# U S Global Investors Inc: Form 10-Q for the period ended Dec 31, 2022

- Company: [U S Global Investors Inc](/companies/grow.md) (CIK 754811)
- Form: 10-Q
- Filed: 2023-06-09
- Accepted by EDGAR: Jun 9, 2023, 16:32 ET
- Period: 2022-12-31
- Accession: 0001437749-23-017067
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/754811/000143774923017067/usglobal20221231_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/754811/000143774923017067/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-10-01 to 2022-12-31 | $3.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2022-07-01 to 2022-12-31 | $8.1m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Operating income | 3 months, 2022-10-01 to 2022-12-31 | $908.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-07-01 to 2022-12-31 | $2.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-10-01 to 2022-12-31 | $1.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-07-01 to 2022-12-31 | $2.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-10-01 to 2022-12-31 | $217.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-07-01 to 2022-12-31 | $296.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-10-01 to 2022-12-31 | $869.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-07-01 to 2022-12-31 | $976.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-10-01 to 2022-12-31 | $0.06 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-07-01 to 2022-12-31 | $0.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-10-01 to 2022-12-31 | $0.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-07-01 to 2022-12-31 | $0.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-10-01 to 2022-12-31 | 14,890,031 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-07-01 to 2022-12-31 | 14,919,693 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-07-01 to 2022-12-31 | $1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-07-01 to 2022-12-31 | $14.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2022-07-01 to 2022-12-31 | $672.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2022-07-01 to 2022-12-31 | $382.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-12-31 | $23.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-12-31 | $38.7m | us-gaap:AssetsCurrent |
| Total assets | at 2022-12-31 | $55.0m | us-gaap:Assets |
| Current liabilities | at 2022-12-31 | $2.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-12-31 | $2.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-12-31 | $52.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,537 characters.

*U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has made forward-looking statements concerning the Company’s performance, financial condition, and operations in this report. The Company from time to time may also make forward-looking statements in its public filings and press releases. Such forward-looking statements are subject to various known and unknown risks and uncertainties and do not guarantee future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Company’s control, including: (i) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, including significant economic disruptions from COVID-19 or other epidemics, pandemics or outbreaks and the actions taken in connection therewith, (iii) the effect of government regulation on the Company’s business, and (iv) market, credit, and liquidity risks associated with the Company’s investment management activities. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward-looking information not to place undue reliance on such statements. All such forward-looking statements are current only as of the date on which such statements were made.*

### FACTORS AFFECTING OUR BUSINESS

The rapid spread of COVID-19 and actions taken in response had a significant detrimental effect on the global and domestic economies and financial markets. Market declines affect the Company’s assets under management, and thus its revenues and also the valuation of the Company’s corporate investments. Should this emerging macro-economic risk reoccur and continue for an extended period, there could be an adverse material financial impact to the Company’s business and investments, including a material reduction in its results of operations.

COVID-19-related circumstances (e.g., remote work arrangements) did not adversely affect the Company’s ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.

Since May 2022, market volatility in the prices of digital assets has been elevated due to a variety of factors, including, but not limited to, the macroeconomic environment (high inflation and rising interest rates) as well as the ‘crypto credit crisis’ brought on by the collapse and bankruptcy of a number of key players in the sector (cryptocurrency Luna collapse, hedge fund Three Arrows Capital default on loans and filing for bankruptcy, crypto-lending platform Celsius freezing all withdraws, cryptocurrency lender Voyager Digital filing for bankruptcy, crypto platform FTX filing for bankruptcy, crypto platform BlockFi filing for bankruptcy among others). The Company does not have direct exposure to any of the foregoing firms affected by the recent crypto credit crisis. Although the Company has no current intention of directly investing in cryptocurrencies, the Company has indirect exposure to cryptocurrencies by investing in securities of issuers with exposure to the cryptocurrency industry. There has been significant volatility in the market price of the securities, which has had a material impact, and may continue to have a material impact, on the investment values included on the consolidated balance sheets and unrealized gain (loss) recognized in investment income.

### BUSINESS SEGMENTS

The Company, with principal operations located in San Antonio, Texas, manages two business segments: (1) the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors, and (2) the Company invests for its own account in an effort to add growth and value to its cash position.

The following is a brief discussion of the Company’s business segments.

### Investment Management Services

The Company provides advisory services for three U.S.-based exchange-traded fund (“ETF”) clients and receives monthly advisory fees based on the net asset values of the funds. Information on the U.S.-based ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. The Company also serves as investment advisor to one European-based ETF and receives a monthly advisory fee based on the net asset value of the fund. The European-based ETF is not available to U.S. investors. The ETFs’ authorized participants are not required to give advance notice prior to redemption of shares in the ETFs, and the ETFs do not charge a redemption fee.

The Company also generates operating revenues from managing and servicing U.S. Global Investors Funds (“USGIF” or the “Funds”). These revenues are largely dependent on the total value and composition of assets under its management. Fluctuations in the markets and investor sentiment directly impact the asset levels of the Funds, thereby affecting income and results of operations. Detailed information regarding the Funds managed by the Company within USGIF can be found on the Company’s website, www.usfunds.com, including the prospectus and performance information for each Fund. The mutual fund shareholders in USGIF are not required to give advance notice prior to redemption of shares in the Funds.

At December 31, 2022, total assets under management, including ETF and USGIF clients, were approximately $2.4 billion versus $3.8 billion at December 31, 2021, a decrease of $1.4 billion, or 36.4 percent. During the six months ended December 31, 2022, average assets under management, including ETF and USGIF clients, were $2.7 billion, versus $4.0 billion during the six months ended December 31, 2021. At June 30, 2022, the Company’s prior fiscal year end, total assets under management, including ETF and USGIF clients, were approximately $2.9 billion, and has decreased $495.5 million, or 17.0 percent, during the six months ended December 31, 2022.

The following tables summarize the changes in assets under management for USGIF for the three and six months ended December 31, 2022, and 2021.

*(dollars in thousands)*

|  | Changes in Assets Under Management Three Months Ended December 31, 2022 Equity | Fixed Income | Total | 2021 Equity | Fixed Income | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning Balance | $260,014 | $66,807 | $326,821 | $370,026 | $75,040 | $445,066 |
| Market appreciation (depreciation) | 23,355 | 539 | 23,894 | 28,590 | (94) | 28,496 |
| Dividends and distributions | (11,329) | (408) | (11,737) | (61,309) | (93) | (61,402) |
| Net shareholder purchases (redemptions) | 5,997 | (1,943) | 4,054 | 51,527 | (1,461) | 50,066 |
| Ending Balance | $278,037 | $64,995 | $343,032 | $388,834 | $73,392 | $462,226 |
| Average investment management fee | 0.77% | 0.00% | 0.62% | 0.94% | 0.00% | 0.79% |
| Average net assets | $273,280 | $65,500 | $338,780 | $392,906 | $73,379 | $466,285 |

*(dollars in thousands)*

|  | Changes in Assets Under Management Six Months Ended December 31, 2022 Equity | Fixed Income | Total | 2021 Equity | Fixed Income | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning Balance | $286,367 | $71,161 | $357,528 | $433,380 | $75,842 | $509,222 |
| Market appreciation (depreciation) | 3,529 | (219) | 3,310 | (25,996) | (194) | (26,190) |
| Dividends and distributions | (11,329) | (537) | (11,866) | (61,308) | (169) | (61,477) |
| Net shareholder purchases (redemptions) | (530) | (5,410) | (5,940) | 42,758 | (2,087) | 40,671 |
| Ending Balance | $278,037 | $64,995 | $343,032 | $388,834 | $73,392 | $462,226 |
| Average investment management fee | 0.82% | 0.00% | 0.66% | 0.95% | 0.00% | 0.80% |
| Average net assets | $277,863 | $67,270 | $345,133 | $396,174 | $74,158 | $470,332 |

The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 62 basis points and 66 basis points for the three and six months ended December 31, 2022, respectively, and 79 basis points and 80 basis points, respectively, for the same periods in the prior year. The average investment management fee for the equity funds was 77 basis points and 82 basis points for the three and six months ended December 31, 2022, respectively, and 94 basis points and 95 basis points for the same periods in the prior year, respectively. The Company has agreed to contractually or voluntarily limit the expenses of the Funds. Therefore, the Company waived or reduced its fees and/or agreed to pay expenses of the Funds. Due to fee waivers, the average investment management fee for the fixed income funds was minimal.

### Investment Activities

Management believes it can more effectively manage the Company’s cash position by broadening the types of investments used in cash management and continues to believe that such activities are in the best interest of the Company. The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices. This source of revenue does not remain consistent and is dependent on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions.

As of December 31, 2022, the Company held investments carried at fair value of $21.4 million and a cost basis of $28.2 million. The fair value of these investments is approximately 38.9 percent of the Company’s total assets at December 31, 2022. In addition, the Company held other investments of approximately $2.6 million and held-to-maturity debt investments of $1.0 million.

Investments recorded at fair value on a recurring basis were approximately $21.4 million at December 31, 2022, compared to approximately $24.9 million at June 30, 2022, the Company’s prior fiscal year end, which is a decrease of approximately $3.5 million. See Note 2, Investments, in the notes to consolidated financial statements of this Quarterly Report on Form 10-Q, for further information regarding investment activities.

**RESULTS OF OPERATIONS – Three months ended December 31, 2022, and 2021**

The Company posted net income of $869,000 ($0.06 per share) for the three months ended December 31, 2022, compared to $3.6 million ($0.24 per share) for the three months ended December 31, 2021, a change of approximately $2.7 million. The change is primarily due to a decrease in operating revenue compared to the same period last year, a decrease in investment income compared to same period last year, offset by decreases in operating expenses and tax expense compared to the same period last year, as discussed further below.

### Operating Revenues

Total consolidated operating revenues for the three months ended December 31, 2022, decreased $2.8 million, or 43.3 percent, compared with the three months ended December 31, 2021. This decrease was primarily attributable to the following:

- Advisory fees decreased by $2.8 million, or 43.4 percent, primarily as a result of lower average assets under management in the ETFs and a decrease in base management fees received. Advisory fees are comprised of two components: base management fees and performance fees.
- Base management fees decreased $2.6 million. The majority of this decrease was from ETF unitary management fees, which decreased $2.1 million as the result of a decrease in ETF average assets under management, primarily for the Jets ETF.
- Performance fees for USGIF paid in the current period were $(135,000) compared to $141,000 in performance fees received in the corresponding period in the prior year, a change of $(276,000). The performance fee, which applies to the USGIF equity funds only, is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

### Operating Expenses

Total consolidated operating expenses for the three months ended December 31, 2022, decreased $815,000, or 22.4 percent, compared with the three months ended December 31, 2021. The decrease in operating expenses was primarily attributable to a decrease in employee compensation of $600,000, or 34.7 percent, primarily as a result of a decrease in bonuses in the current period and amortization expense of employee stock options in the prior period. Higher bonuses in the same period last year were related to realized investment gains, company performance, and fund performance. General and administrative expenses decreased by $258,000, or 14.6 percent, primarily due to lower directors’ fees and expenses. Director's fees and expenses were higher in the prior period primarily due to amortization expense of stock options.

### Other Income (Loss)

Total consolidated other income for the three months ended December 31, 2022, was $178,000, compared to $1.6 million for the three months ended December 31, 2021, a decrease of approximately $1.4 million. This change was primarily due to the following factors:

- Investment income was $116,000 for the three months ended December 31, 2022, compared to $1.6 million for the three months ended December 31, 2021, a change of approximately $1.5 million. This was primarily due to unrealized losses on equity securities of $937,000 for the three months ended December 31, 2022, compared to unrealized gains on equity securities of $455,000 for the three months ended December 31, 2021, a change of $1.4 million.

### Provision for Income Taxes

A tax expense of $217,000 was recorded for the three months ended December 31, 2022, compared to $939,000 for the three months ended December 31, 2021. The change was primarily the result of lower operating income in the current period compared to the prior period, and unrealized losses on equity securities in the current period compared to unrealized gains on equity securities in the prior period.

**RESULTS OF OPERATIONS – Six months ended December 31, 2022, and 2021**

The Company posted net income of $976,000 ($0.07 per share) for the six months ended December 31, 2022, compared to $6.0 million ($0.40 per share) for the six months ended December 31, 2021, a change of approximately $5.0 million. The change is primarily due to a decrease in operating revenue compared to the same period last year, an investment loss in the current period compared to investment income in the same period last year, offset by decreases in operating expenses and tax expenses compared to the same period last year, as discussed further below.

### Operating Revenues

Total consolidated operating revenues for the six months ended December 31, 2022, decreased $5.0 million, or 37.8 percent, compared with the six months ended December 31, 2021. This decrease was primarily attributable to the following:

- Advisory fees decreased by $4.9 million, or 37.9 percent, primarily as a result of lower average assets under management in the ETFs and a decrease in base management fees received. Advisory fees are comprised of two components: base management fees and performance fees.
- Base management fees decreased $4.3 million. The majority of this decrease was from ETF unitary management fees, which decreased $3.6 million as the result of a decrease in ETF average assets under management, primarily for the Jets ETF.
- Performance fees for USGIF paid in the current period were $(281,000) compared to $329,000 in performance fees received in the corresponding period in the prior year, a change of $(610,000). The performance fee, which applies to the USGIF equity funds only, is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

### Operating Expenses

Total consolidated operating expenses for the six months ended December 31, 2022, decreased $1.6 million, or 22.5 percent, compared with the six months ended December 31, 2021. The decrease in operating expenses was primarily attributable to a decrease in employee compensation of $1.3 million, or 36.9 percent, primarily as a result of a decrease in bonuses in the current period and amortization expense of employee stock options in the prior period. Higher bonuses in the same period last year were related to realized investment gains, company performance, and fund performance. General and administrative expenses decreased by $352,000, or 10.5 percent, primarily due to lower directors’ fees and expenses and a decrease in ETF expenses. Director's fees and expenses were higher in the prior period primarily due to amortization expense of stock options. ETF expenses were lower in the current period primarily due to lower average net assets.

### Other Income (Loss)

Total consolidated other loss for the six months ended December 31, 2022, was $1.2 million, compared to $1.6 million of other income for the six months ended December 31, 2021, a decrease of approximately $2.8 million. This change was primarily due to the following factors:

- Investment loss was $1.3 million for the six months ended December 31, 2022, compared to investment income of $1.5 million for the six months ended December 31, 2021, a change of approximately $2.9 million. This was primarily due to unrealized losses on equity securities of $2.9 million for the six months ended December 31, 2022, compared to $1.9 million for the six months ended December 31, 2021, a change of $1.0 million. There were no realized gains on sales of equity securities in the current period, whereas the same period in the prior year had $1.9 million in realized gains on sales of equity securities.

### Provision for Income Taxes

A tax expense of $296,000 was recorded for the six months ended December 31, 2022, compared to $1.5 million for the six months ended December 31, 2021. The change was primarily the result of lower operating income in the current period compared to prior period, higher unrealized losses on equity securities in the current period compared to the prior period, and realized gains on sales of equity securities in the prior period.

### LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2022, the Company had net working capital (current assets minus current liabilities) of approximately $36.2 million, an increase of $2.3 million, or 6.9 percent, since June 30, 2022, and a current ratio (current assets divided by current liabilities) of 15.4 to 1. With approximately $23.4 million in cash and cash equivalents, an increase of $1.1 million, or 4.9 percent since June 30, 2022, and $13.2 million in securities carried at fair value on a recurring basis, excluding convertible securities, which together comprise approximately 66.7 percent of total assets, the Company has adequate liquidity to meet its current obligations.

The increase in cash, and accordingly, net working capital, was primarily due to net cash provided by operating activities of $1.1 million, proceeds from principal paydowns of $1.5 million; offset by purchases of investments of $477,000, repurchases of the Company's common stock of $382,000, and dividends paid of $672,000. Consolidated shareholders’ equity at December 31, 2022, was $52.4 million, a decrease of $1.8 million, or 3.3 percent since June 30, 2022. The decrease was primarily due to other comprehensive loss of $1.7 million, dividends declared of $670,000, repurchases of the Company's common stock of $382,000, and net loss of $976,000 for the six months ended December 31, 2022.

The Company also has access to a $1 million credit facility, which can be utilized for working capital purposes. The credit agreement requires the Company to maintain certain covenants; the Company has been in compliance with these covenants during the current fiscal year. The credit agreement expires on May 31, 2023, and the Company intends to renew annually. The credit facility is collateralized by approximately $1 million, included in restricted cash on the consolidated balance sheets, held in deposit in a money market account at the financial institution that provided the credit facility. As of December 31, 2022, this credit facility remained unutilized by the Company.

Investment advisory contracts pursuant to the Investment Company Act of 1940 and related affiliated contracts in the U.S., by law, may not exceed one year in length and, therefore, must be renewed at least annually after an initial two-year term. The investment advisory and related contracts between the Company and USGIF have been renewed through September 2023. The advisory agreement for the U.S.-based ETFs has been renewed through September 2023.

The primary cash requirements are for operating activities. The Company also uses cash to purchase investments, pay dividends and repurchase Company stock. The cash outlays for investments and dividend payments are discretionary and management or the Board may discontinue as deemed necessary. The stock repurchase plan is approved through December 31, 2023, but may be suspended or discontinued at any time. Cash and securities recorded at fair value on a recurring basis, excluding convertible securities, of approximately $36.7 million are available to fund current activities.

Management believes current cash reserves, investments, and financing available will be sufficient to meet foreseeable cash needs for operating activities.

The rapid spread of COVID-19 and actions taken in response had a significant detrimental effect on the global and domestic economies and financial markets. Market declines affect the Company’s assets under management, and thus its revenues and also the valuation of the Company’s corporate investments. Should this emerging macro-economic risk reoccur and continue for an extended period, there could be an adverse material financial impact to the Company’s business and investments, including a material reduction in its results of operations.

### CRITICAL ACCOUNTING ESTIMATES

For a discussion of other critical accounting policies that the Company follows, please refer to the notes to the consolidated financial statements included in the Annual Report on Form 10-K/A-2 for the year ended June 30, 2022.

## Market risk

As filed, 9,118 characters.

COVID-19 had an adverse effect on global and domestic financial markets, which may reoccur and continue for an undetermined period. This may adversely affect assets under management and thus the Company’s revenues and operating results. Market declines also affect the valuation of the Company’s corporate investments, which also adversely affects the Company’s balance sheet and results of operations.

Macroeconomic declines, including inflation; negative political developments, including volatile market conditions due to investor concerns regarding inflation and potential hostilities between Russia and Ukraine; adverse market conditions, including cryptocurrency market disruptions; and catastrophic events may cause a decline in the Company’s revenue, an increase in the Company’s costs, negatively affect the Company’s operating results, adversely affect the Company’s cash flow, and could result in a decline in the Company’s stock price.

### Investment Management and Administrative Services Fees

Revenues are generally based upon a percentage of assets under management in accordance with contractual agreements. Accordingly, fluctuations in the financial markets have a direct effect on the Company’s operating results. A significant portion of assets under management in equity funds have exposure to international markets and/or natural resource sectors, which may experience volatility. In addition, fluctuations in interest rates may affect the value of assets under management in fixed income funds.

### Performance Fees

USGIF advisory fees are comprised of two components: a base management fee and a performance fee. The performance fee is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

As a result, the Company’s revenues are subject to volatility beyond market-based fluctuations discussed in the investment management and administrative services fees section above. For the three and six months ended December 31, 2022, the Company realized a decrease of $(135,000) and $(281,000), respectively, in its USGIF base advisory fee, and for the three and six months ended December 31, 2021, an increase of $141,000 and $329,000, respectively, due to these performance adjustments.

### Corporate Investments

The Company’s Consolidated Balance Sheets include substantial amounts of assets whose fair values are subject to market risk. The market risks are primarily associated with equity prices and foreign currency exchange rates. The fair values of corporate investments with exposure to the cryptocurrency industry are subject to considerable volatility.

The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices.

### Equity price risk

Due to the Company’s investments in securities carried at fair value, equity price fluctuations represent a market risk factor affecting the Company’s consolidated financial position. The carrying values of investments subject to equity price risks are based on quoted market prices or, if not actively traded, management’s estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported fair value.

The following table summarizes the Company’s equity price risks in securities recorded at fair value on a recurring basis as of December 31, 2022, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.

*(dollars in thousands)*

|  | Fair Value at December 31, 2022 | Hypothetical Percentage Change | Estimated Fair Value After Hypothetical Price Change | Estimated Increase (Decrease) in Net Income (Loss) (1) |
| --- | ---: | --- | ---: | ---: |
| Equity securities at fair value | $13,264 | 25% increase | $16,580 | $2,620 |
|  |  | 25% decrease | $9,948 | $(2,620) |
| Embedded derivatives at fair value (2) | $29 | 25% increase | $36 | $6 |
|  |  | 25% decrease | $22 | $(6) |

*1. Changes in unrealized gains and losses on embedded derivatives and equity securities at fair value are included in earnings in the consolidated statements of operations. The estimated increase (decrease) is after income taxes at the statutory rate in effect as of the balance sheet date.*

*2. An embedded derivative and its related host contract represent one legal contract and are combined within the investments in available-for-sale debt securities on the consolidated balance sheets.*

The selected hypothetical changes do not reflect what could be considered best- or worst-case scenarios. Results could be significantly different due to both the nature of markets and the concentration of the Company’s investment portfolio.

COVID-19 had an effect on volatility in global and domestic financial markets, which may reoccur and continue for an undetermined period. This may not only adversely affect the Company’s assets under management but also the valuation of the Company’s corporate investments.

A portion of the equity securities recorded at fair value in the above table subject to equity price risk are investments in common share purchase warrants of HIVE Blockchain Technologies Ltd. (“HIVE”), which were valued at $26,000 at December 31, 2022. Also, the embedded derivatives shown in the above table, which were valued at $29,000 at December 31, 2022, are related to HIVE convertible debentures. HIVE is discussed in more detail in Note 2, Investments, in the notes to consolidated financial statements of this Quarterly Report on Form 10-Q. HIVE is a company that is headquartered in Canada with cryptocurrency mining facilities in Iceland, Sweden and Canada. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for significant volatility in the market price of HIVE, which could materially impact the investment’s value included on the consolidated balance sheets and unrealized gain (loss) recognized in investment income.

### Interest rate risk

Due to the Company’s investments in debt securities carried at fair value, interest rate fluctuations represent a market risk factor affecting the Company’s consolidated financial position. Debt securities may fluctuate in value due to changes in interest rates. Typically, investments subject to interest rate risk will decrease in value when interest rates rise and increase in value when interest rates decline. Fluctuations in interest rates could materially impact the Company’s investments in debt securities carried at fair value included on the consolidated balance sheets and unrealized gains (losses) recognized in investment income.

### Foreign currency risk

A portion of cash and certain corporate investments are held in foreign currencies, primarily Canadian. Adverse changes in foreign currency exchange rates would lower the value of those cash accounts and corporate investments. Certain assets under management also have exposure to foreign currency fluctuations in various markets, which could have an impact on their valuation and thus the revenue received by the Company.

### Indirect exposure to cryptocurrencies risk

Cryptocurrencies (also referred to as “virtual currencies” and “digital currencies”) are digital assets that are designed to act as a medium of exchange. Although the Company has no current intention of directly investing in cryptocurrencies, the Company has indirect exposure to cryptocurrencies by investing in securities of issuers with exposure to the cryptocurrency industry. Cryptocurrencies (some of the most well-known include Bitcoin, Dogecoin and Ethereum) are not backed by any government, corporation, or other identified body. Trading markets for cryptocurrencies are often unregulated and may be more exposed to operational or technical issues as well as the potential for fraud or manipulation than established, regulated exchanges for securities, derivatives and traditional currencies.

Cryptocurrencies have been subject to significant fluctuations in value. The value of a cryptocurrency may significantly fluctuate precipitously (including declining to zero) and unpredictably for a variety of reasons, including, but not limited to: investor perceptions and expectations; regulatory changes; general economic conditions; adoption and use in the retail and commercial marketplace; public opinion regarding the environmental impact of the creation (“minting” or “mining”) of cryptocurrency; confidence in, and the maintenance and development of, its network and open-source software protocols such as blockchain for ensuring the integrity of cryptocurrency transactional data; and general risks tied to the use of information technologies, including cybersecurity risks.

## Controls and procedures

As filed, 2,129 characters.

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2022, was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of December 31, 2022, due to the material weakness in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures).

The material weakness in internal controls over financial reporting that was disclosed in our annual report on Form 10-K/A-2 as of and for the year ended June 30, 2022, was also present as of December 31, 2022. Based on the completion of the fair value measurements, we believe that the consolidated financial statements included in this quarterly report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows as of the date, and for the period, presented, in conformity with U.S. GAAP.

Management is in the process of designing a remediation plan intended to address this material weakness, which will include taking steps to enhance its evaluation of the qualifications of third-party specialists, more accurately define the scope of work to be performed by such specialists, and improve the review process for work products prepared by specialists. Management, under the supervision of the Audit Committee, will develop a comprehensive remediation plan, including a detailed plan and timetable for implementation, and will report regularly to the Audit Committee regarding the status of the implementation activities.

Other than as described above, there has been no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 274 characters.

For a discussion of risk factors which could affect the Company, please refer to Item 1A, “Risk Factors” in the Annual Report on Form 10-K/A-2 for the year ended June 30, 2022. There have been no material changes since the fiscal year end to the risk factors listed therein.

Filed Jun 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-017067. Last ingested by Listed: Nov 3, 2026, 19:00 ET. No prices; not investment advice.