NOTE 2. INVESTMENTS

As of March 31, 2017, the Company held investments with a fair value of approximately $13.2 million and a cost basis of approximately $14.0 million. The fair value of these investments is approximately 50.9 percent of the Company’s total assets. In addition, the Company held other investments of $2.6 million accounted for under the cost method of accounting. On March 31, 2017, the Company had $10.7 million and $430,000 at fair value invested in U.S. Global Investors Funds (“USGIF” or the “Funds”) and an offshore fund the Company advises, respectively. These amounts were included in the Consolidated Balance Sheets as “trading securities” and “available-for-sale securities.”

Investments in securities classified as trading are reflected as current assets on the Consolidated Balance Sheets at their fair value. Unrealized holding 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, are reflected as non-current assets on the Consolidated Balance Sheets at their fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income 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 investments are accounted for under the cost method of accounting and evaluated periodically for impairment.

The Company considers many factors in determining impairment, including the severity and duration of the decline in value below cost, the Company’s interest and ability to hold the security for a period of time sufficient for an anticipated recovery in value, and the financial condition and specific events related to the issuer. When an impairment of a security is determined to be other than temporary, the impairment is recognized as a loss in the Company’s earnings.

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.

The following details the components of the Company’s investments recorded as fair value as of March 31, 2017, and June 30, 2016.

	March 31, 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		-		(172	)		363
Other		45		-		(45	)		-
Offshore fund		1,184		-		(754	)		430
Total trading securities	$	10,648	$	50	$	(978	)	$	9,720

Available-for-sale securities²
Common stock - Domestic	$	109	$	16	$	-		$	125
Common stock - International		575		5		(233	)		347
Corporate debt		1,038		397		-			1,435
Mutual funds - Fixed income		1,148		1		(2	)		1,147
Mutual funds - Domestic equity		394		14		-			408
Other		55		7		-			62
Total available-for-sale securities³	$	3,319	$	440	$	(235	)	$	3,524

	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 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 March 31, 2017, are $205 and $205, respectively, and as of June 30, 2016, are $45 and $45, respectively.

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

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

•	realized gains and losses on sales of securities;

•	unrealized gains and losses on trading securities;

•	realized foreign currency gains and losses;

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

•	other-than-temporary impairments on held-at-cost securities; and

•	dividend and interest income.

The following summarizes investment income (loss) reflected in earnings for the periods discussed:

(dollars in thousands)	Nine Months Ended March 31,						Three Months Ended March 31,
Investment Income	2017			2016			2017			2016
Realized gains on sales of available-for-sale securities	$	31		$	545		$	-		$	14
Realized gains (losses) on sales of trading securities		-			(32	)		-			3
Unrealized gains (losses) on trading securities		16			(103	)		42			30
Realized foreign currency gains (losses)		(25	)		24			(20	)		(28	)
Other-than-temporary declines in available-for-sale securities		(16	)		(259	)		-			-
Other-than-temporary declines in securities held at cost		-			(258	)		-			-
Dividend and interest income		657			494			139			129
Total Investment Income	$	663		$	411		$	161		$	148

Included in investment income were other-than temporary declines in value on available-for-sale securities of approximately $16,000 for the nine months ended March 31, 2017, and $259,000 for the nine months ended March 31, 2016, respectively. There were no impairment losses for the three months ended March 31, 2017, and 2016. The impairment losses resulted from fair values of securities being lower than book value and from proposed changes to debt securities. During the nine months ended March 31, 2017, two securities with a combined cost basis of $98,000 were written down to a combined fair value of $82,000. During the nine months ended March 31, 2016, eight securities with a combined cost basis of $702,000 were written down to a combined fair value of $466,000. Also during the nine months ended March 31, 2016, a debt security with a cost basis of $970,000 was written down to $947,000 based on the net present value of estimated cash flows. Also included in investment income for the nine months ended March 31, 2016, were other-than-temporary declines in value on securities held at cost of approximately $258,000. The impairment loss resulted from the estimated values of certain securities being lower than cost. 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 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 March 31, 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.

	March 31, 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		295		(233	)		-		-			295		(233	)
Corporate debt		-		-			-		-			-		-
Mutual funds - Fixed income		-		-			98		(2	)		98		(2	)
Mutual funds - Domestic equity		-		-			-		-			-		-
Other		-		-			-		-			-		-
Total available-for-sale securities	$	295	$	(233	)	$	98	$	(2	)	$	393	$	(235	)

	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 include 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 may be valued by an independent pricing service using an evaluated quote based on such factors as institutional-size trading in similar groups of securities, yield, quality maturity, coupon rate, type of issuance and individual trading characteristics and other market data. As part of its independent price verification process, 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 March 31, 2017, and June 30, 2016, for the major categories of U.S. Global’s investments measured at fair value on a recurring basis:

	March 31, 2017
			Significant		Significant
			Other		Unobservable
	Quoted Prices		Inputs		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		363		-		-		363
Other		-		-		-		-
Offshore fund investment measured at net asset value¹								430
Total trading securities		9,290		-		-		9,720
Available-for-sale securities
Common stock - Domestic		125		-		-		125
Common stock - International		347		-		-		347
Corporate debt		1,435		-		-		1,435
Mutual funds - Fixed income		1,147		-		-		1,147
Mutual funds - Domestic equity		408		-		-		408
Other		62		-		-		62
Total available-for-sale securities		3,524		-		-		3,524
Total	$	12,814	$	-	$	-	$	13,244

	June 30, 2017
			Significant		Significant
			Other		Unobservable
	Quoted Prices		Inputs		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 March 31, 2017, and June 30, 2016, 100 percent of the Company’s financial assets classified in the fair value hierarchy were derived from Level 1 inputs. The Company recognizes transfers between levels at the end of each quarter.

The Company’s available-for-sale investments in corporate debt securities mature in 2020.

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 $430,000 and $358,000 as of March 31, 2017, and June 30, 2016, respectively. The Company may redeem this investment on the first business day of each month after providing a redemption notice at least forty-five days prior to the proposed redemption date.

The following table is a reconciliation of investments for which unobservable inputs (Level 3) were used in determining fair value during the nine months ended March 31, 2017, and March 31, 2016:

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
	March 31, 2017		March 31, 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		-		(1,001	)
Ending Balance	$	-	$	212

The transfers out of Level 3 shown above in the prior period were corporate debt securities that were transferred to Level 1 when they started trading on a market. The securities previously had been valued based on other traded debt from the same issuer.