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. It also provided distribution services to USGIF through December 9, 2015. For these services, the Company received fees from USGIF. Since December 9, 2015, the Company is reimbursed for certain distribution costs. The Company also provides advisory services to offshore clients and two SEC registered exchange traded funds (“ETFs”). The Company holds a controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm.
U.S. Global formed the following companies to provide transfer agent and distribution services to USGIF: United Shareholder Services, Inc. (“USSI”) and U.S. Global Brokerage, Inc. (“USGB”). USSI, which ceased operations in fiscal 2014, was legally dissolved in December 2015. USGB ceased operations in December 2015 as discussed in Note 17.
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
.
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. 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 $11.3 million at June 30, 2017, and $11.8 million at June 30, 2016.
Since the Company is not the primary beneficiary of the 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 funds it advises; therefore, the Company does not consolidate any of these funds.
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.
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.
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 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. No investments were held at June 30, 2017, or 2016 that are accounted for using the equity method.
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, 2017, or 2016.
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. Build-out allowances and other such lease incentives are amortized on a straight-line basis as a reduction of rent expense over the term of the lease.
Impairment of Long-Lived Assets.
The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable. Impairment is indicated when the assets’ net book value is less than fair value of the asset. If this occurs, an impairment loss is recognized for the difference between the fair value and net book value. Factors that indicate potential impairment include: a significant decrease in the market value of the asset or a significant change in the asset’s physical condition or use. No impairments of long-lived assets were recorded during the years included in these financial statements.
Intangible Asset.
An intangible asset, consisting of a non-compete agreement, acquired in connection with the acquisition of Galileo shares effective June 1, 2014, was recorded at fair value $90,000 determined using a discounted cash flow model as of the date of acquisition.
The Company determined that the non-compete agreement had a finite useful life. The Company amortized this finite-lived identifiable intangible asset on a straight-line basis over its estimated useful life of 2 years. Amortization expense totaled $0; $41,000; and $45,000
in fiscal years 2017, 2016, and 2015
, respectively. Amortization expense is included in depreciation and amortization on the Consolidated Statements of Operations. The asset was fully amortized by June 30, 2017, and June 30, 2016.
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.
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, 2017, the Company did not have any accrued interest or penalties related to uncertain tax positions. The tax years from 2013 through 2016 remain open to examination by the U.S. Federal tax jurisdictions to which the Company is subject. The tax years from 2010 through 2016 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 provide 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. Revenue shown on the Consolidated Statements of Operations is net of fee waivers.
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. As of December 2015, the Company is reimbursed for certain advertising expenses related to USGIF from the distributor for USGIF. Net advertising expenditures were $135,000; $212,000; and $135,000 during fiscal years 2017, 2016, and 2015, 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
Accounting Pronouncements Adopted During the Period
In August 2014, the FASB issued
Accounting Standards Update (“
ASU”) 2014-15
, Disclosure of Uncertainties about an Entity
’
s Ability to Continue as a Going Concern
(“ASU 2014-15”). This update requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). When conditions or events raise substantial doubts about an entity’s ability to continue as a going concern, management shall disclose: i) the principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern; ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and iii) management’s plans that are intended to mitigate the conditions or events - and whether or not those plans alleviate the substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 was effective for the annual period ending after December 15, 2016, and for annual period and interim periods thereafter. Early application was permitted. The Company adopted this guidance in the fourth quarter of the fiscal year ended June 30, 2017, with no impact on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02,
Amendments to the Consolidation Analysis
(“ASU 2015-02”), which amended the consolidation requirements in ASC 810, Consolidation. This standard modified existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 was effective for fiscal years and interim periods within those years beginning after December 15, 2015, and required either a retrospective or a modified retrospective approach to adoption. The Company adopted this standard on a modified retrospective approach effective July 1, 2016. The adoption did not result in any change in consolidated entities. See further discussion of the Company’s analysis for consolidation in Note 2, Significant Accounting Policies - Principles of Consolidation.
In May 2015, the FASB issued ASU 2015-07,
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
(“ASU 2015-07”). ASU 2015-07 removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015, and required the retrospective adoption approach. The Company adopted this standard for the September 30, 2016, financial statements on a retrospective basis and modified the presentation of the fair value hierarchy tables included in the notes to financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 required entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. Netting by tax jurisdiction is still required under the new guidance. The update was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and early adoption was permitted. Entities were permitted to apply the amendments either prospectively or retrospectively.
The Company early adopted this guidance effective September 30, 2016, on a prospective basis. As a full reserve valuation allowance was recorded for deferred tax balances, adoption of the guidance did not result in any changes or reclassifications in the Consolidated Balance Sheets as of September 30, 2016. No prior periods were retrospectively adjusted.
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 currently does not expect to 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 No. 2016-20,
Technical Corrections and Improvements in Topic 606 Revenue from Contracts with Customers,
provides 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 expects to adopt the guidance in the first quarter of fiscal year 2019 on a modified retrospective basis. The Company is in the process of evaluating its contracts using the prescribed five-step process to determine the impact of this standard and does not currently expect the adoption to have a material impact on its consolidated balance sheets or statements of operations.
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. As indicated, when this standard is adopted, changes in the fair value of the Company’s investments securities classified as available-for-sale will no longer be reported through other comprehensive income, but rather through earnings, causing investment income (loss) to be more volatile. The Company is currently evaluating other potential impacts of this standard on its consolidated financial statements.
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. Please see Note 9 for more information on the Company’s minimum lease payments as of June 30, 2017.
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. Early adoption will be permitted in any interim or annual period, as long as all elements of the new standard are adopted at the same time. The Company intends to adopt this new standard in its September 30, 2017, Form 10-Q. The Company is currently evaluating the potential impact of this standard but does not currently expect the adoption to have a material impact on its consolidated financial statements.
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. Early adoption is permitted, and the Company is in the process of determining whether the standard will be early adopted. 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 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 is in the process of determining whether the standard will be early adopted but does not currently expect the adoption to have a material impact on its consolidated financial statements.
NOTE 3. INVESTMENTS
As of June 30, 2017, the Company held investments with a fair value of $13.1 million and a cost basis of $13.6 million. The market value of these investments is approximately 51.4 percent of the Company’s total assets. In addition, the Company owned other investments of $2.1 million accounted for under the cost method of accounting.
Investments in securities classified as trading are reflected as current assets on the Consolidated Balance Sheets at their fair market 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 an equity security is determined to be other-than-temporary, the impairment is recognized in earnings.
The following details the components of the Company’s investments recorded at fair value as of June 30, 2017, and 2016:
|
|
June 30, 2017
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
(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
4
|
|
|
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
|
|
|
|
June 30, 2016
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Fair Value
|
|
Trading securities
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - Fixed income
|
|
$
|
9,284
|
|
|
$
|
124
|
|
|
$
|
-
|
|
|
$
|
9,408
|
|
Mutual funds - Domestic equity
|
|
|
535
|
|
|
|
-
|
|
|
|
(197
|
)
|
|
|
338
|
|
Other
|
|
|
45
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
-
|
|
Offshore fund
|
|
|
1,184
|
|
|
|
-
|
|
|
|
(826
|
)
|
|
|
358
|
|
Total trading securities
|
|
$
|
11,048
|
|
|
$
|
124
|
|
|
$
|
(1,068
|
)
|
|
$
|
10,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
$
|
109
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
130
|
|
Common stock - International
|
|
|
613
|
|
|
|
16
|
|
|
|
(83
|
)
|
|
|
546
|
|
Corporate debt
|
|
|
1,038
|
|
|
|
86
|
|
|
|
-
|
|
|
|
1,124
|
|
Mutual funds - Fixed income
|
|
|
1,226
|
|
|
|
18
|
|
|
|
(23
|
)
|
|
|
1,221
|
|
Mutual funds - Domestic equity
|
|
|
394
|
|
|
|
2
|
|
|
|
-
|
|
|
|
396
|
|
Other
|
|
|
56
|
|
|
|
8
|
|
|
|
-
|
|
|
|
64
|
|
Total available-for-sale securities
3
|
|
$
|
3,436
|
|
|
$
|
151
|
|
|
$
|
(106
|
)
|
|
$
|
3,481
|
|
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, 2017, are $461 and $461, respectively, and as of June 30, 2016, are $45 and $45, respectively.
|
4
|
Corporate debt matures in 2024.
|
The following summarizes investment income (loss) reflected in earnings for the periods presented.
(dollars in thousands)
|
|
Year Ended June 30,
|
|
Investment Income
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Realized gains on sales of available-for-sale securities
|
|
$
|
31
|
|
|
$
|
532
|
|
|
$
|
591
|
|
Realized losses on sales of trading securities
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
(1
|
)
|
Realized gains (losses) on sales of securities classified as other investments
|
|
|
-
|
|
|
|
3
|
|
|
|
(30
|
)
|
Unrealized gains (losses) on trading securities
|
|
|
15
|
|
|
|
(93
|
)
|
|
|
(601
|
)
|
Realized foreign currency gains (losses)
|
|
|
(37
|
)
|
|
|
43
|
|
|
|
71
|
|
Other-than-temporary declines in available-for-sale securities
|
|
|
(411
|
)
|
|
|
(259
|
)
|
|
|
(247
|
)
|
Other-than-temporary declines in securities held at cost
|
|
|
(72
|
)
|
|
|
(258
|
)
|
|
|
-
|
|
Dividend and interest income
|
|
|
820
|
|
|
|
542
|
|
|
|
651
|
|
Total Investment Income
|
|
$
|
346
|
|
|
$
|
485
|
|
|
$
|
434
|
|
Included in investment income were other-than temporary declines in value on available-for-sale securities of approximately $411,000; $259,000; and $247,000 in fiscal years 2017, 2016, and 2015, respectively. The impairment losses resulted from fair values of certain equity securities being lower than book value and from proposed changes to debt securities. 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. For the year ending June 30, 2016, there were eight securities with a combined cost basis of $702,000 that were written down to a combined fair value of $466,000. Also during the year ending June 30, 2016, another security with a cost basis of $970,000 was written down to $947,000 based on the net present value of estimated future cash flows. The impairment losses in the 2015 fiscal year resulted from issuers defaulting on scheduled payments. One security with a cost basis of $44,000 was written down to its fair value of $5,000. Two other securities, for which the common issuer has resumed interest payments, were written down to the net present value of estimated future cash flows. These securities had a cost basis of $310,000 and $1.1 million, respectively, and were written down to $234,000 and $970,000, respectively. Also included in investment income were approximately $72,000 for fiscal 2017 and $258,000 for fiscal 2016 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 fiscal 2016, three securities held at cost with a combined cost basis of $1.1 million were written down to a combined adjusted cost basis of $867,000. 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, 2017, 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, 2017
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
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
|
)
|
|
|
June 30, 2016
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Common stock - International
|
|
|
246
|
|
|
|
(60
|
)
|
|
|
23
|
|
|
|
(23
|
)
|
|
|
269
|
|
|
|
(83
|
)
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
1
|
|
|
|
-
|
|
|
|
201
|
|
|
|
(23
|
)
|
|
|
202
|
|
|
|
(23
|
)
|
Mutual funds - Domestic equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total available-for-sale securities
|
|
$
|
247
|
|
|
$
|
(60
|
)
|
|
$
|
224
|
|
|
$
|
(46
|
)
|
|
$
|
471
|
|
|
$
|
(106
|
)
|
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.
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. 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, accounting and legal/compliance 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, 2017
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
Inputs
|
|
|
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
|
|
$
|
12,706
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,121
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - Fixed income
|
|
$
|
9,408
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,408
|
|
Mutual funds - Domestic equity
|
|
|
338
|
|
|
|
-
|
|
|
|
-
|
|
|
|
338
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Offshore fund investment measured at net asset value
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
Total trading securities
|
|
|
9,746
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,104
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - Domestic
|
|
$
|
130
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
130
|
|
Common stock - International
|
|
|
546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
546
|
|
Corporate debt
|
|
|
1,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,124
|
|
Mutual funds - Fixed income
|
|
|
1,221
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,221
|
|
Mutual funds - Domestic equity
|
|
|
396
|
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
Other
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
Total available-for-sale securities
|
|
|
3,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,481
|
|
Total
|
|
$
|
13,227
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,585
|
|
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 expedient 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, 2017, and June 30, 2016, 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.
The Company has an investment in an affiliated offshore fund, classified as trading, which invests in companies in the energy and natural resources sectors.
The fair value of this investment has been estimated based on the net asset value per share at
$415,000 and $358,000 as of June 30, 2017, and June 30, 2016, respectively. This offshore fund has provided notice that the fund is liquidating. The liquidation is expected to be completed in September 2017. The investment has an unrealized loss of $769,000 as of June 30, 2017, that has already been recognized in earnings.
The following table is a reconciliation of investments recorded at fair value for which unobservable inputs (Level 3) were used in determining fair value during the years ended June 30, 2017, and 2016:
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
(dollars in thousands)
|
|
|
|
|
Corporate Debt
|
|
Beginning Balance
|
|
$
|
-
|
|
|
$
|
539
|
|
Return of capital
|
|
|
-
|
|
|
|
(13
|
)
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings (investment income)
|
|
|
-
|
|
|
|
(23
|
)
|
Included in other comprehensive income (loss)
|
|
|
-
|
|
|
|
710
|
|
Purchases
|
|
|
-
|
|
|
|
-
|
|
Sales
|
|
|
-
|
|
|
|
-
|
|
Transfers into Level 3
|
|
|
-
|
|
|
|
-
|
|
Transfers out of Level 3
|
|
|
-
|
|
|
|
(1,213
|
)
|
Ending Balance
|
|
$
|
-
|
|
|
$
|
-
|
|
The transfers out of Level 3 shown above in the prior period were corporate debt securities from two issuers. The debt security from one issuer was transferred to Level 1 when it started trading on a market. The securities previously had been valued based on other traded debt from the same issuer. The debt instrument from the other issuer was transferred out of available-for-sale Level 3 assets and classified as a note receivable at June 30, 2016.
NOTE 4. INVESTMENT 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 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, 2017, 2016, and 2015, the Company realized a decrease in its base advisory fee of $49,000; $132,000; and $1.0 million, respectively, due to these performance adjustments.
The Company has agreed to contractually limit the expenses of the Near-Term Tax Free Fund through April 2018. 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 $1.0 million; $1.3 million; and $1.3 million for the years ended June 30, 2017, 2016, and 2015, respectively. 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.
Prior to November 2014, the Company was compensated for administrative services at an annual rate of 0.10 percent per investor class and 0.08 percent per institutional class plus $10,000 per fund.
Effective November 1, 2014, the annual per fund fee changed to $7,000. Effective December 10, 2015, the agreement was amended and the level of administrative services performed and corresponding fees were reduced, including elimination of the per fund fee.
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 U.S. Global ETFs. The U.S. Global Jets ETF commenced operations in April 2015, and fiscal 2016 was its first full year of operations. U.S. Global GO GOLD and Precious Metal Miners ETF 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 advisory fees from the ETFs totaling $357,000; $296,000; and $26,000 in fiscal 2017, 2016, and 2015, respectively.
The Company provides 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 $135,000; $91,000; and $130,000 for the years ended June 30, 2017, 2016, and 2015, respectively. The Company recorded no performance fees from these clients for fiscal years 2015 through 2017. The offshore clients have provided notice that they are liquidating. The liquidations are expected to be completed in September 2017.
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 $1.1 million; $1.2 million; and $2.0 million for the years ended June 30, 2017, 2016, and 2015, respectively.
NOTE 5. NOTES RECEIVABLE
The Company has invested in notes receivable consisting of two promissory notes. One note with a principal amount of $2 million was entered into 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, which is included in Notes Receivable on the balance sheet, is amortized to interest income using the interest method over the remaining term of the note. The note bears interest at 12 percent, with 10 percent payable monthly and 2 percent payable at maturity. In case of prepayment, there would be a penalty for the amount of lost interest. The balance of this note was approximately $2.0 million at June 30, 2017, and June 30, 2016.
The other note of $234,000 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 schedule interest or principal payments or failure to provide timely financial statements. Principal repayments on the amended note are scheduled to start in February 2019. The balance of this note was $234,000 at June 30, 2017, and $212,000 at June 30, 2016.
The Company considered the credit quality of the other parties and determined that no allowance for credit losses is necessary.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Building and land
|
|
$
|
4,597
|
|
|
$
|
4,597
|
|
Furniture, equipment, and other
|
|
|
1,729
|
|
|
|
2,103
|
|
|
|
|
6,326
|
|
|
|
6,700
|
|
Accumulated depreciation
|
|
|
(4,114
|
)
|
|
|
(4,234
|
)
|
Net property and equipment
|
|
$
|
2,212
|
|
|
$
|
2,466
|
|
Depreciation expense totaled $253,000; $275,000; and $282,000 in fiscal years 2017, 2016, and 2015, respectively.
NOTE 7. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Professional fees
|
|
$
|
229
|
|
|
$
|
272
|
|
Vendors payable
|
|
|
257
|
|
|
|
253
|
|
Taxes payable
|
|
|
58
|
|
|
|
61
|
|
Other accrued expenses
|
|
$
|
544
|
|
|
$
|
586
|
|
NOTE 8. BORROWINGS
As of June 30, 2017, the Company has no long-term liabilities.
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, 2018, and the Company intends to renew annually. The credit facility is collateralized by $1 million at June 30, 2017, held in deposit in a money market account at the financial institution that provided the credit facility. As of June 30, 2017, 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 2018 and 2020 and for office facilities in Canada that expire in 2023. Lease expense totaled $292,000; $397,000; and $514,000 in fiscal years 2017, 2016, and 2015, respectively. Minimum non-cancelable lease payments required under operating leases for future periods are as follows:
(dollars in thousands)
|
|
|
|
Fiscal Year
|
|
Amount
|
|
2018
|
|
$
|
195
|
|
2019
|
|
|
171
|
|
2020
|
|
|
101
|
|
2021
|
|
|
98
|
|
2022
|
|
|
98
|
|
2023
|
|
|
100
|
|
Total
|
|
$
|
763
|
|
NOTE 10. 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 has recorded expenses for contributions to the 401(k) plan of $86,000; $113,000; and $131,000 for fiscal years 2017, 2016, and 2015, 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 2017, 2016, or 2015
.
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. Through December 31, 2015, certain employees could have contributed to the Near-Term Tax Free Fund, and the Company matched these contributions on a limited basis. The Company match, reflected in base salary expense, aggregated in all programs to $22,000; $39,000; and $51,000 in fiscal years 2017, 2016, and 2015, respectively.
The Company has an Employee Stock Purchase Plan whereby eligible employees can purchase treasury shares at market price. Through December 31, 2015, the Company matched their contributions up to 3 percent of gross salary. During fiscal years 2017, 2016, and 2015, employees purchased 3,433; 39,084; and 37,383, respectively, shares of treasury stock from the Company.
NOTE 11. SHAREHOLDERS’ EQUITY
Dividends
The Company paid $0.005 per share per month in fiscal year 2015 and through September 2015 and $0.0025 per share per month from October 2015 through June 2017. Dividends of $394,000; $496,000; and $800,000 were paid to holders of class A common stock in fiscal years 2017, 2016, and 2015, respectively. Dividends of $62,000; $78,000; and $124,000 were paid to holders of class C common stock in fiscal years 2017, 2016, and 2015, respectively.
The monthly
dividend
of $0.0025 is authorized through September 2017 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 Board of Directors approved a share repurchase program on December 7, 2012, authorizing the Company to 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, 2013. On December 12, 2013, December 10, 2014, December 9, 2015, and December 6, 2016, the Board of Directors renewed the repurchase program for calendar years 2014, 2015, 2016, and 2017, respectively. The total amount of shares that may be repurchased in 2017 under the renewed program is $2.75 million. 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, 2017, approximately $2.72 million remains available for repurchase under this authorization.
During fiscal years 2017, 2016, and 2015, the Company repurchased 69,636; 177,998; and 95,251, respectively, of its class A shares on the open market using cash of $114,000; $313,000; and $292,000, respectively. To date, the Company has repurchased a total of 491,288 class A shares under the repurchase program using cash of $1,181,000.
Other Activity
The Company granted 2,400 shares of class A common stock at a weighted average fair value of $2.66 to an employee during fiscal year 2016. The Company did not grant any shares of class A common stock to employees during fiscal year 2017 or 2015. Grants vest immediately after issuance.
The Company granted 3,600; 3,600; and 3,600 shares of class A common stock at a weighted average fair value of $1.66; $1.63, and $3.24 to its non-employee directors in fiscal years 2017, 2016, and 2015, 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 years 2017 and 2016, shares were issued, as described above, 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 and $43,000 for fiscal years 2017 and 2016, respectively.
Shareholders of class C shares are allowed to convert to class A. During fiscal years 2017, 2016, and 2015, 180, 0, and 60 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 2017, 2016, or 2015. As of June 30, 2017, 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. No options were granted in fiscal years 2017, 2016, or 2015. As of June 30, 2017, there were 2,000 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 three 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, 2014
|
|
|
22,000
|
|
|
$
|
18.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
|
22,000
|
|
|
$
|
18.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(20,000
|
)
|
|
$
|
19.36
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2.27
|
|
|
$
|
-
|
|
As of June 30, 2017, 2016, and 2015, exercisable employee stock options totaled 2,000; 2,000; and 22,000 shares and had weighted average exercise prices of $12.31, $12.31, and $18.72 per share, respectively.
Class A common stock options outstanding and exercisable under the employee stock option plans at June 30, 2017, were as follows:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Date of
Option
Grant
|
|
Number
Outstanding
|
|
|
Remaining Life
in Years
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Option Price
($)
|
|
1997 Plan Class A
|
|
10/07/09
|
|
|
2,000
|
|
|
|
2.27
|
|
|
$
|
12.31
|
|
|
|
2,000
|
|
|
$
|
12.31
|
|
|
|
|
|
|
2,000
|
|
|
|
2.27
|
|
|
$
|
12.31
|
|
|
|
2,000
|
|
|
$
|
12.31
|
|
NOTE 12. 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. The current applicable U.S. statutory rate for the consolidated U.S. federal income tax return is approximately 34 percent and the current applicable Canadian statutory rate for the Canadian subsidiaries is approximately 26.5 percent. 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 Company has not recognized deferred income taxes on undistributed earnings of Galileo since such earnings are considered to be reinvested indefinitely.
For U.S. federal income tax purposes at June 30, 2017, the Company has charitable contribution carryovers totaling approximately $147,000 with $68,000; $34,000; $19,000; $5,000; and $21,000 expiring in fiscal years 2018, 2019, 2020, 2021, and 2022, respectively. The Company has U.S. federal net operating loss carryovers of $4.7 million with $2.0 million expiring in fiscal year 2035 and $2.7 million expiring in fiscal year 2036. For Canadian income tax purposes, Galileo has cumulative eligible capital carryovers of $254,000 with no expiration and net operating loss carryovers of $66,000; $120,000; $45,000; $123,000 and $7,000 expiring in fiscal 2025, 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.
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, 2017, and 2016, a valuation allowance of $3.3 million and $3.1 million, respectively, was included to fully reserve for net operating loss carryovers, other carryovers and 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)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
(188
|
)
|
|
$
|
(3,496
|
)
|
|
$
|
(3,400
|
)
|
Canada
|
|
|
(339
|
)
|
|
|
(213
|
)
|
|
|
246
|
|
Total
|
|
$
|
(527
|
)
|
|
$
|
(3,709
|
)
|
|
$
|
(3,154
|
)
|
The reconciliation of income tax computed for continuing operations at the U.S. federal statutory rates to income tax expense is as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2017
|
|
|
% of
Pretax
|
|
|
2016
|
|
|
% of
Pretax
|
|
|
2015
|
|
|
% of
Pretax
|
|
Tax expense (benefit) at statutory rate - continuing operations
|
|
$
|
(179
|
)
|
|
|
34.0
|
%
|
|
$
|
(1,255
|
)
|
|
|
34.0
|
%
|
|
$
|
(1,045
|
)
|
|
|
34.0
|
%
|
Valuation allowance
|
|
|
144
|
|
|
|
(27.3
|
)%
|
|
|
1,067
|
|
|
|
(28.9
|
)%
|
|
|
1,857
|
|
|
|
(60.4
|
)%
|
Income from controlled foreign corporation
|
|
|
33
|
|
|
|
(6.3
|
)%
|
|
|
51
|
|
|
|
(1.4
|
)%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other
|
|
|
19
|
|
|
|
(3.6
|
)%
|
|
|
131
|
|
|
|
(3.6
|
)%
|
|
|
10
|
|
|
|
(0.3
|
)%
|
Total tax expense (benefit) - continuing operations
|
|
$
|
17
|
|
|
|
(3.2
|
)%
|
|
$
|
(6
|
)
|
|
|
0.1
|
%
|
|
$
|
822
|
|
|
|
(26.7
|
)%
|
Components of total tax expense (benefit) are as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit) - U.S. Federal
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
(21
|
)
|
Current tax expense (benefit) - Non-U.S.
|
|
|
11
|
|
|
|
(6
|
)
|
|
|
36
|
|
Deferred tax expense - U.S. Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
807
|
|
Total tax expense (benefit) - continuing operations
|
|
|
17
|
|
|
|
(6
|
)
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax benefit - U.S. Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total tax expense (benefit)
|
|
$
|
17
|
|
|
$
|
(6
|
)
|
|
$
|
822
|
|
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. The Company’s deferred assets and liabilities using the effective U.S. statutory tax rate are as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Book/tax differences in the balance sheet
|
|
|
|
|
|
|
Trading securities
|
|
$
|
316
|
|
|
$
|
321
|
|
Prepaid expenses
|
|
|
(92
|
)
|
|
|
(73
|
)
|
Accumulated depreciation
|
|
|
166
|
|
|
|
142
|
|
Available-for-sale securities
|
|
|
228
|
|
|
|
436
|
|
Other investments
|
|
|
355
|
|
|
|
83
|
|
Accrued expenses
|
|
|
126
|
|
|
|
99
|
|
Product start-up costs
|
|
|
117
|
|
|
|
63
|
|
Stock-based compensation expense
|
|
|
6
|
|
|
|
6
|
|
Tax Carryovers
|
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
|
1,690
|
|
|
|
1,953
|
|
Cumulative eligible capital carryover
|
|
|
67
|
|
|
|
67
|
|
Charitable contributions carryover
|
|
|
50
|
|
|
|
43
|
|
Capital loss carryover
|
|
|
255
|
|
|
|
-
|
|
Valuation Allowance
|
|
|
(3,284
|
)
|
|
|
(3,140
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
In November 2015, the FASB issued accounting guidance that simplifies the presentation of deferred income taxes. The guidance requires that deferred tax balances be classified as non-current in a statement of financial position. The Company adopted this guidance effective September 30, 2016, on a prospective basis. As a full reserve valuation allowance is recorded for deferred tax balances, adoption of the guidance did not result in any changes or reclassifications in the Consolidated Balance Sheets as of September 30, 2016. No prior periods were retrospectively adjusted.
NOTE 13. 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)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(544
|
)
|
|
$
|
(3,685
|
)
|
|
$
|
(3,895
|
)
|
Less: Income (loss) attributable to non-controlling interest in subsidiary
|
|
|
(31
|
)
|
|
|
(28
|
)
|
|
|
54
|
|
Loss from continuing operations attributable to U.S. Global Investors, Inc.
|
|
|
(513
|
)
|
|
|
(3,657
|
)
|
|
|
(3,949
|
)
|
Loss from discontinued operations attributable to U.S. Global Investors, Inc.
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
(81
|
)
|
Net loss attributable to U.S. Global Investors, Inc.
|
|
$
|
(513
|
)
|
|
$
|
(3,675
|
)
|
|
$
|
(4,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of outstanding shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,212,008
|
|
|
|
15,294,893
|
|
|
|
15,399,831
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
|
|
|
15,212,008
|
|
|
|
15,294,893
|
|
|
|
15,399,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to U.S. Global Investors, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.25
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.01
|
)
|
Net loss attributable to U.S. Global Investors, Inc.
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.25
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.01
|
)
|
Net loss attributable to U.S. Global Investors, Inc.
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
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, 2017, 2016, and 2015, employee stock options for 2,000; 2,000; and 22,000 shares were excluded from diluted EPS.
During fiscal years 2017, 2016, and 2015, 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 14. 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, 2014
|
|
$
|
888
|
|
|
$
|
18
|
|
|
$
|
906
|
|
Other comprehensive loss before reclassifications
|
|
|
(1,341
|
)
|
|
|
(162
|
)
|
|
|
(1,503
|
)
|
Tax effect
|
|
|
341
|
|
|
|
-
|
|
|
|
341
|
|
Amount reclassified from AOCI
|
|
|
(344
|
)
|
|
|
-
|
|
|
|
(344
|
)
|
Tax effect
|
|
|
117
|
|
|
|
-
|
|
|
|
117
|
|
Net other comprehensive loss for 2015
|
|
|
(1,227
|
)
|
|
|
(162
|
)
|
|
|
(1,389
|
)
|
Balance at June 30, 2015
|
|
|
(339
|
)
|
|
|
(144
|
)
|
|
|
(483
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
657
|
|
|
|
(50
|
)
|
|
|
607
|
|
Tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amount reclassified from AOCI
|
|
|
(273
|
)
|
|
|
-
|
|
|
|
(273
|
)
|
Tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net other comprehensive income (loss) for 2016
|
|
|
384
|
|
|
|
(50
|
)
|
|
|
334
|
|
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
|
|
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 15. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company manages the following business segments:
1.
|
Investment management services, by which the Company offers, through 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, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
5,663
|
|
|
$
|
1,100
|
|
|
$
|
-
|
|
|
$
|
6,763
|
|
Net other income
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
343
|
|
|
$
|
346
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(763
|
)
|
|
$
|
(89
|
)
|
|
$
|
325
|
|
|
$
|
(527
|
)
|
Depreciation and amortization
|
|
$
|
238
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
253
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross identifiable assets at June 30, 2017
|
|
$
|
5,893
|
|
|
$
|
1,531
|
|
|
$
|
18,096
|
|
|
$
|
25,520
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Consolidated total assets at June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,520
|
|
Year ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
4,341
|
|
|
$
|
1,164
|
|
|
$
|
-
|
|
|
$
|
5,505
|
|
Net other income
|
|
$
|
-
|
|
|
$
|
35
|
|
|
$
|
450
|
|
|
$
|
485
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(4,018
|
)
|
|
$
|
(122
|
)
|
|
$
|
449
|
|
|
$
|
(3,691
|
)
|
Loss from discontinued operations
|
|
$
|
(18
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(18
|
)
|
Depreciation and amortization
|
|
$
|
255
|
|
|
$
|
61
|
|
|
$
|
-
|
|
|
$
|
316
|
|
Capital expenditures
|
|
$
|
13
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13
|
|
Year ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
5,326
|
|
|
$
|
2,007
|
|
|
$
|
-
|
|
|
$
|
7,333
|
|
Net other income
|
|
$
|
-
|
|
|
$
|
102
|
|
|
$
|
332
|
|
|
$
|
434
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(3,473
|
)
|
|
$
|
111
|
|
|
$
|
289
|
|
|
$
|
(3,073
|
)
|
Loss from discontinued operations
|
|
$
|
(81
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(81
|
)
|
Depreciation and amortization
|
|
$
|
253
|
|
|
$
|
74
|
|
|
$
|
-
|
|
|
$
|
327
|
|
Capital expenditures
|
|
$
|
40
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40
|
|
Net operating revenues from investment management services include revenues from USGIF of $5.2 million; $4.0 million; and $5.2 million in fiscal years 2017, 2016, and 2015, respectively. The loss from discontinued operations in investment management services includes revenues from USGIF of $608,000 and $2.0 million in fiscal years 2016 and 2015, respectively.
Net operating revenues from investment management services in Canada includes revenues from Galileo funds of $866,000; $900,000; and $1.6 million in fiscal years 2017, 2016, and 2015, respectively, and other significant advisory clients of $220,000; $254,000; and $354,000 in fiscal years 2017, 2016, and 2015, respectively.
NOTE 16. RELATED PARTY TRANSACTIONS
On June 30, 2017, and 2016, the Company had $11.1 million and $11.5 million, respectively, at fair value invested in USGIF and offshore funds the Company advises. These amounts were included in the Consolidated Balance Sheet as “trading securities” and “available-for-sale securities” in fiscal year 2017 and 2016. The Company recorded $110,000; $180,000; and $244,000 in income from dividends and capital gain distributions and $15,000; $(273,000); and $(596,000) in net recognized gains (losses) on its investments in the Funds and offshore clients for fiscal years 2017, 2016, and 2015, respectively.
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, 2017, and 2016, the Company had $396,000 and $595,000, respectively, of receivables from mutual funds included in the Consolidated Balance Sheets within “receivables.”
Frank Holmes, a director and Chief Executive Officer of the Company, was a trustee of USGIF until December 2015. Mr. Holmes is a director of each offshore fund and is also a director of Meridian Fund Managers Ltd., the manager of the offshore funds. The offshore clients have provided notice that they are liquidating. The liquidations are expected to be completed in September 2017. The Company has a corporate investment, classified as trading, in one of the offshore funds valued at $415,000 and $358,000 at June 30, 2017, and 2016, respectively.
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 and $723,000 at June 30, 2017, and 2016, respectively, and in which he holds nontransferable stock options. The Company received $105,000; $117,000; and $68,000 in dividend and interest income from its investments in this company in fiscal years 2017, 2016, and 2015, respectively. The Company recorded $211,000 in recognized losses on its investments in this company in fiscal year 2016.
NOTE 17. DISCONTINUED OPERATIONS
In December 2015, USGIF elected a new slate of trustees to the Board of Trustees of the Funds. The Company proposed the election of new trustees and the transition of certain functions to third-party service providers with the intention of streamlining the Company’s responsibilities so it can better focus on strategic activities. The new Board of Trustees of USGIF adopted several new service agreements. As anticipated, effective December 10, 2015, the Company, through its wholly-owned subsidiary, U.S. Global Brokerage, Inc., ceased to be the distributor for USGIF and no longer receives distribution fees and shareholder services fees from USGIF. The Company’s portion of one-time transition expenses, recorded in the quarter ended December 31, 2015, was approximately $290,000. Due to this transition, the Company is no longer responsible for paying certain distribution and shareholder servicing related expenses and is reimbursed for certain distribution expenses from the new distributor for USGIF. As a result of this change, the Company filed Form BDW, the Uniform Request Withdrawal From Broker-Dealer Registration, with FINRA, which was approved in February 2016. This constituted a strategic shift that has started to have, and will continue to have, a major effect on the Company’s operating revenues and expenses.
The distribution and shareholder services revenues and the expenses associated with certain distribution operations for USGIF are reflected as discontinued operations in the statement of operations and are, therefore, excluded from continuing operations results. These revenues and expenses were previously included in the investment management services segment.
The discontinued operations did not have depreciation, amortization, capital expenditures or significant non-cash operating and investing items.
There were no assets and liabilities related to distribution discontinued operations at June 30, 2017, or June 30, 2016:
The components of loss from discontinued operations of the distributor were as follows:
|
|
Year Ended June 30,
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Distribution fees
|
|
$
|
-
|
|
|
$
|
425
|
|
|
$
|
1,408
|
|
Shareholder services fees
|
|
|
-
|
|
|
|
183
|
|
|
|
630
|
|
|
|
|
-
|
|
|
|
608
|
|
|
|
2,038
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
-
|
|
|
|
188
|
|
|
|
491
|
|
General and administrative
|
|
|
-
|
|
|
|
77
|
|
|
|
152
|
|
Platform fees
|
|
|
-
|
|
|
|
347
|
|
|
|
1,201
|
|
Advertising
|
|
|
-
|
|
|
|
14
|
|
|
|
275
|
|
|
|
|
-
|
|
|
|
626
|
|
|
|
2,119
|
|
Loss from discontinued operations of distributor before income taxes
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
(81
|
)
|
Tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations of distributor
|
|
$
|
-
|
|
|
$
|
(18
|
)
|
|
$
|
(81
|
)
|
Through December 9, 2015, USGIF paid the Company a distribution fee at an annual rate of 0.25 percent of the average daily net assets of the investor class of each of the equity funds. Effective December 10, 2015, the Company, through U.S. Global Brokerage, Inc., ceased to be the distributor for USGIF and no longer receives distribution fees directly from the Funds.
In addition, through December 9, 2015, the Company received shareholder servicing fees from USGIF based on the value of Fund assets held through broker-dealer platforms. Effective December 10, 2015, the Company ceased to be the distributor for USGIF and no longer receives shareholder services fees from the Funds.
Due to this transition, the Company is no longer responsible for paying the platform fees for the USGIF equity funds and is reimbursed for certain distribution expenses from the new distributor for USGIF.
NOTE 18. 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 2017 through September 2017, 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 2017 to September 2017 will be approximately $114,000.
NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Note that quarterly per share amounts may not add to the annual total due to rounding.
|
|
Quarters
|
|
|
|
|
Fiscal 2017
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Total
|
|
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,981
|
|
|
$
|
1,642
|
|
|
$
|
1,669
|
|
|
$
|
1,471
|
|
|
$
|
6,763
|
|
Income (loss) from continuing operations before income taxes
|
|
|
284
|
|
|
|
15
|
|
|
|
(30
|
)
|
|
|
(796
|
)
|
|
|
(527
|
)
|
Tax expense (benefit)
|
|
|
20
|
|
|
|
(10
|
)
|
|
|
3
|
|
|
|
4
|
|
|
|
17
|
|
Income (loss) from continuing operations
|
|
|
264
|
|
|
|
25
|
|
|
|
(33
|
)
|
|
|
(800
|
)
|
|
|
(544
|
)
|
Net income (loss)
|
|
|
264
|
|
|
|
25
|
|
|
|
(33
|
)
|
|
|
(800
|
)
|
|
|
(544
|
)
|
Net income (loss) attributable to non-controlling interest
|
|
|
1
|
|
|
|
17
|
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
(31
|
)
|
Net income (loss) attributable to U.S. Global Investors, Inc.
|
|
|
263
|
|
|
|
8
|
|
|
|
(33
|
)
|
|
|
(751
|
)
|
|
|
(513
|
)
|
Comprehensive income (loss)
|
|
|
941
|
|
|
|
(370
|
)
|
|
|
(215
|
)
|
|
|
(459
|
)
|
|
|
(103
|
)
|
Comprehensive income (loss) attributable to U.S. Global Investors, Inc.
|
|
|
946
|
|
|
|
(356
|
)
|
|
|
(219
|
)
|
|
|
(471
|
)
|
|
|
(100
|
)
|
Earnings (loss) per share attributable to U.S. Global Investors, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
Average Assets Under Management (in millions)
|
|
$
|
945.6
|
|
|
$
|
850.7
|
|
|
$
|
841.4
|
|
|
$
|
732.8
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
|
Fiscal 2016
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Total
|
|
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,250
|
|
|
$
|
1,289
|
|
|
$
|
1,330
|
|
|
$
|
1,636
|
|
|
$
|
5,505
|
|
Loss from continuing operations before income taxes
|
|
|
(861
|
)
|
|
|
(2,187
|
)
|
|
|
(392
|
)
|
|
|
(251
|
)
|
|
|
(3,691
|
)
|
Tax expense (benefit)
|
|
|
11
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
Loss from continuing operations
|
|
|
(872
|
)
|
|
|
(2,187
|
)
|
|
|
(376
|
)
|
|
|
(250
|
)
|
|
|
(3,685
|
)
|
Income (loss) from discontinued operations
|
|
|
7
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(18
|
)
|
Net loss
|
|
|
(865
|
)
|
|
|
(2,212
|
)
|
|
|
(376
|
)
|
|
|
(250
|
)
|
|
|
(3,703
|
)
|
Net income (loss) attributable to non-controlling interest
|
|
|
3
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
(5
|
)
|
|
|
(28
|
)
|
Net loss attributable to U.S. Global Investors, Inc.
|
|
|
(868
|
)
|
|
|
(2,212
|
)
|
|
|
(350
|
)
|
|
|
(245
|
)
|
|
|
(3,675
|
)
|
Comprehensive income (loss)
|
|
|
(1,577
|
)
|
|
|
(1,592
|
)
|
|
|
148
|
|
|
|
(348
|
)
|
|
|
(3,369
|
)
|
Comprehensive income (loss) attributable to U.S. Global Investors, Inc.
|
|
|
(1,533
|
)
|
|
|
(1,575
|
)
|
|
|
115
|
|
|
|
(348
|
)
|
|
|
(3,341
|
)
|
Earnings (loss) per share attributable to U.S. Global Investors, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.24
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to U.S. Global Investors, Inc.
|
|
$
|
(0.06
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.24
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.24
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to U.S. Global Investors, Inc.
|
|
$
|
(0.06
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.24
|
)
|
Average Assets Under Management (in millions)
|
|
$
|
724.0
|
|
|
$
|
707.6
|
|
|
$
|
708.7
|
|
|
$
|
835.6
|
|
|
|
|
|