UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 


 

FORM 10-Q 

 


 

☒  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended SeptemberDecember 301, 2019

 

OR

 

☐  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________.

 

Commission File Number 0-13928

 

U.S. GLOBAL INVESTORS, INC.

(Exact name of registrant as specified in its charter)

 

Texas

74-1598370

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)

  

  

7900 Callaghan Road

San Antonio, Texas

78229

(Zip Code)

(Address of principal executive offices)

  

 

(210) 308-1234

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Class A common stock,

$0.025 par value per share

GROW

NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒  

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☒

  

On October 25, 2019,January 28, 2020, there were 13,866,811 shares of Registrant’s class A nonvoting common stock issued and 13,061,66613,060,985 shares of Registrant’s class A nonvoting common stock issued and outstanding; no shares of Registrant’s class B nonvoting common shares outstanding; and 2,068,737 shares of Registrant’s class C voting common stock issued and outstanding. 

 

 

 

 

TABLE OF CONTENTS

 

  

  

PART I. FINANCIAL INFORMATION

1

  

  

ITEM 1. FINANCIAL STATEMENTS

1

CONSOLIDATED BALANCE SHEETS

1

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

2

CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

3

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

4

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

67

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

1921

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

2327

ITEM 4. CONTROLS AND PROCEDURES

2428

  

  

PART II. OTHER INFORMATION

2529

  

  

ITEM 1A. RISK FACTORS

2529

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

2529

ITEM 6. EXHIBITS

2630

  

  

SIGNATURES

2731

 

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEMITEM 1.  FINANCIAL STATEMENTS

 

CONSCONSOLIDATEDOLIDATED BALANCE SHEETS

 

Assets

 

September 30, 2019

  

June 30, 2019

  

December 31,

2019

  

June 30,

2019

 

(dollars in thousands)

 

(unaudited)

      

(unaudited)

     

Current Assets

                

Cash and cash equivalents

 $2,618  $2,949  $1,796  $1,466 

Restricted cash

  1,025   1,025   1,025   1,025 

Investments in securities at fair value

  7,525   8,021   6,513   8,021 

Accounts and other receivables

  626   501   505   308 

Note receivable

  -   199   -   199 

Prepaid expenses

  267   344   367   293 

Total assets held related to discontinued operations

  1,440   1,780 

Total Current Assets

  12,061   13,039   11,646   13,092 
                

Net Property and Equipment

  1,692   1,746   1,606   1,708 
                

Other Assets

                

Deferred tax asset, long-term

  91   - 

Deferred tax asset, long term

  110   - 

Investments in securities at fair value, non-current

  4,100   7,166   3,509   7,166 

Other investments

  1,396   1,404   1,488   1,404 

Equity method investments

  279   309   256   309 

Right of use assets

  346   -   117   - 

Other assets, non-current

  72   72   80   64 

Total Other Assets

  6,284   8,951   5,560   8,943 

Total Assets

 $20,037  $23,736  $18,812  $23,743 

Liabilities and Shareholders’ Equity

                

Current Liabilities

                

Accounts payable

 $137  $166  $36  $31 

Accrued compensation and related costs

  304   395   275   311 

Dividends payable

  113   113   113   113 

Lease liability, short-term

  102   -   49   - 

Other accrued expenses

  702   750   590   496 

Total liabilities held related to discontinued operations

  394   481 

Total Current Liabilities

  1,358   1,424   1,457   1,432 
                

Long-Term Liabilities

                

Deferred tax liability

  -   133   -   133 

Lease liability, long-term

  247   -   68   - 

Total Long-Term Liabilities

  247   133   68   133 

Total Liabilities

  1,605   1,557   1,525   1,565 
                

Commitments and Contingencies (Note 13)

        

Commitments and Contingencies (Note 14)

        
                

Shareholders’ Equity

                

Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,866,811 shares and 13,866,751 shares at September 30, 2019, and June 30, 2019, respectively

  347   347 

Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,866,811 shares and 13,866,751 shares at December 31, 2019, and June 30, 2019, respectively

  347   347 

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

  -   -   -   - 

Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,068,737 shares and 2,068,797 shares at September 30, 2019, and June 30, 2019, respectively

  52   52 

Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,068,737 shares and 2,068,797 shares at December 31, 2019, and June 30, 2019, respectively

  52   52 

Additional paid-in-capital

  15,645   15,646   15,638   15,646 

Treasury stock, class A shares at cost; 805,145 shares and 804,959 shares at September 30, 2019, and June 30, 2019, respectively

  (1,888)  (1,888)

Treasury stock, class A shares at cost; 805,826 shares and 804,959 shares at December 31, 2019, and June 30, 2019, respectively

  (1,888)  (1,888)

Accumulated other comprehensive income (loss), net of tax

  (219)  (206)  (205)  (206)

Retained earnings

  4,080   7,761   2,964   7,761 

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

  18,017   21,712   16,908   21,712 

Non-Controlling Interest in Subsidiary

  415   467   379   467 

Total Shareholders’ Equity

  18,432   22,179   17,287   22,179 

Total Liabilities and Shareholders’ Equity

 $20,037  $23,736  $18,812  $23,744 

 

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

 

Page 1

Table of Contents

 

CONCONSOLIDATEDSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

Three Months Ended September 30,

  

Six Months Ended December 31,

  

Three Months Ended December 31,

 

(dollars in thousands, except per share data)

 

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 

Operating Revenues

                        

Advisory fees

 $860  $1,170  $1,602  $1,741  $842  $750 

Administrative services fees

  44   53   89   96   45   43 
  904   1,223   1,691   1,837   887   793 

Operating Expenses

                        

Employee compensation and benefits

  740   798   1,345   1,470   633   788 

General and administrative

  903   1,010   1,349   1,480   663   766 

Advertising

  23   40   74   80   51   40 

Depreciation and amortization

  53   58   102   110   51   55 
  1,719   1,906   2,870   3,140   1,398   1,649 

Operating Loss

  (815)  (683)  (1,179)  (1,303)  (511)  (856)

Other Income (Loss)

                        

Investment loss

  (3,020)  (907)  (3,481)  (4,331)  (451)  (3,430)

Loss from equity method investments

  (27)  (7)  (55)  (55)  (28)  (48)

Other income

  23   9   61   19   39   15 
  (3,024)  (905)  (3,475)  (4,367)  (440)  (3,463)

Loss Before Income Taxes

  (3,839)  (1,588)

Loss from Continuing Operations Before Income Taxes

  (4,654)  (5,670)  (951)  (4,319)

Provision for Income Taxes

                        

Tax benefit

  (224)  (356)  (249)  (1,100)  (25)  (744)

Loss from Continuing Operations

  (4,405)  (4,570)  (926)  (3,575)

Discontinued Operations

                

Income (loss) from discontinued operations of investment management services in Canada before income taxes

  (253)  334   (117)  571 

Tax expense

  -   11   -   11 

Income (Loss) from Discontinued Operations

  (253)  323   (117)  560 

Net Loss

  (3,615)  (1,232)  (4,658)  (4,247)  (1,043)  (3,015)

Less: Net Loss Attributable to Non-Controlling Interest

  (48)  (83)

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

  (88)  113   (40)  196 

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

 $(3,567) $(1,149) $(4,570) $(4,360) $(1,003) $(3,211)
                        

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

                 

Basic

 $(0.24) $(0.08)

Diluted

 $(0.24) $(0.08)

Basic Net Income (Loss) per Share

                

Loss from continuing operations

 $(0.29) $(0.30) $(0.06) $(0.24)

Income (loss) from discontinued operations

 $(0.01) $0.01  $-  $0.03 

Net loss

 $(0.30) $(0.29) $(0.06) $(0.21)

Diluted Net Income (Loss) per Share

                

Loss from continuing operations

 $(0.29) $(0.30) $(0.06) $(0.24)

Income (loss) from discontinued operations

 $(0.01) $0.01  $-  $0.03 

Net loss

 $(0.30) $(0.29) $(0.06) $(0.21)
                        

Basic weighted average number of common shares outstanding

  15,130,235   15,144,884   15,129,674   15,145,293   15,129,114   15,145,702 

Diluted weighted average number of common shares outstanding

  15,130,235   15,144,884   15,129,674   15,145,293   15,129,114   15,145,702 

 

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

 

Page 2

Table of Contents

 

CONCONSOLIDATEDSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

 

Three Months Ended September 30,

  

Six Months Ended December 31,

  

Three Months Ended December 31,

 

(dollars in thousands)

 

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 

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

 $(3,567

)

 $(1,149

)

 $(4,570) $(4,360) $(1,003) $(3,211)

Other Comprehensive Income (Loss), Net of Tax:

                        

Foreign currency translation adjustment

  (17

)

  27   1   (48)  18   (75)

Comprehensive Loss

  (3,584

)

  (1,122

)

  (4,569)  (4,408)  (985)  (3,286)

Less: Comprehensive Income (Loss) Attributable to Non-Controlling Interest

  (4

)

  8   -   (21)  4   (29)

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

 $(3,580

)

 $(1,130

)

 $(4,569) $(4,387) $(989) $(3,257)

 

 

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

 

Page 3

Table of Contents

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

(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

  

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

Purchases of 1,400 shares of Common Stock (class A)

  -   -   -   (3)  -   -   -   (3)

Issuance of stock under ESPP of 314 shares of Common Stock (class A)

  -   -   -   1   -   -   -   1 

Purchases of 3,400 shares of Common Stock (class A)

  -   -   -   (6)  -   -   -   (6)

Issuance of stock under ESPP of 733 shares of Common Stock (class A)

  -   -   -   2   -   -   -   2 

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

  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 

Dividends declared

  -   -   -   -   -   (114)  -   (114)  -   -   -   -   -   (227)  -   (227)

Stock bonuses

  -   -   (1)  2   -   -   -   1   -   -   (2)  4   -   -   -   2 

Other comprehensive loss, net of tax

  -   -   -   -   (13)  -   (4)  (17)

Stock-based compensation expense

  -   -   (6)  -   -   -   -   (6)

Other comprehensive income, net of tax

  -   -   -   -   1   -   -   1 

Net loss

  -   -   -   -   -   (3,567)  (48)  (3,615)  -   -   -   -   -   (4,570)  (88)  (4,658)

Balance at September 30, 2019 (13,866,811 shares of class A; 2,068,737 shares of class C)

 $347  $52  $15,645  $(1,888) $(219) $4,080  $415  $18,432 

Balance at December 31, 2019 (13,866,811 shares of class A; 2,068,737 shares of class C)

 $347  $52  $15,638  $(1,888) $(205) $2,964  $379  $17,287 

 

 

(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

  

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

Balance at July 1, 2018

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

Purchases of 1,000 shares of Common Stock (class A)

  -   -   -   (2)  -   -   -   (2)

Issuance of stock under ESPP of 628 shares of Common Stock (class A)

  -   -   -   2   -   -   -   2 

Purchases of 12,000 shares of Common Stock (class A)

  -   -   -   (15)  -   -   -   (15)

Issuance of stock under ESPP of 1,491 shares of Common Stock (class A)

  -   -   (1)  4   -   -   -   3 

Dividends declared

  -   -   -   -   -   -   -   -   -   -   -   -   -   (227)  -   (227)

Stock bonuses

  -   -   (1)  2   -   -   -   1   -   -   (2)  4   -   -   -   2 

Stock-based compensation expense

  -   -   2   -   -   -   -   2   -   -   2   -   -   -   -   2 

Other comprehensive income, net of tax

  -   -   -   -   19   -   8   27 

Net loss

  -   -   -   -   -   (1,149)  (83)  (1,232)

Balance at September 30, 2018 (13,866,691 shares of class A; 2,268,857 shares of class C)

 $347  $52  $15,651  $(1,876) $(212) $10,453  $443  $24,858 

Other comprehensive loss, net of tax

  -   -   -   -   (27)  -   (21)  (48)

Net income (loss)

  -   -   -   -   -   (4,360)  113   (4,247)

Balance at December 31, 2018 (13,866,691 shares of class A; 2,068,857 shares of class C)

 $347  $52  $15,649  $(1,885) $(258) $7,015  $610  $21,530 

 

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

 

Page 4

Table of Contents

 

U.S. GLOBAL INVESTORS, INC.

CONSCONSOLIDATEDOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY (CONTINUED) (UNAUDITED)

 

  

Three Months Ended September 30,

 

(dollars in thousands)

 

2019

  

2018

 

Cash Flows from Operating Activities:

        

Net loss

 $(3,615) $(1,232)

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

        

Depreciation and amortization

  53   58 

Net recognized loss on securities

  -   29 

Net loss from equity method investment

  27   7 

Provision for deferred taxes

  (224)  (361)

Stock bonuses

  1   1 

Stock-based compensation expense

  -   2 

Changes in operating assets and liabilities:

        

Accounts receivable and notes receivable

  73   612 

Prepaid expenses and other assets

  (270)  50 

Investment securities

  3,562   951 

Accounts payable and accrued expenses

  185   (406)

Total adjustments

  3,407   943 

Net cash used in operating activities

  (208)  (289)

Cash Flows from Investing Activities:

        

Return of capital on investments

  8   10 

Net cash provided by investing activities

  8   10 

Cash Flows from Financing Activities:

        

Issuance of common stock

  1   2 

Repurchases of common stock

  (3)  (2)

Dividends paid

  (113)  (114)

Net cash used in financing activities

  (115)  (114)

Effects of foreign currency translation

  (16)  25 

Net decrease in cash, cash equivalents, and restricted cash

  (331)  (368)

Beginning cash, cash equivalents, and restricted cash

  3,974   7,364 

Ending cash, cash equivalents, and restricted cash

 $3,643  $6,996 
         

Supplemental Disclosures of Cash Flow Information

        

Cash paid for income taxes

 $-  $119 

(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 September 30, 2019 (13,866,691 shares of class A; 2,068,857 shares of class C)

 $347  $52  $15,645  $(1,888) $(219) $4,080  $415  $18,432 

Purchases of 2,000 shares of Common Stock (class A)

  -   -   -   (3)  -   -   -   (3)

Issuance of stock under ESPP of 419 shares of Common Stock (class A)

  -   -   -   1   -   -   -   1 

Dividends declared

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

Stock bonuses

  -   -   (1)  2   -   -   -   1 

Stock-based compensation expense

  -   -   (6)  -   -   -   -   (6)

Other comprehensive income, net of tax

  -   -   -   -   14   -   4   18 

Net loss

  -   -   -   -   -   (1,003)  (40)  (1,043)

Balance at December 31, 2019 (13,866,811 shares of class A; 2,068,737 shares of class C)

 $347  $52  $15,638  $(1,888) $(205) $2,964  $379  $17,287 

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

 $347  $52  $15,651  $(1,876) $(212) $10,453  $443  $24,858 

Purchases of 11,000 shares of Common Stock (class A)

  -   -   -   (13)  -   -   -   (13)

Issuance of stock under ESPP of 863 shares of Common Stock (class A)

  -   -   (1)  2   -   -   -   1 

Dividends declared

  -   -   -   -   -   (227)  -   (227)

Stock bonuses

  -   -   (1)  2   -   -   -   1 

Other comprehensive loss, net of tax

  -   -   -   -   (46)  -   (29)  (75)

Net income (loss)

  -   -   -   -   -   (3,211)  196   (3,015)

Balance at December 31, 2018 (13,866,691 shares of class A; 2,068,857 shares of class C)

 $347  $52  $15,649  $(1,885) $(258) $7,015  $610  $21,530 

 

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

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

  

Six Months Ended December 31,

 

(dollars in thousands)

 

2019

  

2018

 

Cash Flows from Operating Activities:

        

Net loss

 $(4,658) $(4,247)

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

     

Depreciation and amortization

  102   110 

Net recognized loss on securities

  -   86 

Net loss from equity method investment

  55   55 

Net (income) loss from discontinued operations, net of tax

  253   (323)

Foreign currency transaction loss

  -   22 

Provision for deferred taxes

  (249)  (1,077)

Stock bonuses

  2   2 

Stock-based compensation expense

  -   2 

Changes in operating assets and liabilities:

        

Accounts receivable and notes receivable

  2   771 

Prepaid expenses and other assets

  (207)  (66)

Investment securities

  5,064   4,374 

Accounts payable and accrued expenses

  180   (393)

Total adjustments

  5,202   3,563 

Net cash provided by (used in) operating activities

  544   (684)

Cash Flows from Investing Activities:

        

Purchase of equity method investment

  -   (230)

Proceeds on sale of equity method investment

  -   230 

Return of capital on investments

  17   20 

Net cash provided by investing activities

  17   20 

Cash Flows from Financing Activities:

        

Issuance of common stock

  2   3 

Repurchases of common stock

  (6)  (15)

Dividends paid

  (227)  (227)

Net cash used in financing activities

  (231)  (239)

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

  330   (903)

Beginning cash, cash equivalents, and restricted cash

  2,491   5,766 

Ending cash, cash equivalents, and restricted cash

 $2,821  $4,863 
         

Supplemental Disclosures of Cash Flow Information

        

Cash paid for income taxes

 $-  $119 

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1. BASIS OF PRESENTATION

 

U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has prepared the consolidated financial statements pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments), which are, in management’s opinion, necessary for a fair presentation of results for the interim periods presented. The Company has consistently followed the accounting policies set forth in the notes to the consolidated financial statements in the Company’s Form 10-K for the fiscal year ended June 30, 2019, except for the adoption of new accounting pronouncements discussed below.

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, U.S. Global Investors (Bermuda) Limited, U.S. Global Investors (Canada) Limited (“USCAN”), and U.S. Global Indices, LLC, and its 65 percent interest in Galileo Global Equity Advisors Inc. (“Galileo”).

 

Galileo is consolidated with the operations of the Company. The non-controlling interest in this subsidiary is included in “Non-Controlling Interest in Subsidiary” in the equity section of the Consolidated Balance Sheets. Frank Holmes, CEO, and Lisa Callicotte, CFO, serve as directors of Galileo. The Company has entered into a binding letter of intent to sell its shares in Galileo. See Note 2 below for further information. Results of operations of Galileo are presented in the consolidated financial statements as discontinued operations.

 

There are two primary consolidation models in U.S. GAAP, the variable interest entity (“VIE”) and voting interest entity models. The Company’s evaluation for consolidation includes whether entities in which it has an interest or from which it receives fees are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the group of holders of the equity investment at risk lack certain characteristics of a controlling financial interest. The primary beneficiary is the entity that has the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns and consolidates the VIE on the basis of having a controlling financial interest.

 

The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain funds it advises, specifically, certain funds in U.S. Global Investors Funds (“USGIF” or the “Funds”). The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. See further information about these funds in Notes 23 and 3.4. In the ordinary course of business, the Company may choose to waive certain fees or assume operating expenses of the funds it advises for competitive, regulatory or contractual reasons (see Note 34 for information regarding fee waivers). The Company has not provided financial support to any of these entities outside the ordinary course of business. The Company’s risk of loss with respect to these VIEs is limited to the carrying value of its investments in, and fees receivable from, the entities. The Company does not consolidate these VIEs because it is not the primary beneficiary. The Company’s total exposure to unconsolidated VIEs, consisting of the carrying value of investment securities and receivables for fees, was $8.3$7.3 million at September 30,December 31, 2019, 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 years 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 2.3.

 

All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes. Certain quarterly amounts may not add to the year-to-date amount due to rounding. The results of operations for the threesix months ended September 30,December 31, 2019, are not necessarily indicative of the results to be expected for the entire year.

 

The unaudited interim financial information in these condensed financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s annual report.

 

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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 iswas 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 Company’s current leases are primarily for equipment and for office space for the Canadian subsidiary. 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 allowsallowed 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 iswas effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. An entity that adopts the guidance in an annual or interim period after the period of enactment will be able to choose whether to apply the amendments retrospectively to each period in which the effect of the Act is recognized or to apply the amendments in the period of adoption. The Company adopted this standard on July 1, 2019, with no impact on its consolidated 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 iswill be effective for public business entities that are SEC filerssmaller reporting companies, including U.S. Global, for fiscal years beginning after December 15, 2019, including interim periods within those years.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 Instruments – Credit 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 iswill be effective for all entitiessmaller reporting companies, including U.S. Global, for fiscal years beginning after December 15, 2019,2022, 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.

 

Significant Accounting Policies

 

As a result of the adoptions of accounting pronouncements during the current period that affected leases, the following accounting policies have been updated. For a complete listing of the Company's significant accounting policies, please refer to the Annual Report on Form 10-K for the year ended June 30, 2019.

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

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

 

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

 

The Company is the lessor of certain areas of its owned office building under operating leases expiring in various years through 2022.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.

 

NOTE 2. DISCONTINUED OPERATIONS

USCAN entered into a binding letter of intent dated December 30, 2019, with Galileo whereby Galileo, pursuant to a capital restructuring, will repurchase all of its common shares owned by USCAN for $1.0 million (Canadian). The transaction is subject to the approval of Canadian securities regulatory authorities and to the satisfaction of other closing conditions. It is anticipated that the transaction will close on or about March 2, 2020. After the transaction, the Company will have no 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 3, Investments.

The results of Galileo 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:

(dollars in thousands)

 

December 31, 2019

  

June 30, 2019

 

Assets

        

Cash and cash equivalents

 $1,078  $1,482 

Accounts and other receivables

  67   200 

Prepaid expenses

  47   52 

Net property and equipment

  33   38 

Right of use assets

  207   - 

Other assets, non-current

  8   8 

Total assets held related to discontinued operations

 $1,440  $1,780 

Liabilities

        

Accounts payable

 $42  $135 

Accrued compensation and related costs

  -   84 

Lease liability, short-term

  54   - 

Other accrued expenses

  142   262 

Lease liability, long-term

  156   - 

Total liabilities held related to discontinued operations

 $394  $481 

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The components of income (loss) from discontinued operations were as follows:

  

Six Months Ended December 31,

  

Three Months Ended December 31,

 

(dollars in thousands)

 

2019

  

2018

  

2019

  

2018

 

Revenues

                

Advisory fees

 $185  $1,185  $85  $1,005 
   185   1,185   85   1,005 

Expenses

                

Employee compensation and benefits

  54   301   26   185 

General and administrative

  383   581   166   284 

Depreciation and amortization

  5   5   3   3 
   442   887   195   472 

Other Income (Loss)

                

Investment income (loss)

  3   30   (7)  36 

Other income

  1   6   -   2 
   4   36   (7)  38 

Income (loss) from discontinued operations of investment management services in Canada before income taxes

  (253)  334   (117)  571 

Tax expense

  -   11   -   11 

Income (loss) from discontinued operations of investment management services in Canada

  (253)  323   (117)  560 

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

  (88)  113   (40)  196 

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

 $(165) $210  $(77) $364 

Galileo provides advisory services for clients in Canada and receives advisory fees based on the net asset values of the clients. Galileo may also receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. Performance fees, which are included in advisory fees in the table above, are recognized when it is determined that they are no longer probable of significant reversal. Galileo recorded no performance fees from these clients for the three and six months ended December 31, 2019, and $870,000 from these clients for three and six months ended December 31, 2018. Prior to November 2018, performance fees were typically recognized on an annual basis at calendar year-end. Due to changes in funds managed and new agreements in the second quarter of fiscal year 2019, these fees are recognized on a quarterly basis. The receipt of performance fees in the future is uncertain as the fees are dependent upon many factors, including market conditions. Galileo may, at its discretion, waive and absorb some of its clients’ operating expenses. The amount of fund expenses waived and absorbed (recovered) was ($20,000) and $20,000 for the three and six months ended December 31, 2019, and $45,000 and $161,000 for the three and six months ended December 31, 2018, respectively.

Galileo has leases for office equipment that expire in fiscal years 2023 and 2024 and for office facilities that expire in fiscal 2023. See further information on these leases in Note 7, Leases.

Galileo files a separate tax return in Canada. Galileo has net operating loss carryovers of $737,000 expiring between fiscal years 2027 and 2039. At December 31, 2019, and June 30, 2019, a valuation allowance for Galileo of $257,000 and $183,000, respectively, was included to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet.

NOTE 3. INVESTMENTS

 

As of September 30,December 31, 2019, the Company held investments in securities at fair value totaling approximately $11.6$10.0 million with a cost basis of approximately $14.1$13.1 million. The fair value of these investments is 58.053.3 percent of the Company’s total assets at September 30,December 31, 2019. In addition, the Company held other investments of approximately $1.4$1.5 million and investments of approximately $279,000$256,000 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.

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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). See further information about these investments in a separate section of this note.

 

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

 

The following details the components of the Company’s investments recorded at fair value as of September 30,December 31, 2019, and June 30, 2019.

 

 

September 30, 2019

  

December 31, 2019

 

(dollars in thousands)

 

Cost

  

Unrealized Gains (Losses)

  

Fair Value

  

Cost

  

Unrealized Gains (Losses)

  

Fair Value

 

Securities at fair value

                        

Common stock - International

 $5,641  $(2,275) $3,366  $5,641  $(2,892) $2,749 

Common stock - Domestic

  45   (45)  -   45   (45)  - 

Mutual funds - Fixed income

  7,525   -   7,525   6,513   -   6,513 

Mutual funds - Domestic equity

  929   (195)  734   929   (169)  760 

Total securities at fair value

 $14,140  $(2,515) $11,625  $13,128  $(3,106) $10,022 

 

  

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 $8.3$7.3 million and $8.8 million as of September 30,December 31, 2019, and June 30, 2019, respectively, at fair value invested in USGIF.

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Investment Income (Loss)

 

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

 

•  

realized gains and losses on sales of securities;

•  

unrealized gains and losses on securities at fair value;

•  

realized foreign currency gains and losses;

•  

other-than-temporary impairments on available-for-sale debt securities;

•  

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

•  

dividend and interest income.

 

The following summarizes investment income (loss) reflected in earnings:earnings from continuing operations:

 

 

Three Months Ended

  

Six Months Ended

  

Three Months Ended

 

(dollars in thousands)

 

September 30,

  

December 31,

  

December 31,

 

Investment Loss

 

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 

Unrealized losses on fair valued securities

 $(3,062) $(951) $(3,653) $(4,374) $(591) $(3,423)

Unrealized gains on equity securities without readily determinable fair values

  100   -   100   - 

Realized gains (losses) on sales of fair valued securities

  -   -   -   -   -   - 

Realized foreign currency gains

  4   2 

Realized foreign currency gains (losses)

  -   (44)  1   (57)

Impairments in equity investments without readily determinable fair values

  -   (29)  -   (86)  -   (57)

Dividend and interest income

  38   71   72   173   39   107 

Total Investment Loss

 $(3,020) $(907) $(3,481) $(4,331) $(451) $(3,430)

 

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The three and six months ended September 30,December 31, 2019, included approximately $3.1$491,000 and $3.6 million of net unrealized losses recognized on equity securities at fair value still held at September 30,December 31, 2019.

 

Investment income can be volatile and varies depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. The Company expects that gains and losses will continue to fluctuate in the future.

 

Fair Value Hierarchy

 

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

 

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

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

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

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

 

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

 

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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.

 

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The following presents fair value measurements, as of September 30,December 31, 2019, and June 30, 2019, for the major categories of U.S. Global’s investments measured at fair value on a recurring basis:

 

 

September 30, 2019

 
     

Significant

  

Significant

      

December 31, 2019

 
 

Quoted

Prices

  

Other

Inputs

  

Unobservable

Inputs

      

Quoted Prices

  

Significant

Other

Inputs

  

Significant

Unobservable

Inputs

     

(dollars in thousands)

 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 

Securities at fair value

                                

Common stock - International

 $2,633  $733  $-  $3,366  $2,216  $533  $-  $2,749 

Common stock - Domestic

  -   -   -   -   -   -   -   - 

Mutual funds - Fixed income

  7,525   -   -   7,525   6,513   -   -   6,513 

Mutual funds - Domestic equity

  734   -   -   734   760   -   -   760 

Total securities at fair value

 $10,892  $733  $-  $11,625  $9,489  $533  $-  $10,022 

 

 

June 30, 2019

 
     

Significant

  

Significant

      

June 30, 2019

 
 

Quoted

Prices

  

Other

Inputs

  

Unobservable

Inputs

      

Quoted Prices

  

Significant

Other

Inputs

  

Significant

Unobservable

Inputs

     

(dollars in thousands)

 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 

Securities at fair value

                                

Common stock - International

 $5,599  $832  $-  $6,431  $5,599  $832  $-  $6,431 

Common stock - Domestic

  -   -   -   -   -   -   -   - 

Mutual funds - Fixed income

  8,021   -   -   8,021   8,021   -   -   8,021 

Mutual funds - Domestic equity

  735   -   -   735   735   -   -   735 

Total securities at fair value

 $14,355  $832  $-  $15,187  $14,355  $832  $-  $15,187 

 

As of September 30,December 31, 2019, 94 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1 and 6 percent as Level 2. As of June 30, 2019, 95 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1 and 5 percent as Level 2.

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The Company has an investment in 10 million common shares of HIVE Blockchain Technologies Ltd. (“HIVE”), a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland and Sweden, at a cost of $2.4 million. The shares are subject to Canadian securities regulations. The investment was valued at approximately $1.8 million$731,000 at September 30,December 31, 2019, and $3.6 million at June 30, 2019. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is considered an early stage high-risk industry, and the nature of mining is expected to evolve. There has been significant volatility in the market price of HIVE, which has materially impacted the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income. The Company’s direct ownership of HIVE was approximately 3.1 percent as of September 30,December 31, 2019. Frank Holmes serves on the board as non-executive chairman of HIVE and held shares and options at September 30,December 31, 2019. Effective August 31, 2018, Mr. Holmes was named Interim Executive Chairman of HIVE while a search for a new CEO is undertaken.

 

The Company has an investment in Thunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in Canada, which was valued at approximately $1.1$1.2 million at September 30,December 31, 2019, of which $368,000$788,000 was classified as Level 1 and $705,000$440,000 was classified as Level 2 in the fair value hierarchy. The investment was valued at approximately $1.1 million at June 30, 2019, of which $377,000 was classified as Level 1 and $675,000 was classified as Level 2 in the fair value hierarchy. The portion of the investment classified in Level 2 is restricted for resale due to escrow provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares will be released from escrow in October 2019 and April 2020. The shares are subject to Canadian securities regulations. The Company’s ownership of Thunderbird was approximately 2.5 percent as of September 30,December 31, 2019. Frank Holmes serves on the board of this company as a director and held options at September 30,December 31, 2019.

 

The Company has an investment in GoldSpot Discoveries Corp. (“GoldSpot”), a technology company headquartered and traded in Canada which leverages machine learning in natural resource exploration. The investment was valued at approximately $467,000$743,000 at September 30,December 31, 2019, of which $439,000$696,000 was classified as Level 1 and $28,000$47,000 was classified as Level 2 in the fair value hierarchy. The investment was valued at approximately $1.7 million at June 30, 2019, of which $1.6 million was classified as Level 1 and $157,000 was classified as Level 2 in the fair value hierarchy. The portion of the investment classified in Level 2 is restricted for resale due to escrow and regulatory provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares will be released from escrow in February 2020 and August 2020. The shares are subject to Canadian securities regulations. The Company’s ownership of GoldSpot was approximately 7.5 percent as of September 30,December 31, 2019. Frank Holmes serves on the board of this company as independent chairman and held common stock and options at September 30,December 31, 2019.

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Other Investments

 

The carrying value of equity securities without readily determinable fair values was approximately $1.5 million and $1.4 million as of September 30,December 31, 2019, and June 30, 2019.2019, respectively.

 

The carrying value of equity securities without readily determinable fair values has been adjusted as follows:

 

 

Three Months Ended

  

Six Months Ended

  

Three Months Ended

 
 

September 30,

  

December 31,

  

December 31,

 

(dollars in thousands)

 

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 

Carrying amount, beginning of period

 $1,404  $2,207  $1,404  $2,207  $1,396  $2,168 

Adjustments:

                        

Reclassification to securities at fair value

  -   (1,499)  -   (1,499)

Impairments

  -   (29)  -   (86)  -   (57)

Other downward adjustments

  (8)  (10)  (16)  (20)  (8)  (10)

Upward adjustments

  100   -   100   - 

Carrying amount, end of period

 $1,396  $2,168  $1,488  $602  $1,488  $602 

 

Cumulative impairment adjustments to all equity securities without readily determinable fair values total $251,000 since their respective acquisitions through September 30,December 31, 2019. The cumulative amount of other downward adjustments, which primarily consist of return of capital distributions, is $661,000,$669,000, which includes $8,000 and $16,000 for the three and six months ended September 30, 2019.December 31, 2019, respectively. The cumulative amount of upward adjustments is $617,000$717,000 through September 30,December 31, 2019, which includes $100,000 in the three months and six months ended December 31, 2019.

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Investments Classified as Equity Method

 

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 (loss)” 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.

 

During fiscal year 2018, the Company, through USCAN, invested approximately $401,000 in the Galileo Technology and Blockchain Fund, a Canadian unit trust investment fund managed by Galileo. The fund reorganized in a taxable transaction into a limited partnership effective November 30, 2018, and the fund terminated. See further discussion below. During the period of ownership, the Company’s ownership ranged between approximately 20 and 25 percent, and the Company was considered to have the ability to exercise significant influence. Thus, the investment was accounted for under the equity method of accounting. 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. Included in other income (loss) for the three and six months ended September 30,December 31, 2018, is $7,000($43,000) and ($50,000), respectively, of equity method loss for the Galileo Technology and Blockchain Fund. Frank Holmes also directly held an investment in the fund. This fund had a concentration in technology and blockchain companies, which resulted in volatility in the fund’s valuation.

 

As noted above, the Galileo Technology and Blockchain Fund reorganized into a limited partnership effective November 30, 2018. The investment portfolio and unitholders’ interests of the Galileo Technology and Blockchain Fund and the Galileo Partners Fund transferred to the new entity, named Galileo Technology and Blockchain LP. The valuation of the Company’s investment in the Galileo Technology and Blockchain Fund as of November 30, 2018, of approximately $230,000 transferred to the Galileo Technology and Blockchain LP. The Company owns approximately 20 percent of the LP as of September 30,December 31, 2019, and the Company is considered to have the ability to exercise significant influence. Thus, the investment is accounted for under the equity method of accounting. Included in other income (loss) for the three and six months ended September 30,December 31, 2019, is $27,000($28,000) and ($55,000) of equity method loss for this investment. Included in other income (loss) for the three and six months ended December 31, 2018, is ($5,000) and ($5,000) of equity method loss for this investment. The Company’s investment in the LP was valued at approximately $279,000$256,000 at September 30,December 31, 2019. Frank Holmes also directly held an investment in the LP as of September 30,December 31, 2019. This investment has a concentration in technology and blockchain companies, which may result in volatility in its valuation.

 

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NOTE 34. INVESTMENT MANAGEMENT AND OTHER FEES

 

The following table presents operating revenues disaggregated by performance obligation:

 

 

Three Months Ended September 30,

  

Six Months Ended December 31,

  

Three Months Ended December 31,

 

(dollars in thousands)

 

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 

USGIF advisory fees

 $836  $911  $1,660  $1,684  $824  $773 

USGIF performance fees paid

  (197)  (86)  (312)  (262)  (115)  (176)

ETF advisory fees

  121   166   254   319   133   153 

Total Advisory Fees

  1,602   1,741   842   750 

USGIF administrative services fees

  44   53   89   96   45   43 

Subtotal investment management services fees

  804   1,044 

Galileo advisory fees

  100   179 

Galileo performance fees

  -   - 

Subtotal investment management services fees - Canada

  100   179 

Total Operating Revenue

 $904  $1,223  $1,691  $1,837  $887  $793 

 

The Company serves as investment adviser to USGIF and receives a fee based on a specified percentage of average assets under management. The advisory agreement for the equity funds within USGIF provides for a base advisory 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.

 

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The Company has agreed to contractually limit the expenses of the Near-Term Tax Free Fund through April 2020. The Company has voluntarily waived or reduced its fees and/or agreed to pay expenses on the remaining USGIF funds. These caps will continue on a voluntary basis at the Company’s discretion. The aggregate fees waived and expenses borne by the Company for USGIF for the three and six months ended September 30,December 31, 2019, were $144,000$122,000 and $266,000, respectively, compared with $165,000$212,000 and $377,000, respectively, for the corresponding period in the prior fiscal year. Management cannot predict the impact of future waivers due the number of variables and the range of potential outcomes.

 

The Company receives administrative service fees from USGIF based on the average daily net assets at an annual rate 0.05 percent per investor class and 0.04 percent per institutional class of each fund. The institutional classes closed in June 2019.

 

The Company also serves as investment advisor to two exchange-traded funds (ETFs): U.S. Global Jets ETF (ticker JETS) and U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU). The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs.

 

Galileo provides advisory services for clients in Canada and receives advisory fees based on the net asset values of the clients. Galileo may also receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. Performance fees are recognized when it is determined that they are no longer probable of significant reversal. Prior to November 2018, performance fees were typically recognized on an annual basis at calendar year-end. Due to changes in funds managed and new agreements in the second quarter of fiscal year 2019, these fees are recognized on a quarterly basis. The receipt of performance fees in the future is uncertain as the fees are dependent upon many factors, including market conditions. Galileo may, at its discretion, waive and absorb some of its clients’ operating expenses. The amount of fund expenses waived and absorbed was $40,000 and $116,000 for the three months ended September 30, 2019, and 2018, respectively.

As of September 30,December 31, 2019, the Company had $418,000$329,000 in receivables from fund clients, of which $226,000$281,000 was from USGIF $151,000 from Galileo clients and $41,000$48,000 from ETFs. As of June 30, 2019, the Company had $371,000$201,000 in receivables from fund clients, of which $159,000 was from USGIF $170,000 from Galileo clients and $42,000 from ETFs.

 

NOTE 4.5. 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. A reconciliation of cash, cash equivalents, and restricted cash reported from the consolidated balance sheets to the statements of cash flows is shown below:

 

(dollars in thousands)

 

September 30, 2019

  

June 30, 2019

  

December 31, 2019

  

June 30, 2019

 

Cash and cash equivalents

 $2,618  $2,949  $1,796  $1,466 

Restricted cash

  1,025   1,025   1,025   1,025 

Total cash, cash equivalents, and restricted cash

 $3,643  $3,974  $2,821  $2,491 

 

NOTE 56. NOTES RECEIVABLE

 

Previously, the Company held a note receivable with an unrelated third party which had an annual interest rate of 15 percent and a stated maturity in November 2021. Interest was paid monthly. Quarterly principal repayments started in February 2019. The balance of this note was $199,000 at June 30, 2019, all of which was classified in current assets. The issuer elected an early redemption option and paid the note in full in July 2019. Proceeds were received for the principal and all accrued interest, and no gain or loss was realized.

 

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NOTE 6.7. LEASES

 

The Company has leaseslease agreements on a continuing operations basis for office equipment that expire between fiscal years 2020 and 2024 and for office facilities and other real estate in Canada that expire between fiscal years 20212020 and 2023. Lease expense included in continuing operations totaled $69,000$38,000 and $77,000$76,000 for the three and six months ended September 30,December 31, 2019, and $46,000 and $96,000 for the three and six months ended December 31, 2018, respectively.

 

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The Company’s subsidiary Galileo, which is classified as discontinued operations as described in Note 2, has lease agreements for office equipment that expire in fiscal years 2021 and 2024 and for office facilities that expire in fiscal 2023. Lease expense included in discontinued operations totaled $29,000 and $60,000 for the three and six months ended December 31, 2019, and $27,000 and $54,000 for the three and six months ended December 31, 2018, respectively.

 

TheFor continuing operations, the components of lease expense included in general and administrative expense on the Consolidated Statements of Operations and qualitative information concerning the company’sCompany’s operating leases were as follows:

 

 

Three Months Ended

  

Six Months Ended

  

Three Months Ended

 
 

September 30,

  

December 31,

  

December 31,

 

(dollars in thousands)

 

2019

  

2019

  

2019

 

Operating lease cost

 $44  $26  $13 

Short-term lease cost

  25   50   25 

Total lease cost

 $69  $76  $38 
            

Cash paid for amounts included in measurement of lease liabilities:

            

Operating cash flows from operating leases

 $33  $26  $13 
            

Right-of-use assets obtained in exchanged for:

            

Net operating lease liabilities

 $375  $141  $- 
            

Weighted-average remaining lease term (in years)

  3.38   2.33     

Weighted-average discount rate

  4.11%  4.11%    

 

Maturities of lease liabilities from continuing operations as of September 30,December 31, 2019, are as follows:

 

(dollars in thousands)

        

Fiscal Year

 

Operating Leases

  

Operating Leases

 

2020 (excluding the three months ended September 30, 2019)

 $85 

2020 (excluding the six months ended December 31, 2019)

 $26 

2021

  115   53 

2022

  106   44 

2023

  64 

2024

  5 

Total lease payments

  375   123 

Less imputed interest

  (26)  (6)

Total

 $349  $117 

 

The Company is the lessor of certain areas of its owned office building under operating leases expiring in various years through 2022.fiscal year 2023. At the commencement of an operation lease, no income is recognized; subsequently, lease payments received are recognized on a straight-line basis. Lease income included in other income on the Consolidated Statements of Operations for the three and six months ending SeptemberDecember 31, 2019, was $24,000 and $41,000, respectively. The cost of obtaining lessor contracts, which is included in other assets on the Consolidated Balance Sheets, was $8,000 and $0 at December 31, 2019, and June 30, 2019, was $17,000.respectively.

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A summary analysis of annual undiscounted cash flows to be received on leases as of September 30,December 31, 2019, is as follows:

 

(dollars in thousands)

        

Fiscal Year

 

Operating Leases

  

Operating Leases

 

2020 (excluding the three months ended September 30, 2019)

 $37 

2020 (excluding the six months ended December 31, 2019)

 $32 

2021

  49   97 

2022

  32   81 

2023

  34 

Total lease payments

 $118  $244 

 

The Company may terminate the building leases with one hundred eighty days written notice if it sells the property. If the Company terminates the lease, the Company will pay the tenant a termination fee of the lesser of six months of the base monthly rent or the base monthly rent times the number of months remaining in the initial term.

 

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NOTE 78. BORROWINGS

 

As of September 30,December 31, 2019, the Company has no borrowings or long-term liabilities except for leases.lease obligations.

 

The Company has access to a $1 million credit facility for working capital purposes. The credit agreement requires the Company to maintain certain covenants; the Company has been in compliance with these covenants during the current fiscal year. The credit agreement will expire on May 31, 2020, and the Company intends to renew annually. The credit facility is collateralized by $1 million at September 30,December 31, 2019, shown as restricted cash on the balance sheet, held in deposit in a money market account at the financial institution that provided the credit facility. As of September 30,December 31, 2019, the credit facility remains unutilized by the Company.

 

NOTE 89. STOCKHOLDERS’ EQUITY

 

Payment of cash dividends is within the discretion of the Company’s board of directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions. A monthly dividend of $0.0025 per share was paid during fiscal year 2019 and for July 2019 through SeptemberDecember 2019 and is authorized through December 2019,March 2020, at which time it will be considered for continuation.

 

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, 2019.2020. The repurchase program has been in place since December 2012, and the Board of Directors has annually renewed the repurchase program each calendar year. The acquired shares may be used for corporate purposes, including shares issued to employees in the Company’s stock-based compensation programs. For the three and six months ended September 30,December 31, 2019, and 2018, the Company repurchased 1,4002,000 and 1,0003,400 class A shares using cash of $3,000 and $2,000,$6,000, respectively. For the three and six months ended December 31, 2018, the Company repurchased 11,000 and 12,000 class A shares using cash of $13,000 and $15,000, respectively.

 

Stock compensation plans

 

The Company’s stock option plans provide for the granting of class A shares as either incentive or nonqualified stock options to employees and non-employee directors. Options are subject to terms and conditions determined by the Compensation Committee of the Board of Directors. There were 4,0002,000 options outstanding and exercisable at September 30,December 31, 2019, at a weighted average exercise price of $7.53.$2.74. There were no options granted or exercised for the three or six months ended December 31, 2019. There were 2,000 options that were forfeited during the three and six months ended December 31, 2019. There were no options granted, exercised, or forfeited for the three or six months ended September 30, 2019, orDecember 31, 2018.

 

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. There was no stock-based compensation expense for the three and six months ended September 30,December 31, 2019. Stock-based compensation expense was $0 and $2,000 for the three and six months ended September 30,December 31, 2018. As of September 30,December 31, 2019, and 2018, there was no unrecognized share-based compensation cost related to share-based awards granted under the plans.

 

NOTE 910. EARNINGS PER SHARE

 

The basic earnings per share (“EPS”) calculation excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised.

 

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The following table sets forth the computation for basic and diluted EPS:

 

 

Three Months Ended September 30,

  

Six Months Ended December 31,

  

Three Months Ended December 31,

 

(dollars in thousands, except per share data)

 

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 

Net Loss

 $(3,615) $(1,232)

Less: Net Loss Attributable to Non-Controlling Interest

  (48)  (83)

Loss from Continuing Operations

 $(4,405) $(4,570) $(926) $(3,575)
                

Income (Loss) from Discontinued Operations

  (253)  323   (117)  560 

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

  (88)  113   (40)  196 

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

  (165)  210   (77)  364 

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

 $(3,567) $(1,149) $(4,570) $(4,360) $(1,003) $(3,211)
                        

Weighted average number of outstanding shares

                        

Basic

  15,130,235   15,144,884   15,129,674   15,145,293   15,129,114   15,145,702 

Effect of dilutive securities

                        

Employee stock options

  -   -   -   -   -   - 

Diluted

  15,130,235   15,144,884   15,129,674   15,145,293   15,129,114   15,145,702 
                        

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

                        

Basic

 $(0.24) $(0.08)

Diluted

 $(0.24) $(0.08)

Basic Net Income (Loss) per Share

                

Loss from continuing operations

 $(0.29) $(0.30) $(0.06) $(0.24)

Net income (loss) from discontinued operations

 $(0.01) $0.01  $-  $0.03 

Net loss

 $(0.30) $(0.29) $(0.06) $(0.21)

Diluted Net Income (Loss) per Share

                

Loss from continuing operations

 $(0.29) $(0.30) $(0.06) $(0.24)

Income (loss) from discontinued operations

 $(0.01) $0.01  $-  $0.03 

Net loss

 $(0.30) $(0.29) $(0.06) $(0.21)

 

The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the three and six months ended September 30,December 31, 2019, employee stock options for 2,000 were excluded from diluted EPS. For the three and six months ended December 31, 2018, employee stock options for 4,000 were excluded from diluted EPS, respectively.EPS.

 

During the three and six months ended September 30,December 31, 2019, and 2018, the Company repurchased class A shares on the open market. Upon repurchase, these shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.

 

NOTE 1011. INCOME TAXES

 

The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. USCAN and Galileo file separate tax returns in Canada. See income tax information for Galileo in Note 2, Discontinued Operations. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes resulting from the use of the liability method of accounting for income taxes.

 

For U.S. federal income tax purposes at September 30,December 31, 2019, the Company has U.S. federal net operating loss carryovers of $7.7$8.3 million with $2.0 million and $2.7 million expiring in fiscal years 2035 and 2036, respectively, and $3.0$3.6 million with no expiration. Certain limitations apply to the utilization of net operating losses with no expiration, which were generated after fiscal year 2018. The Company has capital loss carryovers of $1.1 million with $744,000$728,000 and $348,000 expiring in fiscal years 2022 and 2023, respectively. The Company has charitable contribution carryovers totaling approximately $40,000$55,000 with $19,000; $5,000; $11,000$10,000; $5,000 and $5,000$16,000 expiring in fiscal years 2020, 2021, 2023, 2024, and 2025, respectively. For Canadian income tax purposes, USCAN has total net operating loss carryovers of $294,000 with $236,000 and $58,000 expiring in fiscal years 2039 and 2040, respectively, and capital loss carryovers of $75,000 with no expiration. Also for Canadian income tax purposes, Galileo has net operating loss carryovers of $600,000 with $101,000; $44,000; $120,000; $71,000; $124,000 and $140,000 expiring in fiscal years 2027, 2030, 2036, 2037, 2038 and 2039, respectively. If certain changes in the Company's ownership should occur, there could be an annual limitation on the amount of net operating loss carryovers that could be utilized.

 

For Canadian income tax purposes, USCAN has total net operating loss carryovers of $354,000 with $236,000 and $118,000 expiring in fiscal years 2039 and 2040, respectively, and capital loss carryovers of $75,000 with no expiration.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. At September 30,December 31, 2019, and June 30, 2019, a valuation allowance of $2.8$2.7 million and $2.1$1.9 million, respectively, was included to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet.

 

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NOTE 1112. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following tables present the change in accumulated other comprehensive income (loss) (“AOCI”) by component:

 

 

Three Months Ended September 30,

  

Six Months Ended December 31,

  

Three Months Ended December 31,

 

(dollars in thousands)

 

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 

Beginning Balance

 $(206) $1,858  $(206) $1,858  $(219) $(212)

Foreign currency translation adjustment, net of tax 1

  (13)  19   1   (27)  14   (46)

Reclassification as a result of adoption of accounting guidance 2

  -   (2,089)  -   (2,089)  -   - 

Ending Balance

 $(219) $(212) $(205) $(258) $(205) $(258)

 

1.

Amounts include no tax expense or benefit.

2.

Effective July 1, 2018, upon the adoption of ASU 2016-01, the Company no longer has an available-for-sale category for equity securities for which changes in fair value are recognized in other comprehensive income (loss).

 

NOTE 1213. FINANCIAL INFORMATION BY BUSINESS SEGMENT

 

The Company operates principally in threetwo business segments:segments on a continuing operations basis: providing investment management services to USGIF offshore clients and ETF clients; investment management services in Canada; and investing for its own account in an effort to add growth and value to its cash position. The former segment of investment management services in Canada is discussed in Note 2, Discontinued Operations. The following schedule details total revenues and income for continuing operations by business segment:

 

(dollars in thousands)

 

Investment

Management

Services

  

Investment

Management

Services - Canada

  

Corporate

Investments

  

Consolidated

  

Investment Management Services

  

Corporate Investments

  

Consolidated

 

Three months ended September 30, 2019

                

Net operating revenues

 $804  $100  $-  $904 

Investment income (loss)

 $-  $10  $(3,030) $(3,020)

Loss from equity method investments

 $-  $-  $(27) $(27)

Other income

 $21  $2  $-  $23 

Loss before income taxes

 $(587) $(136) $(3,116) $(3,839)

Depreciation and amortization

 $48  $2  $3  $53 

Gross identifiable assets at September 30, 2019

 $4,690  $1,695  $13,561  $19,946 

Deferred tax asset

             $91 

Consolidated total assets at September 30, 2019

             $20,037 

Three months ended September 30, 2018

                

Six months ended December 31, 2019

            

Net operating revenues

 $1,044  $179  $-  $1,223  $1,691  $-  $1,691 

Investment loss

 $-  $(6) $(901) $(907) $-  $(3,481) $(3,481)

Loss from equity method investments

 $-  $-  $(7) $(7) $-  $(55) $(55)

Other income

 $5  $4  $-  $9  $61  $-  $61 

Loss before income taxes

 $(405) $(237) $(946) $(1,588)

Loss from continuing operations before income taxes

 $(1,000) $(3,654) $(4,654)

Depreciation and amortization

 $56  $2  $-  $58  $96  $6  $102 

Gross identifiable assets at December 31, 2019

 $5,207  $12,055  $17,262 

Total assets held related to discontinued operations

         $1,440 

Deferred tax asset

         $110 

Consolidated total assets at December 31, 2019

         $18,812 

Six months ended December 31, 2018

            

Net operating revenues

 $1,837  $-  $1,837 

Investment loss

 $-  $(4,331) $(4,331)

Loss from equity method investments

 $-  $(55) $(55)

Other income

 $19  $-  $19 

Loss from continuing operations before income taxes

 $(1,211) $(4,459) $(5,670)

Depreciation and amortization

 $110  $-  $110 

Three months ended December 31, 2019

            

Net operating revenues

 $887  $-  $887 

Investment loss

 $-  $(451) $(451)

Loss from equity method investments

 $-  $(28) $(28)

Other income

 $39  $-  $39 

Loss from continuing operations before income taxes

 $(413) $(538) $(951)

Depreciation and amortization

 $48  $3  $51 

Three months ended December 31, 2018

            

Net operating revenues

 $793  $-  $793 

Investment loss

 $-  $(3,430) $(3,430)

Loss from equity method investments

 $-  $(48) $(48)

Other income

 $15  $-  $15 

Loss from continuing operations before income taxes

 $(805) $(3,514) $(4,319)

Depreciation and amortization

 $55  $-  $55 

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Net operating revenues from investment management services includes operating revenues from USGIF of $683,000$754,000 and $878,000$1.4 million, respectively, for the three and six months ended September 30,December 31, 2019, and 2018, respectively.$640,000 and $1.5 million, respectively, for the three and six months ended December 31, 2018. Net operating revenues from investment management services also include operating revenues from ETF clients of $121,000$133,000 and $166,000$254,000, respectively, for the three and six months ended September 30,December 31, 2019, and 2018, respectively.

Net operating revenues from investment management services in Canada includes revenues from Galileo funds of $100,000$153,000 and $177,000$319,000, respectively, for the three and six months ended September 30, 2019, and 2018, respectively.December 31, 2018.

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NOTE 1314. CONTINGENCIES AND COMMITMENTS

 

The Company continuously reviews all investor, employee and vendor complaints, and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated through consultation with legal counsel, and a loss contingency is recorded if probable and reasonably estimable.

 

During the normal course of business, the Company may be subject to claims, legal proceedings, and other contingencies. These matters are subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. The Company establishes accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial statements of the Company.

 

The Board has authorized a monthly dividend of $0.0025 per share through December 2019,March 2020, at which time it will be considered for continuation by the Board. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions. The total amount of cash dividends expected to be paid to class A and class C shareholders from OctoberJanuary to December 2019March 2020 is approximately $113,000.

 

As discussed in Note 2, Discontinued Operations, the Company has a binding letter of intent to sell its 65-percent ownership in Galileo. It is anticipated that the transaction will close on or about March 2, 2020. The Company will continue to record its 65 percent interest of Galileo operations, which may include operational losses, until the close of the transaction.

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ITEMITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has made forward-looking statements concerning the Companys performance, financial condition, and operations in this report. The Company from time to time may also make forward-looking statements in its public filings and press releases. Such forward-looking statements are subject to various known and unknown risks and uncertainties and do not guarantee future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Company’s control, including: (i) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, (iii) the effect of government regulation on the Company’s business, and (iv) market, credit, and liquidity risks associated with the Company’s investment management activities. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward-looking information not to place undue reliance on such statements. All such forward-looking statements are current only as of the date on which such statements were made.

 

BUSINESS SEGMENTS

 

The Company, with principal operations located in San Antonio, Texas, manages threetwo business segments:segments on a continuing operations basis: (1) the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors;investors, and (2) the Company invests for its own account in an effort to add growth and value to its cash position.

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”), owns a 65 percent controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), which offers investment management products and services in Canada; and (3) the Company invests for its own account in an effortCanada. USCAN entered into a binding letter of intent dated December 30, 2019, with Galileo whereby Galileo, pursuant to add growth and value to its cash position. Although the Company usually generates the majoritya capital restructuring, will purchase back all of its revenues fromcommon shares owned by the USCAN for $1.0 million (Canadian). The transaction is subject to the approval of Canadian securities regulatory authorities and to the satisfaction of other closing conditions. It is anticipated that the transaction will close on or about March 2, 2020. See Note 2, Discontinued Operations, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, for further information on the pending transaction. The Company will continue to record its investment advisory segments,65 percent interest of Galileo operations, which may include operational losses, until the Company holdsclose of the transaction. At December 31, 2019, total Galileo assets under management were $16.9 million versus $31.5 million at December 31, 2018, a significant amountdecrease of its total46.3 percent. During the six months ended December 31, 2019, average assets in investments. under management were $22.9 million versus $39.8 million during the six months ended December 31, 2018. Total assets under management at December 31, 2019, were $16.9 million versus $30.0 million at June 30, 2019, the Company’s prior fiscal year end.

The following is a brief discussion of the Company’s three business segments.segments included in continuing operations.

 

Investment Management Services

 

The Company generates operating revenues from managing and servicing U.S. Global Investors Funds (“USGIF” or the “Funds”). These revenues are largely dependent on the total value and composition of assets under its management. Fluctuations in the markets and investor sentiment directly impact the asset levels of the Funds, thereby affecting income and results of operations. Detailed information regarding the Funds managed by the Company within USGIF can be found on the Company’s website, www.usfunds.com, including the prospectus and performance information for each Fund. The mutual fund shareholders in USGIF are not required to give advance notice prior to redemption of shares in the Funds.

 

The Company provides advisory services for two exchange-traded fund (“ETF”) clients and receives monthly advisory fees based on the net asset values of the funds. Information on the ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. The ETFs’ authorized participants are not required to give advance notice prior to redemption of shares in the ETFs, and the ETFs do not charge a redemption fee.

 

At September 30,December 31, 2019, total assets under management, including USGIF and ETF clients, were $498.0$543.6 million versus $559.2$504.0 million at September 30,December 31, 2018, a decreasean increase of 10.97.9 percent. During the threesix months ended September 30,December 31, 2019, average assets under management were $513.8$510.7 million versus $579.3$550.8 million during the threesix months ended September 30,December 31, 2018. Total assets under management as of period-end at September 30,December 31, 2019, including USGIF and ETF clients, were $498.0$543.6 million versus $510.1 million at June 30, 2019, the Company’s prior fiscal year end.

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The following tables summarize the changes in assets under management for USGIF for the three and six months ended September 30,December 31, 2019, and 2018:

 

 

Changes in Assets Under Management

 
 

Changes in Assets Under Management

  

Six Months Ended December 31,

 
 

Three Months Ended September 30, 2019

  

2019

  

2018

 

(dollars in thousands)

 

Equity

  

Fixed Income

  

Total

  

Equity

  

Fixed Income

  

Total

  

Equity

  

Fixed Income

  

Total

 

Beginning Balance

 $334,684  $90,921  $425,605  $334,684  $90,921  $425,605  $389,442  $106,231  $495,673 

Market appreciation

  5,411   397   5,808 

Market appreciation (depreciation)

  43,326   728   44,054   (54,893)  680   (54,213)

Dividends and distributions

  -   (308)  (308)  (2,973)  (603)  (3,576)  (20,774)  (626)  (21,400)

Net shareholder redemptions

  (15,451)  (610)  (16,061)  (19,768)  (5,304)  (25,072)  (3,611)  (9,081)  (12,692)

Ending Balance

 $324,644  $90,400  $415,044  $355,269  $85,742  $441,011  $310,164  $97,204  $407,368 
                        

Average investment management fee

  0.97%  0.00%  0.76%  0.97%  0.02%  0.77%  0.97%  0.01%  0.75%

Average net assets

 $343,475  $90,358  $433,833  $336,917  $89,559  $426,476  $343,473  $101,557  $445,030 

 

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Changes in Assets Under Management

 
 

Changes in Assets Under Management

  

Three Months Ended December 31,

 
 

Three Months Ended September 30, 2018

  

2019

  

2018

 

(dollars in thousands)

 

Equity

  

Fixed Income

  

Total

  

Equity

  

Fixed Income

  

Total

  

Equity

  

Fixed Income

  

Total

 

Beginning Balance

 $389,442  $106,231  $495,673  $324,644  $90,400  $415,044  $347,350  $100,643  $447,993 

Market appreciation (depreciation)

  (29,374)  160   (29,214)  37,915   331   38,246   (25,520)  521   (24,999)

Dividends and distributions

  -   (302)  (302)  (2,973)  (295)  (3,268)  (20,774)  (324)  (21,098)

Net shareholder redemptions

  (12,718)  (5,446)  (18,164)

Net shareholder purchases (redemptions)

  (4,317)  (4,694)  (9,011)  9,108   (3,636)  5,472 

Ending Balance

 $347,350  $100,643  $447,993  $355,269  $85,742  $441,011  $310,164  $97,204  $407,368 
                        

Average investment management fee

  0.98%  0.00%  0.77%  0.98%  0.04%  0.78%  0.96%  0.00%  0.73%

Average net assets

 $366,078  $103,579  $469,657  $330,360  $88,759  $419,119  $320,867  $99,536  $420,403 

 

As shown above, USGIF period-end assets under management were lowerhigher at September 30,December 31, 2019, compared to September 30,December 31, 2018. Also,However, average net assets for the three-month period in the current fiscal year were slightly lower than the same period in the previous fiscal year. Average net assets for the six-month period in the current fiscal year were also lower than the same period in the previous fiscal year. The three and six months ended September 30,December 31, 2019, had net market appreciation across all funds, but primarily in the gold funds, compared to net market depreciation for the three and six months ended September 30,December 31, 2018, primarily in the natural resources and international equity funds. ThereA significant portion of the dividends and distributions shown above were reinvested and included in net shareholder redemptionspurchases (redemptions). The combined amounts for these two lines for all periods shown contributing to the decline in net assets.were negative.

 

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 for the three months ended September 30, 2019,78 and 77 basis points for the three and six months ended December 31, 2019, and 73 and 75 basis points for the same periodperiods in the prior year. The average investment management fee for the equity funds was 98 and 97 basis points for the three and six months ended September 30,December 31, 2019, and 9896 and 97 basis points for the same periodperiods in the prior year. The Company has agreed to contractually or voluntarily limit the expenses of the Funds. Therefore, the Company waived or reduced its fees and/or agreed to pay expenses of the Funds. Due to fee waivers, the average investment management fee for the fixed income funds was 4 and 2 basis points for the three and six months ended December 31, 2019, and nil and 1 basis points for both periods.

Investment Management Services - Canada

The Company owns a 65 percent controlling interestthe same periods in the Canadian asset management firm Galileo. These revenues are largely dependent on the total value and composition of assets under its management. Fluctuations in the markets and investor sentiment directly impact the funds’ asset levels, thereby affecting income and results of operations.

On September 29, 2017, Galileo launched its first ETF, U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOGO), on the Toronto Stock Exchange. This ETF did not gain a profitable level of assets and was liquidated in September 2019.

Galileo also started accepting purchases in the Galileo Partners Fund, a unit trust investment fund, in June 2017 and launched the Galileo Technology and Blockchain Fund, also a unit trust investment fund, in November 2017. The Galileo Technology and Blockchain Fund reorganized into a limited partnership in November 2018, named the Galileo Technology and Blockchain LP, and the portfolio assets and unitholders interests of the Galileo Technology and Blockchain Fund and the Galileo Partners Fund were transferred into the limited partnership and the funds terminated.

At September 30, 2019, total Galileo assets under management were $21.4 million versus $41.3 million at September 30, 2018, a decrease of 48.2 percent. During the three months ended September 30, 2019, average assets under management were $27.0 million versus $44.3 million during the three months ended September 30, 2018. Total assets under management at September 30, 2019, were $21.4 million versus $30.0 million at June 30, 2019, the Company’s prior fiscal year, end.respectively.

 

Investment Activities

 

Management believes it can more effectively manage the Company’s cash position by broadening the types of investments used in cash management and continues to believe that such activities are in the best interest of the Company. The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices. This source of revenue does not remain consistent and is dependent on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions.

 

As of September 30,December 31, 2019, the Company held investments with a fair value of approximately $11.6$10.0 million and a cost basis of approximately $14.1$13.1 million. The fair value of these investments is 58.053.3 percent of the Company’s total assets. In addition, the Company held other investments which do not have readily determinable fair values of approximately $1.4$1.5 million and $279,000$256,000 in investments accounted for under the equity method of accounting.

 

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Investments recorded at fair value were approximately $11.6$10.0 million at September 30,December 31, 2019, compared to approximately $15.2 million at June 30, 2019, the Company’s prior fiscal year end, which is a decrease of approximately $3.6$5.2 million. See Note 2,3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, for further information regarding investment activities.

 

RESULTS OF OPERATIONS – Three months ended September 30December 31, 2019, and 2018

 

The Company posted a net loss attributable to U.S. Global Investors, Inc. of $3.6$1.0 million ($0.240.06 per share loss) for the three months ended September 30,December 31, 2019, compared with a net loss attributable to U.S. Global Investors, Inc. of $1.1$3.2 million ($0.080.21 per share loss) for the three months ended September 30,December 31, 2018, an increasea decrease in loss of approximately $2.4$2.2 million. The increasedecrease in loss is primarily due to increasedimprovement in unrealized investment losses and a decreasean increase in operating revenues, as discussed further below.

 

Operating Revenues

 

Total consolidated operating revenues for the three months ended September 30,December 31, 2019, decreased $319,000,increased $94,000, or 26.111.9 percent, compared with the three months ended September 30,December 31, 2018. This decreaseincrease was primarily attributable to the following:

 

•  

Advisory fees decreasedincreased by $310,000,$92,000, or 26.512.3 percent, primarily as a result of lowerhigher average assets under management.management in equity funds and lower performance fees paid out. Advisory fees are comprised of two components: base management fees and performance fees.

 

•  

Base management fees decreased $199,000.increased $31,000. Base fees for USGIF and Galileo clients decreased asincreased despite a result of lowerdecrease in total average net assets because average assets underwere higher for the equity funds, which have higher management primarily duefee rates compared to shareholder redemptions.fixed income funds, and also because fee waivers were lower in the current period. ETF unitary management fees also decreased due to a decrease in ETF average assets under management.

 

Performance fees for USGIF paid out in the current period were $197,000$115,000 compared to $86,000$176,000 in fees paid out in the corresponding period in the prior year, a negativepositive change of $111,000.$61,000. The performance fee, which applies to the USGIF 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.

•  

There were no performance fees for Galileo clients received in the current period or the corresponding period in the prior year. Galileo may receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks.

•  

Administrative services fee revenue decreased by $9,000, or 17.0 percent, due to lower average net assets under management upon which these fees are based in the current period.

  

Operating Expenses

 

Total consolidated operating expenses for the three months ended September 30,December 31, 2019, decreased $187,000,$251,000, or 9.815.2 percent, compared with the three months ended September 30,December 31, 2018. The change in operating expenses was primarily attributable to a decrease in employee compensation and benefits expenses of $155,000, or 19.7 percent, primarily due to decreased bonuses, and a decrease in general and administrative expenses of $107,000,$103,000, or 10.613.4 percent, primarily due to decreased fund expenses, and a decrease in employee compensation and benefits expenses of $58,000, or 7.3 percent, primarily due to decreased salaries.expenses.

 

Other Income (Loss)

 

Total consolidated other loss for the three months ended September 30,December 31, 2019, increased $2.1decreased $3.0 million, or 234.187.3 percent, compared with the three months ended September 30,December 31, 2018. The increasedecrease in loss was primarily due to the following factors:

 

•  

Investment loss was $3.0 million$451,000 for the three months ended September 30,December 31, 2019, compared to an investment loss of $907,000$3.4 million for the three months ended September 30,December 31, 2018, a negativepositive change of approximately $2.1$3.0 million. There were unrealized losses of $3.1 million$591,000 in the current period. The same quarter in the prior year had unrealized losses of $951,000$3.4 million and a $29,000$57,000 impairment loss. The majority of the unrealized loss in the current periodboth periods was related to technology and cryptocurrency mining equity securities held in corporate investments. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. See further discussion of this security and other investments in Note 2,3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

 

•  

There was a $27,000$28,000 loss from equity method investments for the three months ended September 30,December 31, 2019, compared to a $7,000$48,000 loss for the three months ended September 30,December 31, 2018, a negativepositive change of $20,000. The equity method investmentinvestments held during the three months ended September 30, 2019, is a different entity than the investment held during the same period in the prior fiscal year. However, both investments,periods, in Galileo offerings, were concentrated in technology and cryptocurrency mining stocks. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for continued significant volatility in the valuation of the equity method investment currently held, and thus the portion of the entity’s net income or loss that is included in the Company’s earnings. See further discussion on these equity method investments in Note 2,3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

 

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Provision for Income Taxes

 

A tax benefit from continuing operations of $224,000$25,000 was recorded for the three months ended September 30,December 31, 2019, compared to a tax benefit of $356,000$744,000 for the three months ended September 30,December 31, 2018. Note that the Company currently has net operating loss carryovers in certain jurisdictions, including the United States. A valuation allowance has been recorded to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet. The tax benefit in the current quarter is primarily the result of operating losses in the Company’s Canadian subsidiary USCAN, while the tax benefit in the same quarter in the prior year was primarily the result of a decrease in valuation of certain investments held by U.S. Global Investors (Canada) Limited,USCAN, which decreased the related deferred tax liability.

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations represents results of the Company’s subsidiary Galileo. Loss from discontinued operations, net of tax, for the three months ended December 31, 2019, was $117,000, compared to net income from discontinued operations, net of tax, for the three months ended December 31, 2018, of $560,000. There were no performance fees for Galileo clients received in the current period compared to $870,000 received in the corresponding period in the prior year, decreasing revenue by $870,000. Galileo may receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. In addition, revenue was lower in the current period due to the closure in July 2019 of one of the mutual funds managed by Galileo and the closure in September 2019 of the ETF managed by Galileo. The decrease in revenue from the prior period was somewhat offset by lower expenses, primarily due to lower fund expenses and lower compensation due to a decrease in employees.

RESULTS OF OPERATIONS – Sixmonths ended December 31, 2019, and 2018

The Company posted a net loss attributable to U.S. Global Investors, Inc. of $4.6 million ($0.30 loss per share) for the six months ended December 31, 2019, compared to a net loss attributable to U.S. Global Investors, Inc. of $4.4 million ($0.29 loss per share) for the six months ended December 31, 2018, an increase in loss of approximately $210,000. The net increase in loss is primarily due to losses from discontinued operations, as discussed further below.

Operating Revenues

Total consolidated operating revenues for the six months ended December 31, 2019, decreased $146,000, or 7.9 percent, compared with the six months ended December 31, 2018. This decrease was primarily attributable to the following:

•  

Advisory fees decreased by $139,000, or 8.0 percent, primarily as a result of lower average assets under management and an increase in performance fees paid out. Advisory fees are comprised of two components: a base management fee and a performance fee.

•  

Base management fees decreased $89,000. Base fees for USGIF decreased as a result of lower average assets under management, primarily due to shareholder redemptions. ETF unitary management fees also decreased due to a decrease in ETF average assets under management.

• Performance fees for USGIF paid out in the current period were $312,000 compared to $262,000 in fees paid out in the corresponding period in the prior year, a negative change of $50,000. The performance fee, which applies to the USGIF 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 fee revenue decreased by $7,000, or 7.3 percent, due to lower average net assets under management upon which these fees are based in the current period.

Operating Expenses

Total consolidated operating expenses for the six months ended December 31, 2019, decreased $270,000, or 8.6 percent, compared with the six months ended December 31, 2018. The change in operating expenses was primarily attributable to a decrease in general and administrative expenses of $131,000, or 8.9 percent, primarily due to decreased fund expenses, and a decrease in employee compensation and benefits expenses of $125,000, or 8.5 percent, primarily due to decreased bonuses.

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Other Income

Total consolidated other loss for the six months ended December 31, 2019, decreased $892,000, or 20.4 percent, compared with the six months ended December 31, 2018. The decrease in loss was primarily due to the following factors:

•  

There was an investment loss of $3.5 million for the six months ended December 31, 2019, compared to an investment loss of $4.3 million for the six months ended December 31, 2018, a positive change of approximately $850,000. There were unrealized losses of $3.7 million in the current period, compared to the same period in the prior year, which had unrealized losses of $4.4 million and $86,000 in impairment losses. The majority of the unrealized loss in the both periods was related to technology and cryptocurrency mining equity securities held in corporate investments. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. See further discussion of this security and other investments in Note 3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

•  

Loss from equity method investments was $55,000 for both the six months ended December 31, 2019, and 2018. The equity method investments held during both periods, in Galileo offerings, are concentrated in technology and cryptocurrency mining stocks. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is considered an early stage high-risk industry, and the nature of mining is expected to evolve. There is potential for 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 3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Provision for Income Taxes

A tax benefit from continuing operations of $249,000 was recorded for the six months ended December 31, 2019, compared to a tax benefit of $1.1 million for the six months ended December 31, 2018. Note that the Company currently has net operating loss carryovers in certain jurisdictions, including the United States. A valuation allowance has been recorded to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet. The tax benefit in the current period is primarily the result of operating losses in USCAN, while the tax benefit in the same period in the prior year was primarily the result of a decrease in valuation of certain investments held by USCAN, which decreased the related deferred tax liability.

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations represents results of the Company’s subsidiary Galileo. Loss from discontinued operations, net of tax, for the six months ended December 31, 2019, was $253,000, compared to net income from discontinued operations, net of tax, for the six months ended December 31, 2018, of $323,000. There were no performance fees for Galileo clients received in the current period compared to $870,000 received in the corresponding period in the prior year, decreasing revenue by $870,000. Galileo may receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. In addition, revenue was lower in the current period due to the closure in July 2019 of one of the mutual funds managed by Galileo and the closure in September 2019 of the ETF managed by Galileo. The decrease in revenue from the prior period was somewhat offset by lower expenses, primarily due to lower fund expenses and lower compensation due to a decrease in employees.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30,December 31, 2019, the Company had net working capital (current assets minus current liabilities) of approximately $10.7$10.2 million and a current ratio (current assets divided by current liabilities) of 8.98.0 to 1. With approximately $2.6$1.8 million in cash and cash equivalents and approximately $10.9$9.5 million in unrestricted securities at fair value, the Company has adequate liquidity to meet its current obligations. Total U.S. Global Investors, Inc. shareholders’ equity is approximately $18.0$16.9 million, with cash, cash equivalents, and unrestricted marketable securities comprising 67.460.2 percent of total assets. Approximately $1.2

Note that approximately $1.1 million in cash in Galileo is included inexcluded from the amounts above.above as it is considered discontinued operations. The Company, through its subsidiary USCAN, entered into a binding letter of intent dated December 30, 2019, with Galileo whereby Galileo, pursuant to a capital restructuring, will repurchase all of its common shares owned by the USCAN for $1.0 million (Canadian). The transaction is subject to the approval of Canadian securities regulatory authorities and to the satisfaction of other closing conditions. It is anticipated that the transaction will close on or about March 2, 2020. The Company will continue to record its 65 percent interest of Galileo operations, which may include operational losses, until the close of the transaction.

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As of September 30,December 31, 2019, the Company has no borrowings or long-term liabilities except for leases.lease obligations. The Company’s primary commitment going forward is for operating expenses. The Company also has access to a $1 million credit facility for working capital purposes. The credit agreement requires the Company to maintain certain covenants; the Company has been in compliance with these covenants during the current fiscal year. The credit agreement will expire on May 31, 2020, and the Company intends to renew annually. The credit facility is collateralized by $1 million at September 30,December 31, 2019, held in deposit in a money market account at the financial institution that provided the credit facility. As of September 30,December 31, 2019, the credit facility remains unutilized by the Company.

 

The investment advisory and administrative services contracts between the Company and USGIF have been renewed through September 2020, and management anticipates that the contracts will be renewed. The investment advisory contracts between the Company and the ETFs expire in September 2020, and management anticipates that the contracts will be renewed. Galileo’s investment management agreement with the Canadian registered mutual funds may be terminated each September 30 with a 180-day prior notice of unitholders’ resolution. Galileo’s advisory agreements with other advisory clients can be terminated upon 30-day written notice.

 

The 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, 2019,2020, but may be suspended or discontinued at any time. Cash and unrestricted marketable securities of approximately $13.5$11.3 million are available to fund current activities. Management believes current cash reserves, investments, and financing available will be sufficient to meet foreseeable cash needs for operating activities.

 

CRITICAL ACCOUNTING ESTIMATES

 

For a discussion of other critical accounting policies that the Company follows, please refer to the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2019.

 

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ITEMITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Investment Management and Administrative Services Fees

 

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

 

Performance Fees

 

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

 

As a result, the Company’s revenues are subject to volatility beyond market-based fluctuations discussed in the investment management and administrative services fees section above. For the three and six months ended September 30,December 31, 2019, the Company realized a decrease in its USGIF base advisory fee of $115,000 and $312,000, respectively, due to these performance adjustments. For the three and six months ended December 31, 2018, the Company realized a decrease in its USGIF base advisory fee of $197,000$176,000 and $86,000,$262,000, respectively, due to these performance adjustments.

Galileo may receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. Galileo recorded no performance fees from these clients for the three months ended September 30, 2019, or September 30, 2018. The receipt of performance fees in the future is uncertain as the fees are dependent upon many factors, including market conditions.

 

Corporate Investments

 

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

 

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

 

The table below summarizes the Company’s price risks in securities recorded at fair value as of September 30,December 31, 2019, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.

 

(dollars in thousands)

 

Fair Value at

September 30, 2019

 

Hypothetical Percentage Change

 

Estimated Fair Value After Hypothetical Price Change

  

Fair Value at

December 31, 2019

 

Hypothetical Percentage Change

 

Estimated Fair Value After Hypothetical Price Change

 

Securities at fair value ¹

 $11,625 

25% increase

 $14,531  $10,022 

25% increase

 $12,528 
    

25% decrease

 $8,719     

25% decrease

 $7,516 

 

1  

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 securities at fair value in the above table is an investment in HIVE Blockchain Technologies Ltd. (“HIVE”), which was valued at approximately $1.8$731,000 million at September 30,December 31, 2019. HIVE is discussed in more detail in Note 2,3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. HIVE is a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland and Sweden. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is still considered an early stage high-risk industry, and the nature of mining is expected to evolve. There is potential for significant continued volatility in the market price of HIVE, which could materially impact the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income.

 

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In addition to the securities at fair value shown in the table above, the Company has an equity method investment in Galileo Technology and Blockchain LP valued at approximately $279,000$256,000 as of September 30,December 31, 2019. As discussed further in Note 2,3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, the Galileo Technology and Blockchain LP, a Canadian limited partnership managed by Galileo, has investments concentrated in technology and cryptocurrency mining stocks. As noted above, exposure to the cryptocurrency industry may result in volatility in the valuation of this investment. Under the equity method, the Company’s proportional share of the LP’s net income or loss, which primarily consists of realized and unrealized gains and losses on investments offset by expenses, is recognized in the Company’s earnings. The potential significant volatility the valuation of the LP’s investments could cause the its 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

 

The Company’s subsidiary Galileo conducts its business in Canada. Galileo’s foreign currency financial statements are translated into U.S. dollars in the financial statement consolidation process. Adverse changes in foreign currency exchange rates would lower the carrying valueA portion of Galileo’s assetscash and reduce its results in the consolidated U.S. financial statements. For the three months ended September 30, 2019, Galileo represented 11.1 percent of net operating revenues and 3.5 percent of consolidated loss before income taxes, and at September 30, 2019, represented 8.5 percent of total assets (see Note 12, Financial Information by Business Segment, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q). Certaincertain corporate investments, including the Company’s equity method investment, are held in foreign currencies, primarily Canadian. Adverse changes in foreign currency exchange rates would also lower the value of those cash accounts and 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.

 

ITEMITEM 4. CONTROLS AND PROCEDURES

 

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30,December 31, 2019, was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30,December 31, 2019.

 

There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended September 30,December 31, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEMITEM 1A. RISK FACTORS

 

For a discussion of risk factors which could affect the Company, please refer to Item 1A, “Risk Factors” in the Annual Report on Form 10-K for the year ended June 30, 2019. There have been no material changes since fiscal year end to the risk factors listed therein.

 

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

 

Issuer Purchases of Equity Securities

 

(dollars in thousands, except price data)(dollars in thousands, except price data)       

(dollars in thousands, except price data)

     
Period  

Total Number

of Shares

Purchased 1

  

Total

Amount

Purchased

  

Average

Price Paid

Per Share 2 

  

Total Number of

Shares Purchased as

Part of Publicly

Announced Plan 3

  

Approximate

Dollar Value of

Shares that May

Yet Be Purchased

Under the Plan

   

Total Number of Shares Purchased 1

  

Total Amount Purchased

  

Average Price Paid Per Share 2 

  Total Number of Shares Purchased as Part of Publicly Announced Plan 3  Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan 
07-01-19 to 07-31-19   400  $1  $1.64   400  $2,740 
08-01-19 to 08-31-19   -   -  $-   -  $2,740 
09-01-19 to 09-30-19   1,000   2  $1.90   1,000  $2,738 
10-01-19 to 10-31-19   2,000  $3  $1.61   2,000  $2,734 
11-01-19 to 11-30-19   -   -  $-   -  $2,734 
12-01-19 to 12-31-19   -   -  $-   -  $2,734 

Total

   1,400  $3  $1.83   1,400        2,000  $3  $1.61   2,000     

 

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 20192020 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 20192020. The total amount of shares that may be repurchased in 20192020 under the renewed program is $2.75 million.

 

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ITEMITEM 6. EXHIBITS

 

1. Exhibits –

  

3114.02

Code of Ethics, Revision Dated December 4, 2019 to Code Approved March 21, 2018, included herein.

31.1

Rule 13a-14(a) Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to(under Section 302 of the Sarbanes-Oxley Act of 2002.2002), included herein.

3232.1

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to(under Section 906 of the Sarbanes-Oxley Act Of 2002.2002), included herein.

  

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNSIGNATURESATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

 

 

 

U.S. GLOBAL INVESTORS, INC.

 

 

 

DATED:

November 7, 2019February 11, 2020

BY: /s/ Frank E. Holmes

 

 

 

            Frank E. Holmes

 

 

            Chief Executive Officer

 

 

 

DATED:

November 7, 2019February 11, 2020

BY: /s/ Lisa C. Callicotte

 

 

 

            Lisa C. Callicotte

 

 

            Chief Financial Officer

 

  

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