fee waivers.

 

Performance Fees. USGI receives investment advisory performance fees from certain funds. Performance fees for the equity funds within USGIF are a fulcrum fee that is a 0.25 percent adjustment upwards or downwards of the base investment advisory fees when there is a 5 percent difference between a fund’s performance and that of its benchmark index over the prior rolling 12 months. Performance fees are recorded when it is determined that they are no longer probable of significant reversal. These fees are received in cash or paid in cash after the end of each monthly period within 30 days. Performance fees are affected by changes in fund performance, benchmark index performance, and assets under management.

 

Administrative Services Fees. The administrative services agreement has a single performance obligation, since the promised services are not separately identifiable from other promises in the agreement and, therefore, are not distinct. Administrative services fees are recognized as the services are performed over time and are based upon agreed-upon percentages of AAUM. These fees are received in cash after the end of each monthly period within 30 days. Administrative services fees are affected by changes in assets under management, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Administrative services fees are reported net of fee waivers.

 

Fee Waivers. For certain clients, the Company has agreed to contractually limit the expenses or voluntarily waived or reduced its fees and/or agreed to pay expenses for the remaining USGIF funds. These fee waivers are deemed to be a reduction of the transaction price and are reported as a reduction of investment advisory fees and/or administrative services fees. These fees are paid in cash after the end of each monthly period within 30 days.

 

Dividends and Interest. Dividends are recorded on the ex-dividend date, and interest income is recorded on an accrual basis. Any discount between the cost and the principal amount of debt investments is amortized to interest income using the effective interest method. Both dividends and interest income are included in investment income.

 

Advertising Costs. The Company expenses advertising costs as they are incurred. The Company is reimbursed for certain advertising expenses related to USGIF from the distributor for USGIF.

 

 

Foreign Exchange. The balance sheets of certain foreign subsidiaries of the Company and certain foreign-denominated investment products are translated at the current exchange rate as of the end of the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange gains and losses resulting from balance sheet translations of foreign subsidiaries are excluded from income and are recorded in “accumulated other comprehensive income (loss)” on the Consolidated Balance Sheets. Net exchange gains and losses resulting from income or loss translations are included in income and are recorded in “investment income (loss)” on the Consolidated Statements of Operations. Investment transactions denominated in foreign currencies are converted to U.S. dollars using the exchange rate on the date of the transaction and any related gain or loss is included in “investment income (loss)” on the Consolidated Statements of Operations.

 

Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

 

Earnings Per Share. The Company computes and presents earnings per share attributable to U.S. Global Investors, Inc. in accordance with ASC 260, Earnings Per Share. Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to U.S. Global Investors, Inc. 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 Company has two classes of common stock with outstanding shares. Both classes share equally in dividend and liquidation preferences.

 

Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (loss), net of tax, is reported in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders’ Equity and includes any unrealized gains and losses on debt securities classified as available-for-sale, foreign currency translation adjustments.

 

Recent Accounting Pronouncements and Developments

 

Accounting Pronouncements Adopted During the Period

 

In February 2016, the FASB issued ASU 2016-02, Leases, and has subsequently issued several amendments (collectively, “ASU 2016-02”), which replaces existing lease accounting guidance. ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet by recording a lease asset and a lease liability. The new standard also requires enhanced disclosure surrounding the amount, timing and uncertainty of cash flows arising from leasing agreements. The new guidance was effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. The Company elected the transition method at the adoption date of July 1, 2019, whereby it initially applied the new standard at the adoption date, versus at the beginning of the earliest period presented. Upon adoption, the Company elected the package of transition practical expedients which would allow the Company to carry forward prior conclusions related to: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. Additionally, the Company elected the practical expedient to not separate lease components from nonlease components for all except real estate leases. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheets and will recognize related lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The adoption resulted in a gross up in total assets and total liabilities on the Company’s Consolidated Balance Sheets. Upon adoption on July 1, 2019, the Company's total assets and total liabilities increased by less than $400,000.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allowed entities the option to reclassify tax effects resulting from recording the effects of the Tax Cuts and Jobs Act enacted in December 2017 from accumulated other comprehensive income to retained earnings. The guidance was effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted this standard on July 1, 2019, with no impact on its consolidated financial statements.

 

Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, 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 the potential impact of this standard on its consolidated financial statements.

 

 

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial InstrumentsCredit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). ASU 2019-04 clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825). The standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. The new guidance in ASU 2019-04 on recognizing and measuring financial instruments is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. If an entity has adopted all of the amendments to ASU 2016-01, it is permitted to early adopt the new guidance. The Company does not believe the adoption of this new amendment will have a material impact on 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 Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

 

NOTE 3. DISCONTINUED OPERATIONS

 

USCAN entered into a binding letter of intent dated December 30, 2019, with Galileo whereby Galileo, pursuant to a capital restructuring, agreed to repurchase all of its common shares owned by USCAN for $1.0 million (Canadian). The transaction was subject to the approval of Canadian securities regulatory authorities and to the satisfaction of other closing conditions. The transaction closed effective March 2, 2020. Proceeds of approximately $746,000 were received (the equivalent of $1.0 million Canadian), and a realized gain of approximately $151,000 was recorded. In addition, approximately $228,000 in foreign currency loss was released from accumulated other comprehensive income (loss) into realized foreign currency loss upon closing the sale.

 

After the transaction, the Company has not and will not have continuing involvement with the operations of Galileo, except for an equity method investment in a fund managed by Galileo. See further information on this equity method investment in Note 4, Investments.

 

The results of Galileo through the March 2, 2020, closing date are reflected as “discontinued operations” in the Consolidated Statements of Operations and are therefore, excluded from continuing operations results. Comparative periods shown in the Consolidated Financial Statements have been adjusted to conform to this presentation. Operations of Galileo had previously been presented as the separate business segment of Investment Management Services – Canada.

 

The components of assets and liabilities classified as discontinued operations were as follows:

 

   

June 30,

 

(dollars in thousands)

 

2020

   

2019

 

Assets

               

Cash and cash equivalents

  $ -     $ 1,482  

Accounts and other receivables

    -       200  

Prepaid expenses

    -       52  

Net property and equipment

    -       38  

Other assets, non-current

    -       8  

Total assets held related to discounted operations

  $ -     $ 1,780  

Liabilities

               

Accounts payable

  $ -     $ 135  

Accrued compensation and related costs

    -       84  

Other accrued expenses

    -       262  

Total liabilities held related to discontinued operations

  $ -     $ 481  

 

Receivables of Galileo included advisory fees owed to Galileo by the funds and clients it manages. Galileo fixed assets, consisting of furniture, equipment and leasehold improvements, were depreciated over 2 to 5 years. Galileo had leases for office equipment and facilities. See further information on these leases in Note 11, Leases.

 

 

The components of income (loss) from discontinued operations were as follows. Note that amounts in the current fiscal year are through the March 2, 2020, closing date of sale.

 

   

Year Ended June 30,

 

(dollars in thousands)

 

2020

   

2019

 

Revenues

               

Advisory fees

  $ 235     $ 1,458  
      235       1,458  

Expenses

               

Employee compensation and benefits

    77       534  

General and administrative

    508       1,121  

Depreciation and amortization

    6       10  
      591       1,665  

Other Income (Loss)

               

Investment income

    24       18  

Other income (loss)

    (6 )     42  
      18       60  

Loss from discontinued operations of investment management services in Canada before income taxes

    (338 )     (147 )

Tax benefit

    -       -  

Loss from discontinued operations of investment management services in Canada

    (338 )     (147 )

Less: net loss attributable to non-controlling interest from discontinued operations

    (118 )     (51 )

Net loss attributable to U.S. Global Investors, Inc. from discontinued operations of investment management services in Canada

  $ (220 )   $ (96 )

 

Galileo provides advisory services for clients in Canada and receives advisory fees based on the agreed-upon percentages of AAUM or assets under management, depending on contractual terms. Galileo investment advisory agreements have a single performance obligation, since the promised services are not separately identifiable from other promises in the agreements and, therefore, are not distinct. Galileo may also receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks on an annual or quarterly basis. Performance fees, which were included in advisory fees in the table above, were recognized when it was determined that they were no longer probable of significant reversal. Galileo recorded no performance fees for the year ended June 30, 2020. Galileo recorded performance fees of $921,000 for the year ended June 30, 2019. Galileo may, at its discretion, waive and absorb some of its clients’ operating expenses. The amount of fund expenses waived and absorbed was $39,000 and $343,000 for the years ended June 30, 2020, and 2019, respectively.

 

Galileo files a separate tax return in Canada. At June 30, 2019, a valuation allowance for Galileo of $183,000 was included to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet.

 

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 cat