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EX-32.1 - EX-32.1 - U S GLOBAL INVESTORS INCex32-1.htm
EX-31.1 - EX-31.1 - U S GLOBAL INVESTORS INCex31-1.htm
EX-23.1 - EX-23.1 - U S GLOBAL INVESTORS INCex23-1.htm
EX-21 - EX 21 - U S GLOBAL INVESTORS INCex21.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 
  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 2017
 
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.
Incorporated in the State of Texas

IRS Employer Identification No. 74-1598370
Principal Executive Offices:
7900 Callaghan Road
San Antonio, Texas 78229
Telephone Number: 210-308-1234
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock
($0.025 par value per share)
Registered: NASDAQ Capital Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes        No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes        No 
Indicate by check mark whether the Company (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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes        No 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.             
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   (Do not check if a smaller reporting company)
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 Act).
Yes        No 
The aggregate market value of the 8,489,360 shares of nonvoting class A common stock held by nonaffiliates of the registrant was $11,545,530, based on the last sale price quoted on NASDAQ as of December 31, 2016, the last business day of the registrant’s most recently completed second fiscal quarter. Registrant’s only voting stock is its class C common stock, par value of $0.025 per share, for which there is no active market. The aggregate value of the 4,567 shares of the class C common stock held by nonaffiliates of the registrant on December 31, 2016 (based on the last sale price of the class C common stock in a private transaction) was $1,142. For purposes of this disclosure only, the registrant has assumed that its directors, executive officers, and beneficial owners of 5 percent or more of the registrant’s common stock are affiliates of the registrant.
On August 30, 2017, there were 13,866,601 shares of Registrant’s class A nonvoting common stock issued and 13,113,766 shares of Registrant’s class A nonvoting common stock issued and outstanding, no shares of Registrant’s class B nonvoting common stock outstanding, and 2,068,947 shares of Registrant’s class C voting common stock issued and outstanding.
Documents incorporated by reference: None


Table of Contents
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Exhibit 21 — Subsidiaries of the Company, Jurisdiction of Incorporation, and Percentage of Ownership
 
Exhibit 23.1 — Consent of BDO USA, LLP
 
Exhibit 31.1 — Rule 13a – 14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002)
 
Exhibit 32.1 — Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002)
 


Part I of Annual Report on Form 10-K

Item 1. Business

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, U.S. Global Investors, Inc. and its subsidiaries (collectively, “U.S. Global” or the “Company”) may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, future expectations of the Company, and other matters that do not relate strictly to historical facts and are based on certain assumptions by management. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of Company management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in Part I, Item 1A, Risk Factors, and elsewhere in this report and other documents filed or furnished by U.S. Global from time to time with the U.S. Securities and Exchange Commission (“SEC”). U.S. Global cautions readers to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date on which such statements are made. Except to the extent required by applicable law, U.S. Global undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

U.S. Global, a Texas corporation organized in 1968, is a registered investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”). The Company, with principal operations located in San Antonio, Texas, manages three business segments:

1.
Investment Management Services, through which the Company offers, to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”), offshore clients, and exchange traded fund (“ETF”) clients, a range of investment management products and services to meet the needs of individual and institutional investors;
2.
Investment Management Services - Canada, through which the Company owns a 65 percent controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm which offers investment management products and services in Canada; and
3.
Corporate Investments, through which the Company invests for its own account in an effort to add growth and value to its cash position. Although the Company generates the majority of its revenues from its investment advisory segments, the Company holds a significant amount of its total assets in investments.

As part of its investment management businesses, the Company provides: (1) investment advisory services and (2) administrative services to the mutual funds advised by the Company. The fees from these services, as well as investment income, are the primary sources of the Company’s revenue. The Company also provided distribution services through December 2015 to USGIF.

Lines of Business

Investment Management Services

Investment Advisory Services. The Company furnishes an investment program for each of the clients it manages and determines, subject to overall supervision by the applicable board of trustees of the clients, the clients’ investments pursuant to an advisory agreement. Consistent with the investment restrictions, objectives and policies of the particular client, the portfolio team for each client determines what investments should be purchased, sold, and held, and makes changes in the portfolio deemed necessary or appropriate. In the advisory agreement, the Company is charged with seeking the best overall terms in executing portfolio transactions and selecting brokers or dealers.

As required by the Investment Company Act of 1940, as amended (“Investment Company Act”), the advisory agreement with USGIF is subject to annual renewal and is terminable upon 60-day notice. The Board of Trustees of USGIF will meet to consider the agreement renewal in September 2017. Management anticipates that the advisory agreement will be renewed.

In addition to providing advisory services to USGIF, the Company provides advisory services to two ETFs. U.S. Global Jets ETF commenced operations in April 2015, and U.S. Global GO GOLD and Precious Metal Miners ETF commenced operations in June 2017.

The Company also provides advisory services to two offshore clients. The offshore clients have provided notice that they are liquidating. The liquidations are expected to be completed in September 2017.

Net assets under management on June 30, 2017, and June 30, 2016, are detailed in the following table.
 
Assets Under Management (“AUM”)
 
Fund
 
Ticker
 
June 30, 2017
   
June 30, 2016
 
(dollars in thousands)
 
 
           
U.S. Global Investors Funds
 
 
           
Natural Resources
 
 
           
Global Resources
 
PSPFX/PIPFX
 
$
90,690
   
$
100,049
 
World Precious Minerals
 
UNWPX/UNWIX
   
130,382
     
179,593
 
Gold and Precious Metals
 
USERX
   
98,530
     
132,061
 
Total Natural Resources
 
 
   
319,602
     
411,703
 
International Equity
 
 
               
Emerging Europe
 
EUROX
   
45,654
     
42,332
 
China Region
 
USCOX
   
20,812
     
16,391
 
Total International Equity
 
 
   
66,466
     
58,723
 
Fixed Income
 
 
               
U.S. Government Securities Ultra-Short Bond
 
UGSDX
   
52,555
     
58,277
 
Near-Term Tax Free
 
NEARX
   
83,945
     
118,965
 
Total Fixed Income
 
 
   
136,500
     
177,242
 
Domestic Equity
 
 
               
Holmes Macro Trends
 
MEGAX
   
40,190
     
37,012
 
All American Equity
 
GBTFX
   
16,658
     
18,340
 
Total Domestic Equity
 
 
   
56,848
     
55,352
 
Total U.S. Global Investors Funds
 
 
   
579,416
     
703,020
 
 
 
 
               
U.S. Global ETFs
 
 
               
U.S. Global Jets ETF
 
JETS
   
114,929
     
43,430
 
U.S. Global GO GOLD and Precious Metal Miners ETF
 
GOAU
   
2,376
     
-
 
Total U.S. Global ETFs
 
 
   
117,305
     
43,430
 
 
 
 
               
Offshore Advisory Clients
 
 
   
15,213
     
13,777
 
 
 
 
   
711,934
     
760,227
 
Total Canada AUM (see separate discussion)
 
 
   
47,787
     
122,844
 
Total AUM
 
 
 
$
759,721
   
$
883,071
 

Administrative Services. The Company also manages, supervises and conducts certain other affairs of USGIF, subject to the control of the Funds’ Board of Trustees pursuant to an administrative services agreement. Prior to December 10, 2015, it provided office space, facilities and certain business equipment as well as the services of executive and clerical personnel for administering the affairs of the Funds. U.S. Global and its affiliates compensated all personnel, officers, directors and interested trustees of the Funds if such persons were also employees of the Company or its affiliates. Prior to November 2014, the Company was compensated for administrative services at an annual rate of 0.10 percent for each investor class and 0.08 percent for each institutional class plus $10,000 per Fund. Effective November 1, 2014, the annual per fund fee changed to $7,000. Effective December 10, 2015, the Company entered into an amended administrative services agreement with USGIF whereby the Company and a third party act as co-administrators to the Funds. The Company continues to assist with certain administrative tasks. Effective December 10, 2015, the annual rate changed to 0.05 percent for each investor class and to 0.04 percent for each institutional class, and the per fund fee was eliminated. The administrative services agreement with USGIF is subject to renewal on an annual basis and is terminable upon 60-day notice. The Board of Trustees of USGIF will meet to consider the agreement renewal in September 2017. Management anticipates that the administrative services agreement will be renewed.

Distribution Services. Prior to December 10, 2015, the Company provided distribution services to USGIF. In doing so, the Company had registered its wholly-owned subsidiary, U.S. Global Brokerage, Inc. (“USGB”), with the Financial Industry Regulatory Authority (“FINRA”), the SEC and appropriate state regulatory authorities as a limited-purpose broker-dealer for the purpose of distributing Fund shares. Effective December 10, 2015, USGB ceased to be the distributor for USGIF. The Company filed Form BDW, the Uniform Request Withdrawal From Broker-Dealer Registration, with FINRA, which was approved in February 2016. Distribution revenues and the expenses associated with certain distribution operations for USGIF are reflected as discontinued operations in the Consolidated Statements of Operations and are, therefore, excluded from continuing operations results.

Shareholder Services. Prior to December 10, 2015, in connection with obtaining and/or providing administrative services to the beneficial owners of USGIF through broker-dealers, banks, trust companies and similar institutions which provide such services, the Company received shareholder services fees at an annual rate of up to 0.20 percent of the value of shares held in accounts at the institutions, which helped to offset related platform costs. This agreement ceased on December 10, 2015. Shareholder services revenues and related expenses are reflected as discontinued operations in the Consolidated Statements of Operations and are, therefore, excluded from continuing operations results.

Investment Management Services - Canada
 
Assets Under Management (“AUM”)
 
(dollars in thousands)
 
Ticker
   
June 30, 2017
   
June 30, 2016
 
Galileo Funds
                 
Galileo High Income Plus Fund
 
N/A1 
 
$
42,916
   
$
45,141
 
Galileo Growth and Income Fund
 
N/A1 
   
3,181
     
3,266
 
Galileo Partners Fund
 
N/A1 
   
39
     
-
 
Total Galileo Funds
         
46,136
     
48,407
 
Other Advisory Clients
         
1,651
     
74,437
 
Total Canada AUM
       
$
47,787
   
$
122,844
 
 
1.
The mutual funds managed by Galileo (“Galileo Funds”) are Canadian registered mutual funds and are not available in the United States.

The Company, through its wholly-owned subsidiary, U.S. Global Investors (Canada) Limited (“USCAN”), owns 65 percent of the issued and outstanding shares of Galileo Global Equity Advisors Inc., a privately held Toronto-based asset management firm,  which represents controlling interest of Galileo. The non-controlling interest in this subsidiary is included in “non-controlling interest in subsidiaries” in the equity section of the Consolidated Balance Sheets. Frank Holmes, CEO, and Susan McGee, President, General Counsel, and Chief Compliance Officer, serve as directors of Galileo.

Galileo Equity Management Inc. was incorporated under the Business Corporations Act (Ontario) on July 16, 1999. On May 17, 2007, its name changed to Galileo Global Equity Advisors Inc. Galileo is registered as a portfolio manager, exempt market dealer, and an investment fund manager with the Ontario Securities Commission (“OSC”), the Nova Scotia Securities Commission and the Quebec Securities Commission. Additionally, the company is registered as an exempt market dealer with the New Brunswick and Newfoundland and Labrador Securities Commissions.

Corporate Investments

Investment Activities. In addition to providing management and advisory services, the Company is actively engaged in trading for its own account. See segment information in the Notes to the Consolidated Financial Statements at Note 15, Financial Information by Business Segment, of this Annual Report on Form 10-K.

Additional Segment Information

See additional financial information about business segments in Part II, Item 8, Financial Statements and Supplementary Data at Note 15, Financial Information by Business Segment, of this Annual Report on Form 10-K.

Employees

As of June 30, 2017, U.S. Global and its wholly-owned subsidiaries employed 24 full-time and 2 part-time employees. The Company considers its relationship with its employees to be good.

Competition

The mutual fund industry is highly competitive. According to the Investment Company Institute, at the end of 2016 there were approximately 9,500 domestically registered open-end investment companies and approximately 1,700 exchange-traded funds of varying sizes and investment policies, whose shares are being offered to the public in the U.S. In addition to competition from other mutual fund managers and investment advisers, the Company and the mutual fund industry are in competition with various investment alternatives offered by insurance companies, banks, securities broker-dealers, and other financial institutions. Many of these institutions are able to engage in more liberal advertising than mutual funds and ETFs and may offer accounts at competitive interest rates, which may be insured by federally chartered corporations such as the Federal Deposit Insurance Corporation.

A number of mutual fund groups are significantly larger than the funds managed by U.S. Global, offer a greater variety of investment objectives and have more experience and greater resources to promote the sale of investments therein. However, the Company believes it has the resources, products, and personnel to compete with these other mutual funds. In particular, the Company is known for its expertise in the gold mining and exploration, natural resources and emerging markets. Competition for sales of fund shares is influenced by various factors, including investment objectives and performance, advertising and sales promotional efforts, distribution channels, and the types and quality of services offered to fund shareholders.
Success in the investment advisory business is substantially dependent on each fund’s investment performance, the quality of services provided to shareholders, and the Company’s efforts to market the Funds and other clients effectively. Sales of Fund shares generate management and administrative services fees (which are based on the assets of the Funds). Costs of distribution and compliance continue to put pressure on profit margins for the mutual fund industry.
Despite the Company’s expertise in gold mining and exploration, natural resources, and emerging markets, the Company faces the same obstacle many advisers face, namely uncovering undervalued investment opportunities as the markets face further uncertainty and increased volatility. In addition, the growing number of alternative investments, especially in specialized areas, has created pressure on the profit margins and increased competition for available investment opportunities.

Supervision and Regulation

The Company and the clients the Company manages and administers operate under certain laws, including federal and state securities laws, governing their organization, registration, operation, legal, financial, and tax status. Among the potential penalties for violation of the laws and regulations applicable to the Company and its subsidiaries are fines, imprisonment, injunctions, revocation of registration, and certain additional administrative sanctions. Any determination that the Company or its management has violated applicable laws and regulations could have a material adverse effect on the business of the Company. Moreover, there is no assurance that changes to existing laws, regulations, or rulings promulgated by governmental entities having jurisdiction over the Company and its clients will not have a material adverse effect on the Company’s business. The Company has no control over regulatory rulemaking or the consequences it may have on the mutual fund and investment advisory industry.

Regulatory pronouncements and oversight have significantly increased the burden of compliance infrastructure with respect to the mutual fund industry and the capital markets. This momentum of regulations has contributed significantly to the costs of managing and administering mutual funds.

U.S. Global is registered as an investment adviser with the SEC. As a registered investment adviser, it is subject to the requirements of the Advisers Act, and the SEC’s regulations thereunder, as well as to examination by the SEC’s staff. The Advisers Act imposes substantive regulation on virtually all aspects of the Company’s business and relationships with the Company’s clients. Applicable rules relate to, among other things, fiduciary duties to clients, transactions with clients, effective compliance programs, conflicts of interest, advertising, recordkeeping, reporting, and disclosure requirements. The Funds and the ETFs for which the Company acts as the investment adviser are registered with the SEC under the Investment Company Act. The Investment Company Act imposes additional obligations, including detailed operational requirements for both funds and their advisers. Moreover, an investment adviser’s contract with a registered fund may be terminated by the fund on not more than 60 days’ notice and is subject to annual renewal by the fund’s board after an initial two-year term. Both the Advisers Act and the Investment Company Act regulate the “assignment” of advisory contracts by the investment adviser. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from fines and censures to termination of an investment adviser’s registration. The failure of the Company, or the Funds and ETFs which the Company advises, to comply with the requirements of the SEC could have a material adverse effect on the Company. The Company is also subject to federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002 (“S-Ox Act”), as well as rules adopted by the SEC.

USGB was subject to regulation by the SEC under the Exchange Act and regulation by FINRA, a self-regulatory organization composed of other registered broker-dealers. U.S. Global and USGB are required to keep and maintain certain reports and records, which must be made available to the SEC and FINRA upon request.

Galileo Global Equity Advisors Inc. (“Galileo”) is registered as a portfolio manager and investment fund manager with the Ontario Securities Commission (“OSC”). As a registered portfolio manager, the OSC imposes substantive regulation on virtually all aspects of Galileo’s business and relationships with Galileo’s clients. Applicable legislation relate to, among other things, fiduciary duties to clients, transactions with clients, effective compliance programs, conflicts of interest, advertising, recordkeeping, reporting, and disclosure requirements. The Canadian funds for which Galileo acts as the investment fund manager are registered with the OSC pursuant to National Instrument 81-101/102/106. These National Policies impose additional obligations, including detailed operational requirements for both funds and their managers. The OSC is authorized to institute proceedings and impose sanctions for violations of the rules ranging from fines and censures to termination of a portfolio manager and investment fund manager’s registration. The failure of Galileo, or the Canadian funds which Galileo advises, to comply with the requirements of the OSC could have a material adverse effect on Galileo.

U.S. Global and Galileo manage clients’ portfolios on a discretionary basis, with the authority to enter into security transactions, select broker-dealers to execute trades, and negotiate brokerage commissions. The Company may receive soft dollar credits from certain broker-dealers that are used to pay for research and related services or products, which therefore has the effect of reducing certain operating expenses. These soft dollar arrangements are intended to be within the safe harbor provisions of the Securities Exchange Act of 1934 and National Instrument 23-102, as applicable. If the ability to use soft dollar arrangements were reduced or eliminated as a result of statutory amendments, new regulations or change in business practices, the Company’s operating expenses would increase.

Relationships with Clients

The businesses of the Company are to a very significant degree dependent on their associations and contractual relationships with USGIF. In the event the advisory or administrative agreements with USGIF are canceled or not renewed pursuant to the terms thereof, the Company would be substantially adversely affected. U.S. Global considers its relationships with the Funds to be good, and management has no reason to believe that the management and service contracts will not be renewed in the future; however, there is no assurance that USGIF will choose to continue its relationship with the Company.
In addition, the Company is also dependent on its relationships with its offshore and exchange traded fund clients. The offshore clients have provided notice that they are liquidating. The liquidations are expected to be completed in September 2017. Even though the Company views its relationship with its exchange traded fund clients as stable, the Company could be adversely affected if that relationship ended.
Galileo is also dependent on its relationships with its clients. Even though Galileo views its relationship with its clients as stable, the Company could be adversely affected if these relationships ended.

Available Information

Available Information. The Company’s Internet website address is www.usfunds.com. Information contained on the Company’s website is not part of this annual report on Form 10-K. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with (or furnished to) the SEC are available through a link on the Company’s Internet website, free of charge, soon after such material is filed or furnished. (The link to the Company’s SEC filings can be found at www.usfunds.com by clicking “About Us,” followed by “Investor Relations.”) The Company routinely posts important information on its website.

The Company also posts its Corporate Governance Guidelines, Code of Business Conduct, Code of Ethics for Principal Executive and Senior Financial Officers and the charters of the audit and compensation committees of its Board of Directors on the Company’s website in the “Policies and Procedures” section. The Company’s SEC filings and governance documents are available in print to any stockholder that makes a written request to: Investor Relations, U.S. Global Investors, Inc., 7900 Callaghan Road, San Antonio, Texas 78229.

The Company files reports electronically with the SEC via the SEC’s Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”), which may be accessed through the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, at www.sec.gov.


The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Investors and others should note that we announce material financial information to our investors using the website, SEC filings, press releases, public conference calls and webcasts. We also use social media to communicate with our customers and the public about our company. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on social media channels listed below. This list may be updated from time to time.

https://www.facebook.com/USFunds
https://twitter.com/USFunds
https://twitter.com/USGlobalETFs
https://www.linkedin.com/company/u-s-global-investors
https://www.instagram.com/usglobal
https://pinterest.com/usfunds
https://www.youtube.com/c/usglobalinvestorssanantonio
https://www.youtube.com/channel/UCDkX1zvbWPyWc99esHOhwRQ

Information contained on our website or on social media channels is not deemed part of this report.
Item 1A. Risk Factors

The Company faces a variety of significant and diverse risks, many of which are inherent in the business. Described below are certain risks that could materially affect the Company. Other risks and uncertainties that the Company does not presently consider to be material, or of which the Company is not presently aware, may become important factors that affect it in the future. The occurrence of any of the risks discussed below could materially and adversely affect the business, prospects, financial condition, results of operations, or cash flow.

The investment management business is intensely competitive.

Competition in the investment management business is based on a variety of factors, including:
·
Investment performance;
·
Investor perception of an investment team’s drive, focus, and alignment of interest with them;
·
Quality of service provided to, and duration of relationships with, clients and shareholders;
·
Business reputation; and
·
Level of fees charged for services.

The Company competes with a large number of investment management firms, commercial banks, broker-dealers, insurance companies, and other financial institutions. Competitive risk is heightened by the fact that some competitors may invest according to different investment styles or in alternative asset classes which the markets may perceive as more attractive than the Company’s investment approach. If the Company is unable to compete effectively, revenues and earnings may be reduced and the business could be materially affected.

Poor investment performance could lead to a decline in revenues.

Success in the investment management industry is largely dependent on investment performance relative to market conditions and the performance of competing products. Good relative performance generally attracts additional assets under management, resulting in additional revenues. Conversely, poor performance generally results in decreased sales and increased redemptions with a corresponding decrease in revenues. Therefore, poor investment performance relative to the portfolio benchmarks and to competitors could impair the Company’s revenues and growth. The equity funds within USGIF have a performance fee whereby the base advisory fee is adjusted upwards or downwards by 0.25 percent if 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.

The Company’s clients can terminate their agreements with the Company on short notice, which may lead to unexpected declines in revenue and profitability.

The Company’s investment advisory agreements are generally terminable on short notice and subject to annual renewal. If the Company’s investment advisory agreements are terminated, which may occur in a short time frame, the Company may experience a decline in revenues and profitability.

Difficult market conditions can adversely affect the Company by reducing the market value of the assets we manage or causing shareholders to make significant redemptions.

Changes in economic or market conditions may adversely affect the profitability, performance of and demand for the Company’s investment products and services. Under the Company’s advisory fee arrangements, the fees received are primarily based on the market value of assets under management. Accordingly, a decline in the price of securities held in the Funds would be expected to cause revenues and net income to decline, which would result in lower advisory fees, or cause increased shareholder redemptions in favor of investments they perceive as offering greater opportunity or lower risk, which redemptions would also result in lower advisory fees. The ability of the Company to compete and grow is dependent on the relative attractiveness of the types of investment products the Company offers and its investment performance and strategies under prevailing market conditions.

Market-specific risks may negatively impact the Company’s earnings.

The Company manages certain funds in the emerging market and natural resources sectors, which are highly cyclical. The investments in the Funds are subject to significant loss due to political, economic and diplomatic developments, currency fluctuations, social instability, and changes in governmental policies. Foreign trading markets, particularly in some emerging market countries, are often smaller, less liquid, less regulated and significantly more volatile than the U.S. and other established markets.

The market price and trading volume of the Company’s class A common stock may be volatile, which could result in rapid and substantial losses for the Company’s stockholders.

The market price of the Company’s class A common stock may be volatile and the trading volume may fluctuate, causing significant price variations to occur. If the market price of the Company’s class A common stock declines significantly, stockholders may be unable to sell their shares at or above their purchase price. The Company cannot assure that the market price of its class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of the Company’s class A common stock, or result in fluctuations in price or trading volume, include:
·
Decreases in assets under management;
·
Variations in quarterly and annual operating results;
·
Publication of research reports about the Company or the investment management industry;
·
Departures of key personnel;
·
Adverse market reactions to any indebtedness the Company may incur, acquisitions or disposals the Company may make, or securities the Company may issue in the future;
·
Changes in market valuations of similar companies;
·
Changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting the business, or enforcement of these laws and regulations, or announcements relating to these matters;
·
Adverse publicity about the asset management industry, generally, or individual scandals, specifically; and
·
General market and economic conditions.

The market price of the Company’s class A common stock could decline due to the large number of shares of the Company’s class C common stock eligible for future sale upon conversion to class A shares.

The market price of the Company’s class A common stock could decline as a result of sales of a large number of shares of class A common stock eligible for future sale upon the conversion of class C shares, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for the Company to raise additional capital by selling equity securities in the future, at a time and price the Company deems appropriate.

Failure to comply with government regulations could result in fines, which could cause the Company’s earnings and stock price to decline.

The Company and its subsidiaries are subject to a variety of federal securities laws and agencies, including, but not limited to, the Advisers Act, the Investment Company Act, the S-Ox Act, the Gramm-Leach-Bliley Act of 1999, the Bank Secrecy Act of 1970, as amended, the USA PATRIOT Act of 2001, the SEC, FINRA, and NASDAQ. Moreover, financial reporting requirements and the processes, controls, and procedures that have been put in place to address them, are comprehensive and complex. While management has focused attention and resources on compliance policies and procedures, non-compliance with applicable laws or regulations could result in fines, sanctions or censures which could affect the Company’s reputation, and thus its revenues and earnings.

Furthermore, Galileo is subject to the rules and regulations of the OSC, and failure of the company or the funds it advises to comply with the requirements of the OSC could have a material adverse effect on the company.

Our business is subject to substantial risk from litigation, regulatory investigations and potential securities laws liability.

Many aspects of U.S. Global’s business involve substantial risks of litigation, regulatory investigations and/or arbitration. The Company is exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC and other regulatory bodies. U.S. Global, its subsidiaries, and/or officers could be named as parties in legal actions, regulatory investigations and proceedings. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against the Company could result in substantial costs or reputational harm to the Company, and have a material adverse effect on the Company’s business, financial condition or results of operations, which, in turn, may negatively affect the market price of the Company’s common stock and U.S. Global’s ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management’s attention from operations.
Galileo is also subject to risks of litigation, regulatory investigations and/or arbitration. Galileo is exposed to liability under provincial laws and court decisions, as well as rules and regulations promulgated by the OSC.

Higher insurance premiums and related insurance coverage risks could increase costs and reduce profitability.

While U.S. Global carries insurance in amounts and under terms that it believes are appropriate, the Company cannot assure that its insurance will cover most liabilities and losses to which it may be exposed, or that our insurance policies will continue to be available at acceptable terms and fees. U.S. Global is subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. There has been increased incidence of litigation and regulatory investigations in the financial services industry in recent years, including customer claims and class action suits alleging substantial monetary damages. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As U.S. Global’s insurance policies come up for renewal, the Company may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase the Company’s expenses and reduce net income.

Increased regulatory and legislative actions and reforms could increase costs and negatively impact the Company’s profitability and future financial results.

During the past two decades, federal securities laws have been substantially augmented and made significantly more complex by the S-Ox Act and the USA PATRIOT Act of 2001. With new laws and changes in interpretations and enforcement of existing requirements, the associated time the Company must dedicate to, and related costs the Company must incur in, meeting the regulatory complexities of the business have increased. In order to comply with these new requirements, the Company has had to expend additional time and resources, including substantial efforts to conduct evaluations required to ensure compliance with the S-Ox Act.

The Company is subject to financial services laws, regulations, corporate governance requirements, administrative actions and policies. During 2009 and 2010, as many emergency government programs slowed or wound down, global regulatory and legislative focus generally moved to a second phase of broader reform and a restructuring of financial institution regulation. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which fundamentally changed the U.S. financial regulatory landscape. The full scope of the regulatory changes imposed by the Dodd-Frank Act will only be determined once extensive rules and regulations have been proposed and become effective, which may result in significant changes in the manner in which the Company’s operations are regulated.

In April 2016, the Department of Labor issued a new fiduciary rule that will subject financial professionals who provide investment advice to certain U.S. retirement clients to a new fiduciary duty intended to address conflicts of interests. The rule could significantly impact the ability of financial professionals to provide investment advice and recommendations for retirement accounts about funds for which they receive a fee from the fund or its affiliates. While parts of the rule are currently in effect, the implementation of certain parts of the rule have been delayed. We continue to review and analyze the potential impact to our business and our clients, and compliance with the final rule may negatively impact our business.

Further, adverse results of regulatory investigations of mutual fund, investment advisory, and financial services firms could tarnish the reputation of the financial services industry generally, and mutual funds and investment advisers more specifically, causing investors to avoid further fund investments or redeem their balances. Redemptions would decrease the Company’s assets under management, which would reduce its advisory revenues and net income.

The Company intends to pay regular dividends to its stockholders, but the ability to do so is subject to the discretion of the Board of Directors.

The Company intends to pay cash dividends on a monthly basis, but the Board of Directors, at its discretion, may decrease the level or frequency of dividends or discontinue payment of dividends entirely based on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions.

One person beneficially owns substantially all of our voting stock and controls the outcome of all matters requiring a vote of stockholders, which may influence the value of our publicly traded non-voting stock.

Frank Holmes, CEO, is the beneficial owner of over 99 percent of our class C voting convertible common stock and controls the outcome of all issues requiring a vote of stockholders. All of our publicly traded stock is nonvoting stock. Consequently, except to the extent provided by law, stockholders other than Frank Holmes have no vote with respect to the election of directors or any other matter requiring a vote of stockholders. This lack of voting rights may adversely affect the market value of the publicly traded class A nonvoting common stock.

The loss of key personnel could negatively affect the Company’s financial performance.

The success of the Company depends on key personnel, including the portfolio managers, analysts, and executive officers. Competition for qualified, motivated, and skilled personnel in the asset management industry remains significant. As the business grows, the Company will likely need to increase the number of employees. Moreover, in order to retain certain key personnel, the Company may be required to increase compensation to such individuals, resulting in additional expense. The loss of key personnel or the Company’s failure to attract replacement personnel could negatively affect its financial performance.

The Company could be subject to losses if it fails to properly safeguard sensitive and confidential information.

As part of the Company’s normal operations, it maintains and transmits certain confidential information about the Company and its clients as well as proprietary information relating to its business operations. These systems could be victimized by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information. Such a breach could subject the Company to liability for a failure to safeguard client data, result in the termination of relationships with our existing customers, require significant capital and operating expenditures to investigate and remediate the breach and subject the Company to regulatory action.

We rely upon certain critical information systems for the operation of our business, and the failure of any critical information system, including a cyber-security breach, may result in harm to our business.

We are heavily dependent on technology infrastructure and rely upon certain critical information systems for the effective operation of our business. These information systems include data network and telecommunications, internet access and our websites, and various computer hardware equipment and software applications. These information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks and other events to the extent that these information systems are under our control. We have implemented measures, such as virus protection software, intrusion detection systems and emergency recovery processes to address the outlined risks. However, security measures for information systems cannot be guaranteed to be failsafe. Any compromise of our data security or our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business and subject us to additional costs and liabilities, which could adversely affect our results of operations. Finally, federal legislation relating to cyber-security threats could impose additional requirements on our operations.

Adverse changes in foreign currencies could negatively impact financial results.

Our subsidiary Galileo conducts its business in Canada. We translate Galileo’s foreign currency financial statements into U.S. dollars in the financial statement consolidation process. Adverse changes in foreign currency exchange rates would lower the carrying value of Galileo’s assets and reduce its results in the consolidated U.S. financial statements. We also have certain corporate investments held in foreign currencies. Adverse changes in foreign currency exchange rates would also lower the value of those 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 we receive.

Acquisitions involve inherent risks that could compromise the success of the combined business and dilute the holdings of current stockholders.

As part of our business strategy, we may pursue corporate development transactions, including the acquisition of asset management firms. These transactions involve assessing the value, strengths, weaknesses, liabilities and potential profitability of the transactions, and if our assessment is incorrect, the success of the combined business could be jeopardized. In addition, such transactions are subject to acquisition costs and expenses, are likely to divert the attention of management’s time, and can dilute the stockholders of the combined company if the acquisition is made for stock of the combined company.

Item 1B. Unresolved Staff Comments

None


Item 2. Properties

The Company presently owns and occupies an office building as its headquarters in San Antonio, Texas. The office building is approximately 46,000 square feet on approximately 2.5 acres of land. Galileo leases office space in Toronto, Canada.

Item 3. Legal Proceedings

There are no material legal proceedings in which the Company is involved.

Item 4. Mine Safety Disclosures

Not applicable.
 
Part II of Annual Report on Form 10-K

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

U.S. Global Investors, Inc. (“U.S. Global” or the “Company”) has three classes of common equity: class A, class B, and class C common stock, par value $0.025 per share.

The Company’s class A common stock is traded over-the-counter and is quoted daily under NASDAQ’s Capital Markets. Trades are reported under the symbol “GROW.”

There is no established public trading market for the Company’s class B and class C common stock.

The Company’s class A and class B common stock have no voting privileges.

The following table sets forth the range of high and low sales prices of “GROW” from NASDAQ for the fiscal years ended June 30, 2017, and June 30, 2016. The quotations represent prices between dealers and do not include any retail markup, markdown, or commission.
 
 
 
Sales Price
 
 
 
2017
   
2016
 
 
 
High ($)
   
Low ($)
   
High ($)
   
Low ($)
 
First quarter (9/30)
   
2.33
     
1.70
     
2.92
     
1.67
 
Second quarter (12/31)
   
1.95
     
1.25
     
1.78
     
1.00
 
Third quarter (3/31)
   
2.05
     
1.39
     
1.90
     
0.96
 
Fourth quarter (6/30)
   
1.59
     
1.25
     
2.07
     
1.48
 

 
Holders

On August 30, 2017, there were approximately 148 holders of record of class A common stock, no holders of record of class B common stock, and 28 holders of record of class C common stock.

Dividends

The Company paid $0.005 per share per month in fiscal year 2015 and through September 2015 and $0.0025 per share per month from October 2015 through June 2017. A monthly dividend of $0.0025 has been authorized from July 2017 through September 2017, and will be reviewed by the Board quarterly. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions.

Securities authorized for issuance under equity compensation plans

Information relating to equity compensation plans under which our stock is authorized for issuance is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”

Purchases of equity securities by the issuer

Effective January 1, 2013, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $2.75 million of its outstanding class A common shares as market and business conditions warrant on the open market in compliance with Rule 10b-18 of the Securities Exchange Act of 1934. On December 12, 2013, December 10, 2014, December 9, 2015, and December 6, 2016, the Board of Directors renewed the repurchase program for calendar years 2014, 2015, 2016, and 2017, respectively. The total amount of shares that may be repurchased in 2017 under the renewed program is $2.75 million.
For the quarter ended June 30, 2017, the Company purchased a total of 12,205 class A shares using cash of $17,000. The Company may repurchase class A stock from employees; however, none were repurchased from employees during the quarter ended June 30, 2017. The Company did not repurchase any classes B or C common stock during the quarter ended June 30, 2017.
 
(dollars in thousands, except price data)
                             
Period
 
Total Number
of Shares Purchased 1
   
Total Amount
Purchased
   
Average
Price Paid
Per Share 2
   
Total Number of
Shares Purchased
as Part of Publicly Announced Plan 3
   
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plan
 
04-01-17 to 04-30-17
   
6,003
   
$
8
   
$
1.39
     
6,003
   
$
2,725
 
05-01-17 to 05-31-17
   
4,269
     
6
     
1.32
     
4,269
     
2,719
 
06-01-17 to 06-30-17
   
1,933
     
3
     
1.48
     
1,933
     
2,716
 
Total
   
12,205
   
$
17
   
$
1.38
     
12,205
         
 
1.
The Board of Directors of the Company approved on December 7, 2012, and renewed on December 12, 2013, December 10, 2014, December 9, 2015, and December 6, 2016, a repurchase of up to $2.75 million in each of calendar years 2013, 2014, 2015, 2016, and 2017, respectively, of its outstanding class A common stock from time to time on the open market in accordance with all applicable rules and regulations.
2.
The average price paid per share of stock repurchased under the stock repurchase program includes the commissions paid to brokers.
3.
The repurchase plan was approved on December 7, 2012, renewed on December 12, 2013, December 10, 2014, December 9, 2015, December 6, 2016, and will continue through calendar year 2017. The total dollar amount of shares that may be repurchased in 2017 under the renewed program is $2.75 million.

Company Performance Presentation

The following graph compares the cumulative total return for the Company’s class A common stock (GROW) to the cumulative total return for the S&P 500 Index, the Russell 2000 Index, and the NYSE Arca Gold BUGS Index for the Company’s last five fiscal years. The graph assumes an investment of $10,000 in the class A common stock and in each index as of June 30, 2012, and that all dividends are reinvested. The historical information included in this graph is not necessarily indicative of future performance and the Company does not make or endorse any predictions as to future stock performance.
 
 
   
Fiscal Year-End Date
 
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
 
U.S. Global Investors, Inc., class A (GROW)
 
$
10,000
   
$
5,018
   
$
8,539
   
$
6,871
   
$
4,299
   
$
3,916
 
S&P 500 Index
 
$
10,000
   
$
12,060
   
$
15,027
   
$
16,143
   
$
16,787
   
$
19,792
 
Russell 2000 Index
 
$
10,000
   
$
12,421
   
$
15,357
   
$
16,353
   
$
15,252
   
$
19,005
 
NYSE Arca Gold BUGS Index
 
$
10,000
   
$
5,425
   
$
5,812
   
$
3,665
   
$
6,082
   
$
4,617
 
Item 6. Selected Financial Data

The following selected financial data is qualified by reference to, and should be read in conjunction with, the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K. The selected financial data as of June 30, 2013, through June 30, 2017, and the years then ended, is derived from the Company’s audited Consolidated Financial Statements.

The Company’s Board of Directors formally agreed on August 23, 2013, to exit the transfer agency business so that the Company could focus more on its core strength of investment management. The Company’s wholly-owned subsidiary United Shareholder Services, Inc. (“USSI”) served as transfer agent until conversion to the new transfer agent on December 9, 2013. The transfer agency results, together with expenses associated with discontinuing transfer agency operations, are included in discontinued operations in the information below.

In December 2015, USGIF elected a new slate of trustees to the Board of Trustees of the Funds. The Company proposed the election of new trustees with the intention of streamlining the Company’s responsibilities so it could better focus on strategic activities. The new Board of Trustees of USGIF adopted several new agreements. As anticipated, effective December 10, 2015, the Company, through its wholly-owned subsidiary, U.S. Global Brokerage, Inc., ceased to be the distributor for USGIF and no longer received distribution fees and shareholder services fees from USGIF. Due to this transition, the Company is no longer responsible for paying certain distribution and shareholder servicing related expenses and is reimbursed for certain distribution expenses from the new distributor for USGIF. The distribution and shareholder services revenues and the expenses associated with certain distribution operations for USGIF are reflected as discontinued operations in the Consolidated Statements of Operations and in the information below and are, therefore, excluded from continuing operations results.
 
(dollars in thousands, except operating data and per share data)
 
Year Ended June 30,
 
Selected Financial Data
 
2017
   
2016
   
2015
   
2014
   
2013
 
Operating revenues
 
$
6,763
   
$
5,505
   
$
7,333
   
$
8,534
   
$
13,118
 
Operating expenses
   
7,636
     
9,681
     
10,840
     
11,811
     
13,087
 
Operating income (loss)
   
(873
)
   
(4,176
)
   
(3,507
)
   
(3,277
)
   
31
 
Other income
   
346
     
485
     
434
     
2,165
     
262
 
Income (loss) from continuing operations before income taxes
   
(527
)
   
(3,691
)
   
(3,073
)
   
(1,112
)
   
293
 
Income tax expense (benefit)
   
17
     
(6
)
   
822
     
(475
)
   
176
 
Income (loss) from continuing operations
   
(544
)
   
(3,685
)
   
(3,895
)
   
(637
)
   
117
 
Loss from discontinued operations
   
-
     
(18
)
   
(81
)
   
(326
)
   
(311
)
Net loss
   
(544
)
   
(3,703
)
   
(3,976
)
   
(963
)
   
(194
)
Less net income (loss) attributable to non-controlling interest
   
(31
)
   
(28
)
   
54
     
7
     
-
 
Net loss attributable to U.S. Global Investors, Inc.
 
$
(513
)
 
$
(3,675
)
 
$
(4,030
)
 
$
(970
)
 
$
(194
)
 
                                       
Earnings Per Share Attributable to U.S. Global Investors, Inc. - Basic
                                 
Income (loss) from continuing operations
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.25
)
 
$
(0.04
)
 
$
0.01
 
Loss from discontinued operations
   
-
     
-
     
(0.01
)
   
(0.02
)
   
(0.02
)
Net loss attributable to U.S. Global Investors, Inc.
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.26
)
 
$
(0.06
)
 
$
(0.01
)
 
                                       
Dividends per common share
 
$
0.03
   
$
0.0375
   
$
0.06
   
$
0.06
   
$
0.17
 
 
                                       
Balance Sheet
                                       
Working capital
 
$
16,299
   
$
16,874
   
$
19,767
   
$
24,673
   
$
22,958
 
Total assets
   
25,520
     
26,346
     
30,770
     
37,846
     
38,683
 
Total U.S. Global Investors, Inc. Shareholders’ Equity
   
23,870
     
24,528
     
28,569
     
35,070
     
36,849
 
 
                                       
Cash Flow
                                       
Net cash provided by (used in) operating activities
 
$
690
   
$
3,033
   
$
(672
)
 
$
(15,189
)
 
$
461
 
Net cash provided by (used in) investing activities
   
(158
)
   
(646
)
   
(390
)
   
4,050
     
(368
)
Net cash used in financing activities
   
(564
)
   
(1,828
)
   
(1,122
)
   
(1,061
)
   
(2,621
)
 
                                       
Operating Data (in millions)
                                       
Average assets under management
 
$
843
   
$
744
   
$
931
   
$
1,078
   
$
1,552
 
 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion reviews and analyzes the consolidated results of operations of U.S. Global Investors, Inc. and its subsidiaries (collectively, “U.S. Global” or the “Company”) for the past three fiscal years and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements and Selected Financial Data of this Annual Report on Form 10-K.

Recent Trends in Financial Markets

The Company’s operating revenues are highly correlated to the level of assets under management (“AUM”) and fees associated with various investment products. While AUM is directly impacted by changes in the financial markets, it is also impacted by cash inflows or outflows due to shareholder activity. Performance fees on certain equity fund products may also impact revenues, either positively or negatively. Various products may have different fees, so changes in our product mix may also affect revenues. For example, international equity products will generally have a higher fee than fixed income products, so changes in assets in those products will have a larger impact on revenues.

While products are offered for a wide variety of markets, the Company has traditionally focused on gold mining and exploration, natural resources, and emerging markets. These markets are volatile and cyclical.

The rally in gold that began at the start of 2016 and continued into early fall 2016 led to an increase in assets in our gold funds. However, gold then began to stall as investors awaited the results of the U.S. presidential election and anticipated a December rate hike. Immediately following Donald Trump’s win, equities took off and the U.S. dollar surged, causing gold to fall out of favor. In addition, in the quarter ended June 30, 2017, the largest junior gold miner ETF reorganized its index methodology, triggering a wave of price weakness throughout the junior gold stocks universe. Junior miners are generally companies in the exploration and development stage. The ETF was getting close to owning 20 percent of the outstanding shares of many of the junior gold mining companies in its index, so its managers chose to downsize their weights in existing holdings and reinvest the proceeds in more mid-tiered gold producers. As our gold funds had investments in most of these same junior gold stocks, this event also had a negative impact on our gold funds towards the end of fiscal year 2017.

The Company’s emerging markets products experienced favorable conditions. For example, the China region has had strong expansion and gross domestic product (GDP) growth. In addition, key markets in emerging Europe including Poland, the Czech Republic, Romania and Hungary, are currently among the fastest growing in the world.

In addition to its gold, natural resources and emerging markets funds, the Company has domestic equity and fixed income funds in the U.S. and, through a subsidiary, Canada. While these products do not drive the Company’s profitability as much as the more specialized products, they provide an opportunity to offer shareholders diversification and less volatility than the niche markets.

A highly contentious U.S. election cycle concluded with the election of Donald Trump in November 2016. While Congress has had little success so far in delivering on President Trump’s political agenda, consumer spending appears to be robust, and domestic financial markets have continued their bull run.

Mutual funds in general continued to see outflows compared to other investment alternatives, including ETFs. In April 2015, the Company launched its first ETF product, the U.S. Global Jets ETF (ticker JETS), which concentrates on the U.S. and international airline industry. The industry experienced a positive market in fiscal year 2017, driven by airlines reporting record profits due to post-financial crisis capacity discipline, depressed labor costs and cheap oil. This led to growth in our Jets ETF assets in fiscal year 2017.

The Company launched its second ETF offering in June 2017, the U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU). This will enable the Company to expand its expertise in precious metals in a different product structure.

To manage expenses, the Company maintains a flexible structure for one of its largest costs, compensation expense, by setting relatively low base salaries with bonuses that are tied to fund performance. Thus, our expense model somewhat expands and contracts with asset swings and performance.

Business Segments

The Company, with principal operations located in San Antonio, Texas, manages three business segments:
1.
Investment management services, through which the Company offers, to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”), U.S. Global ETFs, and offshore clients, a range of investment management products and services to meet the needs of individual and institutional investors;

2.
Investment management services - Canada, through which the Company owns a 65 percent controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm which offers investment management products and services in Canada; and

3.
Corporate investments, through which the Company invests for its own account in an effort to add growth and value to its cash position. Although the Company generates the majority of its revenues from its investment advisory segments, the Company holds a significant amount of its total assets in investments.
 
Assets Under Management (“AUM”)
 
(dollars in thousands)
 
June 30, 2017
   
June 30, 2016
 
Investment Management Services
           
USGIF
 
$
579,416
   
$
703,020
 
U.S. Global ETFs
   
117,305
     
43,430
 
Offshore Advisory Clients
   
15,213
     
13,777
 
Total AUM
   
711,934
     
760,227
 
 
               
Investment Management Services - Canada
               
Galileo Funds
   
46,136
     
48,407
 
Other Advisory Clients
   
1,651
     
74,437
 
Total AUM
   
47,787
     
122,844
 
Total AUM
 
$
759,721
   
$
883,071
 
 
On June 30, 2017, total AUM as of period end was $760 million versus $883 million on June 30, 2016, a decrease of 14.0 percent. The decrease was primarily due to market depreciation and shareholder redemptions in USGIF, the Galileo Funds and other Canadian advisory clients, somewhat offset by market appreciation of the offshore funds and growth of the ETF clients.

During fiscal year 2017, average AUM was $843 million versus $744 million in fiscal year 2016, an increase of 13.3 percent. The increase was primarily due to market appreciation and shareholder purchases in the gold funds starting in fiscal year 2016 and continuing into the beginning of fiscal year 2017, although that trend started to reverse later in fiscal year 2017 due to sector market conditions.

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

Investment Management Services

In fiscal year 2017, the Company generated a majority of all of its operating revenues from managing and servicing the Funds. The Company recorded advisory and administrative services fees from USGIF totaling approximately $5.2 million and $4.0 million in fiscal 2017 and fiscal 2016, respectively. 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 Funds’ asset levels, 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, and the USGIF funds do not currently charge a redemption fee.

The Company also provides advisory services for two ETFs and receives monthly advisory fees based on the net asset values. The Company recorded advisory fees from the ETF clients totaling $357,000 and $296,000 in fiscal 2017 and fiscal 2016, respectively. Information on the ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. The ETF 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 provides advisory services for two offshore clients and receives monthly advisory fees based on the net asset values of the clients and performance fees, if any, based on the overall increase in net asset values. The Company recorded advisory fees from the offshore clients of $135,000 and $91,000 in fiscal years 2017 and 2016, respectively. No performance fees from the offshore clients were recorded in fiscal years 2017 and 2016. Frank Holmes, CEO, serves as a director of the two offshore clients. The offshore clients have provided notice that they are liquidating. The liquidations are expected to be completed in September 2017.

The following tables summarize the changes in assets under management for USGIF for fiscal years 2017, 2016, and 2015:
 
 
 
2017
 
(dollars in thousands)
 
Equity
   
Fixed Income
   
Total
 
Beginning Balance
 
$
525,778
   
$
177,242
   
$
703,020
 
Market depreciation
   
(32,633
)
   
(594
)
   
(33,227
)
Dividends and distributions
   
(7,722
)
   
(1,577
)
   
(9,299
)
Net shareholder redemptions
   
(42,507
)
   
(38,571
)
   
(81,078
)
Ending Balance
 
$
442,916
   
$
136,500
   
$
579,416
 
Average investment management fee
   
0.97
%
   
0.01
%
   
0.74
%
Average net assets
 
$
504,524
   
$
158,723
   
$
663,247
 

 
 
2016
 
(dollars in thousands)
 
Equity
   
Fixed Income
   
Total
 
Beginning Balance
 
$
442,243
   
$
148,583
   
$
590,826
 
Market appreciation
   
104,113
     
2,877
     
106,990
 
Dividends and distributions
   
(14,068
)
   
(1,625
)
   
(15,693
)
Net shareholder purchases (redemptions)
   
(6,510
)
   
27,407
     
20,897
 
Ending Balance
 
$
525,778
   
$
177,242
   
$
703,020
 
Average investment management fee
   
0.93
%
   
0.00
%
   
0.66
%
Average net assets
 
$
403,424
   
$
163,718
   
$
567,142
 

 
 
2015
 
(dollars in thousands)
 
Equity
   
Fixed Income
   
Total
 
Beginning Balance
 
$
815,368
   
$
130,560
   
$
945,928
 
Market appreciation (depreciation)
   
(256,504
)
   
761
     
(255,743
)
Dividends and distributions
   
(10,590
)
   
(1,666
)
   
(12,256
)
Net shareholder purchases (redemptions)
   
(106,031
)
   
18,928
     
(87,103
)
Ending Balance
 
$
442,243
   
$
148,583
   
$
590,826
 
Average investment management fee
   
0.95
%
   
0.00
%
   
0.76
%
Average net assets
 
$
581,188
   
$
146,027
   
$
727,215
 
 
As shown above, average assets under management increased in fiscal year 2017 compared to fiscal year 2016, while period-end assets decreased. The increase in average assets under management in fiscal year 2017 was primarily due to market appreciation and shareholder purchases in the gold funds starting in fiscal year 2016 and continuing into the beginning of fiscal year 2017. However, assets under management as of the end of fiscal year 2017 decreased over the prior year, primarily driven by market depreciation in the gold funds in the latter part of the year and shareholder redemptions in the gold, natural resources and fixed income funds.

Average assets under management decreased in fiscal year 2016 compared to fiscal year 2015, while period-end assets increased. The decrease in average assets under management in fiscal year 2016 was driven by market depreciation and redemptions, primarily in the natural resources funds, somewhat offset by shareholder purchases in the fixed income funds. However, assets under management as of the end of fiscal year 2016 increased over the prior year, primarily driven by market appreciation in the gold funds and shareholder purchases in the fixed income funds.

Both average and period-end assets under management decreased in fiscal year 2015 compared to fiscal year 2014. The decrease in assets under management in fiscal year 2015 was driven by market depreciation and redemptions, primarily in the natural resources funds, and redemptions in the international equity funds.

A significant portion of the dividends and distributions shown above are reinvested and included in net shareholder purchases (redemptions).

The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 74 basis points in fiscal year 2017, 66 basis points in fiscal year 2016, and 76 basis points in fiscal year 2015. The average investment management fee for equity funds in fiscal year 2017, 2016, and 2015 was 97, 93 and 95 basis points, respectively. The average investment management fee for the fixed income funds was nil or close to nil for fiscal years 2017, 2016, and 2015. This is due to voluntary fee waivers on these funds as discussed in Note 4 Investment Management and Other Fees in the Consolidated Financial Statements of this Annual Report on Form 10-K.

Investment Management Services – Canada

The Company, through its wholly-owned subsidiary, U.S. Global Investors (Canada) Limited (“USCAN”), owns 65 percent of the issued and outstanding shares of Galileo, a privately held Toronto-based asset management firm, which represented controlling interest of Galileo. The non-controlling interest in this subsidiary is included in “non-controlling interest in subsidiary” in the equity section of the Consolidated Balance Sheets. Frank Holmes, CEO, and Susan McGee, President, General Counsel, and Chief Compliance Officer, serve as directors of Galileo.

Corporate Investments

Management believes it can more effectively manage the Company’s cash position by maintaining certain types of investments utilized in cash management and continues to believe that such activities are in the best interest of the Company.

The following summarizes the market value, cost, and unrealized gain or loss on investments recorded at fair value as of June 30, 2017, and June 30, 2016.
 
Securities
 
Market Value
   
Cost
   
Unrealized Gain (Loss)
   
Unrealized gains
on available-for-
sale securities,
net of tax
 
(dollars in thousands)
                       
Trading¹
 
$
9,720
   
$
10,648
   
$
(928
)
   
N/A
 
Available-for-sale²
   
3,401
     
2,940
     
461
   
$
461
 
Total at June 30, 2017
 
$
13,121
   
$
13,588
   
$
(467
)
       
                                 
Trading¹
 
$
10,104
   
$
11,048
   
$
(944
)
   
N/A
 
Available-for-sale²
   
3,481
     
3,436
     
45
   
$
45
 
Total at June 30, 2016
 
$
13,585
   
$
14,484
   
$
(899
)
       
 
1.
Unrealized and realized gains and losses on trading securities are included in earnings in the Consolidated Statements of Operations.
2.
Unrealized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income (loss) as a separate component of shareholders’ equity until realized.

In addition, as of June 30, 2017, and 2016, the Company owned other investments of approximately $2.1 million and $1.9 million, respectively, accounted for under the cost method of accounting. The Company also had invested in notes receivable of approximately $2.2 million and $2.2 million at June 30, 2017, and 2016, respectively.

As of June 30, 2017, and 2016, the Company held approximately $4.1 million and $4.0 million, respectively, in investments other than the clients the Company advises. Investments in securities classified as trading are reflected as current assets on the Consolidated Balance Sheets at their fair market value. Unrealized gains and losses on trading securities are included in earnings in the Consolidated Statements of Operations. Investments in securities classified as available for sale, which may not be readily marketable, are reflected as non-current assets on the Consolidated Balance Sheets at their fair value. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income (loss) as a separate component of shareholders’ equity until realized.

Investment income (loss) from the Company’s investments includes:
·
realized gains and losses on sales of securities;
·
unrealized gains and losses on trading securities;
·
realized foreign currency gains and losses;
·
other-than-temporary impairments on available-for-sale securities;
·
other-than-temporary impairments on held-at-cost securities; and
·
dividend and interest income.

Investment income can be volatile and may vary depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. A significant portion of the unrealized gains and losses is concentrated in a small number of issuers. For fiscal years 2017, 2016, and 2015, the Company had total investment income of $346,000; $485,000; and $434,000, respectively. Due to market volatility, the Company expects that gains or losses will continue to fluctuate in the future.

Consolidated Results of Operations

The following is a discussion of the consolidated results of operations of the Company and a detailed discussion of the Company’s revenues and expenses.
 
 
 
Year Ended June 30,
 
(dollars in thousands, except per share data)
 
2017
   
2016
   
2015
 
Net Loss
                 
Loss from continuing operations
 
$
(544
)
 
$
(3,685
)
 
$
(3,895
)
Less:  Income (loss) attributable to non-controlling interest in subsidiary
   
(31
)
   
(28
)
   
54
 
Loss from continuing operations attributable to U.S. Global Investors, Inc.
   
(513
)
   
(3,657
)
   
(3,949
)
Loss from discontinued operations attributable to U.S. Global Investors, Inc.
   
-
     
(18
)
   
(81
)
Net loss attributable to U.S. Global Investors, Inc.
 
$
(513
)
 
$
(3,675
)
 
$
(4,030
)
 
                       
Weighted average number of outstanding shares
                       
     Basic
   
15,212,008
     
15,294,893
     
15,399,831
 
Effect of dilutive securities
                       
     Employee stock options
   
-
     
-
     
-
 
     Diluted
   
15,212,008
     
15,294,893
     
15,399,831
 
 
                       
Net loss per share attributable to U.S. Global Investors, Inc.
                       
Basic
                       
Loss from continuing operations
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.25
)
Loss from discontinued operations
   
-
     
-
     
(0.01
)
Net loss attributable to U.S. Global Investors, Inc.
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.26
)
Diluted
                       
Loss from continuing operations
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.25
)
Loss from discontinued operations
   
-
     
-
     
(0.01
)
Net loss attributable to U.S. Global Investors, Inc.
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.26
)
 
Year Ended June 30, 2017, Compared with Year Ended June 30, 2016

The Company posted a net loss attributable to U.S. Global Investors, Inc., as shown in the Consolidated Statements of Operations, of $513,000 ($0.03 loss per share) for the year ended June 30, 2017, compared with a net loss attributable to U.S. Global Investors, Inc. of $3,675,000 ($0.24 loss per share) for the year ended June 30, 2016. The change is mainly due to an increase in revenues, resulting from an increase in average assets under management, and a decrease in expenses, as discussed further below.

Operating Revenues

Total consolidated operating revenues for the year ended June 30, 2017, increased $1.3 million, or 22.9 percent, compared with the year ended June 30, 2016. This increase was primarily attributable to the following:
Advisory fees increased by $1.3 million, or 25.0 percent, as the result of higher assets under management and performance fees received. USGIF advisory fees are comprised of two components: a base management fee and a performance fee.
o
Base management fees increased approximately $1.2 million, primarily as a result of higher average assets under management in USGIF due to market appreciation, primarily in the gold funds.
o
Performance fee adjustments paid out in the current period were $49,000 compared to $132,000 paid out in the prior year, a positive difference of $83,000. 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.
Administrative services fees decreased by $36,000, or 11.3 percent, primarily as a result of the current period’s fees being subject to a lower rate. Effective December 10, 2015, due to the Company’s reduced administrative responsibilities as a result of outsourcing to other service providers a portion of these services previously provided to USGIF, the administrative fee paid to the Company by USGIF was reduced. The effect of the lower fee rate was somewhat offset by higher average net assets under management upon which these fees are based in the current period.

Operating Expenses

Total consolidated operating expenses for the year ended June 30, 2017, decreased by $2.0 million, or 21.1 percent, compared with the prior year and was primarily attributable to the following:
Employee compensation and benefits decreased by $1.2 million, or 23.7 percent, primarily as a result of fewer employees in the current period and severance costs paid in the prior year due to a reduction of workforce resulting from the outsourcing of certain functions.
General and administrative expenses decreased $741,000, or 17.5 percent, due to several factors, including lower fund expense reimbursements, primarily as a result of higher average net assets in the current year, the benefit of strategic cost-cutting measures, and nonrecurring USGIF transition costs in the prior year. Costs were incurred in the prior year related to the transition of certain services previously provided to USGIF by the Company to other service providers. The costs of the transition, which included a proxy of USGIF shareholders, were split equally between the Company and USGIF, and the Company’s portion was approximately $290,000.

Other Income

Total consolidated other income, which consisted of investment income, for the year ended June 30, 2017, decreased $139,000, or 28.7 percent, compared with the year ended June 30, 2016. This decrease was primarily due to lower realized net gains on sales of securities of $479,000 offset somewhat by an increase in dividend and interest income of $278,000 and a positive change in unrealized gains/losses on trading securities of $108,000 compared to the prior year.

Discontinued Operations

Effective December 10, 2015, the Company ceased to be the distributor for USGIF and no longer received distribution fees and shareholder services fees from USGIF. Due to this transition, the Company is no longer responsible for paying certain distribution and shareholder servicing related expenses and is reimbursed for certain distribution expenses from the new distributor for USGIF. The operations associated with providing these services are considered discontinued operations. See additional information in Note 17, Discontinued Operations.

Total loss, net of tax, on discontinued operations was $18,000 for the year ended June 30, 2016. There was no income or loss on discontinued operations for the year ended June 30, 2017.

Year Ended June 30, 2016, Compared with Year Ended June 30, 2015

The Company posted a net loss attributable to U.S. Global Investors, Inc., as shown in the Consolidated Statements of Operations, of $3.7 million ($0.24 loss per share) for the year ended June 30, 2016, compared with a net loss attributable to U.S. Global Investors, Inc. of $4.0 million ($0.26 loss per share) for the year ended June 30, 2015. The decrease in net loss is mainly due to a decrease in expenses, offset somewhat by a decrease in revenues resulting primarily from a decrease in assets under management.

Operating Revenues

Total consolidated operating revenues for the year ended June 30, 2016, decreased $1.8 million, or 24.9 percent, compared with the year ended June 30, 2015. This decrease was primarily attributable to the following:
Advisory fees decreased by $1.5 million, or 22.4 percent as the result of lower assets under management, somewhat offset by higher ETF advisory fees and lower performance fee payouts. USGIF advisory fees are comprised of two components: a base management fee and a performance fee.
o
Base management fees decreased approximately $2.4 million, primarily as a result of lower assets under management in the USGIF and Galileo funds due to market depreciation and shareholder redemptions. This decrease was somewhat offset by an increase in ETF advisory fees.
o
Performance fee adjustments paid out in fiscal 2016 were $868,000 less compared to fiscal 2015. 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.
Administrative services fees decreased by $331,000, or 50.8 percent, as a result of lower average net assets under management upon which these fees are based and the outsourcing to other service providers a portion of these services previously provided to USGIF. Effective December 10, 2015, due to the Company’s reduced administrative responsibilities, the administrative fee paid to the Company by USGIF was decreased. As noted below, the Company has less related expenses due to these reduced responsibilities.

Operating Expenses

Total consolidated operating expenses for the year ended June 30, 2016, decreased by $1.2 million, or 10.7 percent, compared with the prior year and was primarily attributable to the following:
Employee compensation and benefits decreased by $481,000, or 8.9 percent, primarily as a result of lower performance-based bonuses and fewer employees.
General and administrative expenses decreased $744,000, or 14.9 percent, primarily due to strategic cost cutting measures, offset somewhat by costs of approximately $290,000 in fiscal 2016 related to the USGIF transition to third-party service providers.
Advertising increased $77,000, or 57.0 percent, primarily due to marketing costs related to the ETF launched in April 2015.

Other Income

Total consolidated other income for the year ended June 30, 2016, increased $51,000, or 11.8 percent, compared with the year ended June 30, 2015. This increase was primarily attributable to lower unrealized losses on trading securities in fiscal 2016 compared to fiscal 2015, offset somewhat by an increase in other-than-temporary impairment losses and a decrease in dividend and interest income.

Discontinued Operations

Effective December 10, 2015, the Company ceased to be the distributor for USGIF and no longer received distribution fees and shareholder services fees from USGIF. Due to this transition, the Company is no longer responsible for paying certain distribution and shareholder servicing related expenses and is reimbursed for certain distribution expenses from the new distributor for USGIF. The operations associated with providing these services are considered discontinued operations. See additional information in Note 17, Discontinued Operations.

Loss attributed to discontinued operations for the distributor for the year ended June 30, 2016, declined $63,000, or 77.8 percent, compared to the year ended June 30, 2015. The fiscal 2015 loss reflects a full year of distribution operations, while the fiscal 2016 loss reflects operations until the transition to the new distributor in December 2015.

Operating Revenues and Other Income
 
(dollars in thousands)
 
2017
   
2016
   
% Change
   
2016
   
2015
   
% Change
 
Investment advisory fees:
                                   
Natural resources funds
 
$
3,728
   
$
2,557
     
45.8
%
 
$
2,557
   
$
2,866
     
(10.8
%)
International equity funds
   
702
     
652
     
7.7
%
   
652
     
1,144
     
(43.0
%)
Domestic equity funds
   
439
     
425
     
3.3
%
   
425
     
509
     
(16.5
%)
Fixed income funds
   
18
     
-
     
N/A
     
-
     
-
     
N/A
 
Total investment advisory fees - USGIF
   
4,887
     
3,634
     
34.5
%
   
3,634
     
4,519
     
(19.6
%)
Galileo advisory fees
   
1,100
     
1,164
     
(5.5
%)
   
1,164
     
2,007
     
(42.0
%)
ETF advisory fees
   
357
     
296
     
20.6
%
   
296
     
26
     
1038.5
%
Offshore advisory fees
   
135
     
91
     
48.4
%
   
91
     
130
     
(30.0
%)
Total advisory fees
   
6,479
     
5,185
     
25.0
%
   
5,185
     
6,682
     
(22.4
%)
Administrative services fees
   
284
     
320
     
(11.3
%)
   
320
     
651
     
(50.8
%)
Total Operating Revenue
 
$
6,763
   
$
5,505
     
22.9
%
 
$
5,505
   
$
7,333
     
(24.9
%)
 
                                               
Other Income
                                               
Investment income
  $
346
    $
485
     
(28.7
%)
  $
485
    $
434
     
11.8
%
Total Other Income
 
$
346
   
$
485
     
(28.7
%)
 
$
485
   
$
434
     
11.8
%
 
Advisory Fees. Advisory fees, the largest component of the Company’s revenues, are derived from four sources: USGIF advisory fees, Galileo advisory fees, exchange-traded fund advisory fees and offshore advisory fees. In fiscal year 2017, these sources accounted for 75.4 percent, 17.0 percent, 5.5 percent and 2.1 percent, respectively, of the Company’s total advisory fees.

Investment advisory fees from USGIF are calculated as a percentage of average net assets, ranging from 0.375 percent to 1.25 percent, and are paid monthly. These USGIF advisory fees increased by approximately $1.3 million, or 34.5 percent, in fiscal year 2017 compared to fiscal year 2016, primarily as a result of an increase in average assets under management driven by market appreciation, primarily in the gold funds. USGIF advisory fees decreased by approximately $885,000, or 19.6 percent, in fiscal year 2016 compared to fiscal year 2015, primarily as a result of a decrease in average net assets under management due to market depreciation and redemptions, primarily in the natural resources funds.

Mutual fund investment advisory fees are also affected by changes in assets under management, which include:
·
market appreciation or depreciation;
·
the addition of new fund shareholder accounts;
·
fund shareholder contributions of additional assets to existing accounts;
·
withdrawals of assets from and termination of fund shareholder accounts;
·
exchanges of assets between accounts or products with different fee structures; and
·
the amount of fees voluntarily reimbursed.

The fees on the equity funds within USGIF consist of a base advisory fee that is adjusted upward or downward based on performance. For the years ended June 30, 2017, 2016, and 2015, the Company adjusted its base advisory fees downward by $49,000; $132,000; and $1.0 million, respectively.

Galileo provides advisory services for clients in Canada and receives advisory fees based on the net asset values of the clients. Galileo recorded advisory fees from these clients totaling $1.1 million; $1.2 million; and $2.0 million for the years ended June 30, 2017, 2016, and 2015, respectively.

The Company also serves as investment advisor to U.S. Global ETFs. U.S. Global Jets ETF commenced operations in April 2015, and fiscal year 2016 was its first full year of operations. U.S. Global GO GOLD and Precious Metal Miners ETF commenced operations in June 2017. The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs. The Company recorded advisory fees from the ETF clients of $357,000; $296,000; and $26,000 in fiscal years 2017, 2016, and 2015, respectively.


The Company provides advisory services for two offshore clients and receives monthly advisory fees based on the net asset values of the clients and performance fees, if any, based on the overall increase in net asset values. The Company recorded advisory fees from the offshore clients of $135,000; $91,000; and $130,000 in fiscal years 2017, 2016, and 2015, respectively. No performance fees from the offshore clients were recorded in fiscal years 2017, 2016, or 2015. Frank Holmes, CEO, serves as a director of the two offshore clients. The offshore clients have provided notice that they are liquidating. The liquidations are expected to be completed in September 2017.

Administrative Services Fees. The Funds pay the Company compensation based on average daily net assets for administrative services provided by the Company to the Funds. Prior to November 2014, the Company was compensated for administrative services at an annual rate of 0.10 percent for each investor class and 0.08 percent for each institutional class plus $10,000 per fund. Effective November 1, 2014, the annual per fund fee changed to $7,000. Effective December 10, 2015, the annual rate changed to 0.05 percent for each investor class and to 0.04 percent for each institutional class, and the per fund fee was eliminated. Administrative services fees decreased by $36,000 in fiscal year 2017 due to the changes in the fee structure, somewhat offset by higher average net assets under management upon which these fees are based. Administrative services fees decreased by $331,000 in fiscal year 2016 due to the changes in the fee structure and lower average net assets under management upon which these fees are based.

Investment Income (Loss). Investment income (loss) from the Company’s investments includes:
·
realized gains and losses on sales of securities;
·
unrealized gains and losses on trading securities;
·
realized foreign currency gains and losses;
·
other-than-temporary impairments on available-for-sale securities;
·
other-than-temporary impairments on held-at-cost securities; and
·
dividend and interest income.

This source of revenue is dependent on market fluctuations and does not remain at a consistent level. Timing of transactions and the Company’s ability to participate in investment opportunities largely affect this source of revenue.

Investment income decreased by $139,000 in fiscal year 2017 primarily due to lower realized net gains on sales of securities, offset somewhat by an increase in dividend and interest income and a positive change in unrealized gains/losses on trading securities. Investment income increased by $51,000 in fiscal year 2016 primarily due to lower unrealized losses on trading securities, offset somewhat by an increase in other-than-temporary impairment losses and a decrease in dividend and interest income.

Included in investment income were other-than-temporary impairments totaling $483,000; $517,000; and $247,000 in fiscal years 2017, 2016, and 2015, respectively. The impairment in fiscal year 2017 resulted from fair values of certain equity investments being lower than book value totaling approximately $411,000, and approximately $72,000 in declines in estimated values of securities held at cost. The impairment in fiscal year 2016 resulted from fair values of certain equity investments being lower than book value and a debt security written down to estimated future cash flows based on proposed restructuring totaling approximately $259,000, and approximately $258,000 in declines in estimated values of securities held at cost. The impairment in fiscal year 2015 resulted from issuers defaulting on scheduled payments. One security with a cost basis of $44,000 was written down to its fair value of $5,000. Two other securities were written down to the net present value of estimated future cash flows. These securities had a cost basis of $310,000 and $1.1 million, respectively, and were written down to $234,000 and $970,000, respectively. In making these determinations, the Company considered the length of time and extent to which the fair value has been less than cost basis, financial condition and prospects of the issuers, and the Company’s ability to hold the investment until recovery.

Operating Expenses

(dollars in thousands)
 
2017
   
2016
   
% Change
   
2016
   
2015
   
% Change
 
Employee compensation and benefits
 
$
3,754
   
$
4,918
     
(23.7
%)
 
$
4,918
   
$
5,399
     
(8.9
%)
General and administrative
   
3,494
     
4,235
     
(17.5
%)
   
4,235
     
4,979
     
(14.9
%)
Advertising
   
135
     
212
     
(36.3
%)
   
212
     
135
     
57.0
%
Depreciation and amortization
   
253
     
316
     
(19.9
%)
   
316
     
327
     
(3.4
%)
Total
 
$
7,636
   
$
9,681
     
(21.1
%)
 
$
9,681
   
$
10,840
     
(10.7
%)

Employee Compensation and Benefits. Employee compensation and benefits decreased $1.2 million, or 23.7 percent, in fiscal year 2017 and decreased $481,000, or 8.9 percent, in fiscal year 2016 as a result of fewer employees and severance costs paid in fiscal year 2016 due to a reduction of workforce resulting from the outsourcing of certain functions.

General and Administrative. General and administrative expenses decreased $741,000, or 17.5 percent, in fiscal year 2017 due to due to several factors, including lower fund expense reimbursements, primarily as a result of higher average net assets in the current year, the benefit of strategic cost-cutting measures, and nonrecurring USGIF transition costs in the prior year. General and administrative expenses decreased $744,000, or 14.9 percent, in fiscal year 2016 due to strategic expense reductions, offset somewhat by fund proxy-related costs of approximately $290,000.

Advertising. Advertising decreased by $77,000, or 36.3 percent, in fiscal year 2017 as a result of a decrease in ETF-related marketing. Advertising increased by $77,000, or 57.0 percent, in fiscal year 2016 as a result of marketing expenses related to the ETF launched in April 2015.

Income Taxes

The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. USCAN and Galileo file separate tax returns in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes resulting from the use of the liability method of accounting for income taxes.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. A valuation allowance to fully reserve for the net operating loss carryforward, other carryovers and book/tax differences in the balance sheet is included in deferred taxes in the amount of $3.3 million at June 30, 2017, and $3.1 million at June 30, 2016. In assessing the valuation allowance, the Company considered, among other matters, the nature, frequency and severity of recent losses, forecast of future profitability, and the duration of statutory carry back and carry forward periods.

Off Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements.

Contractual Obligations

A summary of contractual obligations of the Company as of June 30, 2017, is as follows:
 
 
 
Payments due by period
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1-3
years
   
4-5
years
   
More than
5 years
 
(dollars in thousands)
                             
Operating lease obligations
 
$
763
   
$
195
   
$
272
   
$
196
   
$
100
 
Contractual obligations
   
445
     
332
     
113
     
-
     
-
 
Total
 
$
1,208
   
$
527
   
$
385
   
$
196
   
$
100
 
 
Operating leases consist of office equipment leased from several vendors and office facilities in Canada. The lease for the office facilities in Canada, included in the table above, was for an original term of five years expiring in June 2018; the lease has been renewed for another five-year term through June 2023. Contractual obligations consist of agreements for services used in daily operations. Other contractual obligations not included in this table consist of agreements to waive or reduce fees and/or pay expenses on certain funds. Future obligations under these agreements are dependent upon future levels of fund assets.

The Board of Directors has authorized a monthly dividend of $0.0025 per share from July 2017 through September 2017, at which time the Board of Directors will consider continuation of the dividend. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions. The total amount of cash dividends to be paid to class A and class C shareholders from July 2017 to September 2017 will be approximately $114,000, which is included as dividends payable in the Consolidated Balance Sheets at June 30, 2017.

Liquidity and Capital Resources

At June 30, 2017, the Company had net working capital (current assets minus current liabilities) of approximately $16.3 million and a current ratio (current assets divided by current liabilities) of 15.0 to 1. With approximately $4.0 million in cash and cash equivalents and $13.1 million in securities recorded at fair value, which together comprise approximately 67 percent of total assets, the Company has adequate liquidity to meet its current obligations. Total shareholders’ equity attributable to U.S. Global Investors, Inc. was approximately $23.9 million. Approximately $1.4 million in cash in Galileo is included in the amounts above. The Company could be required to accrue and pay taxes to repatriate (i.e., bring back into the U.S.) these funds, and there is no current intention to repatriate.

The Company has no long-term debt; thus, the Company’s only material commitment going forward is for operating expenses. The Company also has access to a $1 million credit facility, which can be utilized for working capital purposes. As of June 30, 2017, 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 expire in September 2017. The Board of Trustees of USGIF will meet to consider the agreement renewals in September 2017. Management anticipates that these agreements will be renewed. The investment advisory contract between the Company and U.S. Global Jets ETF expires in April 2018. The investment advisory contract between the Company and U.S. Global GO GOLD and Precious Metal Miners ETF is in its initial two-year term and will not expire until June 2019. Galileo’s investment management agreement with Canadian registered mutual funds may be terminated each September 30 with a 180-day prior notice of unitholders’ resolution. Galileo’s advisory agreements with other advisory clients can be terminated upon 30-day written notice. The Company’s two offshore clients have provided notice that they are liquidating. The liquidations are expected to be completed in September 2017; therefore, any fees received in fiscal year 2018 will be minimal.

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, 2017. Although the Company had a net loss of $513,000 for the year ended June 30, 2017, cash and marketable securities of approximately $17.1 million are available to fund current activities. Certain revenues and expenses have decreased due to the outsourcing in December 2015 certain services previously provided to USGIF to other service providers. The transition has allowed the Company to streamline its responsibilities so it can focus on strategic activities.

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

Critical Accounting Estimates

The discussion and analysis of financial condition and results of operations are based on the Company’s financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. Management reviews these estimates on an ongoing basis. Estimates are based on experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While recent accounting policies are described in more detail in Note 2 to the consolidated financial statements, the Company believes the accounting policies that require management to make assumptions and estimates involving significant judgment are those relating to valuation of investments, income taxes, and valuation of stock-based compensation.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: U.S. Global Investors (Bermuda) Limited (“USBERM”), U.S. Global Brokerage, Inc. (“USGB”), U.S. Global Investors (Canada) Limited (“USCAN”) and U.S. Global Indices, LLC.

The Company, through USCAN, owns 65 percent of the issued and outstanding shares of Galileo and represented controlling interest of Galileo. Galileo is consolidated with USCAN and the non-controlling interest in this subsidiary is included in “non-controlling interest in subsidiary” in the equity section of the Consolidated Balance Sheets.

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. The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. 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 Investment Management and Other Fees to the Consolidated Financial Statements of this Annual Report on Form 10-K 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 does not consolidate these VIEs because it is not the primary beneficiary.

Since the Company is not the primary beneficiary of the 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 funds it advises; therefore, the Company does not consolidate any of these funds.

Investments. The Company classifies its investments based on intent at the time of purchase and reevaluates such designation as of each reporting period date. The Company records security transactions on trade date. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable, and are recorded in earnings on the date of sale.

Trading Securities. Securities that are purchased and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value. Unrealized gains and losses on these securities are included in earnings.

Held-to-Maturity Securities. Debt securities that are purchased with the intent and ability to hold until maturity are classified as held-to-maturity and measured at amortized cost.

Available-for-sale Securities. Securities that are neither trading securities nor held-to-maturity securities and for which the Company does not have significant influence are classified as available-for-sale securities and reported at fair value. Unrealized holding gains and losses on these available-for-sale securities are excluded from earnings, reported net of tax as a separate component of shareholders’ equity, and recorded in earnings when realized.

The Company evaluates its available-for-sale investments for other-than-temporary decline in value on a periodic basis. This may exist when the fair value of an investment security has been below the current value for an extended period of time. When a security in the Company’s investment portfolio has an unrealized loss in fair value that is deemed to be other than temporary, the Company reduces the book value of such security to its current fair value, recognizing the credit related decline as a realized loss in the Consolidated Statements of Operations and a revised GAAP cost basis for the security is established. For available-for-sale securities with declines in value deemed other than temporary, the unrealized loss recorded net of tax in accumulated other comprehensive income (loss) is realized as a charge to net income.

Other Investments. Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. These equity investments are accounted for under the cost method of accounting and evaluated for impairment. The Company considers many factors in determining impairment, including the severity and duration of the decline in value below cost, the Company’s interest and ability to hold the security for a period of time sufficient for an anticipated recovery in value, and the financial condition and specific events related to the issuer. When an impairment of an equity security is determined to be other-than-temporary, the impairment is recognized in earnings.

Fair Value of Financial Instruments. The financial instruments of the Company are reported on the Consolidated Balance Sheets at market or fair values or at carrying amounts that approximate fair values.

Non-Controlling Interests. The Company reports “non-controlling interest in subsidiary” as equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”

Income Taxes. The Company’s annual effective income tax rate is based on the mix of income and losses in its U.S. and non-U.S. entities which are part of the Company’s Consolidated Financial Statements, statutory tax rates, and tax-planning opportunities available to the Company in the various jurisdictions in which it operates. Significant judgment is required in evaluating the Company’s tax positions.


Tax law requires certain items to be included in the tax return at different times from when these items are reflected in the Company’s Consolidated Statements of Operations. As a result, the effective tax rate reflected in the Consolidated Financial Statements is different from the tax rate reported on the Company’s consolidated tax return. Some of these differences are permanent, such as expenses that are not deductible in the tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates.

The Company assesses uncertain tax positions in accordance with ASC 740, Income Taxes. Judgment is used to identify, recognize, and measure the amounts to be recorded in the financial statements related to tax positions taken or expected to be taken in a tax return. A liability is recognized to represent the potential future obligation to the taxing authority for the benefit taken in the tax return. These liabilities are adjusted, including any impact of the related interest and penalties, in light of changing facts and circumstances such as the progress of a tax audit. A number of years may elapse before a particular matter for which a reserve has been established is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction.

The Company assesses whether a valuation allowance should be established against its deferred income tax assets based on consideration of available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecast of future profitability, the duration of statutory carry back and carry forward periods, the Company’s experience with tax attributes expiring unused, and tax planning alternatives.

Assessing the future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements or tax returns requires judgment. Variations in the actual outcome of these future tax consequences could materially impact the Company’s financial position, results of operations or cash flows.

Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. No options were granted in fiscal years 2017, 2016 or 2015.

The Company believes that the estimates related to stock-based compensation expense are critical accounting estimates because the assumptions used could significantly impact the timing and amount of stock-based compensation expense recorded in the Company’s Consolidated Financial Statements.

Foreign Exchange. The balance sheets of certain foreign subsidiaries of the Company and certain foreign-denominated investment products are translated at the current exchange rate as of the end of the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange gains and losses resulting from balance sheet translations of foreign subsidiaries are excluded from income and are recorded in “accumulated other comprehensive income (loss)” on the Consolidated Balance Sheets. Net exchange gains and losses resulting from income or loss translations are included in income and are recorded in “investment income (loss)” on the Consolidated Statements of Operations. Investment transactions denominated in foreign currencies are converted to U.S. dollars using the exchange rate on the date of the transaction and any related gain or loss is included in “investment income (loss)” on the Consolidated Statements of Operations.

Recent Accounting Pronouncements. See information regarding accounting pronouncements that have been issued but not yet adopted by the Company in Note 2, Significant Accounting Policies, to the Consolidated Financial Statements of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Disclosures

The following information, together with information included in other parts of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, describes the key aspects of certain financial instruments that have market risk to the Company.

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 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 fees section above. For the years ended June 30, 2017, 2016, and 2015, the Company realized a decrease in its USGIF base advisory fee of $49,000; $132,000; and $1.0 million, respectively, due to these performance adjustments.

The Company agreement with its offshore advisory clients provided for performance fees based on the overall increase in net asset values, if any. The Company recorded no performance fees from these clients for the years ended June 30, 2017, 2016, or 2015. The offshore advisory clients have provided notice that they are liquidating these funds. The liquidation is expected to be completed in September 2017.

Corporate Investments

The Company’s Consolidated Balance Sheets include assets whose fair value is subject to market risk. 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 equity price risks as of June 30, 2017, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.
 
(dollars in thousands)
 
Fair Value at
June 30, 2017
 
Hypothetical
Percentage
Change
 
Estimated Fair Value
After Hypothetical
Price Change
   
Increase (Decrease) in
Shareholders’ Equity,
Net of Tax
 
Trading securities ¹
 
$
9,720
 
25% increase
 
$
12,150
   
$
2,430
 
 
       
25% decrease
 
$
7,290
   
$
(2,430
)
Available-for-sale ²
 
$
3,401
 
25% increase
 
$
4,251
   
$
850
 
 
       
25% decrease
 
$
2,551
   
$
(850
)
1.
Unrealized and realized gains and losses on trading securities are included in earnings in the Consolidated Statements of Operations.
2.
Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income (loss) as a component of shareholders’ equity until realized.

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 equity markets and the concentration of the Company’s investment portfolio.

Foreign currency risk

The Company’s subsidiary Galileo conducts its business in Canada. We translate Galileo’s foreign currency financial statements into U.S. dollars in the financial statement consolidation process. Adverse changes in foreign currency exchange rates would lower the carrying value of Galileo’s assets and reduce its results in the consolidated U.S. financial statements. For the year ended June 30, 2017, Galileo represented 16.3 percent of net operating revenues, 16.9 percent of loss from continuing operations before taxes, and 6.0 percent of total assets (see Note 15, Financial Information by Business Segment, to the Consolidated Financial Statements of this Annual Report on Form 10-K). Certain corporate investments are held in foreign currencies. Adverse changes in foreign currency exchange rates would also lower the value of those 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.


Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

Board of Directors and Stockholders
U.S. Global Investors, Inc.
San Antonio, Texas

We have audited the accompanying Consolidated Balance Sheets of U.S. Global Investors, Inc. (the “Company”) as of June 30, 2017 and 2016 and the related Consolidated Statements of Operations, Comprehensive Income (Loss), Shareholders’ Equity, and Cash Flows for each of the three years in the period ended June 30, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Global Investors, Inc. at June 30, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.




/s/ BDO USA, LLP
BDO USA, LLP
Dallas, Texas
September 12, 2017

U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS

Assets
 
June 30, 2017
   
June 30, 2016
 
(dollars in thousands)
           
Current Assets
           
Cash and cash equivalents
 
$
3,958
   
$
3,993
 
Restricted cash
   
1,000
     
1,000
 
Investment securities - trading, at fair value
   
9,720
     
10,104
 
Accounts and other receivables
   
520
     
787
 
Note receivable
   
1,952
     
2,000
 
Prepaid expenses
   
315
     
290
 
Total Current Assets
   
17,465
     
18,174
 
 
               
Net Property and Equipment
   
2,212
     
2,466
 
 
               
Other Assets
               
Investment securities - available-for-sale, at fair value
   
3,401
     
3,481
 
Other investments
   
2,130
     
1,924
 
Note receivable, long term
   
234
     
212
 
Other assets, long term
   
78
     
89
 
Total Other Assets
   
5,843
     
5,706
 
Total Assets
 
$
25,520
   
$
26,346
 
Liabilities and Shareholders’ Equity
               
Current Liabilities
               
Accounts payable
 
$
118
   
$
148
 
Accrued compensation and related costs
   
390
     
451
 
Dividends payable
   
114
     
115
 
Other accrued expenses
   
544
     
586
 
Total Current Liabilities
   
1,166
     
1,300
 
 
               
Commitments and Contingencies (Note 18)
               
 
               
Shareholders’ Equity
               
Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,866,601 and 13,866,421 at June 30, 2017, and June 30, 2016, respectively
   
347
     
347
 
Common stock (class B) - $0.025 par value; nonvoting; authorized, 4,500,000 shares; no shares issued
   
-
     
-
 
Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,068,947 and 2,069,127 shares at June 30, 2017, and June 30, 2016, respectively
   
52
     
52
 
Additional paid-in-capital
   
15,646
     
15,651
 
Treasury stock, class A shares at cost; 751,303 and 688,700 shares at June 30, 2017, and June 30, 2016, respectively
   
(1,760
)
   
(1,663
)
Accumulated other comprehensive gain (loss), net of tax
   
264
     
(149
)
Retained earnings
   
9,321
     
10,290
 
Total U.S. Global Investors Inc. Shareholders’ Equity
   
23,870
     
24,528
 
Non-Controlling Interest in Subsidiary
   
484
     
518
 
Total Shareholders’ Equity
   
24,354
     
25,046
 
Total Liabilities and Shareholders’ Equity
 
$
25,520
   
$
26,346
 
 
The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 
 
Year Ended June 30,
 
(dollars in thousands, except per share data)
 
2017
   
2016
   
2015
 
 Operating Revenues
                 
 Advisory fees
 
$
6,479
   
$
5,185
   
$
6,682
 
 Administrative services fees
   
284
     
320
     
651
 
 
   
6,763
     
5,505
     
7,333
 
 Operating Expenses
                       
 Employee compensation and benefits
   
3,754
     
4,918
     
5,399
 
 General and administrative
   
3,494
     
4,235
     
4,979
 
 Advertising
   
135
     
212
     
135
 
 Depreciation and amortization
   
253
     
316
     
327
 
 
   
7,636
     
9,681
     
10,840
 
 Operating Loss
   
(873
)
   
(4,176
)
   
(3,507
)
 Other Income
                       
 Investment income
   
346
     
485
     
434
 
 Total Other Income
   
346
     
485
     
434
 
 Loss from Continuing Operations Before Income Taxes
   
(527
)
   
(3,691
)
   
(3,073
)
 Provision for Federal Income Taxes
                       
 Tax expense (benefit)
   
17
     
(6
)
   
822
 
 Loss from Continuing Operations
   
(544
)
   
(3,685
)
   
(3,895
)
 Loss from Discontinued Operations, Net of $0 Tax Benefit of Distributor
   
-
     
(18
)
   
(81
)
 Net Loss
   
(544
)
   
(3,703
)
   
(3,976
)
 Less: Net Income (Loss) Attributable to Non-Controlling Interest
   
(31
)
   
(28
)
   
54
 
 Net Loss Attributable to U.S. Global Investors, Inc.
 
$
(513
)
 
$
(3,675
)
 
$
(4,030
)
 
                       
 Net Loss Per Share Attributable to U.S. Global Investors, Inc.
                       
 Basic
                       
 Loss from continuing operations
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.25
)
 Loss from discontinued operations
   
-
     
-
     
(0.01
)
 Net loss
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.26
)
 Diluted
                       
 Loss from continuing operations
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.25
)
 Loss from discontinued operations
   
-
     
-
     
(0.01
)
 Net loss
 
$
(0.03
)
 
$
(0.24
)
 
$
(0.26
)
 
                       
 Basic weighted average number of common shares outstanding
   
15,212,008
     
15,294,893
     
15,399,831
 
 Diluted weighted average number of common shares outstanding
   
15,212,008
     
15,294,893
     
15,399,831
 
 
The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
Year Ended June 30,
 
(dollars in thousands)
 
2017
   
2016
   
2015
 
 Net Loss Attributable to U.S. Global Investors, Inc.
 
$
(513
)
 
$
(3,675
)
 
$
(4,030
)
 Other Comprehensive Income (Loss), Net of Tax:
                       
Unrealized gains (losses) on available-for-sale securities arising during period
   
36
     
657
     
(1,000
)
Less:  reclassification adjustment for gains/losses included in net income
   
380
     
(273
)
   
(227
)
Net change from available-for-sale investments, net of tax
   
416
     
384
     
(1,227
)
Foreign currency translation adjustment
   
(6
)
   
(78
)
   
(248
)
 Other Comprehensive Income (Loss)
   
410
     
306
     
(1,475
)
 Comprehensive Loss
   
(103
)
   
(3,369
)
   
(5,505
)
 Less: Comprehensive Loss Attributable to Non-Controlling Interest
   
(3
)
   
(28
)
   
(86
)
 Comprehensive Loss Attributable to U.S. Global Investors, Inc.
 
$
(100
)
 
$
(3,341
)
 
$
(5,419
)


 
The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars in thousands)
 
Common
Stock
(class A)
   
Common
Stock
(class C)
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Other Comprehensive Income (Loss)
   
Retained
Earnings
   
Non-
Controlling Interest
   
Total
 
Balance at June 30, 2014 (13,866,361 shares of class A; 2,069,187 shares of class C)
  $
347
    $
52
    $
15,669
    $
(1,280
)
  $
906
    $
19,376
    $
633
    $
35,703
 
Purchases of 95,251 shares of Common Stock (class A)
   
-
     
-
     
-
     
(292
)
   
-
     
-
     
-
     
(292
)
Issuance of stock under ESPP of 37,383 shares of Common Stock (class A)
   
-
     
-
     
23
     
98
     
-
     
-
     
-
     
121
 
Conversion of 60 shares of class C common stock for class A common stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Dividends declared
   
-
     
-
     
-
     
-
     
-
     
(923
)
   
-
     
(923
)
Stock bonuses
   
-
     
-
     
2
     
10
     
-
     
-
     
-
     
12
 
Distribution to non-controlling interests in subsidiary
   
-
     
-
     
-
     
-
     
-
     
-
     
(27
)
   
(27
)
Other comprehensive income (loss), net of tax
   
-
     
-
     
-
     
-
     
(1,389
)
   
-
     
(86
)
   
(1,475
)
Net income (loss)
   
-
     
-
     
-
     
-
     
-
     
(4,030
)
   
54
     
(3,976
)
Balance at June 30, 2015 (13,866,421 shares of class A; 2,069,127 shares of class C)
   
347
     
52
     
15,694
     
(1,464
)
   
(483
)
   
14,423
     
574
     
29,143
 
Purchases of 177,998 shares of Common Stock (class A)
   
-
     
-
     
-
     
(313
)
   
-
     
-
     
-
     
(313
)
Issuance of stock under ESPP of 39,084 shares of Common Stock (class A)
   
-
     
-
     
(40
)
   
99
     
-
     
-
     
-
     
59
 
Dividends declared
   
-
     
-
     
-
     
-
     
-
     
(458
)
   
-
     
(458
)
Stock bonuses
   
-
     
-
     
(3
)