U.S. GLOBAL INVESTORS, INC. 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 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
Since the beginning of 2020, the rapid spread of the global COVID-19 outbreak and actions taken in response have 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. It is too early to determine the long-term impact of current circumstances on the Company's business. Should this emerging macro-economic risk 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) have not adversely affected the Company's ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.
BUSINESS SEGMENTS The Company, with principal operations located inSan Antonio, Texas , manages two business segments on a continuing operations basis: (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 included in continuing operations.
Investment Management Services
The Company 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.
The Company provides advisory services for two exchange-traded fund ("ETF")
clients and receives monthly advisory fees based on the net asset values of the
funds. Information on the ETFs can be found at www.usglobaletfs.com, including
the prospectus, performance, and holdings. 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.
At March 31, 2021 , total assets under management, including USGIF and ETF
clients, were approximately $4.6 billion versus $665.1 million at March 31,
2020 , an increase of $3.9 billion , or 592.4 percent. During the nine months
ended March 31, 2021 , average assets under management, including USGIF and ETF
clients, were $3.0 billion versus $518.7 million during the nine months ended
March 31, 2020 . Total assets under management as of period-end at March 31,
2021 , including USGIF and ETF clients, were $4.6 billion versus $1.7 billion at
June 30, 2020 , the Company's prior fiscal year end, an increase of 2.9 billion,
or 168.7 percent.
The increase in assets under management as of March 31, 2021 , compared to March
31, 2020 , is primarily due to inflows into ETF clients, primarily the U.S.
Global Jets ETF ("Jets ETF"). Inflows into the Jets ETF, resulting in an
increase in assets, accelerated starting in the latter part of March 2020 and
continuing through March 2021 . The Jets ETF invests in airline-related stocks,
including global airline carriers, airport operators and aircraft manufacturers.
While global financial markets have experienced declines and volatility,
including stocks in which the Jets ETF invests, this ETF has attracted inflows.
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The following tables summarize the changes in assets under management for USGIF
for the nine months ended
Changes in Assets Under Management
Three Months Ended March 31,
2021 2020
(dollars in
thousands) Equity Fixed Income Total Equity Fixed Income Total
Beginning Balance $ 427,794 $ 82,024 $ 509,818 $ 355,269 $ 85,742 $ 441,011
Market appreciation
(depreciation) (24,074 ) (234 ) (24,308 ) (108,964 ) 169 (108,795 )
Dividends and
distributions - (98 ) (98 ) - (226 ) (226 )
Net shareholder
redemptions (2,116 ) (2,255 ) (4,371 ) (9,442 ) (4,213 ) (13,655 )
Ending Balance $ 401,604 $ 79,437 $ 481,041 $ 236,863 $ 81,472 $ 318,335
Average investment
management fee 0.95 % 0.00 % 0.79 % 0.96 % 0.00 % 0.76 %
Average net assets $ 417,345 $ 81,905 $ 499,250 $ 315,360 $ 84,744 $ 400,104
Changes in Assets Under Management
Nine Months Ended March 31,
2021 2020
(dollars in
thousands) Equity Fixed Income Total Equity Fixed Income Total
Beginning Balance $ 343,214 $ 82,683 $ 425,897 $ 334,684 $ 90,921 $ 425,605
Market appreciation
(depreciation) 66,319 120 66,439 (65,640 ) 898 (64,742 )
Dividends and
distributions (16,243 ) (316 ) (16,559 ) (2,973 ) (829 ) (3,802 )
Net shareholder
purchases
(redemptions) 8,314 (3,050 ) 5,264 (29,208 ) (9,518 ) (38,726 )
Ending Balance $ 401,604 $ 79,437 $ 481,041 $ 236,863 $ 81,472 $ 318,335
Average investment
management fee 0.92 % 0.00 % 0.76 % 0.97 % 0.01 % 0.77 %
Average net assets
As shown above, USGIF period-end assets under management were higher atMarch 31, 2021 , compared toMarch 31, 2020 . Average net assets for the three and nine months in the current fiscal year were higher than the same periods in the previous fiscal year for equity funds and in total, while average net assets for fixed income funds were lower than the same periods in the prior fiscal year. Both the fixed income and equity funds had net market depreciation for the three months endedMarch 31, 2021 , and net market appreciation for the nine months endedMarch 31, 2021 , primarily in the gold and natural resources funds. The equity funds had net market depreciation for the three and nine months endedMarch 31, 2020 , while the fixed income funds had net market appreciation for the same periods. A significant portion of the dividends and distributions shown above were reinvested and included in net shareholder purchases (redemptions). There were net shareholder redemptions for the equity funds for the three months endedMarch 31, 2021 , and net shareholder purchases for the nine months endedMarch 31, 2021 . There were net shareholder redemptions for the fixed income funds for the three and nine months endedMarch 31, 2021 . For the three and nine months endedMarch 31, 2020 , there were net shareholder redemptions for both the equity and fixed income funds. The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 79 and 76 basis points for the three and nine months endedMarch 31, 2021 , respectively, and 76 and 77 basis points for the same periods in the prior year. The average investment management fee for the equity funds was 95 and 92 basis points for the three and nine months endedMarch 31, 2021 , and 96 and 97 basis points for the same periods in the prior year. 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. The decline in the average investment management fee rate for the equity funds was due to fee waivers. Also, due to fee waivers, the average investment management fee for the fixed income funds was nil for the three and nine months endedMarch 31, 2021 , and nil and 1 basis point for the same periods in the prior year, respectively. Page 30
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Table of Contents 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 ofMarch 31, 2021 , the Company held investments carried at fair value of approximately$47.2 million and a cost basis of approximately$24.2 million . The fair value of these investments is approximately 70.6 percent of the Company's total assets. In addition, the Company held other investments which do not have readily determinable fair values of approximately$2.9 million , held-to-maturity debt investments of$1.0 million , and investments accounted for under the equity method of accounting of$596,000 . Investments carried at fair value were approximately$47.2 million atMarch 31, 2021 , compared to approximately$11.5 million atJune 30, 2020 , the Company's prior fiscal year end, which is an increase of approximately$35.7 million . See Note 4, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q/A, for further information regarding investment activities. Page 31
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RESULTS OF OPERATIONS - Three months ended
The Company posted net income attributable toU.S. Global Investors, Inc. of$8.6 million ($0.57 per share) for the three months endedMarch 31, 2021 , compared with a net loss attributable toU.S. Global Investors, Inc. of$1.6 million ($0.11 per share loss) for the three months endedMarch 31, 2020 , a positive change of approximately$10.2 million . The change is primarily due to operating income and realized and unrealized investment gains in the current quarter compared to operating loss and unrealized investment losses in the same quarter last year, as discussed further below. Operating Revenues Total consolidated operating revenues for the three months endedMarch 31, 2021 , increased$5.4 million , or 595.3 percent, compared with the three months endedMarch 31, 2020 . This increase was primarily attributable to the following:
• Advisory fees increased by
result of higher average assets under management in the ETFs and performance
fees received versus paid out. Advisory fees are comprised of two
components: base management fees and performance fees.
• Base management fees increased
was from ETF unitary management fees, which increased
result of an increase in ETF average assets under management, primarily for
the Jets ETF. Inflows into the Jets ETF accelerated from the latter part of
assets. The Jets ETF invests in airline-related stocks, including global
airline carriers, airport operators and aircraft manufacturers. Base fees
for USGIF increased by
assets under management.
• Performance fees for USGIF received in the current period were
compared to
prior year, a positive change of
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 March 31, 2021 ,
increased $1.2 million , or 61.8 percent, compared with the three months ended
March 31, 2020 . The increase in operating expenses was primarily attributable to
an increase in employee compensation of $727,000 , or 101.7 percent, primarily
due to increased bonuses related to positive company and fund performance, and
an increase in general and administrative expenses of $437,000 , or 40.1 percent,
primarily due to higher ETF expenses related to the increase in ETF assets.
Other Income (Loss)
Total consolidated other income for the three months ended
• Investment income was
2021, compared to investment loss of
included realized and unrealized gains on fair value securities of
million and
quarter in the prior year had no realized gains and unrealized losses of
due to an increase in market value of fair value securities. See further
discussion of investments in Note 4, Investments, to the Consolidated
Financial Statements of this Quarterly Report on Form 10-Q/A.
Provision for Income Taxes
A tax expense from continuing operations of$3.1 million was recorded for the three months endedMarch 31, 2021 , compared to tax expense of$75,000 for the three months endedMarch 31, 2020 . The tax expense in the current period was primarily the result of operating income, realized gain on sale of securities, and unrealized gains on securities. The tax expense in the same quarter in the prior year was primarily the result of increasing the valuation allowance to fully reserve for deferred tax assets.
Income (Loss) from Discontinued Operations
Income (loss) from discontinued operations represents results of the Company's subsidiary Galileo, which was sold onMarch 2, 2020 . Loss from discontinued operations, net of tax, was$85,000 for the three months endedMarch 31, 2020 . See Note 3, Discontinued Operations, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q/A for further information on this transaction and the results from Galileo operations. Page 32 --------------------------------------------------------------------------------
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RESULTS OF OPERATIONS - Nine months ended
The Company posted a net income attributable toU.S. Global Investors, Inc. of$27.2 million ($1.81 per share) for the nine months endedMarch 31, 2021 , compared to a net loss attributable toU.S. Global Investors, Inc. of$6.2 million ($0.41 loss per share) for the nine months endedMarch 31, 2020 , a positive change of approximately$33.4 million . The change is primarily due to operating income and realized and unrealized investment gains in the current period compared to operating loss and unrealized investment losses in the same period last year, as discussed further below. Operating Revenues Total consolidated operating revenues for the nine months endedMarch 31, 2021 , increased$11.7 million , or 449.8 percent, compared with the nine months endedMarch 31, 2020 . This increase was primarily attributable to the following:
• Advisory fees increased by
result of higher average assets under management and an increase in
performance fees received. Advisory fees are comprised of two components: a
base management fee and a performance fee.
• Base management fees increased $11.0 million . The majority of this
increase was from ETF unitary management fees, which increased $10.7
million as the result of an increase in ETF average assets under
management, primarily for the Jets ETF. Inflows into the Jets
ETF accelerated starting in the latter part of
through
invests in airline-related stocks, including global airline carriers,
airport operators and aircraft manufacturers. Base fees for USGIF
increased by
under management.
• Performance fees for USGIF received in the current period were
compared to $391,000 in fees paid out in the corresponding period in the
prior year, a positive change of $671,000 . The performance fee, whichapplies 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 nine months ended March 31, 2021 ,
increased $5.3 million , or 110.3 percent, compared with the nine months ended
March 31, 2020 . The increase in operating expenses was primarily attributable to
an increase in employee compensation of $3.6 million , or 173.9 percent,
primarily due to increased bonuses related to realized investment gains and
positive company and fund performance, and an increase in general and
administrative expenses of $1.6 million , or 66.6 percent, primarily due to
higher ETF expenses and business development costs related to the increase in
ETF assets.
Other Income (Loss)
Total consolidated other income (loss) for the nine months ended March 31, 2021 ,
had a positive change of $35.1 million , compared with total other loss for the
nine months ended March 31, 2020 . The positive change was primarily due to the
following factors:
• There was investment income of
31, 2021, compared to an investment loss of
ended
included realized and unrealized gains on fair value securities of
million and
the same period in the prior year, which had unrealized losses of
million. During the nine months ended
investment in HIVE, resulting in
included in investment income. The change in unrealized gain (loss) was due
to an increase in market value of fair value securities versus losses in the
previous period. See further discussion of investments in Note 4,
Investments, to the Consolidated Financial Statements of this Quarterly
Report on Form 10-Q/A.
• Gain on forgiveness of PPP loan for the nine months ended
was
PPP loan and accrued interest. See further information on the PPP loan in
Note 8, Borrowings, to the Consolidated Financial Statements of this
Quarterly Report on Form 10-Q/A.
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--------------------------------------------------------------------------------Table of Contents Provision for Income Taxes A tax expense from continuing operations of$8.2 million was recorded for the nine months endedMarch 31, 2021 , compared to tax benefit of$174,000 for the nine months endedMarch 31, 2020 . The tax expense in the current period was primarily the result of operating income, realized gain on sale of securities, and unrealized gains on securities. The tax benefit in the same period in the prior year was primarily the result of a decrease in valuation of certain investments, which decreased the related deferred tax liability.
Income (Loss) from Discontinued Operations
Income (loss) from discontinued operations represents results of the Company's subsidiary Galileo, which was sold onMarch 2, 2020 . Loss from discontinued operations, net of tax, was$338,000 for the nine months endedMarch 31, 2020 . See Note 3, Discontinued Operations, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q/A for further information on this transaction and the results from Galileo operations.
LIQUIDITY AND CAPITAL RESOURCES
AtMarch 31, 2021 , the Company had net working capital (current assets minus current liabilities) of approximately$14.1 million and a current ratio (current assets divided by current liabilities) of 3.4 to 1. With approximately$9.5 million in cash and cash equivalents, and approximately$12.3 million in securities recorded at fair value, excluding convertible securities and warrants, the Company has adequate liquidity to meet its current obligations. EffectiveApril 12, 2020 , the Company was approved for a loan of approximately$442,000 under the Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company has under 25 employees and is considered a small business. The Company has been granted forgiveness of the entire PPP loan and any accrued interest. The Company also has access to a$1 million credit facility 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 will expire onMay 31, 2021 , and the Company intends to renew annually. The credit facility is collateralized by$1 million atMarch 31, 2021 , held in deposit in a money market account at the financial institution that provided the credit facility. As ofMarch 31, 2021 , the credit facility remains unutilized by the Company. The rapid spread of the global COVID-19 outbreak and actions taken in response have 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. It is early to determine the long-term impact of current circumstances on the Company's business. Should this emerging macro-economic risk 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.
The investment advisory and administrative services contracts between the
Company and USGIF have been renewed through
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 throughDecember 31, 2021 , but may be suspended or discontinued at any time. Cash and securities at fair value, excluding convertible securities and warrants, of approximately$21.8 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. 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 for the year endedJune 30, 2020 . Page 34 --------------------------------------------------------------------------------
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of the global COVID-19 pandemic are still evolving. There has been an adverse effect on global and domestic financial markets, which may 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.
Investment Management and Administrative Services Fees
Revenues are generally based upon a percentage of the market value 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 portion of assets under management have exposure to international markets, 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 nine months endedMarch 31, 2021 , the Company realized an increase in its USGIF base advisory fee of$156,000 and$280,000 , respectively, due to these performance adjustments. For the three and nine months endedMarch 31, 2020 , the Company realized a decrease in its USGIF base advisory fee of$79,000 and$391,000 , respectively, due to these performance adjustments. Corporate Investments The Company's Consolidated Balance Sheets includes assets whose fair value is subject to market risks. Due to the Company's investments in securities recorded at fair value, price fluctuations represent a market risk factor affecting the Company's consolidated financial position. The carrying values of investments subject to price risks are based on quoted market prices or, if not actively traded, management's estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported market value. The Company's investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company's investment practices. The table below summarizes the Company's price risks in equity securities recorded at fair value as ofMarch 31, 2021 , and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices. Estimated Fair Value at Estimated Fair Increase March 31, 2021 Value After (Decrease) in As Restated Hypothetical Hypothetical Net Income (dollars in thousands) (See Note 2) Percentage Change Price Change (Loss) (1) Equity securities at fair value 2$ 23,261 25% increase$ 29,076 $ 4,594 25% decrease$ 17,446 $ (4,594 )
1 The estimated increase (decrease) is after income taxes at the statutory rate in effect as of the balance sheet date.
2 Unrealized and realized gains and losses are included in earnings in the Consolidated Statements of Operations.
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.
The effects of the global COVID-19 pandemic are still evolving. There has been
an adverse effect on global and domestic financial markets, which may continue
for an undetermined period. This not only adversely affects the Company's assets
under management but also the valuation of the Company's corporate investments.
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A significant portion of the equity securities recorded at fair value in the
above table is an investment in HIVE Blockchain Technologies Ltd. ("HIVE")
common share purchase warrants, which was valued at $11.0 million at March 31,
2021 , with the use of significant unobservable inputs (Level 3). HIVE is
discussed in more detail in Note 4, Investments, to the Consolidated Financial
Statements of the Quarterly Report on Form 10-Q/A. HIVE is a company that is
headquartered and traded in Canada with cryptocurrency mining facilities in
Iceland , Sweden , and Canada . Cryptocurrency markets and related securities have
been, and are expected to continue to be, volatile, and may be influenced by a
wide variety of factors, including speculative activity. Cryptocurrency mining
companies face a variety of risks, including, but not limited to, environmental
concerns, regulatory factors, and heightened risks of cybersecurity attacks for
which there may be no source of recovery. There is potential for significant
volatility in the market price of HIVE, which could materially impact the
investment's value included on the balance sheet and unrealized gain (loss)
recognized in investment income.
The Company also has a significant investment in HIVE convertible debentures,
which was valued at $23.9 million at March 31, 2021 , with the use of significant
unobservable inputs (Level 3). As noted above, there is potential for
significant volatility in the market price of HIVE, which could materially
impact the investment's value included on the balance sheet. The convertible
debentures are classified as available-for-sale debt securities, for which
changes in unrealized gains and losses are reported net of tax in accumulated
other comprehensive income, except for declines in fair value determined to be
other than temporary, which would be reflected in the Company's earnings.
The Company also has an equity method investment in Galileo New Economy Fund LP
in the amount of $596,000 at March 31, 2021 , which has investments in the
technology and cryptocurrency mining industries. As noted above, exposure to
cryptocurrency industry may result in volatility in the valuation of this fund.
Under the equity method, the Company's proportional share of the fund's net
income or loss, which primarily consists of realized and unrealized gains and
losses on investments offset by fund expenses, is recognized in the Company's
earnings. The potential significant volatility in the valuation of the fund's
investments could cause the fund's net income or loss to vary significantly from
period to period, which in turn would be reflected in the Company's earnings.
Foreign currency risk
A portion of cash and certain corporate investments, including the Company's
equity method investment, 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 impact their valuation and thus the revenue received by the Company.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as ofMarch 31, 2021 , 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 at that time that the disclosure controls and procedures were effective as ofMarch 31, 2021 . In connection with the preparation of this Amended Quarterly Report on Form 10-Q/A, a reevaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as ofMarch 31, 2021 , was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that reevaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as ofMarch 31, 2021 , due to the existence of the material weaknesses in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures). Based on the completion of the fair value remeasurements, we believe that the unaudited interim consolidated financial statements included in this Amended Quarterly Report on Form 10-Q/A 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 withU.S. GAAP. Management identified a deficiency in the design and operating effectiveness of the Company's internal controls as ofMarch 31, 2021 , that represents a material weakness in our internal control over financial reporting. The deficiency is the result of inadequate design and implementation of internal controls to identify complex investments requiring specialized valuation expertise. Specifically, the Company's controls over valuation procedures did not address valuation methodologies for hybrid financial instruments that led to the restatement of previously issued financial statements. Management is in the process of designing and implementing remediation efforts intended to address the material weakness discussed above. These remediation efforts will be focused on amending the Company's valuation procedures to include the use of a binomial lattice model and/or independent pricing service to value these types of complex investments. The valuation procedures are to be reviewed and approved by the Company's Board of Directors. 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. The Company held one hybrid financial instrument as of the date, and for the period, presented, that has been remeasured by an independent pricing service using a binomial lattice model. There has been no change in the Company's internal control over financial reporting that occurred during the three months endedMarch 31, 2021 , that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, as the material weakness described above had not yet been identified by management.
Inherent Limitations on Internal Controls
Notwithstanding the foregoing, management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Limitations inherent in any control system include the following:
• Judgments in decision-making can be faulty, and control and process
breakdowns can occur because of simple errors or mistakes.
• Controls can be circumvented by individuals, acting alone or in collusion
with others, or by management override.
The design of any system of controls is based in part on certain assumptions • about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
Over time, controls may become inadequate because of changes in conditions or • deterioration in the degree of compliance with associated policies or
procedures.
The design of a control system must reflect the fact that resources are • constrained, and the benefits of controls must be considered relative to
their costs.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected.
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