NOTE 3. INVESTMENTS

As of June 30, 2018, the Company held investments with a fair value of $15.3 million and a cost basis of $12.3 million. The market value of these investments is approximately 52.8 percent of the Company’s total assets. In addition, the Company held other investments of $2.2 million accounted for under the cost method of accounting and investments of approximately $283,000 accounted for under the equity method of accounting.

Investments in securities classified as trading are reflected as current assets on the Consolidated Balance Sheets at their fair value. Unrealized gains and losses on trading securities are included in earnings in the Consolidated Statements of Operations.

Investments in securities classified as available-for-sale, which may not be readily marketable but have readily determinable fair values, are reflected as non-current assets on the Consolidated Balance Sheets at their fair value. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income (loss) as a separate component of shareholders’ equity until realized.

Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. These equity investments are accounted for under the cost method of accounting and evaluated for impairment.

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

Cost basis may also be adjusted for amortization of premium or accretion of discount on debt securities held or to recharacterize distributions from investments in partnerships.

The following details the components of the Company’s investments recorded at fair value as of June 30, 2018, and 2017:

	June 30, 2018
(dollars in thousands)	Cost		Unrealized Gains		Unrealized (Losses)			Fair Value
Trading securities¹
Mutual funds - Fixed income	$	7,785	$	22	$	-		$	7,807
Mutual funds - Domestic equity		535		-		(163	)		372
Other		45		-		(45	)		-
Offshore fund		-		-		-			-
Total trading securities		8,365		22		(208	)		8,179
Available-for-sale securities²
Common stock - Domestic		-		-		-			-
Common stock - International		2,554		3,213		(94	)		5,673
Corporate debt		-		-		-			-
Mutual funds - Fixed income		1,000		-		(9	)		991
Mutual funds - Domestic equity		394		28		-			422
Other		-		-		-			-
Total available-for-sale securities³		3,948		3,241		(103	)		7,086
Total securities at fair value	$	12,313	$	3,263	$	(311	)	$	15,265

	June 30, 2017
(dollars in thousands)	Cost		Unrealized Gains		Unrealized (Losses)			Fair Value
Trading 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 debt		1,042		427		-			1,469
Mutual funds - Fixed income		1,148		1		(5	)		1,144
Mutual funds - Domestic equity		394		12		-			406
Other		56		10		-			66
Total available-for-sale securities³		2,940		466		(5	)		3,401
Total securities at fair value	$	13,588	$	516	$	(983	)	$	13,121

1	Unrealized and realized gains and losses on trading securities are included in earnings in the statement of operations.

2	Unrealized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income (loss) as a separate component of shareholders’ equity until realized.

3	Net unrealized gains (losses) on available-for-sale securities gross and net of tax as of June 30, 2018, are $3,138 and $2,089, respectively, and as of June 30, 2017, are $461 and $461, respectively.

At June 30, 2017, the Company had an available-for-sale investment in corporate debt securities with a par value of approximately $1.7 million which was valued at approximately $1.5 million. The securities were scheduled to mature in 2024. The issuer of the corporate debt redeemed these debt securities early at par value in May 2018. The Company recorded a realized gain in fiscal 2018 related to the early redemption of approximately $638,000.

The following summarizes investment income (loss) reflected in earnings for the periods presented.

(dollars in thousands)	Year Ended June 30,
Investment Income	2018			2017
Realized gains on sales of available-for-sale securities	$	669		$	31
Realized losses on sales of trading securities		(736	)		-
Unrealized gains on trading securities		742			15
Realized foreign currency losses		(59	)		(37	)
Other-than-temporary declines in available-for-sale securities		-			(411	)
Other-than-temporary declines in securities held at cost		-			(72	)
Dividend and interest income		888			820
Total Investment Income	$	1,504		$	346

Proceeds from the sales of available-for-sale investments were approximately $2.1 million and $649,000, for the fiscal years ended June 30, 2018, and June 30, 2017, respectively. Gross gains on sales of available-for-sale investments were $675,000 and $34,000 for fiscal years 2018 and 2017, respectively. Gross losses on sales of available-for-sale investments were $6,000 and $3,000 for fiscal years 2018 and 2017, respectively. The amounts for fiscal 2018 include the proceeds and realized gain from the early redemption of debt securities discussed above. Realized gains and losses on the sale of available-for-sale investments are reclassified from other comprehensive income into investment income.

There were no impairment losses during fiscal year 2018. In fiscal year 2017, other-than temporary declines in value on available-for-sale securities of approximately $411,000 were included in investment income. The impairment losses resulted from fair values of certain equity securities being lower than book value. For the year ending June 30, 2017, there were four securities with a combined cost basis of $627,000 that were written down to a combined fair value of $216,000. Also included in investment income for fiscal 2017 was approximately $72,000 in other-than-temporary declines in value on securities held at cost. The impairment loss resulted from the estimated values of certain securities being lower than cost. In fiscal 2017, one security held at cost with a cost basis of $72,000 was written down to zero. In making these determinations, the Company considered the length of time and extent to which the fair value has been less than the cost basis, financial condition and prospects of the issuers, and the Company's ability to hold the investment until recovery.

Unrealized Losses

The following tables show the gross unrealized losses and fair values of available-for-sale investment securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. The Company reviewed the gross unrealized losses shown as of June 30, 2018, and determined that the losses were not other-than-temporary based on consideration of the nature of the investment and the cause, severity and duration of the loss.

	June 30, 2018
	Less Than 12 Months					12 Months or Greater				Total
			Gross					Gross				Gross
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale securities
Common stock - Domestic	$	-	$	-		$	-	$	-	$	-	$	-
Common stock - International		39		(94	)		-		-		39		(94	)
Corporate debt		-		-			-		-		-		-
Mutual funds - Fixed income		991		(9	)		-		-		991		(9	)
Mutual funds - Domestic equity		-		-			-		-		-		-
Other		-		-			-		-		-		-
Total available-for-sale securities	$	1,030	$	(103	)	$	-	$	-	$	1,030	$	(103	)

	June 30, 2017
	Less Than 12 Months				12 Months or Greater					Total
			Gross				Gross					Gross
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale securities
Common stock - Domestic	$	-	$	-	$	-	$	-		$	-	$	-
Common stock - International		-		-		-		-			-		-
Corporate debt		-		-		-		-			-		-
Mutual funds - Fixed income		-		-		95		(5	)		95		(5	)
Mutual funds - Domestic equity		-		-		-		-			-		-
Other		-		-		-		-			-		-
Total available-for-sale securities	$	-	$	-	$	95	$	(5	)	$	95	$	(5	)

Fair Value Hierarchy

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

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

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

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

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

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

For actively traded securities, the Company values investments using the closing price of the securities on the exchange or market on which the securities principally trade. If the security is not traded on the last business day of the quarter, it is generally valued at the mean between the last bid and ask quotation. The fair value of a security that has a restriction is based on the quoted price for an otherwise identical unrestricted instrument that trades in a public market, adjusted for the estimated effect of the restriction. Mutual funds, which include open- and closed-end funds, exchange-traded funds, and offshore funds are valued at net asset value or closing price, as applicable. Certain corporate debt securities not traded on an exchange are valued by an independent pricing service using an evaluated quote based on such factors as institutional-size trading in similar groups of securities, yield, quality maturity, coupon rate, type of issuance and individual trading characteristics and other market data. As part of its independent price verification process, the Company periodically reviews the fair value provided by the pricing service using information such as transactions in these investments, broker quotes, market transactions in comparable investments, general market conditions and the issuer’s financial condition. Certain debt securities may be valued based on review of similarly structured issuances in similar jurisdictions, when possible, or based on other traded debt securities issued by the issuer. The Company also takes into consideration numerous other factors that could affect valuation such as overall market conditions, liquidity of the security and bond structure. Securities for which market quotations are not readily available are valued at their fair value as determined by the portfolio management team. The portfolio management team includes representatives from the investment and accounting departments. The portfolio management team meets periodically to consider a number of factors in determining a security’s fair value, including the security’s trading volume, market values of similar class issuances, investment personnel’s judgment regarding the market experience of the issuer, financial status of the issuer, the issuer’s management, and back testing, as appropriate. The fair values may differ from what may have been used had a broader market for these securities existed. The portfolio management team reviews inputs and assumptions and reports material items to the Board of Directors.

The following presents fair value measurements, as of each balance sheet date, for the major categories of U.S. Global’s investments measured at fair value on a recurring basis:

	June 30, 2018
	Quoted Prices		Significant Other Inputs		Significant Unobservable Inputs
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Trading securities
Mutual funds - Fixed income	$	7,807	$	-	$	-	$	7,807
Mutual funds - Domestic equity		372		-		-		372
Other		-		-		-		-
Offshore fund investment measured at net asset value¹								-
Total trading securities		8,179		-		-		8,179
Available-for-sale securities
Common stock - Domestic		-		-		-		-
Common stock - International		5,673		-		-		5,673
Corporate debt		-		-		-		-
Mutual funds - Fixed income		991		-		-		991
Mutual funds - Domestic equity		422		-		-		422
Other		-		-		-		-
Total available-for-sale securities		7,086		-		-		7,086
Total securities at fair value	$	15,265	$	-	$	-	$	15,265

	June 30, 2017
	Quoted Prices		Significant Other Inputs		Significant Unobservable Inputs
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Trading securities
Mutual funds - Fixed income	$	8,927	$	-	$	-	$	8,927
Mutual funds - Domestic equity		378		-		-		378
Other		-		-		-		-
Offshore fund investment measured at net asset 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 securities at fair value	$	12,706	$	-	$	-	$	13,121

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, 2018, and June 30, 2017, 100 percent of the Company’s financial assets measured at fair value are derived from Level 1 inputs. The Company recognizes transfers between levels at the end of each quarter.

During the quarter ended September 30, 2017, the Company invested in 10 million common shares of HIVE Blockchain Technologies Ltd. (“HIVE”), a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland and Sweden, at a cost of $2.4 million. The shares are subject to Canadian securities regulations. The investment, classified as available-for-sale, was valued at approximately $5.6 million at June 30, 2018, based on the quoted market price and is classified as Level 1 in the fair value hierarchy. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is considered an early stage high-risk industry, and the nature of mining is expected to evolve. There is potential for significant volatility in the market price of HIVE, which could materially impact the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income. Two unit trust investment funds managed by Galileo, described below under Investments Classified as Equity Method, also hold common shares of HIVE. The Company had both a direct ownership of HIVE and a combined direct and indirect ownership of HIVE of approximately 3.2 percent as of June 30, 2018. Frank Holmes is the non-executive chairman of HIVE and held shares and options at June 30, 2018. Effective August 31, 2018, upon the retirement of HIVE’s CEO and until a new CEO is hired, Mr. Holmes became Interim Executive Chairman of HIVE.

The Company had an investment in an affiliated offshore fund, classified as trading, which invested in companies in the energy and natural resources sectors. The fair value of this investment was estimated based on the net asset value per share at $415,000 as of June 30, 2017. This offshore fund liquidated during the fiscal year ended June 30, 2018.

Investments Classified as Equity Method

During the quarter ended September 30, 2017, the Company, through USCAN, invested approximately $500,000 in the Galileo Partners Fund, a Canadian unit trust investment fund managed by Galileo. The investment was subsequently redeemed in full during fiscal 2018, and the Company no longer has an investment in the Galileo Partners Fund as of June 30, 2018. During the period of ownership, the Company’s ownership ranged between 23 and 30 percent, and the Company was considered to have the ability to exercise significant influence. Thus, the investment was accounted for under the equity method of accounting. Under the equity method, the Company’s proportional share of the fund’s net income or loss, which primarily consists of realized and unrealized gains and losses on investments offset by fund expenses, is recognized in the Company’s earnings. Included in other income for the year ended June 30, 2018, is $1.7 million of equity method income of Galileo Partners Fund. Frank Holmes also directly held an investment in the fund as of June 30, 2018.

Summarized income statement information on the Galileo Partners Fund for the period of the Company’s investment is as follows:

Galileo Partners Fund
Summary Financial Information
For the Period from August 31, 2017 (investment) to June 30, 2018
(dollars in thousands)
Realized gains on sales of investments	$	6,254
Decrease in unrealized gains on investments		(28	)
Fund fees and expenses, including performance fees		(1,677	)
Net income of fund	$	4,549

During the year ended June 30, 2018, the Company, through USCAN, invested approximately $401,000 in the Galileo Technology and Blockchain Fund, a Canadian unit trust investment fund managed by Galileo. This fund has a concentration in technology and blockchain companies, which may result in volatility in the fund’s valuation. The Company owns approximately 25 percent of Galileo Technology and Blockchain Fund as of June 30, 2018, and the company is considered to have the ability to exercise significant influence. Thus, the investment is accounted for under the equity method of accounting. Included in other income for the year ended June 30, 2018, is $99,000 of equity method loss for Galileo Technology and Blockchain Fund. The Company’s investment in the fund was valued at approximately $283,000 at June 30, 2018. Frank Holmes also directly held an investment in the fund as of June 30, 2018.