The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) serves as investment adviser to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”), a Delaware statutory trust that is a no-load, open-end investment company offering shares in numerous mutual funds to the investing public. The Company also provides administrative services to USGIF. For these services, the Company receives fees from USGIF. The Company also provides advisory services to SEC registered exchange traded funds (“ETFs”) and formerly provided advisory services to offshore clients. The Company holds a controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm.
The Company has the following subsidiaries utilized primarily for corporate investment purposes: U.S. Global Investors (Bermuda) Limited (“USBERM”), incorporated in Bermuda, and U.S. Global Investors (Canada) Limited (“USCAN”). The Company created U.S. Global Indices, LLC, a Texas limited liability company, of which the Company is the sole member, to provide indexing services to exchange-traded funds managed by the Company.
U.S. Global formed U.S. Global Brokerage, Inc. (“USGB”) to provide distribution services to USGIF. USGB ceased operations in December 2015. On July 27, 2018, USGB was dissolved.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: USGB, USBERM, USCAN and U.S. Global Indices, LLC.
The Company, through USCAN, owns 65 percent of the issued and outstanding shares of Galileo, which represents controlling interest of Galileo. Galileo is consolidated with USCAN and the non-controlling interest in this subsidiary is included in “non-controlling interest in subsidiary” in the equity section of the Consolidated Balance Sheets.
There are two primary consolidation models in U.S. GAAP, the variable interest entity (“VIE”) and voting interest entity models. The Company’s evaluation for consolidation includes whether entities in which it has an interest or from which it receives fees are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the group of holders of the equity investment at risk lacks certain characteristics of a controlling financial interest. The primary beneficiary is the entity that has the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns and consolidates the VIE on the basis of having a controlling financial interest.
The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain funds it advises, specifically, certain funds in USGIF and, until November 2017, one of the offshore funds. The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. 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 4 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 $9.6 million at June 30, 2018, and $11.3 million at June 30, 2017.
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 holds a variable interest in a fund advised by Galileo, and during fiscal 2018 held a variable interest in another fund advised by Galileo, but these funds do not qualify as VIEs. Since the funds are not VIEs, the Company evaluated if it should consolidate the funds 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 funds and, therefore, does not consolidate the funds. However, during fiscal 2018, the Company’s ownership ranged between approximately 23 and 30 percent of one fund until the investment was redeemed in full and between 20 and 25 percent of the other fund, and is considered to have the ability to exercise significant influence. Thus, the investments are accounted for under the equity method of accounting. See further information about these investments in Note 3.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes.
Business Combinations.
Business combinations are accounted for under the acquisition method of accounting. Results of operations of an acquired business are included from the date of acquisition. Management estimates the fair value of the acquired assets, including identifiable intangible assets, assumed liabilities, and non-controlling interest in the acquiree based on their estimated fair values as of the date of acquisition. Any excess acquisition date fair value of the consideration transferred over fair value of the acquired net assets, if any, is recorded as “goodwill” on the Consolidated Balance Sheets. Any excess fair value of the acquired net assets over the acquisition date fair value of the consideration transferred is recorded as a gain on the Consolidated Statements of Operations.
Cash and Cash Equivalents.
Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
Restricted Cash.
Restricted cash represents cash invested in a money market account as collateral for the credit facility 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:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
6,364
|
|
|
$
|
3,958
|
|
Restricted cash
|
|
|
1,000
|
|
|
|
1,000
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
7,364
|
|
|
$
|
4,958
|
|
Investments.
The Company classifies its investments based on intent at the time of purchase and reevaluates such designation as of each reporting period date. The Company records security transactions on trade date. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable, and are recorded in earnings on the date of sale.
Trading Securities.
Securities that are purchased and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value. Unrealized gains and losses on these securities are included in Investment income (loss).
Held-to-Maturity Securities.
Debt securities that are purchased with the intent and ability to hold until maturity are classified as held-to-maturity and measured at amortized cost. The Company currently has no investments in held-to-maturity securities.
Available-for-sale Securities.
Securities that are neither trading securities nor held-to-maturity securities and for which the Company does not have significant influence are classified as available-for-sale securities and reported at fair value. Unrealized gains and losses on these available-for-sale securities are excluded from earnings, reported net of tax as a separate component of shareholders’ equity, and recorded in earnings when realized.
The Company evaluates its available-for-sale investments for other-than-temporary decline in value on a periodic basis. This may exist when the fair value of an investment security has been below the current value for an extended period of time. When a security in the Company’s investment portfolio has an unrealized loss in fair value that is deemed to be other than temporary, the Company reduces the book value of such security to its current fair value, recognizing the credit related decline as a realized loss in the Consolidated Statements of Operations and a revised GAAP cost basis for the security is established. For available-for-sale securities with declines in value deemed other than temporary, the unrealized loss recorded net of tax in accumulated other comprehensive income (loss) is realized as a charge to net income.
As discussed further in the Recent Accounting Pronouncements and Developments of this note, the Company will adopt ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, effective July 1, 2018. Thereafter, changes in the fair value of investments formerly classified as available-for-sale will be reported through earnings rather than through other comprehensive income.
Other Investments.
Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. These equity investments are accounted for under the cost method of accounting and evaluated for impairment. The Company considers many factors in determining impairment, including the severity and duration of the decline in value below cost, the Company’s interest and ability to hold the security for a period of time sufficient for an anticipated recovery in value, and the financial condition and specific events related to the issuer.
Equity Method Investments
.
Investments classified as equity method consist of investments in companies in which the Company is able to exercise significant influence but not control. Under the equity method of accounting, the investment is initially recorded at cost, then the Company’s proportional share of investee’s underlying net income or loss is recorded as a component of “other income” with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce the Company’s carrying value of the investment. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. No impairment was recognized for the Company’s equity method investment during the years presented.
Fair Value of Financial Instruments.
The financial instruments of the Company are reported on the Consolidated Balance Sheets at market or fair values or at carrying amounts that approximate fair values.
Receivables
.
Receivables other than notes receivable consist primarily of advisory and other fees owed to the Company by clients. Receivables also include advisory fees owed to Galileo by the funds and clients it manages. The Company also invests in notes receivable. Notes receivable are recorded in accordance with the terms of the agreement, and accrued interest is recorded when earned. Unearned fees are shown as a deduction from the related notes receivable and are amortized to interest income using the effective interest method. The Company reviews the need for an allowance for credit losses for notes and other receivables based on various factors including payment history, historical bad debt experience, existing economic conditions, aging and specific accounts identified as high risk. Uncollectible receivables, if any, are charged against the allowance when all reasonable efforts to collect the amounts due have been exhausted. The Company had no allowance for credit losses as of June 30, 2018, or 2017.
Property and Equipment.
Fixed assets are recorded at cost. Except for Galileo, depreciation for fixed assets is recorded using the straight-line method over the estimated useful life of each asset as follows: furniture and equipment are depreciated over 3 to 10 years, and the building and related improvements are depreciated over 14 to 40 years. Galileo fixed assets, consisting of furniture, equipment and leasehold improvements, are depreciated over 2 to 5 years.
Leases
. The Company and its subsidiaries lease equipment and office space under various leasing arrangements. Leases may be classified as either capital leases or operating leases, as appropriate. Current lease agreements are classified as operating leases and most contain renewal options. Rent expense under non-cancelable operating leases with scheduled rent increases or rent incentives is accounted for on a straight-line basis over the lease term..
Impairment of Long-Lived Assets.
The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable. Impairment is indicated when the assets’ net book value is less than fair value of the asset. If this occurs, an impairment loss is recognized for the difference between the fair value and net book value. Factors that indicate potential impairment include: a significant decrease in the market value of the asset or a significant change in the asset’s physical condition or use. No impairments of long-lived assets were recorded during the years included in these financial statements.
Intangible Asset.
Management periodically evaluates the remaining useful lives and carrying values of intangible assets to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of impairment monitored by management include a decline in the level of managed assets, changes to contractual provisions underlying the intangible assets and reductions in underlying operating cash flows. Should there be an indication of a change in the useful life or impairment in value of the finite-lived intangible asset, the Company compares the carrying value of the asset and its related useful life to the projected discounted cash flows expected to be generated from the underlying managed assets over its remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the discounted cash flows, the asset is written down to its fair value determined using discounted cash flows.
Non-Controlling Interests.
The Company reports “non-controlling interest in subsidiary” as equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”
Treasury Stock.
Treasury stock purchases are accounted for under the cost method. The subsequent issuances of these shares are accounted for based on their weighted-average cost basis.
Stock-Based Compensation
.
Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. Forfeitures are recognized as they occur.
Income Taxes
. The Company and its non-Canadian subsidiaries file a consolidated federal income tax return. USCAN and Galileo file separate tax returns in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. The liability method requires that deferred tax assets be reduced by a valuation allowance in cases where it is more likely than not that the deferred tax assets will not be realized.
The Company accounts for income taxes in accordance with ASC 740,
Income Taxes
. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2018, the Company did not have any accrued interest or penalties related to uncertain tax positions. The tax years from 2014 through 2017 remain open to examination by the U.S. Federal tax jurisdictions to which the Company is subject. The tax years from 2011 through 2017 remain open to examination by the non-U.S. Federal tax jurisdictions to which the Company is subject.
Revenue Recognition.
The Company earns substantially all of its revenues from advisory and administrative fees that are calculated as a percentage of assets under management and are recorded as revenue as services are performed. Offshore advisory client contracts provided for monthly management fees, in addition to performance fees. The advisory contract for the equity funds within USGIF provides for a performance fee on the base advisory fee that are calculated and recorded monthly. Galileo may receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks.
Dividends and Interest.
Dividends are recorded on the ex-dividend date, and interest income is recorded on an accrual basis. Any discount between the cost and the principal amount of debt investments is amortized to interest income using the effective interest method. Both dividends and interest income are included in investment income.
Advertising Costs.
The Company expenses advertising costs as they are incurred. The Company is reimbursed for certain advertising expenses related to USGIF from the distributor for USGIF. Net advertising expenditures were $172,000 and $135,000 during fiscal years 2018 and 2017, respectively.
Foreign
Exchange
.
The balance sheets of certain foreign subsidiaries of the Company and certain foreign-denominated investment products are translated at the current exchange rate as of the end of the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange gains and losses resulting from balance sheet translations of foreign subsidiaries are excluded from income and are recorded in “accumulated other comprehensive income (loss)” on the Consolidated Balance Sheets. Net exchange gains and losses resulting from income or loss translations are included in income and are recorded in “investment income (loss)” on the Consolidated Statements of Operations. Investment transactions denominated in foreign currencies are converted to U.S. dollars using the exchange rate on the date of the transaction and any related gain or loss is included in “investment income (loss)” on the Consolidated Statements of Operations.
Use of Estimates.
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Earnings Per Share.
The Company computes and presents earnings per share attributable to U.S. Global Investors, Inc. in accordance with ASC 260,
Earnings Per Share
. Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to U.S. Global Investors, Inc. by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised. The Company has two classes of common stock with outstanding shares. Both classes share equally in dividend and liquidation preferences.
Accumulated Other Comprehensive Income (Loss).
Accumulated other comprehensive income (loss) (“AOCI”), net of tax is reported in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders’ Equity and includes the unrealized gains and losses on securities classified as available-for-sale and foreign currency translation adjustments.
Recent Accounting Pronouncements and Developments
Accounting Pronouncements Adopted During the Period
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and disclosed. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this guidance on July 1, 2017, without a material impact to the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”). Under ASU 2016-18, restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The guidance will be applied retrospectively, and early adoption is permitted. The Company early adopted this guidance in its June 30, 2018, financial statements and has included restricted cash in its consolidated statements of cash flows for the fiscal years ended June 30, 2018, and June 30, 2017. The adoption of ASU 2016-15 did not have a material impact on the consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is permitted, but the Company did not implement the new standard before the required effective date. Additional ASUs have been issued to clarify certain aspects of ASU 2014-09. ASU 2016-08,
Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
amends ASU 2014-09 to clarify that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
clarifies the guidance related to identifying performance obligations and the licensing guidance in ASU 2014-09. ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
, and ASU 2016-20,
Technical Corrections and Improvements in Topic 606 Revenue from Contracts with Customers
, provide additional clarification to a number of topics addressed in ASU No. 2014-09. These ASUs are effective in conjunction with the adoption of ASU 2014-09. The Company has completed a detailed review of the terms and conditions of our current contracts, including performance based fees. Based on this analysis, the Company does not expect the adoption of the new guidance to have any effect on the timing of the recognition of revenue. If there were to be any impact, which is not expected, the Company has determined that it would use the modified retrospective transition method. As part of the review, current business process and internal controls were also analyzed, and no new procedures are required be implemented to successfully adopt the standard The Company has also been reviewing and preparing for the enhanced disclosure requirements of the standard, which will have an effect on the disclosures in the consolidated financial statements and accompanying notes effective with our fiscal 2019 first quarter Form 10-Q.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). ASU 2016-01 amends the guidance on the classification and measurement of investments in equity securities. It also amends certain presentation and disclosure requirements. Under the amended guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values. ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. To adopt the amendments, entities will be required to make a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective. The Company adopted this guidance effective July 1, 2018, and reclassified $3.1 million in unrealized net gain out of Accumulated Comprehensive Income and into Retained Earnings. Effective July 1, 2018, changes in the fair value of these investments formerly classified as available-for-sale will be reported through earnings rather than through other comprehensive income. The Company anticipates that this will cause investment income (loss), and thus the Company’s net income (loss), to be more volatile.
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU 2016-02”). 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 guidance will be effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. The Company’s current leases are primarily for equipment and for office space for the Canadian subsidiary. The Company does not expect that adoption will have a material impact on its consolidated statements of operations because its leases are currently classified as operating leases, which under the guidance will continue to be recognized as expense on a straight-line basis. The adoption, however, will result in a gross up in total assets and total liabilities on the Company’s consolidated balance sheets. See Note 9 for more information on the Company’s minimum lease payments as of June 30, 2018.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments
(“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 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those years. 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 August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payment
s (“ASU 2016-15”). ASU 2016-15 may change how an entity classifies certain cash receipts and cash payments on its statement of cash flows to reduce existing diversity in practice. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. The Company will adopt the standard in fiscal 2019. The Company is currently evaluating the potential impact of this standard but does not currently expect the adoption to have a material impact on the consolidated statements of cash flows.
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 allows entities the option to reclassify tax effects resulting from recording the effects of the Tax Cuts and Jobs Act (“the Act”) enacted in December 2017 from accumulated other comprehensive income to retained earnings. The guidance is 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 is currently evaluating the potential impact of this standard on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-03,
Technical Corrections and Improvements
to Financial Instruments—Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2018-03”). ASU 2018-03 clarifies certain aspects of the guidance issued in ASU 2016-01 and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. The Company will implement ASU 2018-03 concurrently with the adoption of ASU 2016-01 effective the beginning of its fiscal year 2019.
Other Recent Accounting Developments
In December 2017, the Securities and Exchange Commission (“SEC” or “Commission”) issued Staff Accounting Bulletin No. 118 (“SAB 118”) which expresses the Commission’s views regarding application of FASB’s ASC Topic 740 “Income Taxes” in the reporting period that includes December 22, 2017. The Commission indicated that The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, affects companies’ reporting because of the Act’s changes that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits. ASC Topic 740 provides accounting and disclosure guidance on accounting for income taxes under U.S. GAAP. This guidance addresses the recognition of taxes payable or refundable for the current year and the recognition of deferred tax liabilities and deferred tax assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. ASC Topic 740 also addresses the accounting for income taxes upon a change in tax laws or tax rates. The income tax accounting effect of a change in tax laws or tax rates includes, for example, adjusting (or re-measuring) deferred tax liabilities and deferred tax assets, as well as evaluating whether a valuation allowance is needed for deferred tax assets. The Commission issued SAB 118 to address situations where the accounting under ASC Topic 740 is incomplete for certain income tax effects of the Act upon issuance of an entity’s financial statements for the reporting period in which the Act was enacted. A company’s financial statements that include the reporting period in which the Act was enacted must first reflect the income tax effects of the Act in which the accounting under ASC Topic 740 is complete. These completed amounts would not be provisional amounts. The company would then also report provisional amounts for those specific income tax effects of the Act for which the accounting under ASC Topic 740 will be incomplete but a reasonable estimate can be determined. For any specific income tax effects of the Act for which a reasonable estimate cannot be determined, the company would not report provisional amounts and would continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. For those income tax effects for which the company was not able to determine a reasonable estimate (such that no related provisional amount was reported for the reporting period in which the Act was enacted), the company would report provisional amounts in the first reporting period in which a reasonable estimate can be determined. U.S. Global has revalued its deferred tax assets and liabilities as of the date of enactment and has considered the provisions of SAB 118 related to provisional amounts. See further discussion in Note 12.
NOTE
3
. INVESTMENTS
As of June 30, 2018, the Company held investments with a fair value of $15.3 million and a cost basis of $12.3 million. The market value of these investments is approximately 52.8 percent of the Company’s total assets. In addition, the Company held other investments of $2.2 million accounted for under the cost method of accounting and investments of approximately $283,000 accounted for under the equity method of accounting.
Investments in securities classified as trading are reflected as current assets on the Consolidated Balance Sheets at their fair value. Unrealized gains and losses on trading securities are included in earnings in the Consolidated Statements of Operations.
Investments in securities classified as available-for-sale, which may not be readily marketable but have readily determinable fair values, are reflected as non-current assets on the Consolidated Balance Sheets at their fair value. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income (loss) as a separate component of shareholders’ equity until realized.
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. These equity investments are accounted for under the cost method of accounting and evaluated for impairment.
The Company considers many factors in determining impairment, including the severity and duration of the decline in value below cost, the Company’s interest and ability to hold the security for a period of time sufficient for an anticipated recovery in value, and the financial condition and specific events related to the issuer. When an impairment of a security is determined to be other-than-temporary, the impairment is recognized as a loss in earnings.
Cost basis may also be adjusted for amortization of premium or accretion of discount on debt securities held or to recharacterize distributions from investments in partnerships.
The following details the components of the Company’s investments recorded at fair value as of June 30, 2018, and 2017:
|
|
June 30, 2018
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
Trading securities
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - Fixed income
|
|
$
|
7,785
|
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
7,807
|
|
Mutual funds - Domestic equity
|
|
|
535
|
|
|
|
-
|
|
|
|
(163
|
)
|
|
|
372
|
|
Other
|
|
|
45
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
-
|
|
Offshore fund
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total trading securities
|
|
|
8,365
|
|
|
|
22
|
|
|
|
(208
|
)
|
|
|
8,179
|
|
Available-for-sale securities
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock - International
|
|
|
2,554
|
|
|
|
3,213
|
|
|
|
(94
|
)
|
|
|
5,673
|
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
1,000
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
991
|
|
Mutual funds - Domestic equity
|
|
|
394
|
|
|
|
28
|
|
|
|
-
|
|
|
|
422
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total available-for-sale securities
3
|
|
|
3,948
|
|
|
|
3,241
|
|
|
|
(103
|
)
|
|
|
7,086
|
|
Total securities at fair value
|
|
$
|
12,313
|
|
|
$
|
3,263
|
|
|
$
|
(311
|
)
|
|
$
|
15,265
|
|
|
|
June 30, 2017
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized (Losses)
|
|
|
Fair Value
|
|
Trading securities
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - Fixed income
|
|
$
|
8,884
|
|
|
$
|
50
|
|
|
$
|
(7
|
)
|
|
$
|
8,927
|
|
Mutual funds - Domestic equity
|
|
|
535
|
|
|
|
-
|
|
|
|
(157
|
)
|
|
|
378
|
|
Other
|
|
|
45
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
-
|
|
Offshore fund
|
|
|
1,184
|
|
|
|
-
|
|
|
|
(769
|
)
|
|
|
415
|
|
Total trading securities
|
|
|
10,648
|
|
|
|
50
|
|
|
|
(978
|
)
|
|
|
9,720
|
|
Available-for-sale securities
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
|
109
|
|
|
|
4
|
|
|
|
-
|
|
|
|
113
|
|
Common stock - International
|
|
|
191
|
|
|
|
12
|
|
|
|
-
|
|
|
|
203
|
|
Corporate debt
|
|
|
1,042
|
|
|
|
427
|
|
|
|
-
|
|
|
|
1,469
|
|
Mutual funds - Fixed income
|
|
|
1,148
|
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
1,144
|
|
Mutual funds - Domestic equity
|
|
|
394
|
|
|
|
12
|
|
|
|
-
|
|
|
|
406
|
|
Other
|
|
|
56
|
|
|
|
10
|
|
|
|
-
|
|
|
|
66
|
|
Total available-for-sale securities
3
|
|
|
2,940
|
|
|
|
466
|
|
|
|
(5
|
)
|
|
|
3,401
|
|
Total securities at fair value
|
|
$
|
13,588
|
|
|
$
|
516
|
|
|
$
|
(983
|
)
|
|
$
|
13,121
|
|
1
|
Unrealized and realized gains and losses on trading securities are included in earnings in the statement of operations.
|
2
|
Unrealized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income (loss) as a separate component of shareholders’ equity until realized.
|
3
|
Net unrealized gains (losses) on available-for-sale securities gross and net of tax as of June 30, 201
8
, are $
3,138
and $
2,
089
,
respectively,
and as of June 30, 201
7
, are $
461
and $
461
, respectively.
|
At June 30, 2017, the Company had an available-for-sale investment in corporate debt securities with a par value of approximately $1.7 million which was valued at approximately $1.5 million. The securities were scheduled to mature in 2024. The issuer of the corporate debt redeemed these debt securities early at par value in May 2018. The Company recorded a realized gain in fiscal 2018 related to the early redemption of approximately $638,000.
The following summarizes investment income (loss) reflected in earnings for the periods presented.
(dollars in thousands)
|
|
Year Ended June 30,
|
|
Investment Income
|
|
2018
|
|
|
2017
|
|
Realized gains on sales of available-for-sale securities
|
|
$
|
669
|
|
|
$
|
31
|
|
Realized losses on sales of trading securities
|
|
|
(736
|
)
|
|
|
-
|
|
Unrealized gains on trading securities
|
|
|
742
|
|
|
|
15
|
|
Realized foreign currency losses
|
|
|
(59
|
)
|
|
|
(37
|
)
|
Other-than-temporary declines in available-for-sale securities
|
|
|
-
|
|
|
|
(411
|
)
|
Other-than-temporary declines in securities held at cost
|
|
|
-
|
|
|
|
(72
|
)
|
Dividend and interest income
|
|
|
888
|
|
|
|
820
|
|
Total Investment Income
|
|
$
|
1,504
|
|
|
$
|
346
|
|
Proceeds from the sales of available-for-sale investments were approximately $2.1 million and $649,000, for the fiscal years ended June 30, 2018, and June 30, 2017, respectively. Gross gains on sales of available-for-sale investments were $675,000 and $34,000 for fiscal years 2018 and 2017, respectively. Gross losses on sales of available-for-sale investments were $6,000 and $3,000 for fiscal years 2018 and 2017, respectively. The amounts for fiscal 2018 include the proceeds and realized gain from the early redemption of debt securities discussed above. Realized gains and losses on the sale of available-for-sale investments are reclassified from other comprehensive income into investment income.
There were no impairment losses during fiscal year 2018. In fiscal year 2017, other-than temporary declines in value on available-for-sale securities of approximately $411,000 were included in investment income. The impairment losses resulted from fair values of certain equity securities being lower than book value. For the year ending June 30, 2017, there were four securities with a combined cost basis of $627,000 that were written down to a combined fair value of $216,000. Also included in investment income for fiscal 2017 was approximately $72,000 in other-than-temporary declines in value on securities held at cost. The impairment loss resulted from the estimated values of certain securities being lower than cost. In fiscal 2017, one security held at cost with a cost basis of $72,000 was written down to zero. In making these determinations, the Company considered the length of time and extent to which the fair value has been less than the cost basis, financial condition and prospects of the issuers, and the Company's ability to hold the investment until recovery.
Unrealized Losses
The following tables show the gross unrealized losses and fair values of available-for-sale investment securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. The Company reviewed the gross unrealized losses shown as of June 30, 2018, and determined that the losses were not other-than-temporary based on consideration of the nature of the investment and the cause, severity and duration of the loss.
|
|
June 30, 2018
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Common stock - International
|
|
|
39
|
|
|
|
(94
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
(94
|
)
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
991
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
991
|
|
|
|
(9
|
)
|
Mutual funds - Domestic equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total available-for-sale securities
|
|
$
|
1,030
|
|
|
$
|
(103
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,030
|
|
|
$
|
(103
|
)
|
|
|
June 30, 2017
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Common stock - International
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
|
|
(5
|
)
|
|
|
95
|
|
|
|
(5
|
)
|
Mutual funds - Domestic equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total available-for-sale securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
95
|
|
|
$
|
(5
|
)
|
|
$
|
95
|
|
|
$
|
(5
|
)
|
Fair Value Hierarchy
ASC 820,
Fair Value Measurement and Disclosures
, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Levels 1, 2, and 3 inputs, as defined below). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, value of these products does not entail a significant degree of judgment.
Level 2 – Valuations based on quoted prices in markets for which not all significant inputs are observable, directly or indirectly. Corporate debt securities valued in accordance with the evaluated price supplied by an independent service are categorized as Level 2 in the hierarchy. Other securities categorized as Level 2 included securities valued at the mean between the last reported bid and ask quotation and securities valued with an adjustment to the quoted price due to restrictions.
Level 3 – Valuations based on inputs that are unobservable and significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with the investing in those securities. Because of the inherent uncertainties of valuation, the values reflected may materially differ from the values received upon actual sale of those investments.
For actively traded securities, the Company values investments using the closing price of the securities on the exchange or market on which the securities principally trade. If the security is not traded on the last business day of the quarter, it is generally valued at the mean between the last bid and ask quotation. The fair value of a security that has a restriction is based on the quoted price for an otherwise identical unrestricted instrument that trades in a public market, adjusted for the estimated effect of the restriction. Mutual funds, which include open- and closed-end funds, exchange-traded funds, and offshore funds are valued at net asset value or closing price, as applicable. Certain corporate debt securities not traded on an exchange are 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, the Company 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 Company also takes into consideration numerous other factors that could affect valuation such as overall market conditions, liquidity of the security and bond structure. Securities for which market quotations are not readily available are valued at their fair value as determined by the portfolio management team. The portfolio management team includes representatives from the investment and accounting departments. The portfolio management team meets periodically to consider 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.
The following presents fair value measurements, as of each balance sheet date, for the major categories of U.S. Global’s investments measured at fair value on a recurring basis:
|
|
June 30, 2018
|
|
|
|
Quoted Prices
|
|
|
Significant
Other Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - Fixed income
|
|
$
|
7,807
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,807
|
|
Mutual funds - Domestic equity
|
|
|
372
|
|
|
|
-
|
|
|
|
-
|
|
|
|
372
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Offshore fund investment measured at net asset value
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Total trading securities
|
|
|
8,179
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,179
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock - International
|
|
|
5,673
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,673
|
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
991
|
|
Mutual funds - Domestic equity
|
|
|
422
|
|
|
|
-
|
|
|
|
-
|
|
|
|
422
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total available-for-sale securities
|
|
|
7,086
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,086
|
|
Total securities at fair value
|
|
$
|
15,265
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,265
|
|
|
|
June 30, 2017
|
|
|
|
Quoted Prices
|
|
|
Significant
Other Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - Fixed income
|
|
$
|
8,927
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,927
|
|
Mutual funds - Domestic equity
|
|
|
378
|
|
|
|
-
|
|
|
|
-
|
|
|
|
378
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Offshore fund investment measured at net asset value
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
Total trading securities
|
|
|
9,305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,720
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
|
113
|
|
|
|
-
|
|
|
|
-
|
|
|
|
113
|
|
Common stock - International
|
|
|
203
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203
|
|
Corporate debt
|
|
|
1,469
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,469
|
|
Mutual funds - Fixed income
|
|
|
1,144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,144
|
|
Mutual funds - Domestic equity
|
|
|
406
|
|
|
|
-
|
|
|
|
-
|
|
|
|
406
|
|
Other
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66
|
|
Total available-for-sale securities
|
|
|
3,401
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,401
|
|
Total securities at fair value
|
|
$
|
12,706
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,121
|
|
1
|
In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical ex
p
edient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets.
|
As of June 30, 2018, and June 30, 2017, 100 percent of the Company’s financial assets measured at fair value are derived from Level 1 inputs. The Company recognizes transfers between levels at the end of each quarter.
During the quarter ended September 30, 2017, the Company invested 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, classified as available-for-sale, was valued at approximately $5.6 million at June 30, 2018, based on the quoted market price and is classified as Level 1 in the fair value hierarchy. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is considered an early stage high-risk industry, and the nature of mining is expected to evolve. There is potential for significant volatility in the 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. Two unit trust investment funds managed by Galileo, described below under Investments Classified as Equity Method, also hold common shares of HIVE. The Company had both a direct ownership of HIVE and a combined direct and indirect ownership of HIVE of approximately 3.2 percent as of June 30, 2018. Frank Holmes is the non-executive chairman of HIVE and held shares and options at June 30, 2018. Effective August 31, 2018, upon the retirement of HIVE’s CEO and until a new CEO is hired, Mr. Holmes became Interim Executive Chairman of HIVE.
The Company had an investment in an affiliated offshore fund, classified as trading, which invested in companies in the energy and natural resources sectors. The fair value of this investment was estimated based on the net asset value per share at $415,000 as of June 30, 2017. This offshore fund liquidated during the fiscal year ended June 30, 2018.
Investments Classified as Equity Method
During the quarter ended September 30, 2017, the Company, through USCAN, invested approximately $500,000 in the Galileo Partners Fund, a Canadian unit trust investment fund managed by Galileo. The investment was subsequently redeemed in full during fiscal 2018, and the Company no longer has an investment in the Galileo Partners Fund as of June 30, 2018. During the period of ownership, the Company’s ownership ranged between 23 and 30 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 for the year ended June 30, 2018, is $1.7 million of equity method income of Galileo Partners Fund. Frank Holmes also directly held an investment in the fund as of June 30, 2018.
Summarized income statement information on the Galileo Partners Fund for the period of the Company’s investment is as follows:
Galileo Partners Fund
|
|
|
|
|
Summary Financial Information
|
|
|
|
|
For the Period from August 31, 2017 (investment) to June 30, 2018
|
|
(dollars in thousands)
|
|
|
|
|
Realized gains on sales of investments
|
|
$
|
6,254
|
|
Decrease in unrealized gains on investments
|
|
|
(28
|
)
|
Fund fees and expenses, including performance fees
|
|
|
(1,677
|
)
|
Net income of fund
|
|
$
|
4,549
|
|
During the year ended June 30, 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. This fund has a concentration in technology and blockchain companies, which may result in volatility in the fund’s valuation. The Company owns approximately 25 percent of Galileo Technology and Blockchain Fund as of June 30, 2018, 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 for the year ended June 30, 2018, is $99,000 of equity method loss for Galileo Technology and Blockchain Fund. The Company’s investment in the fund was valued at approximately $283,000 at June 30, 2018. Frank Holmes also directly held an investment in the fund as of June 30, 2018.
NOTE
4
. INVE
STMENT MANAGEMENT AND OTHER FEES
The Company generates a majority of all of its operating revenues from managing and servicing USGIF. The Company serves as investment adviser to USGIF and receives a fee based on a specified percentage of net assets under management. The Company recorded base advisory fees from USGIF totaling $4.4 million and $4.9 million, respectively, for the years ended June 30, 2018, and 2017.
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 if there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months. For the years ended June 30, 2018, and 2017, the Company realized a decrease in its base advisory fee of $539,000 and $49,000, respectively, due to these performance adjustments.
The Company has agreed to contractually limit the expenses of the Near-Term Tax Free Fund through April 2019. The Company has voluntarily waived or reduced its fees and/or agreed to pay expenses on the remaining USGIF funds. These caps will continue on a voluntary basis at the Company’s discretion. The aggregate fees waived and expenses borne by the Company for USGIF were $637,000 and $1.0 million for the years ended June 30, 2018, and 2017, respectively. USGIF revenue included on the Consolidated Statements of Operations is net of fee waivers. Management cannot predict the impact of future waivers due to the number of variables and the range of potential outcomes.
The Company receives administrative service fees from USGIF based on the average daily net assets at an annual rate of 0.05 percent per investor class and 0.04 percent per institutional class of each fund. The Company recorded administrative services fees of $248,000 and $284,000 in fiscal years 2018 and 2017, respectively.
As of June 30, 2018, the Company had $419,000 in receivables from fund clients, of which $321,000 was from USGIF. As of June 30, 2017, the Company had $396,000 in receivables from fund clients, of which $287,000 was from USGIF.
The Company also serves as investment advisor to two exchange-traded funds (ETFs). The U.S. Global Jets ETF (ticker JETS) commenced operations in April 2015, and U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU) commenced operations in June 2017. The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs. The Company recorded ETF advisory fees totaling $701,000 and $357,000 in fiscal 2018 and 2017, respectively.
The Company provided advisory services to offshore clients and received a monthly advisory fee based on the net asset values of the clients and performance fees based on the overall increase in net asset values, if any. The Company recorded advisory fees from these clients totaling $3,000 and $135,000 for the years ended June 30, 2018, and 2017, respectively. The Company recorded no performance fees from these clients for fiscal years 2018 and 2017. The offshore clients liquidated during fiscal year 2018.
Galileo provides advisory services for clients in Canada and receives advisory fees based on the net asset values of the clients. Galileo recorded advisory fees from these clients totaling $960,000 and $1.1 million for the years ended June 30, 2018, and 2017, respectively. Galileo may also receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. Galileo recorded performance fees of $464,000 from these clients for the year ended June 30, 2018. The majority of the performance fees recorded in the current fiscal year are annual performance fees calculated at calendar year-end. Galileo recorded no performance fees for fiscal year 2017. Galileo may, at its discretion, waive and absorb some of its clients’ operating expenses. The amount of expenses waived and absorbed was $88,000 and $53,000 for the years ended June 30, 2018, and 2017, respectively. On September 29, 2017, Galileo launched its first ETF, U.S. Global GO GOLD and Precious Metal Miners ETF (Canadian ticker GOGO), on the Toronto Stock Exchange. GOGO is the Canadian version of GOAU. Galileo also started accepting purchases in its Partners Fund, a unit trust investment fund, in June 2017 and launched its Technology and Blockchain Fund, also a unit trust investment fund, in November 2017.
NOTE
5
. NOTE
S
RECEIVABLE
As of June 30, 2018, the Company held a note receivable with a principal amount of $234,000, of which $35,000 is included in current assets and $199,000 is classified as long term. The note is with an unrelated third party, has an annual interest rate of 15 percent and matures in 2021. This note was amended in November 2016. Upon amendment, the maturity date was extended from 2017 to 2021, unpaid interest was added to the principal, and provisions for penalty interest were added for failure to make scheduled interest or principal payments or failure to provide timely financial statements. Principal repayments on the note are scheduled to start in February 2019. The Company considered the credit quality of the other party and determined that no allowance for credit loss is necessary.
The Company had also entered into a promissory note with a principal amount of $2 million with an unrelated third party in June 2016 with a one-year maturity. As allowed by the agreement, in June 2017, the initial maturity was extended one-year to June 2018, and the Company received a $50,000 extension fee and all interest to date. The fee was amortized to interest income using the interest method over the remaining term of the note. The note bore interest at 12 percent, with 10 percent payable monthly and 2 percent payable at maturity. This promissory note was paid off in May 2018, prior to its scheduled maturity in June 2018. Proceeds were received for the principal and all accrued interest, and no gain or loss was realized.
NOTE
6
. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Building and land
|
|
$
|
4,597
|
|
|
$
|
4,597
|
|
Furniture, equipment, and other
|
|
|
1,625
|
|
|
|
1,729
|
|
|
|
|
6,222
|
|
|
|
6,326
|
|
Accumulated depreciation
|
|
|
(4,252
|
)
|
|
|
(4,114
|
)
|
Net property and equipment
|
|
$
|
1,970
|
|
|
$
|
2,212
|
|
Depreciation expense totaled $241,000 and $253,000 in fiscal years 2018 and 2017, respectively.
NOTE
7
. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Professional fees
|
|
$
|
219
|
|
|
$
|
229
|
|
Vendors payable
|
|
|
420
|
|
|
|
257
|
|
Taxes payable
|
|
|
178
|
|
|
|
58
|
|
Other accrued expenses
|
|
$
|
817
|
|
|
$
|
544
|
|
NOTE
8
. BORROWINGS
As of June 30, 2018, the Company has no borrowings or long-term liabilities except for deferred taxes.
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 fiscal year. The credit agreement will expire on May 31, 2019, and the Company intends to renew annually. The credit facility is collateralized by $1 million at June 30, 2018, 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 June 30, 2018, the credit facility remains unutilized by the Company.
NOTE
9
. LEASE COMMITMENTS
The Company has operating leases for office equipment that expire between fiscal years 2019 and 2020 and for office facilities in Canada that expire in 2023. Lease expense totaled $336,000 and $292,000 in fiscal years 2018 and 2017, respectively. Minimum non-cancelable lease payments required under operating leases for future periods are as follows:
(dollars in thousands)
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
2019
|
|
$
|
223
|
|
2020
|
|
|
101
|
|
2021
|
|
|
98
|
|
2022
|
|
|
99
|
|
2023
|
|
|
100
|
|
Total
|
|
$
|
621
|
|
NOTE
1
0
. BENEFIT PLANS
The Company offers a savings and investment plan qualified under Section 401(k) of the Internal Revenue Code covering substantially all employees. In connection with this 401(k) plan, participants can voluntarily contribute a portion of their compensation, up to certain limitations, to this plan, and the Company will match 100 percent of participants’ contributions up to the first 3 percent of compensation and 50 percent of the next 2 percent of compensation. The Company recorded expenses for contributions to the 401(k) plan of $90,000 and $86,000 for fiscal years 2018 and 2017, respectively.
The 401(k) plan allows for a discretionary profit sharing contribution by the Company, as authorized by the Board of Directors. No profit sharing contributions were made in fiscal years 2018 or 2017.
The Company offers employees, including its executive officers, an opportunity to participate in savings programs using mutual funds managed by the Company. Employees may contribute to an IRA, and the Company matches these contributions on a limited basis. A similar savings plan utilizing Uniform Gifts to Minors Act (“UGMA”) accounts is offered to employees to save for their minor relatives. The Company match, reflected in base salary expense, aggregated in all programs to $20,000 and $22,000 in fiscal years 2018 and 2017, respectively.
The Company has an Employee Stock Purchase Plan whereby eligible employees can purchase treasury shares at market price. During fiscal years 2018 and 2017, employees purchased 2,605 and 3,433, respectively, shares of treasury stock from the Company.
NOTE
1
1
. SHAREHOLDERS’ EQUITY
The Company has three classes of common equity: class A, class B, and class C common stock. The Company’s class A common stock is traded over-the-counter and is quoted daily under NASDAQ’s Capital Markets under the symbol “GROW.” There is no established public trading market for the Company’s class B and class C common stock. There are no shares of class B stock issued as of June 30, 2018, or 2017.
The Company’s class A and class B common stock have no voting privileges.
Dividends
Dividends of $0.0025 per share per month totaling $393,000 and $394,000 were paid to holders of class A common stock in fiscal years 2018 and 2017, respectively. Dividends of $62,000 and $62,000 were paid to holders of class C common stock in fiscal years 2018 and 2017, respectively.
The monthly dividend of $0.0025 is authorized through September 2018 and will be considered for continuation at that time 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. On a per share basis, the holders of the class C common stock and the nonvoting class A common stock participate equally in dividends as declared by the Company’s Board of Directors.
Share Repurchase Plan
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, 2018. 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. As of June 30, 2018, approximately $2.74 million remains available for repurchase under this authorization.
During fiscal years 2018 and 2017, the Company repurchased 48,947 and 69,636, respectively, of its class A shares on the open market using cash of $141,000 and $114,000, respectively. To date, the Company has repurchased a total of 540,235 class A shares under the repurchase program using cash of $1.3 million.
Other Activity
The Company did not grant any shares of class A common stock to employees during fiscal year 2018 or 2017. Grants vest immediately after issuance.
The Company granted 7,200 and 3,600 shares of class A common stock at a weighted average fair value of $2.62 and $1.66 to its non-employee directors in fiscal years 2018 and 2017, respectively. Grants vest immediately after issuance.
Issuances of treasury stock for grants or bonuses are accounted for using the weighted-average cost basis of the shares issued. During fiscal year 2018, shares were issued, as described above, with a weighted-average cost basis less than current fair value, which resulted in a combined increase to additional paid-in capital of approximately $2,000 for fiscal year 2018. During fiscal year 2017, shares were issued with a weighted-average cost basis greater than current fair value, which resulted in a combined negative adjustment to additional paid-in capital of approximately $5,000 for fiscal year 2017.
Shareholders of class C shares are allowed to convert to class A. During fiscal years 2018 and 2017, 90 and 180 shares, respectively, were converted from class C to class A. Conversions are one class A share for one class C share and are recorded at par value. There are no restrictions or requirements to convert.
Stock-based compensation
In November 1989, the Board of Directors adopted the 1989 Non-Qualified Stock Option Plan (“1989 Plan”), amended in December 1991, which provides for the granting of options to purchase 1,600,000 shares of the Company’s class A common stock to directors, officers and employees of the Company and its subsidiaries. Options issued under the 1989 Plan vest six months from the grant date or 20 percent on the first, second, third, fourth, and fifth anniversaries of the grant date. Options issued under the 1989 Plan expire ten years after issuance. No options were granted in fiscal years 2018 or 2017. As of June 30, 2018, there were no options outstanding under the 1989 Plan.
In April 1997, the Board of Directors adopted the 1997 Non-Qualified Stock Option Plan (“1997 Plan”), which provides for the granting of stock appreciation rights (SARs) and/or options to purchase 400,000 shares of the Company’s class A common stock to directors, officers, and employees of the Company and its subsidiaries. Options issued under the 1997 Plan expire ten years after issuance. In fiscal year 2018, 2,000 options were granted with a fair value, net of tax, of approximately $4,000. The options granted in fiscal year 2018 will vest over six months through September 2018. No options were granted in fiscal year 2017. As of June 30, 2018, there were 4,000 options outstanding under the 1997 Plan.
The estimated fair value of options granted is amortized to expense over the options’ vesting period. The fair value of these options is estimated at the date of the grant using a Black-Scholes option pricing model.
Stock option transactions under the various employee stock option plans for the past two fiscal years are summarized below:
(dollars in thousands, except price data)
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life in Years
|
|
|
Aggregate Intrinsic Value (net of tax)
|
|
Outstanding June 30, 2016
|
|
|
2,000
|
|
|
$
|
12.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
|
2,000
|
|
|
$
|
12.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,000
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2018
|
|
|
4,000
|
|
|
$
|
7.53
|
|
|
|
5.49
|
|
|
$
|
-
|
|
Class A common stock options outstanding and exercisable under the employee stock option plans at June 30, 2018, were as follows:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Date of Option Grant
|
|
Number Outstanding
|
|
|
Remaining Life in Years
|
|
|
Weighted Average Exercise Price ($)
|
|
|
Number Exercisable
|
|
|
Weighted Average Option Price ($)
|
|
1997 Plan Class A
|
10/07/09
|
|
|
2,000
|
|
|
|
1.27
|
|
|
$
|
12.31
|
|
|
|
2,000
|
|
|
$
|
12.31
|
|
|
03/21/18
|
|
|
2,000
|
|
|
|
9.72
|
|
|
$
|
2.74
|
|
|
|
-
|
|
|
$
|
2.74
|
|
|
|
|
|
4,000
|
|
|
|
5.49
|
|
|
$
|
7.53
|
|
|
|
2,000
|
|
|
$
|
12.31
|
|
NOTE
1
2
. 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. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes resulting from the use of the liability method of accounting for income taxes.
The U.S. statutory rate for the consolidated U.S. federal income tax return was approximately 34 percent for the fiscal year ended June 30, 2017. The current applicable Canadian statutory rate for the Canadian subsidiaries is approximately 26.5 percent.
The Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In the second quarter, the Company revised its estimated annual effective rate to reflect a change in its U.S. federal statutory rate from 34 percent to 21 percent. See further discussion in the
Provisional amounts
section below. The rate change is effective on January 1, 2018; therefore, the Company’s blended U.S. statutory tax rate for the fiscal year ended June 30, 2018, is approximately 28 percent.
At June 30, 2018, the Company has not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on existing deferred tax balances and the one-time transition tax. The Securities and Exchange Commission has issued guidance that allows for a measurement period of up to one year after the enactment date of the Act to finalize the recording of the related tax impacts. The final transitional impacts of the Act may differ from the initial estimates.
Prior to the enactment of Act, the Company had not recorded U.S. income taxes on the undistributed earnings of the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries were considered to be indefinitely reinvested, and as a result, no deferred tax liability was previously recorded. The Company has reevaluated its historic indefinite reinvestment assertion as a result of the enactment of the Act and determined that historical or future undistributed earnings of foreign subsidiaries are no longer considered to be indefinitely reinvested. As a result, for the period ended June 30, 2018, the Company recorded a deferred tax expense and liability related to foreign withholding taxes in the amount of approximately $57,000 for those undistributed earnings which are no longer considered indefinitely invested.
The Act also established new tax provisions that become effective in future periods, including but not limited to eliminating the corporate alternative minimum tax, creating the base erosion anti-abuse tax (“BEAT”), establishing new limitations on deductible interest expense and certain executive compensation, creating a new provision designed to tax global intangible low-tax income (“GILTI”) and generally eliminating U.S. Federal income taxes on dividends from foreign subsidiaries.
Under the new GILTI tax rules, an accounting policy election must be made to either treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred or reflect as a component of deferred taxes. This provision is effective for tax years beginning on or after January 1, 2018, which for the Company would be the fiscal year beginning on July 1, 2018 (fiscal 2019). The Company’s analysis of the new GILTI rules and its impacts is currently incomplete. Accordingly, the Company has not yet made a policy election regarding the treatment of the GILTI tax.
Provisional amounts
Deferred tax assets and liabilities: Certain domestic-related deferred tax assets and liabilities were remeasured in the second quarter of fiscal 2018 based on the rates at which they are expected to reverse in the future, which is generally 21 percent. The remeasurement at the lower tax rate on domestic-related deferred tax assets and liabilities resulted in a deferred tax benefit of approximately $1.4 million. However, the Company is still analyzing certain aspects of the Act and refining the calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As a valuation allowance is recorded for the full amount of these net deferred tax assets, the remeasurement of the net deferred tax assets was offset by a corresponding remeasurement of the valuation allowance.
Foreign tax effects: The one-time transition tax is based on total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. The Company recorded a provisional amount for the one-time transition tax for foreign subsidiaries of $17,000. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the calculations are finalized.
Carryovers
For U.S. federal income tax purposes at June 30, 2018, the Company has U.S. federal net operating loss carryovers of $4.7 million with $2.0 million and $2.7 million expiring in fiscal years 2035 and 2036, respectively. The Company has capital loss carryovers of $1.1 million with $750,000 and $348,000 expiring in fiscal years 2022 and 2023, respectively. The Company has charitable contribution carryovers totaling approximately $69,000 with $34,000; $19,000; $5,000; and $11,000 expiring in fiscal years 2019, 2020, 2021, and 2023, respectively. For Canadian income tax purposes, Galileo has net operating loss carryovers of $338,000 with $102,000; $44,000; $121,000; and $71,000 expiring in fiscal years 2027, 2030, 2036 and 2037, 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.
Additional Disclosures
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 June 30, 2018, and 2017, a valuation allowance of $1.7 million and $3.3 million, respectively, was included to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet.
The Company's components of income (loss) before tax by jurisdiction are as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
(645
|
)
|
|
$
|
(188
|
)
|
Canada
|
|
|
1,531
|
|
|
|
(339
|
)
|
Total
|
|
$
|
886
|
|
|
$
|
(527
|
)
|
The reconciliation of income tax computed at U.S. federal statutory rates to income tax expense is as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
% of
Pretax
|
|
|
2017
|
|
|
% of
Pretax
|
|
Tax expense (benefit) at statutory rate
|
|
$
|
244
|
|
|
|
27.6
|
%
|
|
$
|
(179
|
)
|
|
|
34.0
|
%
|
Valuation allowance
|
|
|
(1,498
|
)
|
|
|
(169.2
|
)%
|
|
|
144
|
|
|
|
(27.3
|
)%
|
Income from controlled foreign corporation
|
|
|
377
|
|
|
|
42.6
|
%
|
|
|
33
|
|
|
|
(6.3
|
)%
|
Tax on deemed repatriation
|
|
|
17
|
|
|
|
1.9
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Rate changes
|
|
|
1,217
|
|
|
|
137.5
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Canadian withholding tax
|
|
|
63
|
|
|
|
7.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Non-taxable investment income
|
|
|
(270
|
)
|
|
|
(30.7
|
)%
|
|
|
(15
|
)
|
|
|
2.9
|
%
|
Nondeductible meals and entertainment
|
|
|
27
|
|
|
|
3.1
|
%
|
|
|
20
|
|
|
|
(3.8
|
)%
|
Other
|
|
|
20
|
|
|
|
2.3
|
%
|
|
|
14
|
|
|
|
(2.7
|
)%
|
Total tax expense
|
|
$
|
197
|
|
|
|
22.2
|
%
|
|
$
|
17
|
|
|
|
(3.2
|
)%
|
Components of total tax expense (benefit) are as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Current tax expense - U.S. Federal
|
|
$
|
5
|
|
|
$
|
6
|
|
Current tax expense - Non-U.S.
|
|
|
142
|
|
|
|
11
|
|
Deferred tax expense - U.S. Federal
|
|
|
-
|
|
|
|
-
|
|
Deferred tax expense - Non-U.S.
|
|
|
50
|
|
|
|
-
|
|
Total tax expense
|
|
$
|
197
|
|
|
$
|
17
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company’s deferred assets and liabilities are as follows:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Book/tax differences in the balance sheet
|
|
|
|
|
|
Trading securities
|
|
$
|
39
|
|
|
$
|
316
|
|
Prepaid expenses
|
|
|
(45
|
)
|
|
|
(92
|
)
|
Accumulated depreciation
|
|
|
162
|
|
|
|
166
|
|
Available-for-sale securities
|
|
|
(1,097
|
)
|
|
|
228
|
|
Other investments
|
|
|
45
|
|
|
|
355
|
|
Equity method investments
|
|
|
13
|
|
|
|
-
|
|
Accrued expenses
|
|
|
146
|
|
|
|
126
|
|
Product start-up costs
|
|
|
60
|
|
|
|
117
|
|
Stock-based compensation expense
|
|
|
4
|
|
|
|
6
|
|
Other
|
|
|
(73
|
)
|
|
|
-
|
|
Tax Carryovers
|
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
|
1,069
|
|
|
|
1,690
|
|
Cumulative eligible capital carryover
|
|
|
-
|
|
|
|
67
|
|
Charitable contributions carryover
|
|
|
14
|
|
|
|
50
|
|
Capital loss carryover
|
|
|
231
|
|
|
|
255
|
|
Valuation Allowance
|
|
|
(1,667
|
)
|
|
|
(3,284
|
)
|
Net deferred tax liability
|
|
$
|
(1,099
|
)
|
|
$
|
-
|
|
NOTE
1
3
. EARNINGS PER SHARE
The following table sets forth the computation for basic and diluted earnings per share (EPS):
|
|
Year Ended June 30,
|
|
(dollars in thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
Net Income (Loss)
|
|
$
|
689
|
|
|
$
|
(544
|
)
|
Less: Net Income (Loss) Attributable to Non-Controlling Interest
|
|
|
42
|
|
|
|
(31
|
)
|
Net Income (Loss) Attributable to U.S. Global Investors, Inc.
|
|
$
|
647
|
|
|
$
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of outstanding shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,158,067
|
|
|
|
15,212,008
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
-
|
|
|
|
-
|
|
Diluted
|
|
|
15,158,067
|
|
|
|
15,212,008
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Attributable to U.S. Global Investors, Inc.
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
(0.03
|
)
|
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the years ended June 30, 2018, and 2017, employee stock options for 4,000 and 2,000 shares were excluded from diluted EPS.
During fiscal years 2018 and 2017, the Company repurchased class A shares on the open market. Repurchased shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.
NOTE
1
4
. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in accumulated other comprehensive income (loss) by component:
(dollars in thousands)
|
|
Unrealized gains (losses) on available-for-sale investments
1
|
|
|
Foreign currency translation adjustment
|
|
|
Total
|
|
Balance at June 30, 2016
|
|
$
|
45
|
|
|
$
|
(194
|
)
|
|
$
|
(149
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
36
|
|
|
|
(3
|
)
|
|
|
33
|
|
Tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amount reclassified from AOCI
|
|
|
380
|
|
|
|
-
|
|
|
|
380
|
|
Tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net other comprehensive income (loss) for 2017
|
|
|
416
|
|
|
|
(3
|
)
|
|
|
413
|
|
Balance at June 30, 2017
|
|
|
461
|
|
|
|
(197
|
)
|
|
|
264
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
3,346
|
|
|
|
(49
|
)
|
|
|
3,297
|
|
Tax effect
|
|
|
(1,049
|
)
|
|
|
-
|
|
|
|
(1,049
|
)
|
Amount reclassified from AOCI
|
|
|
(669
|
)
|
|
|
15
|
|
|
|
(654
|
)
|
Tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net other comprehensive income (loss) for 2018
|
|
|
1,628
|
|
|
|
(34
|
)
|
|
|
1,594
|
|
Balance at June 30, 2018
|
|
$
|
2,089
|
|
|
$
|
(231
|
)
|
|
$
|
1,858
|
|
1.
|
Amounts reclassified from unrealized gains (losses) on available-for-sale investments, net of tax, were recorded in investment income (loss) on the Consolidated Statements of Operations.
|
NOTE
1
5
. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company manages the following business segments:
|
1.
|
Investment management services, by which the Company offers, to USGIF, offshore clients, and ETF clients, a range of investment management products and services to meet the needs of individual and institutional investors;
|
|
2.
|
Investment management services - Canada, through which the Company owns a 65 percent controlling interest in Galileo, a privately held Toronto-based asset management firm which offers investment management products and services in Canada; and
|
|
3.
|
Corporate investments, through which the Company invests for its own account in an effort to add growth and value to its cash position. Although the Company generates the majority of its revenues from its investment advisory segments, the Company holds a significant amount of its total assets in investments.
|
The following schedule details total revenues and income by business segment; certain amounts have been reclassified for comparative purposes:
(dollars in thousands)
|
|
Investment Management Services
|
|
|
Investment Management Services - Canada
|
|
|
Corporate Investments
|
|
|
Consolidated
|
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
4,837
|
|
|
$
|
1,424
|
|
|
$
|
-
|
|
|
$
|
6,261
|
|
Investment income
|
|
$
|
-
|
|
|
$
|
21
|
|
|
$
|
1,483
|
|
|
$
|
1,504
|
|
Income from equity method investments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,624
|
|
|
$
|
1,624
|
|
Other income
|
|
$
|
31
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
46
|
|
Income (loss) before income taxes
|
|
$
|
(1,941
|
)
|
|
$
|
97
|
|
|
$
|
2,730
|
|
|
$
|
886
|
|
Depreciation and amortization
|
|
$
|
229
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
241
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross identifiable assets at June 30, 2018
|
|
$
|
7,878
|
|
|
$
|
1,812
|
|
|
$
|
19,242
|
|
|
$
|
28,932
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Consolidated total assets at June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,932
|
|
Year ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
5,663
|
|
|
$
|
1,100
|
|
|
$
|
-
|
|
|
$
|
6,763
|
|
Investment income
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
343
|
|
|
$
|
346
|
|
Income (loss) before income taxes
|
|
$
|
(763
|
)
|
|
$
|
(89
|
)
|
|
$
|
325
|
|
|
$
|
(527
|
)
|
Depreciation and amortization
|
|
$
|
238
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
253
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net operating revenues from investment management services include revenues from USGIF of $4.1 million and $5.2 million in fiscal years 2018 and 2017, respectively. Net operating revenues from investment management services also include operating revenues from ETF clients of $701,000 and $357,000 in fiscal years 2018 and 2017, respectively.
Net operating revenues from investment management services in Canada includes revenues from Galileo funds of $1.4 million and $866,000 in fiscal years 2018 and 2017, respectively, and from other significant advisory clients of $220,000 in fiscal year 2017.
NOTE
1
6
. RELATED PARTY TRANSACTIONS
On June 30, 2018, and 2017, the Company had $9.6 million and $11.1 million, respectively, at fair value invested in USGIF and offshore funds the Company advised. These amounts were included in the Consolidated Balance Sheet as “trading securities” and “available-for-sale securities” in fiscal years 2018 and 2017. The Company recorded $131,000 and $110,000 in income from dividends and capital gain distributions and $10,000 and $15,000 in net recognized gains (losses) on its investments in the Funds and offshore clients for fiscal years 2018 and 2017, respectively. The offshore clients liquidated during fiscal 2018.
In addition, the Company had $283,000 at June 30, 2018, invested in a fund advised by Galileo accounted for under the equity method of accounting. During fiscal 2018, the Company was also invested in another fund advised by Galileo accounted for under the equity method of accounting. This investment was no longer held at June 30, 2018. The Company recorded income from equity method investments of $1.6 million in fiscal 2018. See further discussion of these investments in Note 3.
The Company earned advisory and administrative services fees, as applicable, from the various funds for which it and its subsidiaries act as investment adviser, as disclosed in Note 4. Receivables include amounts due from the funds for those fees and out-of-pocket expenses, net of amounts payable to the funds for expense reimbursements. As of June 30, 2018, and 2017, the Company had $419,000 and $396,000, respectively, of receivables from mutual funds included in the Consolidated Balance Sheets within “receivables.”
As discussed in Note 3, the Company holds an investment in HIVE valued at $5.6 million as of June 30, 2018. Frank Holmes, a director and Chief Executive Officer of the Company, is the non-executive chairman of HIVE, for which he received director fees from HIVE during fiscal 2018. Mr. Holmes held shares and options of HIVE at June 30, 2018. Effective August 31, 2018, upon the retirement of HIVE’s CEO and until a new CEO is hired, Mr. Holmes became Interim Executive Chairman of HIVE.
Mr. Holmes was a director of each offshore fund until the liquidation of the offshore funds in fiscal year 2018. The Company had a corporate investment, classified as trading, in one of the offshore funds valued at $415,000 at June 30, 2017. Mr. Holmes is a director of Meridian Fund Managers Ltd., which served as the manager of the offshore funds.
Mr. Holmes is also a director of a private company in which the Company holds common stock and warrants classified as other investments and valued at $1.5 million at June 30, 2018, and 2017, and in which he holds nontransferable stock options. The Company received $126,000 and $105,000 in dividend income from its investments in this company in fiscal years 2018 and 2017, respectively.
NOTE
1
7
. 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 of Directors has authorized a monthly dividend of $0.0025 per share from July 2018 through September 2018, at which time it will be considered for continuation by the Board of Directors. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company and general business conditions. The total amount of cash dividends to be paid to class A and class C shareholders from July 2018 to September 2018 will be approximately $113,000.