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Other investments include equity securities without readily determinable fair values that were adjusted as a result of the measurement alternative on dates during the nine months ended March 31, 2024. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2024

 

OR

 

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________.

 

Commission File Number 0-13928

 

U.S. GLOBAL INVESTORS, INC.

(Exact name of registrant as specified in its charter)

 

Texas

74-1598370

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)

  

  

7900 Callaghan Road

San Antonio, Texas

78229

(Zip Code)

(Address of principal executive offices)

  

 

(210) 308-1234

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Class A common stock,

$0.025 par value per share

GROW

NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒  

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

On May 2, 2024, there were 13,866,999 shares of Registrant’s class A nonvoting common stock issued and 11,844,295 shares of Registrant’s class A nonvoting common stock issued and outstanding; no shares of Registrant’s class B nonvoting common shares outstanding; and 2,068,549 shares of Registrant’s class C voting common stock issued and outstanding.

  

 
Table of Contents

  

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

1

  

  

ITEM 1. FINANCIAL STATEMENTS

1

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

1

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

2

CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

3

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

4

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

ITEM 4. CONTROLS AND PROCEDURES

27

  

  

PART II. OTHER INFORMATION

28

  

  

ITEM 1A. RISK FACTORS

28

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

28

ITEM 6. EXHIBITS

29

  

  

SIGNATURES

30

 

 
Table of Contents

  

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

 

  

March 31, 2024

  

June 30, 2023

 

(dollars in thousands)

 

(unaudited)

     

Assets

        

Current Assets

        

Cash and cash equivalents

 $27,460  $25,401 

Restricted cash

  1,000   1,000 

Investments in trading securities at fair value, current

  10,071   11,642 

Accounts and other receivables (net of allowance for credit losses of $0, and $0, respectively)

  1,027   1,245 

Tax receivable

  749   576 

Prepaid expenses

  635   510 

Total Current Assets

  40,942   40,374 
         

Net Property and Equipment

  1,154   1,138 
         

Other Assets

        

Deferred tax asset

  1,840   1,920 

Investments in trading securities at fair value, non-current

  1,435   1,563 

Investments in available-for-sale debt securities at fair value (amortized cost: $6,651, and $7,729, respectively) (net of allowance for credit losses of $0, and $0, respectively)

  5,190   7,008 

Investments in held-to-maturity debt securities at amortized cost

  1,000   1,000 

Less: Allowance for credit losses

  (157)  - 

Investments in held-to-maturity debt securities, net of allowance for credit losses

  843   1,000 

Other investments

  1,114   2,388 

Financing lease, right of use assets

  45   65 

Other assets, non-current

  209   217 

Total Other Assets

  10,676   14,161 

Total Assets

 $52,772  $55,673 

Liabilities and Shareholders’ Equity

        

Current Liabilities

        

Accounts payable

 $58  $143 

Accrued compensation and related costs

  306   1,165 

Dividends payable

  317   329 

Financing lease liability, short-term

  31   28 

Other accrued expenses

  1,629   1,274 

Total Current Liabilities

  2,341   2,939 
         

Long-Term Liabilities

        

Deferred tax liability

  20   4 

Reserve for uncertain tax positions

  549   496 

Financing lease liability, long-term

  16   38 

Total Long-Term Liabilities

  585   538 

Total Liabilities

  2,926   3,477 
         

Commitments and Contingencies (Note 14)

          
         

Shareholders’ Equity

        

Common stock (class A) - $0.025 par value; nonvoting; 28,000,000 shares authorized; 13,866,999 shares issued at March 31, 2024, and June 30, 2023; 11,908,737 and 12,496,674 shares outstanding at March 31, 2024, and June 30, 2023, respectively

  347   347 

Common stock (class B) - $0.025 par value; nonvoting; 4,500,000 shares authorized; no shares issued

  -   - 

Convertible common stock (class C) - $0.025 par value; voting; 3,500,000 shares authorized; 2,068,549 shares issued and outstanding at March 31, 2024, and June 30, 2023

  52   52 

Additional paid-in-capital

  16,444   16,442 

Treasury stock, class A shares at cost; 1,958,262 and 1,370,325 shares at March 31, 2024, and June 30, 2023, respectively

  (5,456)  (3,740)

Accumulated other comprehensive income, net of tax

  831   1,348 

Retained earnings

  37,628   37,747 

Total Shareholders’ Equity

  49,846   52,196 

Total Liabilities and Shareholders’ Equity

 $52,772  $55,673 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

Page 1
Table of Contents

  

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   

Nine Months Ended

    

Three Months Ended

  
   

March 31,

    

March 31,

  

(dollars in thousands, except per share data)

  

2024

    

2023

    

2024

    

2023

  

Operating Revenues

                                

Advisory fees

   $ 8,458     $ 11,663     $ 2,566     $ 3,591  

Administrative services fees

     86       101       27       33  

Total Operating Revenues

     8,544       11,764       2,593       3,624  

Operating Expenses

                                

Employee compensation and benefits

     3,445       3,569       1,209       1,264  

General and administrative

     4,725       4,489       1,733       1,477  

Advertising

     291       297       97       91  

Depreciation

     163       183       41       61  

Interest

     2       3       1       1  

Total Operating Expenses

     8,626       8,541       3,081       2,894  

Operating Income (Loss)

     (82 )     3,223       (488 )     730  

Other Income (Loss)

                                

Net investment income (loss)

     1,363       (189 )     460       1,155  

Other income (loss)

     183       184       68       61  

Total Other Income (Loss)

     1,546       (5 )     528       1,216  

Income (Loss) Before Income Taxes

     1,464       3,218       40       1,946  

Provision for Income Taxes

                                

Tax expense (benefit)

     446       698       75       326  

Net Income (Loss)

   $ 1,018     $ 2,520     $ (35 )   $ 1,620  
                                 

Earnings (Loss) Per Share

                                

Basic Net Income (Loss) per share

   $ 0.07     $ 0.17     $ (0.00 )   $ 0.11  

Diluted Net Income (Loss) per share

   $ 0.07     $ 0.17     $ (0.00 )   $ 0.11  
                                 

Basic weighted average number of common shares outstanding

     14,278,691       14,862,893       14,077,042       14,747,537  

Diluted weighted average number of common shares outstanding

     14,278,777       14,863,188       14,077,042       14,747,637  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

Page 2
Table of Contents

  

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

   

Nine Months Ended

    

Three Months Ended

  
   

March 31,

    

March 31,

  

(dollars in thousands)

  

2024

    

2023

    

2024

    

2023

  

Net Income (Loss)

   $ 1,018     $ 2,520     $ (35 )   $ 1,620  

Other Comprehensive Income (Loss)

                                

Unrealized gains (losses) on available-for-sale securities arising during period, net of tax

     199       (939 )     79       80  

Less: reclassification adjustment for gains included in net income (loss), net of tax

     (716 )     (1,026 )     (211 )     (311 )

Net change from available-for-sale securities

     (517 )     (1,965 )     (132 )     (231 )

Other Comprehensive Income (Loss)

     (517 )     (1,965 )     (132 )     (231 )

Total Comprehensive Income (Loss)

   $ 501     $ 555     $ (167 )   $ 1,389  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

Page 3
Table of Contents

  

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

   

Common Stock

    

Convertible Common Stock

            

Treasury Stock

    

Accumulated

                  
   

(class A)

    

(class C)

    

Additional

                    

Other

                  
                                   

Paid-in

                    

Comprehensive

    

Retained

          

(dollars in thousands)

  

Shares

    

Par Value

    

Shares

    

Par Value

    

Capital

    

Shares

    

Cost

    

Income (Loss)

    

Earnings

    

Total

  

Balance at June 30, 2023

     13,866,999     $ 347       2,068,549     $ 52     $ 16,442       1,370,325     $ (3,740 )   $ 1,348     $ 37,747     $ 52,196  

Impact of ASU 2016-13 adoption, net of tax (Note 2)

     -       -       -       -       -       -       -       -       (183 )     (183 )

Balance at June 30, 2023 (as adjusted for change in accounting principle)

     13,866,999     $ 347       2,068,549     $ 52     $ 16,442       1,370,325     $ (3,740 )   $ 1,348     $ 37,564     $ 52,013  

Repurchases of shares of Common Stock (class A), including excise tax

     -       -       -       -       -       198,213       (617 )     -       -       (617 )

Issuance of stock under ESPP of shares of Common Stock (class A)

     -       -       -       -       2       (5,494 )     15       -       -       17  

Dividends declared

     -       -       -       -       -       -       -       -       (322 )     (322 )

Other comprehensive income (loss), net of tax

     -       -       -       -       -       -       -       (214 )     -       (214 )

Net income (loss)

     -       -       -       -       -       -       -       -       (176 )     (176 )

Balance at September 30, 2023

     13,866,999     $ 347       2,068,549     $ 52     $ 16,444       1,563,044     $ (4,342 )   $ 1,134     $ 37,066     $ 50,701  

Repurchases of shares of Common Stock (class A), including excise tax

     -       -       -       -       -       196,295       (566 )     -       -       (566 )

Issuance of stock under ESPP of shares of Common Stock (class A)

     -       -       -       -       -       (6,100 )     17       -       -       17  

Dividends declared

     -       -       -       -       -       -       -       -       (320 )     (320 )

Other comprehensive income (loss), net of tax

     -       -       -       -       -       -       -       (171 )     -       (171 )

Net income (loss)

     -       -       -       -       -       -       -       -       1,229       1,229  

Balance at December 31, 2023

     13,866,999     $ 347       2,068,549     $ 52     $ 16,444       1,753,239     $ (4,891 )   $ 963     $ 37,975     $ 50,890  

Repurchases of shares of Common Stock (class A), including excise tax

     -       -       -       -       -       211,282       (582 )     -       -       (582 )

Issuance of stock under ESPP of shares of Common Stock (class A)

     -       -       -       -       -       (6,259 )     17       -       -       17  

Dividends declared

     -       -       -       -       -       -       -       -       (312 )     (312 )

Other comprehensive income (loss), net of tax

     -       -       -       -       -       -       -       (132 )     -       (132 )

Net income (loss)

     -       -       -       -       -       -       -       -       (35 )     (35 )

Balance at March 31, 2024

     13,866,999     $ 347       2,068,549     $ 52     $ 16,444       1,958,262     $ (5,456 )   $ 831     $ 37,628     $ 49,846  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

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U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED) (UNAUDITED)

 

   

Common Stock

    

Convertible Common Stock

            

Treasury Stock

    

Accumulated

                  
   

(class A)

    

(class C)

    

Additional

                    

Other

                  
                                   

Paid-in

                    

Comprehensive

    

Retained

          

(dollars in thousands)

  

Shares

    

Par Value

    

Shares

    

Par Value

    

Capital

    

Shares

    

Cost

    

Income (Loss)

    

Earnings

    

Total

  

Balance at June 30, 2022

     13,866,999     $ 347       2,068,549     $ 52     $ 16,438       978,049     $ (2,599 )   $ 3,624     $ 35,923     $ 53,785  

Repurchases of shares of Common Stock (class A)

     -       -       -       -       -       39,965       (133 )     -       -       (133 )

Issuance of stock under ESPP of shares of Common Stock (class A)

     -       -       -       -       3       (3,983 )     10       -       -       13  

Share-based compensation, adjustment for forfeitures, net of tax

     -       -       -       -       (1 )     -       -       -       -       (1 )

Dividends declared

     -       -       -       -       -       -       -       -       (335 )     (335 )

Other comprehensive income (loss), net of tax

     -       -       -       -       -       -       -       (486 )     -       (486 )

Net income (loss)

     -       -       -       -       -       -       -       -       53       53  

Balance at September 30, 2022

     13,866,999     $ 347       2,068,549     $ 52     $ 16,440       1,014,031     $ (2,722 )   $ 3,138     $ 35,641     $ 52,896  

Repurchases of shares of Common Stock (class A)

     -       -       -       -       -       87,407       (249 )     -       -       (249 )

Issuance of stock under ESPP of shares of Common Stock (class A)

     -       -       -       -       1       (4,898 )     13       -       -       14  

Dividends declared

     -       -       -       -       -       -       -       -       (335 )     (335 )

Other comprehensive income (loss), net of tax

     -       -       -       -       -       -       -       (1,248 )     -       (1,248 )

Net income (loss)

     -       -       -       -       -       -       -       -       847       847  

Balance at December 31, 2022

     13,866,999     $ 347       2,068,549     $ 52     $ 16,441       1,096,540     $ (2,958 )   $ 1,890     $ 36,153     $ 51,925  

Repurchases of shares of Common Stock (class A)

     -       -       -       -       -       193,040       (556 )     -       -       (556 )

Issuance of stock under ESPP of shares of Common Stock (class A)

     -       -       -       -       1       (5,486 )     15       -       -       16  

Dividends declared

     -       -       -       -       -       -       -       -       (329 )     (329 )

Other comprehensive income (loss), net of tax

     -       -       -       -       -       -       -       (231 )     -       (231 )

Net income (loss)

     -       -       -       -       -       -       -       -       1,620       1,620  

Balance at March 31, 2023

     13,866,999     $ 347       2,068,549     $ 52     $ 16,442       1,284,094     $ (3,499 )   $ 1,659     $ 37,444     $ 52,445  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Nine Months Ended March 31,

  

(dollars in thousands)

  

2024

    

2023

  

Cash Flows from Operating Activities:

                

Net income (loss)

   $ 1,018     $ 2,520  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

                

Depreciation, amortization and accretion

     (103 )     (198 )

Net recognized (gain) loss on disposal of fixed assets

     -       3  

Net realized (gains) losses on securities

     5,928       (1,286 )

Unrealized (gains) losses on securities

     (5,594 )     2,504  

Investment basis adjustment

     -       (5 )

Provision for deferred taxes

     282       (265 )

Allowance for credit losses

     (75 )     -  

Changes in operating assets and liabilities:

                

Accounts and other receivables

     45       754  

Prepaid expenses and other assets

     (97 )     (146 )

Accounts payable and other accrued liabilities

     (551 )     (1,252 )

Total adjustments

     (165 )     109  

Net cash provided by (used in) operating activities

     853       2,629  

Cash Flows from Investing Activities:

                

Purchase of property and equipment

     (179 )     (14 )

Purchase of trading securities at fair value, non-current

     (219 )     -  

Purchase of other investments

     -       (663 )

Proceeds on sale of trading securities at fair value, current

     1,600       350  

Proceeds on sale of trading securities at fair value, non-current

     179       -  

Proceeds from principal paydowns of available-for-sale debt securities at fair value

     2,250       2,250  

Return of capital on other investments

     259       -  

Net cash provided by (used in) investing activities

     3,890       1,923  

Cash Flows from Financing Activities:

                

Principal payments on financing lease

     (22 )     (20 )

Issuance of common stock

     51       43  

Repurchases of common stock

     (1,748 )     (938 )

Dividends paid

     (965 )     (1,004 )

Net cash provided by (used in) financing activities

     (2,684 )     (1,919 )

Net increase (decrease) in cash, cash equivalents, and restricted cash

     2,059       2,633  

Beginning cash, cash equivalents, and restricted cash

     26,401       23,314  

Ending cash, cash equivalents, and restricted cash

   $ 28,460     $ 25,947  
                 

Supplemental Disclosures of Non-Cash Investing and Financing Activities

                

Dividends declared but not paid

   $ 317     $ 332  

Excise tax liability accrued on stock repurchases

   $ 17     $ -  

Unsettled purchases of other investments

   $ -     $ 186  

Unsettled class A common stock repurchases

   $ 11     $ -  
                 

Supplemental Disclosures of Cash Flow Information

                

Cash paid for income taxes

   $ 250     $ 470  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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U.S. GLOBAL INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

NOTE 1. REVISION OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

 

In connection with the preparation of its Consolidated Financial Statements for the fiscal year ended June 30, 2023, the Company determined that its previously issued Consolidated Financial Statements as of and for the three and nine months ended March 31, 2023, contained an error. Specifically, the Company did not record certain liabilities as required by FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (codified under ASC 740-10). Based on management’s evaluation of the accounting error under the SEC Staff’s Accounting Bulletins Nos. 99 and 108 and interpretations thereof, the Company concluded the error is not material, on an individual or aggregate basis, to the Company’s previously reported financial statements. The Company has corrected this accounting error in the accompanying Consolidated Financial Statements as of and for the three and nine months ended March 31, 2023, as a revision to those financial statements.

  

The following table sets forth the impact of correcting this error in the Company’s previously issued Consolidated Financial Statements.

 

 

  

Nine Months Ended March 31, 2023

  

Three Months Ended March 31, 2023

 
  

As

          

As

         
  

Previously

  

Immaterial

  

As

  

Previously

  

Immaterial

  

As

 

(dollars in thousands, except per share data)

 

Reported

  

Revisions

  

Revised

  

Reported

  

Revisions

  

Revised

 

Tax expense (benefit)

 $602  $96  $698  $306  $20  $326 

Net Income (Loss)

 $2,616  $(96) $2,520  $1,640  $(20) $1,620 
                         

Earnings Per Share

                        

Basic Net Income (Loss) per Share

 $0.18  $(0.01) $0.17  $0.11  $(0.00) $0.11 

Diluted Net Income (Loss) per Share

 $0.18  $(0.01) $0.17  $0.11  $(0.00) $0.11 

 

In addition to the changes listed above, the Consolidated Statements of Comprehensive Income, Consolidated Statements of Shareholders' Equity, Consolidated Statements of Cash Flows, and impacted footnote disclosures have also been revised to reflect the error correction.
 

NOTE 2. BASIS OF PRESENTATION AND CONSOLIDATION

 

U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has prepared the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments), which are, in management’s opinion, necessary for a fair presentation of results for the interim periods presented. The Company has consistently followed the accounting policies set forth in the notes to the Consolidated Financial Statements in the Company’s Form 10-K for the fiscal year ended June 30, 2023 ("Form 10-K"), except for the adoption of the new accounting pronouncement discussed below.

 

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, U.S. Global Investors (Bermuda) Limited, U.S. Global Investors (Canada) Limited (“USCAN”), and U.S. Global Indices, LLC.

 

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 lack 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, specifically, certain funds in U.S. Global Investors Funds (“USGIF” or the “Funds”). The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. See further information about these funds in Notes 3 and 4. 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 is not deemed to be the primary beneficiary because it does not have the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns. 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 $10.9 million at March 31, 2024, and $12.5 million at June 30, 2023.

 

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The carrying amount of assets and liabilities recognized in the Consolidated Balance Sheets related to the Company's interests in these non-consolidated VIEs were as follows:

 

  

Carrying Value and Maximum Exposure to Loss

 

(dollars in thousands)

 

March 31, 2024

  

June 30, 2023

 

Investments in securities at fair value, current

 $10,071  $11,642 

Investments in equity securities at fair value, non-current

  830   785 

Other receivables

  29   45 

Total VIE assets, maximum exposure to loss

 $10,930  $12,472 

 

Since the Company is not the primary beneficiary of the above 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 above 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. Due to rounding, the year-to-date amount may not be the exact sum of the quarterly amounts. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results the Company may expect for the fiscal year ending June 30, 2024 (“fiscal 2024”).

 

The unaudited interim financial information in these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s annual report on Form 10-K; interim disclosures generally do not repeat those in the annual statements.

 

Use of Estimates

 

Preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may materially differ from those estimates.

    

Adoption of New Accounting Standard

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and has subsequently issued several amendments (collectively, “ASU 2016-13”). ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss model, or "CECL") that is based on expected losses rather than incurred losses for most financial assets and certain other instruments. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. It also modifies the impairment model for available-for-sale debt securities; the concept of "other-than-temporary" impairment was replaced by a determination of whether any impairment is a result of a credit loss or other factors. To adopt the standard, entities are required to make a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective. The Company adopted the standard using the modified-retrospective approach for all financial assets measured at amortized cost on July 1, 2023, and recognized an initial allowance for credit losses of $232,000 for one held-to-maturity debt security. The cumulative-effect adjustment to beginning retained earnings, net of the related tax effect, was a decrease of $183,000.

 

Recent Accounting Pronouncements

 

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. ASU 2022-03 will be effective for fiscal years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company has evaluated the guidance and does not expect the adoption of the new standard to have a material impact on its Consolidated Financial Statements.

 

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which enhances the disclosures required for reportable segments in annual and interim consolidated financial statements, including additional, more detailed information about a reportable segment’s expenses. ASU 2023-07 will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2023-07 on its Consolidated Financial Statements.

 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures. ASU 2023-09 will be effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the impact of the pending adoption of ASU 2023-09 on its Consolidated Financial Statements.

 

Significant Accounting Policies
 
As a result of the adoption of an accounting pronouncement during the current fiscal year, the following accounting policies have been updated. For a complete listing of the Company's significant accounting policies, please refer to the Annual Report on Form 10-K for the year ended June 30, 2023.

 

Investments in Debt Securities. The Company classifies debt investments based on the Company’s intent to sell the security or its intent and ability to hold the debt security to maturity. Debt securities classified as trading are acquired with the intent to sell in the near term and are carried at fair value with changes reported in earnings. Held-to-maturity debt securities are purchased with the intent and ability to hold until maturity and are measured at amortized cost. All other debt securities are classified as available-for-sale and are carried at fair value, and changes in unrealized gains and losses are reported net of tax in accumulated other comprehensive income (loss), except for declines in fair value determined to be a result of credit loss, which are reported in earnings. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to net investment income (loss). Both available-for-sale and held-to-maturity debt securities are subject to an allowance for credit losses. 

 

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Allowance for Credit Losses (Held-to-Maturity Debt Securities). For held-to-maturity debt securities, the Company is required to utilize the CECL methodology to estimate expected credit losses. Securities are evaluated on an individual basis. The individual assessment and determination of expected credit losses is generally based on the discounted cash flow method. Under the discounted cash flow method, the allowance for credit losses reflects the difference between the amortized cost basis and the present value of the expected cash flows. The Company adjusts the discount rate utilized to determine the present value of the expected cash flows quarterly for subsequent fluctuations in market interest rates. Changes in the present value attributable to the passage of time are those solely due to changes in the present value of the expected cash flows as the instrument approaches maturity rather than expectations of cash flow timing or amounts, and are included in interest income within net investment income (loss) on the Consolidated Statements of Operations. Changes in the allowance attributable to expectations of cash flow timing or amounts are recorded as a provision (or release) for credit losses and are included within other income (loss) on the Consolidated Statements of Operations. Held-to-maturity debt securities, or portions thereof, are charged against the allowance when management believes the uncollectible status of a held-to-maturity security is confirmed. Accrued interest receivable is excluded from the allowance for credit losses. For more information about held-to-maturity debt securities, see Note 3, Investments.

 

Allowance for Credit Losses (Available-for-Sale Debt Securities). The impairment model for available-for-sale debt securities differs from the CECL methodology applied for held-to-maturity debt securities because available-for-sale debt securities are measured at fair value rather than amortized cost. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through earnings. For available-for-sale debt securities where neither of the criteria is met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a provision (or release) for credit losses and are included within other income (loss) on the Consolidated Statements of Operations. Losses are charged against the allowance when management believes the uncollectible status of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable is excluded from the allowance for credit losses. See Note 3, Investments, for more information about available-for-sale debt securities.

 

Credit Quality Indicators. The Company monitors the credit quality of debt securities through credit ratings from various rating agencies. Credit ratings express opinions about the credit quality of a security and are utilized by the Company to make informed decisions. Investment grade securities are rated BBB-/Baa3 or higher and generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade are considered to have distinctively higher credit risk than investment grade securities. For securities without credit ratings, the Company utilizes other financial information indicating the financial health of the underlying organization.  

 

Receivables and Allowance for Credit Losses. Receivables consist primarily of advisory and other fees owed to the Company by clients. The Company records an expense based on a forward-looking current expected credit loss model to maintain an allowance for credit losses. When determining the allowance for receivables, the probability of recoverability of the receivable based on past experience, taking into account current collection trends and general economic factors, including bankruptcy rates, is considered. The Company also considers future economic trends to estimate expected credit losses over the lifetime of the asset. Credit risks are assessed based on historical write-offs, net of recoveries, as well as an analysis of the aged accounts receivable balances with allowances generally increasing as the receivable ages. Accounts receivable may be fully reserved for when specific collection issues are known to exist, such as pending bankruptcies. Due to the short-term nature, the Company had no allowance for credit losses related to receivables as of March 31, 2024, or June 30, 2023.

 

Dividends and Interest. Dividends are recorded on the ex-dividend date, and interest income is recorded on an accrual basis. Debt investments are placed on a non-accrual status when they are past due 180 days or more as to contractual obligations or when other circumstances indicate that collection is not probable. When a debt investment is placed on a non-accrual status, any interest accrued but not received is reversed against interest income. Any discount between the cost and the principal amount of debt investments is amortized to interest income using the effective interest method. When the discounted cash flow method is utilized to estimate expected credit losses for held-to-maturity debt securities, any changes in the allowance for credit losses that are attributable to the passage of time are recognized in interest income. Both dividends and interest income are included within net investment income (loss) on the Consolidated Statements of Operations.

 

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NOTE 3. INVESTMENTS

 

As of March 31, 2024, the Company held investments carried at fair value on a recurring basis of $16.7 million and a cost basis of $18.9 million. The fair value of these investments is approximately 31.6 percent of the Company’s total assets at March 31, 2024. In addition, the Company held other investments of approximately $1.1 million and held-to-maturity debt investments, net of allowance for credit losses, of $843,000.

 

The cost basis of investments is adjusted for amortization of premium or accretion of discount on debt securities held or the recharacterization of distributions from investments in partnerships.

 

Concentrations of Credit Risk

 

A significant portion of the Company’s investments carried at fair value on a recurring basis is investments in USGIF, which were $10.9 million and $12.4 million as of March 31, 2024, and June 30, 2023, respectively, and investments in HIVE Digital Technologies Ltd. (“HIVE”), which were convertible debentures valued at $5.2 million at March 31, 2024, and convertible debentures and common share purchase warrants valued at $7.3 million at June 30, 2023. For these investments, the maximum amount of loss due to credit risk the Company could incur is the fair value of the financial instruments.

 

Fair Value Hierarchy

 

Fair value is defined 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. The valuation techniques described below maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.

 

The inputs used for measuring financial instruments at fair value are summarized in the three broad levels listed below:

 

Level 1 – Inputs represent unadjusted quoted prices for identical assets exchanged in active markets.

 

Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets exchanged in active or inactive markets; quoted prices for identical assets exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets, such as interest rates and yield curves; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 – Inputs include unobservable inputs used in the measurement of assets. The Company is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets.

 

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 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.

 

The Company has established a Proprietary Valuation Committee (the “Committee”) to administer and oversee the Company’s valuation policies and procedures, which are approved by the Board of Directors, and to perform a periodic review of valuations provided by independent pricing services.

 

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.

 

For common share purchase warrants not traded on an exchange, the estimated fair value is determined using the Black-Scholes option-pricing model. This sophisticated model utilizes a number of assumptions in arriving at its results, including the estimated life, the risk-free interest rate, and historical volatility of the underlying common stock. The Company may change the assumption of the risk-free interest rate and utilize the yield curve for instruments with similar characteristics, such as credit ratings and jurisdiction, or change the expected volatility. The effects of changing any of the assumptions or factors employed by the Black-Scholes model may result in a significantly different valuation.

 

Certain convertible debt securities not traded on an exchange are valued by an independent third party using a binomial lattice model based on factors such as yield, quality, maturity, coupon rate, type of issuance, individual trading characteristics of the underlying common shares and other market data. The model utilizes a number of assumptions in arriving at its results. The effects of changing any of the assumptions or factors utilized in the binomial lattice model, including expected volatility, credit adjusted discount rates, and discounts for lack of marketability, may result in a significantly different valuation for the securities.

 

For other securities included in the fair value hierarchy with unobservable inputs, the Committee 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 Committee 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 Committee.

 

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Table of Contents
 

The following tables summarize the major categories of investments with fair values adjusted on a recurring basis as of March 31, 2024, and June 30, 2023, and other investments with fair values adjusted on a nonrecurring basis, with fair values shown according to the fair value hierarchy.

 

  

March 31, 2024

 
      

Significant

  

Significant

     
  Quoted  Other  Unobservable     
  

Prices

  

Inputs

  

Inputs

     

(dollars in thousands)

 

(Level 1)