NOTE 3. INVESTMENTS

As of June 30, 2019, the Company held investments with a fair value of $15.2 million and a cost basis of $14.6 million. The fair value of these investments is approximately 64.0 percent of the Company’s total assets at June 30, 2019. In addition, the Company held other investments of $1.4 million and investments of approximately $309,000 accounted for under the equity method of accounting.

As discussed in Note 2, the Company adopted ASU 2016-01, which amended the guidance on the classification and measurement of investments in equity securities, effective July 1, 2018. Prior to ASU 2016-01, unrealized gains and losses on trading securities were included in earnings in the Consolidated Statements of Operations, and unrealized gains and losses on available-for-sale securities were excluded from earnings and reported in other comprehensive income (loss) as a separate component of shareholders’ equity until realized. After the adoption of ASU 2016-01, there is no longer an available-for-sale classification (with changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values. Under the amended guidance, all of the Company’s equity investments with readily determinable fair values are classified as securities at fair value, and changes in unrealized gains or losses are reported in current period earnings.

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. For these securities, the Company generally elects to value using the measurement alternative, under which such securities are measured at cost, less impairment, plus or minus observable price changes for identical or similar securities of the same issuer with such changes recorded in investment income (loss). Prior to fiscal year 2019 and the adoption of ASU 2106-01, these investments were 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. The cost basis of investments may also be adjusted for the recharacterization of distributions from investments in partnerships. See further information about these investments in a separate section of this note.

The following details the components of the Company’s investments recorded at fair value as of June 30, 2019, and 2018. Note that the change in presentation is the result of the adoption of ASU 2016-01.

	June 30, 2019
(dollars in thousands)	Cost		Unrealized Gains (Losses)			Fair Value
Securities at fair value¹
Common stock - International	$	5,641	$	790		$	6,431
Common stock - Domestic		45		(45	)		-
Mutual funds - Fixed income		8,025		(4	)		8,021
Mutual funds - Domestic equity		929		(194	)		735
Total securities at fair value	$	14,640	$	547		$	15,187

¹	Changes in unrealized and realized gains and losses on securities at fair value are included in earnings in the statement of operations.

	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	)		-
Total trading securities		8,365		22		(208	)		8,179
Available-for-sale securities²
Common stock - International		2,554		3,213		(94	)		5,673
Mutual funds - Fixed income		1,000		-		(9	)		991
Mutual funds - Domestic equity		394		28		-			422
Total available-for-sale securities³		3,948		3,241		(103	)		7,086
Total securities at fair value	$	12,313	$	3,263	$	(311	)	$	15,265

¹	Prior to July 1, 2018, changes in unrealized and realized gains and losses on trading securities were included in earnings in the statement of operations.

²	Prior to July 1, 2018, changes in unrealized gains and losses on available-for-sale securities were excluded from earnings and recorded in other comprehensive income as a separate component of shareholders’ equity until realized.

³	Net unrealized gains on available-for-sale securities gross and net of tax as of June 30, 2018, were $3,138 and $2,089, respectively.

The following table shows 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 were in a continuous unrealized loss position as of June 30, 2018. No disclosures are required as of June 30, 2019, due the adoption of ASU 2016-01.

	June 30, 2018
	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 - International	$	39	$	(94	)	$	-	$	-	$	39	$	(94	)
Mutual funds - Fixed income		991		(9	)		-		-		991		(9	)
Total available-for-sale securities with unrealized losses	$	1,030	$	(103	)	$	-	$	-	$	1,030	$	(103	)

Investment Income (Loss)

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

(dollars in thousands)	Year Ended June 30,
Investment Income (Loss)	2019			2018
Realized gains (losses) on sales of fair valued securities ¹	$	23		$	(67	)
Unrealized gains (losses) on fair valued securities ²		(2,406	)		742
Unrealized gains on equity securities without readily determinable fair values		617			-
Realized foreign currency losses		(32	)		(59	)
Impairments in equity investments that do not have readily determinable fair values		(114	)		-
Dividend and interest income		348			888
Total Investment Income (Loss)	$	(1,564	)	$	1,504

¹	The prior year amounts shown include $736 in realized losses on sales of trading securities and $669 in realized gains on sales of available-for-sale securities for the year ended June 30, 2018. These classifications were used prior to the adoption of ASU 2016-01 effective July 1, 2018.

²	The prior year amounts shown include $742 in unrealized gains on trading securities for the year ended June 30, 2018 (classification used prior to the adoption of ASU 2016-01 effective July 1, 2018).

The year ended June 30, 2019, included approximately $1.8 million of net unrealized losses recognized on equity securities still held at June 30, 2019. The majority of unrealized losses recognized in the current year are related to unrealized losses on securities formerly classified as available-for-sale, which previously would have been reported through other comprehensive income rather than in investment income.

Proceeds from the sales of available-for-sale investments were approximately $2.1 million for the fiscal year ended June 30, 2018. Gross gains and (losses) on sales of available-for-sale investments were $675,000 and ($6,000) fiscal year 2018. The amounts for fiscal 2018 include proceeds of approximately $1.7 million and realized gain of approximately $638,000 from an available-for-sale debt security that was redeemed early by the issuer. Note that prior to fiscal year 2019, gains and losses realized upon sales of available-for-sale investments were reclassified from other comprehensive income into investment income.

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 and exchange-traded 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, a portfolio management team, which includes representatives from the investment and accounting departments, 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 portfolio management team also takes into consideration numerous other factors that could affect valuation such as overall market conditions, liquidity of the security and bond structure. For other securities included in the fair value hierarchy with unobservable inputs, the portfolio management team considers 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. Securities which do not have readily determinable fair values are also periodically reviewed by the portfolio management team.

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, 2019
			Significant		Significant
	Quoted Prices		Other Inputs		Unobservable Inputs
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Securities at fair value
Common stock - International	$	5,599	$	832	$	-	$	6,431
Common stock - Domestic		-		-		-		-
Mutual funds - Fixed income		8,021		-		-		8,021
Mutual funds - Domestic equity		735		-		-		735
Total securities at fair value	$	14,355	$	832	$	-	$	15,187

	June 30, 2018
			Significant		Significant
	Quoted Prices		Other Inputs		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		-		-		-		-
Total trading securities		8,179		-		-		8,179
Available-for-sale securities
Common stock - International		5,673		-		-		5,673
Mutual funds - Fixed income		991		-		-		991
Mutual funds - Domestic equity		422		-		-		422
Total available-for-sale securities		7,086		-		-		7,086
Total securities at fair value	$	15,265	$	-	$	-	$	15,265

As of June 30, 2019, 95 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1 and 5 percent as Level 2. As of June 30, 2018, 100 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1.

During the first quarter of fiscal year 2018, 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 prior to the adoption of ASU 2016-01, was valued at approximately $3.6 million and $5.6 million at June 30, 2019, and 2018, respectively, 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 has been significant volatility in the market price of HIVE, which has materially impacted the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income. The Company’s ownership of HIVE was approximately 3.1 percent as of June 30, 2019. Frank Holmes is the non-executive chairman of HIVE and held shares and options at June 30, 2019. Effective August 31, 2018, Mr. Holmes was named Interim Executive Chairman of HIVE while a search for a new CEO is undertaken.

The Company has an investment in Thunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in Canada, which was valued at approximately $1.1 million at June 30, 2019, of which $377,000 was classified as Level 1 and $675,000 was classified as Level 2 in the fair value hierarchy. The investment was included in other investments at June 30, 2018, at a value of $1.5 million. This was previously a private company that underwent a corporate transaction and started trading on an exchange during the quarter ended December 31, 2018. The shares are subject to Canadian securities regulations. The portion of the investment classified in Level 2 is restricted for resale due to escrow provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares will be released from escrow between October 2019 and April 2020. The Company’s ownership of Thunderbird was approximately 2.5 percent as of June 30, 2019. Frank Holmes serves on the board of this company as a director and held options at June 30, 2019.

The Company has another investment in GoldSpot Discoveries Corp. (“GoldSpot”), a company headquartered and traded in Canada, which was valued at approximately $1.7 million at June 30, 2019, of which $1.6 million was classified as Level 1 and $157,000 was classified as Level 2 in the fair value hierarchy. The investment was purchased during the quarter ended March 31, 2019, and the shares are subject to Canadian securities regulations. The portion of the investment classified in Level 2 is restricted for resale due to escrow and regulatory provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares will be released from escrow between August 2019 and August 2020. The Company’s ownership of GoldSpot was approximately 7.5 percent as of June 30, 2019. Frank Holmes serves on the board of this company as independent chairman and held common stock at June 30, 2019.

Other Investments

The carrying value of equity securities without readily determinable fair values as of June 30, 2019, is approximately $1.4 million. Prior to July 1, 2018, these investments were accounted for at cost less impairment. The carrying value of investments accounted for at cost less impairment as of June 30, 2018, was $2.2 million. On July 1, 2018, the Company adopted ASU 2016-01 and elected to value these investments using the measurement alternative, under which such securities are measured at cost, less impairment, plus or minus observable price changes for identical or similar securities of the same issuer with such changes recorded in investment income (loss).

The carrying value of equity securities without readily determinable fair values has been adjusted as follows during the fiscal year ended June 30, 2019:

	Year Ended
(dollars in thousands)	June 30, 2019
Carrying amount, beginning of period	$	2,207
Adjustments:
Purchases		250
Reclassification to securities at fair value		(1,499	)
Impairments		(114	)
Other downward adjustments		(57	)
Upward adjustments		617
Carrying amount, end of period	$	1,404

As discussed above, the Company’s investment in Thunderbird was previously included in other investments but started trading on a stock exchange during the quarter ended December 31, 2018, and is now included in securities at fair value. There were impairment adjustments to one security totaling $114,000 during the year ended June 30, 2019. No impairment adjustments were recorded during the year ended June 30, 2018. Cumulative impairment adjustments to all equity securities without readily determinable fair values total $251,000 since their respective acquisitions through June 30, 2019. The cumulative amount of other downward adjustments, which primarily consist of return of capital distributions, is $652,000, which includes $57,000 for the year ended June 30, 2019. The cumulative amount of upward adjustments is $617,000, all of which was included in the year ended June 30, 2019. During the fourth quarter of fiscal year 2019, the Company increased the carrying value of one of its investments by $617,000 based on an observable price change for a similar investment of the same issuer.

Investments Classified as Equity Method

During fiscal year 2018, 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 had an investment in the Galileo Partners Fund as of June 30, 2018. During the period of ownership, the investment was accounted for under the equity method of accounting. Included in other income (loss) for the year ended June 30, 2018, is $1.7 million of equity method income for the Galileo Partners Fund. This fund had a concentration in technology and blockchain companies, which resulted in volatility in the fund’s valuation. Frank Holmes also directly held an investment in the fund.

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

Also during fiscal year 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. The fund reorganized in a taxable transaction into a limited partnership effective November 30, 2018, and the fund terminated. See further discussion below. Thus, the Company no longer had an investment in the Galileo Technology and Blockchain Fund as of June 30, 2019. During the period of ownership, the Company’s ownership ranged between approximately 20 and 25 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. Included in other income (loss) is $50,000 and $99,000 of equity method loss for the Galileo Technology and Blockchain Fund for the years ended June 30, 2019, and 2018, respectively. Frank Holmes also directly held an investment in the fund. This fund had a concentration in technology and blockchain companies, which resulted in volatility in the fund’s valuation.

As noted above, the Galileo Technology and Blockchain Fund reorganized into a limited partnership effective November 30, 2018. The investment portfolio and unitholders’ interests of the Galileo Technology and Blockchain Fund and the Galileo Partners Fund transferred to the new entity, named Galileo Technology and Blockchain LP. The valuation of the Company’s investment in the Galileo Technology and Blockchain Fund as of November 30, 2018, of approximately $230,000 transferred to the Galileo Technology and Blockchain LP. The Company owns approximately 20 percent of the LP as of June 30, 2019, 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 (loss) for the year ended June 30, 2019, is $73,000 of equity method income for this investment. The Company’s investment in the LP was valued at approximately $309,000 at June 30, 2019. Frank Holmes also directly held an investment in the LP as of June 30, 2019. This investment has a concentration in technology and blockchain companies, which may result in volatility in its valuation.