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 securities¹
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 securities²
Common stock - Domestic	$	109	$	4	$	-		$	113
Common stock - International		191		12		-			203
Corporate debt⁴		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 securities³	$	2,940	$	466	$	(5	)	$	3,401

	June 30, 2016
(dollars in thousands)	Cost		Gains		(Losses)			Fair Value
Trading securities¹
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 securities²
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 securities³	$	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 value¹								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 value¹								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

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.