2013.12.31 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
[X]    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2013

OR

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

 
Commission File Number 0-13928
 
 
 
 
 
U.S. GLOBAL INVESTORS, INC.
 
 
(Exact name of registrant as specified in its charter)
 
Texas
 
74-1598370
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
7900 Callaghan Road
San Antonio, Texas
 
78229-1234
(Zip Code)
(Address of principal executive offices)
 
 
(210) 308-1234
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]                                NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X]                                NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [    ]
Accelerated filer [X]
Non-accelerated filer [    ] 
 Smaller Reporting Company [    ]
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ]                                NO [X]
On January 21, 2014, there were 13,865,817 shares of Registrant’s class A nonvoting common stock issued and 13,394,446 shares of Registrant’s class A nonvoting common stock issued and outstanding, no shares of Registrant’s class B nonvoting common shares outstanding, and 2,069,731 shares of Registrant’s class C voting common stock issued and outstanding.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

PART I. FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
 
 
December 31, 2013
 
June 30, 2013
Assets
 
(UNAUDITED)
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
4,566,383

 
$
18,085,226

Trading securities, at fair value
 
18,640,758

 
4,758,220

Receivables
 
 
 
 
Mutual funds
 
732,101

 
964,461

Offshore clients
 
14,500

 
21,000

Income tax
 
1,038,702

 
140,792

Employees
 
54

 
5,500

Other
 
34,056

 
16,140

Prepaid expenses
 
608,000

 
604,701

Deferred tax asset
 
71,424

 
195,871

Total Current Assets
 
25,705,978

 
24,791,911

Net Property and Equipment
 
2,960,049

 
3,084,860

Other Assets
 
 
 
 
Deferred tax asset, long term
 
560,861

 
677,539

Investment securities available-for-sale, at fair value
 
7,343,679

 
9,053,111

Investment in Galileo
 
639,761

 
654,528

Total assets held related to discontinued operations
 
55,207

 
420,853

Total Other Assets
 
8,599,508

 
10,806,031

Total Assets
 
$
37,265,535

 
$
38,682,802

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
89,423

 
$
71,289

Accrued compensation and related costs
 
902,814

 
686,562

Dividends payable
 
232,327

 
232,402

Other accrued expenses
 
847,973

 
770,024

Total liabilities held related to discontinued operations
 
112,104

 
73,284

Total Current Liabilities
 
2,184,641

 
1,833,561

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 
 
 
Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,865,757 and 13,865,021 shares at December 31, 2013, and June 30, 2013, respectively
 
346,644

 
346,626

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, 2,069,791 and 2,070,527 shares at December 31, 2013, and June 30, 2013, respectively
 
51,745

 
51,763

Additional paid-in-capital
 
15,665,168

 
15,654,397

Treasury stock, class A shares at cost; 471,371 and 463,958 shares at December 31, 2013, and June 30, 2013, respectively
 
(1,155,282
)
 
(1,128,704
)
Accumulated other comprehensive income, net of tax
 
566,417

 
652,218

Retained earnings
 
19,606,202

 
21,272,941

Total Shareholders’ Equity
 
35,080,894

 
36,849,241

Total Liabilities and Shareholders’ Equity
 
$
37,265,535

 
$
38,682,802


The accompanying notes are an integral part of this statement. 

PAGE 1

Table of Contents

U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
Six Months Ended December 31,
 
Three Months Ended December 31,
 
 
2013
 
2012
 
2013
 
2012
Operating Revenues
 
 
 
 
 
 
 
 
Mutual fund advisory fees
 
$
3,805,993

 
$
6,412,472

 
$
1,769,193

 
$
3,495,609

Distribution fees
 
1,035,682

 
1,552,068

 
504,761

 
780,506

Shareholder services fees
 
491,817

 
740,512

 
231,159

 
361,179

Administrative services fees
 
353,185

 
511,141

 
181,841

 
256,917

Other advisory fees
 
105,068

 
169,574

 
52,790

 
79,012

 
 
5,791,745

 
9,385,767

 
2,739,744

 
4,973,223

Operating Expenses
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
3,752,847

 
4,473,278

 
1,870,582

 
2,315,586

General and administrative
 
3,114,168

 
2,750,941

 
1,587,897

 
1,410,072

Platform fees
 
960,738

 
1,448,332

 
451,975

 
732,926

Advertising
 
350,149

 
431,088

 
216,954

 
270,465

Depreciation
 
124,811

 
134,157

 
62,068

 
67,119

Subadvisory fees
 
30,000

 
30,000

 
15,000

 
15,000

 
 
8,332,713

 
9,267,796

 
4,204,476

 
4,811,168

Operating Income (Loss)
 
(2,540,968
)
 
117,971

 
(1,464,732
)
 
162,055

Other Income (Loss)
 
 
 
 
 
 
 
 
Investment income
 
1,108,875

 
361,638

 
48,225

 
160,987

Equity in earnings of Galileo
 
(14,767
)
 
—

 
(7,579
)
 
—

 
 
1,094,108

 
361,638

 
40,646

 
160,987

Income (Loss) from Continuing Operations Before Income Taxes
 
(1,446,860
)
 
479,609

 
(1,424,086
)
 
323,042

Provision for Federal Income Taxes
 
 
 
 
 
 
 
 
Tax expense (benefit)
 
(480,418
)
 
208,837

 
(466,412
)
 
145,310

Income (Loss) from Continuing Operations
 
(966,442
)
 
270,772

 
(957,674
)
 
177,732

Discontinued Operations (Note 12)
 
 
 
 
 
 
 
 
Loss from operations of discontinued transfer agent
 
(357,845
)
 
(84,830
)
 
(314,444
)
 
(17,799
)
Tax benefit
 
(121,667
)
 
(28,843
)
 
(106,911
)
 
(6,052
)
Loss on Discontinued Operations
 
(236,178
)
 
(55,987
)
 
(207,533
)
 
(11,747
)
Net Income (Loss)
 
(1,202,620
)
 
214,785

 
(1,165,207
)
 
165,985

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities arising during period (net of tax expense (benefit) of ($191,308) and ($24,668) for the six months ended December 31, 2013 and 2012, respectively, and $3,890 and $27,775 for the three months ended December 31, 2013 and 2012, respectively)
 
371,363

 
47,886

 
(7,551
)
 
(53,914
)
Less: reclassification adjustment for gains/losses included in investment income (net of tax expense (benefit) of $235,508 and $73,848 for the six months ended December 31, 2013 and 2012, respectively, and ($62,109) and $73,848 for the three months ended December 31, 2013 and 2012, respectively)
 
(457,164
)
 
(143,352
)
 
120,564

 
(143,352
)
Comprehensive Income (Loss)
 
$
(1,288,421
)
 
$
119,319

 
$
(1,052,194
)
 
$
(31,281
)
Basic Net Income (Loss) per Share
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(0.06
)
 
$
0.01

 
$
(0.06
)
 
$
0.01

Loss from discontinued operations
 
$
(0.02
)
 
$
0.00

 
$
(0.02
)
 
$
0.00

Net income (loss)
 
$
(0.08
)
 
$
0.01

 
$
(0.08
)
 
$
0.01

Diluted Net Income (Loss) per Share
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(0.06
)
 
$
0.01

 
$
(0.06
)
 
$
0.01

Loss from discontinued operations
 
$
(0.02
)
 
$
0.00

 
$
(0.02
)
 
$
0.00

Net income (loss)
 
$
(0.08
)
 
$
0.01

 
$
(0.08
)
 
$
0.01

Basic weighted average number of common shares outstanding
 
15,471,816

 
15,481,547

 
15,472,370

 
15,487,207

Diluted weighted average number of common shares outstanding
 
15,471,816

 
15,481,547

 
15,472,370

 
15,487,207

The accompanying notes are an integral part of this statement. 

PAGE 2

Table of Contents

U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
 
Six Months Ended December 31,
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
 
Net income (loss)
 
$
(1,202,620
)
 
$
214,785

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
128,230

 
137,577

Net recognized (gain) loss on securities
 
(524,455
)
 
69,264

Net loss from equity method investment
 
14,767

 
—

Provision for deferred taxes
 
285,327

 
171,043

Stock bonuses
 
4,926

 
57,700

Stock-based compensation expense
 
1,220

 
8,320

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(309,293
)
 
(228,432
)
Prepaid expenses
 
(3,299
)
 
(159,478
)
Trading securities
 
(14,050,756
)
 
(90,720
)
Accounts payable and accrued expenses
 
351,155

 
(59,554
)
Total adjustments
 
(14,102,178
)
 
(94,280
)
Net cash (used in) provided by operating activities
 
(15,304,798
)
 
120,505

Cash Flows from Investing Activities:
 
 
 
 
Purchase of property and equipment
 
—

 
(39,159
)
Purchase of available-for-sale securities
 
(609,256
)
 
(343,967
)
Proceeds on sale of available-for-sale securities
 
2,881,359

 
661,506

Net cash provided by (used in) investing activities
 
2,272,103

 
278,380

Cash Flows from Financing Activities:
 
 
 
 
Issuance of common stock
 
87,784

 
94,646

Repurchases of common stock
 
(109,737
)
 
—

Dividends paid
 
(464,195
)
 
(2,167,481
)
Net cash used in financing activities
 
(486,148
)
 
(2,072,835
)
Net decrease in cash and cash equivalents
 
(13,518,843
)
 
(1,673,950
)
Beginning cash and cash equivalents
 
18,085,226

 
20,612,721

Ending cash and cash equivalents
 
$
4,566,383

 
$
18,938,771

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
—

 
$
—

The accompanying notes are an integral part of this statement.

PAGE 3

Table of Contents

U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has prepared the consolidated financial statements pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments), which are, in management’s opinion, necessary for a fair presentation of results for the interim periods presented. The Company has consistently followed the accounting policies set forth in the notes to the consolidated financial statements in the Company’s Form 10-K for the fiscal year ended June 30, 2013.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, United Shareholder Services, Inc. (“USSI”), U.S. Global Investors (Guernsey) Limited (“USGG”) (on August 3, 2013, USGG was dissolved), U.S. Global Brokerage, Inc., U.S. Global Investors (Bermuda) Limited, U.S. Global Investors (Canada) Limited, and U.S. Global Indices, LLC.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes. The results of operations for the six months ended December 31, 2013, are not necessarily indicative of the results to be expected for the entire year.
The unaudited interim financial information in these condensed financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s annual report.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Under this standard, an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, rather than as a liability, when the uncertain tax position would reduce the net operating loss or other carryforward under the tax law. The standard is effective for interim and annual periods beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is currently evaluating the impact of the standard on its consolidated results of operations and financial condition.
NOTE 2. INVESTMENTS
As of December 31, 2013, the Company held investments with a market value of approximately $26.0 million and a cost basis of approximately $25.5 million. The market value of these investments is approximately 69.7 percent of the Company’s total assets.
Investments in securities classified as trading are reflected as current assets on the consolidated balance sheet at their fair market value. Unrealized holding gains and losses on trading securities are included in earnings in the consolidated statements of operations and comprehensive income.
Investments in securities classified as available-for-sale, which may not be readily marketable, are reflected as non-current assets on the consolidated balance sheet at their fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported in other comprehensive income as a separate component of shareholders’ equity until realized.
In December 2013, the shareholders of the U.S. Government Securities Savings Fund approved a proposal resulting in the conversion of the fund from a money market market fund to a U.S. Government ultra-short bond fund that is not a money market fund. The fund was renamed U.S. Government Securities Ultra-Short Bond Fund (“Government Fund”). Prior to the conversion, while the fund was a money market fund, the amount held in the fund was classified as a cash equivalent. After the conversion, the amount held in the fund is classified as a trading mutual fund investment. The amount held in the fund by the Company as of the conversion date was $14,118,943.
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.

PAGE 4

Table of Contents

U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

The following summarizes the market value, cost, and unrealized gain or loss on investments as of December 31, 2013, and June 30, 2013.
 
Securities
 
Market Value
 
Cost
 
Unrealized Gain
(Loss)
 
Unrealized holding
gains on available-for-
sale securities, net of
tax
 
 
 
 
 
 
 
 
 
Trading1
 
$
18,640,758

 
$
19,062,335

 
$
(421,577
)
 
N/A

Available-for-sale2
 
7,343,679

 
6,485,471

 
858,208

 
$
566,417

Total at December 31, 2013
 
$
25,984,437

 
$
25,547,806

 
$
436,631

 
 
 
 
 
 
 
 
 
 
 
Trading1
 
$
4,758,220

 
$
5,457,989

 
$
(699,769
)
 
N/A

Available-for-sale2
 
9,053,111

 
8,064,902

 
988,209

 
$
652,218

Total at June 30, 2013
 
$
13,811,331

 
$
13,522,891

 
$
288,440

 
 
1Unrealized and realized gains and losses on trading securities are included in earnings in the statement of operations.

2Unrealized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income as a separate component of shareholders’ equity until realized.
The following details the components of the Company’s available-for-sale investments as of December 31, 2013, and June 30, 2013.
 
 
 
December 31, 2013 (in thousands)
 
 
 
 
Gross Unrealized
 
 
 
 
Cost
 
Gains
 
(Losses)
 
Market Value
Available-for-sale securities
 
 
 
 
 
 
 
 
Common stock
 
$
1,668

 
$
1,075

 
$
(11
)
 
$
2,732

Preferred stock
 
204

 
—

 
(7
)
 
197

Corporate debt
 
1,718

 
—

 
(226
)
 
1,492

Venture capital investments
 
168

 
—

 
(5
)
 
163

Mutual funds
 
2,727

 
61

 
(29
)
 
2,759

Total available-for-sale securities
 
$
6,485

 
$
1,136

 
$
(278
)
 
$
7,343

 
 
 
June 30, 2013 (in thousands)
 
 
 
 
Gross Unrealized
 
 
 
 
Cost
 
Gains
 
(Losses)
 
Market Value
Available-for-sale securities
 
 
 
 
 
 
 
 
Common stock
 
$
870

 
$
529

 
$
(5
)
 
$
1,394

Venture capital investments
 
168

 
—

 
(5
)
 
163

Offshore funds
 
5,000

 
—

 
(288
)
 
4,712

Mutual funds
 
2,027

 
760

 
(3
)
 
2,784

Total available-for-sale securities
 
$
8,065

 
$
1,289

 
$
(301
)
 
$
9,053

 
 

PAGE 5

Table of Contents

U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

The following tables show the gross unrealized losses and fair values of available-for-sale investment securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
 
December 31, 2013 (in thousands)
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
$
322

 
$
(11
)
 
$
—

 
$
—

 
$
322

 
$
(11
)
Preferred stock
 
197

 
(7
)
 
—

 
—

 
197

 
(7
)
Corporate debt
 
1,242

 
(226
)
 
—

 
—

 
1,242

 
(226
)
Venture capital investments
 
163

 
(5
)
 
—

 
—

 
163

 
(5
)
Mutual funds
 
982

 
(29
)
 
—

 
—

 
982

 
(29
)
Total available-for-sale securities
 
$
2,906


$
(278
)

$
—


$
—


$
2,906


$
(278
)
 
 
 
June 30, 2013 (in thousands)
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
$
95

 
$
(5
)
 
$
—

 
$
—

 
$
95

 
$
(5
)
Venture capital investments
 
163

 
(5
)
 
—

 
—

 
163

 
(5
)
Offshore funds
 
—

 
—

 
4,712

 
(288
)
 
4,712

 
(288
)
Mutual funds
 
3

 
(3
)
 
—

 
—

 
3

 
(3
)
Total available-for-sale securities
 
$
261

 
$
(13
)
 
$
4,712

 
$
(288
)
 
$
4,973

 
$
(301
)
Investment income can be volatile and varies depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. The Company expects that gains and losses will continue to fluctuate in the future.
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; and
•
dividend and interest income.
The following summarizes investment income reflected in earnings for the periods discussed:
Investment Income
 
Six Months Ended December 31,
 
 
2013
 
2012
Realized gains on sales of available-for-sale securities
 
$
692,673

 
$
217,200

Realized losses on sales of trading securities
 
(168,218
)
 
(244,627
)
Unrealized gains on trading securities
 
278,191

 
348,739

Realized foreign currency gains (losses)
 
4,527

 
(2,751
)
Other-than-temporary declines in available-for sale securities
 
—

 
(41,837
)
Dividend and interest income
 
301,702

 
84,914

Total Investment Income
 
$
1,108,875

 
$
361,638


 

PAGE 6

Table of Contents

U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

Investment Income
 
Three Months Ended December 31,
 
 
2013
 
2012
Realized gains (losses) on sales of available-for-sale securities
 
$
(182,673
)
 
$
217,200

Realized losses on sales of trading securities
 
(168,218
)
 
(244,627
)
Unrealized gains on trading securities
 
169,488

 
177,158

Realized foreign currency losses
 
(452
)
 
(2,726
)
Other-than-temporary declines in available-for sale securities
 
—

 
(41,837
)
Dividend and interest income
 
230,080

 
55,819

Total Investment Income
 
$
48,225

 
$
160,987

NOTE 3. FAIR VALUE DISCLOSURES
Accounting Standards Codification (ASC) 820, Fair Value Measurement and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Levels 1, 2, and 3 inputs, as defined below). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, value of these products does not entail a significant degree of judgment.
Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Corporate debt securities valued in accordance with the evaluated price supplied by an independent service are categorize as Level 2 in the hierarchy. Other securities categorized as Level 2 included securities valued at the mean between the last reported bid and ask quotation.
Level 3 – Valuations based on inputs that are unobservable and significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with the investing in those securities. Because of the inherent uncertainties of valuation, the values reflected may materially differ from the values received upon actual sale of those investments.
For actively traded securities, the Company values investments using the closing price of the securities on the exchange or market on which the securities principally trade. If the security is not actively traded, it is valued based at the mean between the last bid and ask quotation. Mutual funds, which includes open- and closed-end funds, exchange-traded funds, and offshore funds, are valued at net asset value or closing price, as applicable. Certain corporate debt securities are valued by an independent pricing service using an evaluated quote based on such factors as institutional-size trading in similar groups of securities, yield, quality maturity, coupon rate, type of issue, individual trading characteristics and other market data. Securities that are not traded on an exchange or market are generally valued at cost, monitored by management and fair value adjusted as considered necessary.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

The following table presents fair value measurements, as of December 31, 2013, for the three major categories of U.S. Global’s investments measured at fair value on a recurring basis:
 
 
 
Fair Value Measurement using (in thousands)
 
 
December 31, 2013
 
 
Quoted Prices
(Level 1)
 
Significant
Other Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Trading securities
 
 
 
 
 
 
 
 
Common stock
 
$
16

 
$
—

 
$
—

 
$
16

Offshore fund
 
—

 
877

 
—

 
877

Mutual funds
 
17,748

 
—

 
—

 
17,748

Total trading securities
 
17,764

 
877

 
—

 
18,641

Available-for-sale securities
 
 
 
 
 
 
 
 
Common stock
 
2,638

 
—

 
94

 
2,732

Preferred stock
 
106

 
—

 
91

 
197

Corporate debt
 
252

 
990

 
250

 
1,492

Venture capital investments
 
—

 
—

 
163

 
163

Mutual funds
 
2,759

 
—

 
—

 
2,759

Total available-for-sale securities
 
5,755

 
990

 
598

 
7,343

Total Investments
 
$
23,519

 
$
1,867

 
$
598

 
$
25,984


Approximately 91 percent of the Company’s financial assets measured at fair value are derived from Level 1 inputs including SEC-registered mutual funds and equity securities traded on an active market, seven percent of the Company’s financial assets measured at fair value are derived from Level 2 inputs, including an investment in an offshore fund, and the remaining two percent are Level 3 inputs. The Company recognizes transfers between levels at the end of each quarter.
In Level 2, the Company has an investment in an affiliated offshore fund, classified as trading, with a fair value of $877,108, based on the net asset value per share, which invests in companies in the energy and natural resources sectors. The Company may redeem this investment on the first business day of each month after providing a redemption notice at least forty-five days prior to the proposed redemption date.
The Company also had a Level 2 investment in an affiliated offshore fund, classified as available-for-sale, which invested in dividend-paying equity and debt securities of companies located around the world. The fund liquidated in November 2013, and the Company received the fund’s underlying investments as a non-taxable redemption-in-kind.
Investments in Level 3 are valued using significant unobservable inputs. The common stock, preferred stock and venture capital investments shown in Level 3 above are private companies valued at cost adjusted for known changes in value. The corporate debt in Level 3 is valued at par, which approximates cost.
The Company may redeem the venture capital investment with general parter approval. As of December 31, 2013, the Company had an unfunded commitment of $62,500 related to this investment. This commitment was paid in January 2014.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

The following table is a reconciliation of investments for which unobservable inputs (Level 3) were used in determining fair value during the period ended December 31, 2013:
 
 
 
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis (in thousands)
 
 
Six Months Ended December 31,
 
 
2013
 
2012
 
 
Common
Stock
 
Preferred Stock
 
Corporate Debt
 
Venture
Capital
Investment
 
Common
Stock
 
Preferred
Stock
 
Corporate Debt
 
Venture
Capital
Investment
Beginning Balance
 
$
95

 
$
—

 
$
—

 
$
163

 
$
—

 
$
—

 
$
—

 
$
168

Total unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings (investment income)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Included in other comprehensive income
 
(1
)
 
(6
)
 
—

 
—

 
—

 
—

 
—

 
—

Purchases
 
—

 
97

 
250

 
—

 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Transfers into Level 3
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Ending Balance
 
$
94

 
$
91

 
$
250

 
$
163

 
$
—

 
$
—

 
$
—

 
$
168


There was no unrealized gain or loss included in earnings that is attributable to the change in unrealized loss relating to assets held at the end of the reporting period.
NOTE 4. EQUITY INVESTMENT
In January 2013, the Company entered into a stock purchase agreement with Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm, to purchase 50 percent of the issued and outstanding shares of Galileo for $600,000. The closing date of the transaction was March 31, 2013. Galileo will continue to have overall control of the operations and investment management activities of Galileo, including its management of the Galileo Funds. After one year, Galileo may terminate the agreement or allow the Company to purchase an additional 15 percent of its shares. There was no material basis difference between the cost of the Company’s investment in Galileo and the Company’s proportionate share of the underlying equity in net assets of Galileo. Frank Holmes, CEO, and Susan McGee, President and General Counsel, serve as directors of Galileo.
On January 17, 2014, Galileo provided written notice allowing U.S. Global to purchase an additional 15 percent of the company. U.S. Global plans to proceed with the purchase in the Company's third fiscal quarter. After the additional purchase, the Company will own 65 percent of the outstanding shares of Galileo.
As the Company lacks control over the investee at this time, the Company accounts for its interest in Galileo under the equity method with its share of Galileo’s profit or loss recognized in earnings. Included in other income for the three and six months ending December 31, 2013, is $7,579 and $14,767, respectively, of equity method losses of Galileo.
NOTE 5. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment adviser to U.S. Global Investors Funds (“USGIF” or the “Funds”) and receives a fee based on a specified percentage of net assets under management.
The advisory agreement for the equity funds provides for a base advisory 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. For the three and six months ended December 31, 2013, the Company realized a decrease in its base advisory fee of $286,070 and $418,681, respectively. For the corresponding periods in fiscal year 2013, base advisory fees were adjusted upward $181,850 and downward by $165,064, respectively.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

The following changes were made during the current fiscal year to the mutual funds the Company manages: (1) the Global Emerging Markets Fund liquidated on October 31, 2013, (2) the MegaTrends Fund was reorganized into the Holmes Growth Fund (renamed Holmes Macro Trends Fund), (3) the Tax Free Fund was reorganized into the Near-Term Tax Free Fund, (4) the Government Fund changed from a money market fund to a U.S. Government ultra-short bond fund, and (5) the U.S. Treasury Securities Cash Fund was liquidated on December 27, 2013.  
The Company has agreed to contractually limit the expenses of the institutional class of Global Resources Fund through April 30, 2014, and the Near-Term Tax Free Fund through December 2014. The Company has voluntarily waived or reduced its fees and/or agreed to pay expenses on the remaining funds. These caps will continue on a voluntary basis at the Company’s discretion. The aggregate fees waived and expenses borne by the Company for the three and six months ended December 31, 2013, were $892,841 and $1,748,211, respectively, compared with $854,558 and $1,704,599, respectively, for the corresponding periods in the prior fiscal year.
The above waived fees include amounts waived under an agreement whereby the Company has voluntarily agreed to waive fees and/or reimburse the U.S. Treasury Securities Cash Fund and the Government Fund to the extent necessary to maintain the respective fund’s yield at a certain level as determined by the Company (Minimum Yield). For the three and six months ended December 31, 2013, total fees waived and/or expenses reimbursed as a result of this agreement were $248,813 and $583,577, respectively. For the corresponding periods in fiscal year 2013, the total fees waived and/or expenses reimbursed were $286,600 and $587,235, respectively.
The Company may recapture any fees waived and/or expenses reimbursed within three years after the end of the fund’s fiscal year of such waiver and/or reimbursement to the extent that such recapture would not cause the fund’s yield to fall below the Minimum Yield. Thus, $736,531 of the waiver for the Government Fund is recoverable by the Company through December 31, 2014; $509,874 through December 31, 2015; and $498,342 through December 31, 2016 . The U.S. Treasury Securities Cash Fund also had waivers subject to future recapture; however, because the fund was liquidated in December 2013, there will be no recapture.
The Company receives shareholder servicing fees based on the value of assets held through broker-dealer platforms.
Effective in December 2013, administrative service fees paid to the Company changed from an annual rate of 0.08 percent to 0.10 percent per investor class and from 0.06 percent to 0.08 percent per institutional class of each fund, based on average daily net assets, plus $10,000 per Fund per year.
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. USSI served as the transfer agent to the USGIF until conversion to a new transfer agent on December 9, 2013. Before the conversion, USSI received fees based on the number of shareholder accounts, transaction and activity-based fees and certain miscellaneous fees directly from USGIF shareholders. The transfer agency fees are included in discontinued operations in the statement of operations.
The Company provided advisory services for three offshore clients and received monthly advisory fees based on the net asset values of the clients and monthly performance fees, if any, based on the overall increase in net asset values. One of the offshore funds liquidated in November 2013. The Company recorded advisory and performance fees from these clients totaling $52,790 and $105,068 for the three and six months ended December 31, 2013, and $79,012 and $169,574 for the corresponding periods in the prior fiscal year. Frank Holmes, CEO, serves as a director of the offshore clients.
NOTE 6. BORROWINGS
As of December 31, 2013, the Company has no long-term liabilities.
The Company has access to a $1 million credit facility with a 1-year maturity for working capital purposes. The credit agreement requires the Company to maintain certain quarterly financial covenants to access the line of credit. The Company has been in compliance with all financial covenants during the fiscal year. As of December 31, 2013, this credit facility remained unutilized by the Company.
NOTE 7. STOCKHOLDERS’ EQUITY
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. A monthly dividend of $0.005 per share is authorized through March 31, 2014, and will be reviewed by the board quarterly.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

The Board of Directors approved a share repurchase program on December 7, 2012, authorizing the Company to purchase up to $2.75 million of its outstanding 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. This share repurchase authorization ended on December 31, 2013. For the three and six months ended December 31, 2013, the Company had repurchased 28,227 and 41,446 class A shares using cash of $72,528 and $109,737, respectively. On December 12, 2013, the Board of Directors renewed the repurchase program for calendar year 2014. The total amount of shares that may be repurchased in 2014 under the renewed program is $2.75 million. The acquired shares may be used for corporate purposes, including shares issued to employees in the Company’s stock-based compensation programs.
The Company accounts for stock-based compensation in accordance with ASC 718 Compensation – Stock Compensation. Stock-based compensation expense is recorded for the cost of stock options. Stock-based compensation expense for the three and six months ended December 31, 2013, was $610 and $1,220, respectively, compared to $610 and $8,320 in the corresponding periods in fiscal 2013. As of December 31, 2013, and 2012, respectively, there was approximately $6,507 and $8,947 of total unrecognized share-based compensation cost related to share-based compensation granted under the plans that will be recognized over the remainder of their respective vesting periods.
Stock compensation plans
The Company’s stock option plans provide for the granting of class A shares as either incentive or nonqualified stock options to employees and non-employee directors. Options are subject to terms and conditions determined by the Compensation Committee of the Board of Directors. Options outstanding at December 31, 2013, were 29,000 at a weighted average exercise price of $17.03. Options exercisable at December 31, 2013, were 26,000 at a weighted average exercise price of $18.25. There was no option activity for the six months ended December 31, 2013. 
NOTE 8. EARNINGS PER SHARE
The basic earnings per share (“EPS”) calculation excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised.
The following table sets forth the computation for basic and diluted EPS:
 
 
Six Months Ended December 31,
 
 
2013
 
2012
Income (loss) from continuing operations
 
$
(966,442
)
 
$
270,772

Loss from discontinued operations
 
(236,178
)
 
(55,987
)
Net income (loss)
 
$
(1,202,620
)
 
$
214,785

Weighted average number of outstanding shares
 
 
 
 
Basic
 
15,471,816

 
15,481,547

Effect of dilutive securities
 
 
 
 
Employee stock options
 
—

 
—

Diluted
 
15,471,816

 
15,481,547

Earnings (loss) per share
 
 
 
 
Basic
 
 
 
 
   Income (loss) from continuing operations
 
$
(0.06
)
 
$
0.01

   Loss from discontinued operations
 
(0.02
)
 
0.00

   Net income (loss)
 
$
(0.08
)
 
$
0.01

Diluted
 
 
 
 
   Income (loss) from continuing operations
 
$
(0.06
)
 
$
0.01

   Loss from discontinued operations
 
(0.02
)
 
0.00

   Net income (loss)
 
$
(0.08
)
 
$
0.01

 

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

 
 
Three Months Ended December 31,
 
 
2013
 
2012
Income (loss) from continuing operations
 
$
(957,674
)
 
$
177,732

Loss from discontinued operations
 
(207,533
)
 
(11,747
)
Net income (loss)
 
$
(1,165,207
)
 
$
165,985

Weighted average number of outstanding shares
 
 
 
 
Basic
 
15,472,370

 
15,487,207

Effect of dilutive securities
 
 
 
 
Employee stock options
 
—

 
—

Diluted
 
15,472,370

 
15,487,207

Earnings (loss) per share
 
 
 
 
Basic
 
 
 
 
   Income (loss) form continuing operations
 
$
(0.06
)
 
$
0.01

   Loss from discontinued operations
 
(0.02
)
 
0.00

   Net income (loss)
 
$
(0.08
)
 
$
0.01

Diluted
 
 
 
 
   Income (loss) form continuing operations
 
$
(0.06
)
 
$
0.01

   Loss from discontinued operations
 
(0.02
)
 
0.00

   Net income (loss)
 
$
(0.08
)
 
$
0.01

The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the three and six months ended December 31, 2013 and 2012, 29,000 options were excluded from diluted EPS.
The Company may repurchase stock from employees. The Company made no repurchases of shares of its class B, or class C common stock during the six months ended December 31, 2013. During the three and six months ended December 31, 2013, the Company repurchased 28,227 and 41,446 class A shares on the open market using cash of $72,528 and $109,737, respectively. The Company did not repurchase any shares of its class A common stock on the open market during the same periods in fiscal year 2013. Upon repurchase, these shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.
NOTE 9. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return. 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. The current deferred tax asset primarily consists of unrealized losses on trading securities. The long-term deferred tax asset is composed primarily of capital loss carryover, unrealized losses and other-than-temporary impairments on available-for-sale securities and the difference in tax treatment of stock options.

For federal income tax purposes at December 31, 2013, the Company has capital loss carryovers of approximately $920,000, expiring in fiscal year 2018. The Company also has charitable contribution carryovers of approximately $103,000, expiring in fiscal years 2018 - 2019.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. At December 31, 2013, and June 30, 2013, a valuation allowance of $34,995 and $27,286, respectively, was included related to the charitable contribution carryover.
NOTE 10. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company operates principally in two business segments: providing investment management services to the funds it manages and investing for its own account in an effort to add growth and value to its cash position. The following schedule details total revenues and income by business segment:
 

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

 
 
Investment
Management
Services
 
Corporate
Investments
 
Consolidated
Six months ended December 31, 2013
 
 
 
 
 
 
Net operating revenues
 
$
5,791,745

 
$
—

 
$
5,791,745

Net other income
 
$
—

 
$
1,094,108

 
1,094,108

Income (loss) from continuing operations before income taxes
 
$
(2,540,968
)
 
$
1,094,108

 
(1,446,860
)
Loss from discontinued operations
 
$
(236,178
)
 
$
—

 
(236,178
)
Depreciation
 
$
128,230

 
$
—

 
$
128,230

Capital expenditures
 
$
—

 
$
—

 
$
—

Gross identifiable assets at December 31, 2013
 
$
9,940,610

 
$
26,692,640

 
$
36,633,250

Deferred tax asset
 

 

 
$
632,285

Consolidated total assets at December 31, 2013
 

 

 
$
37,265,535

Six months ended December 31, 2012
 
 
 
 
 
 
Net operating revenues
 
$
9,385,767

 
$
—

 
$
9,385,767

Net other income
 
$
—

 
$
361,638

 
361,638

Income from continuing operations before income taxes
 
$
117,971

 
$
361,638

 
479,609

Loss from discontinued operations
 
$
(55,987
)
 
$
—

 
(55,987
)
Depreciation
 
$
137,577

 
$
—

 
$
137,577

Capital expenditures
 
$
39,159

 
$
—

 
$
39,159

Three months ended December 31, 2013
 
 
 
 
 
 
Net operating revenues
 
$
2,739,744

 
$
—

 
$
2,739,744

Net other income
 
$
—

 
$
40,646

 
$
40,646

Income (loss) from continuing operations before income taxes
 
$
(1,464,732
)
 
$
40,646

 
$
(1,424,086
)
Loss from discontinued operations
 
$
(207,533
)
 
$
—

 
$
(207,533
)
Depreciation
 
$
63,777

 
$
—

 
$
63,777

Capital expenditures
 
$
—

 
$
—

 
$
—

Three months ended December 31, 2012
 
 
 
 
 
 
Net operating revenues
 
$
4,973,223

 
$
—

 
$
4,973,223

Net other income
 
$
—

 
$
160,987

 
$
160,987

Income from continuing operations before income taxes
 
$
162,055

 
$
160,987

 
$
323,042

Loss from discontinued operations
 
$
(11,747
)
 
$
—

 
$
(11,747
)
Depreciation
 
$
68,830

 
$
—

 
$
68,830

Capital expenditures
 
$
39,159

 
$
—

 
$
39,159

NOTE 11. CONTINGENCIES AND COMMITMENTS
The Company continuously reviews all investor, employee and vendor complaints, and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated through consultation with legal counsel, and a loss contingency is recorded if probable and reasonably estimable.
During the normal course of business, the Company may be subject to claims, legal proceedings, and other contingencies. These matters are subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. The Company establishes accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial statements of the Company.
The Board has authorized a monthly dividend of $0.005 per share through March 31, 2014, at which time it will be considered for continuation by the Board. 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 expected to be paid to class A and class C shareholders from January to March 2014 is approximately $232,327.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q


NOTE 12. DISCONTINUED OPERATIONS
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. USSI served as transfer agent until conversion to the new transfer agent in December 2013.
The transfer agency results, together with expenses associated with discontinuing transfer agency operations, are reflected as discontinued operations in the statement of operations and are therefore excluded from continuing operations results. These expenses include approximately $65,187 of expenses related to leased equipment that will not be utilized. Comparative periods shown in the statement of operations have been adjusted to conform with this presentation.
The assets and liabilities related to the transfer agency business are as follows at December 31, 2013:
 
 
As of December 31, 2013
Assets
 
Receivables
$
19,430

Property and equipment, net
35,777

Total assets held related to discontinued operations
$
55,207

Liabilities
 
Accrued compensation
$
31,010

Other accrued expenses
81,094

Total liabilities held related to discontinued operations
$
112,104

The components of income from discontinued operations were as follows for the three and six months ended December 31, 2013 and 2012:
 
 
 
Three Months Ended December 31,
 
 
2013
 
2012
Operating revenue
 
$
226,812

 
$
356,991

Operating expenses
 
541,256

 
374,790

Loss from discontinued operations before income taxes
 
(314,444
)
 
(17,799
)
Income tax benefit
 
(106,911
)
 
(6,052
)
Loss from discontinued operations, net of tax
 
$
(207,533
)
 
$
(11,747
)

 
 
Six Months Ended December 31,
 
 
2013
 
2012
Operating revenue
 
$
540,404

 
$
721,362

Operating expenses
 
898,249

 
806,192

Loss from discontinued operations before income taxes
 
(357,845
)
 
(84,830
)
Income tax benefit
 
(121,667
)
 
(28,843
)
Loss from discontinued operations, net of tax
 
$
(236,178
)
 
$
(55,987
)

NOTE 13. SUBSEQUENT EVENTS
On January 17, 2014, Galileo provided written notice allowing U.S. Global to purchase an additional 15 percent of Galileo. The Company plans to proceed with the purchase in the Company’s third fiscal quarter. After the additional purchase, the Company will own 65 percent of the outstanding shares of Galileo.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S. Global has made forward-looking statements concerning the Company’s performance, financial condition, and operations in this report. The Company from time to time may also make forward-looking statements in its public filings and press releases. Such forward-looking statements are subject to various known and unknown risks and uncertainties and do not guarantee future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Company’s control, including: (i) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, (iii) the effect of government regulation on the Company’s business, and (iv) market, credit, and liquidity risks associated with the Company’s investment management activities. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward-looking information not to place undue reliance on such statements. All such forward-looking statements are current only as of the date on which such statements were made.
BUSINESS SEGMENTS
The Company, with principal operations located in San Antonio, Texas, manages two business segments: (1) the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors; and (2) the Company invests for its own account in an effort to add growth and value to its cash position. Although the Company generates the majority of its revenues from its investment advisory segment, the Company holds a significant amount of its total assets in investments. The following is a brief discussion of the Company’s two business segments.
Investment Management Services
The Company generates substantially all of its operating revenues from managing and servicing USGIF and other advisory clients. 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 SEC-registered funds managed by the Company can be found on the Company’s website, www.usfunds.com, including performance information for each fund for various time periods, assets under management as of the most recent month end and inception date of each fund.
SEC-registered mutual fund shareholders are not required to give advance notice prior to redemption of shares in the funds; however, the equity funds charge a redemption fee if the fund shares have been held for less than the applicable periods of time set forth in the funds’ prospectuses. The fixed income funds charge no redemption fee. Detailed information about redemption fees can be found in the funds’ prospectuses, which are available on the Company’s website, www.usfunds.com.
The Company provided advisory services for three offshore clients and received monthly advisory fees based on the net asset values of the clients and monthly performance fees, if any, based on the overall increase in net asset values. One of the offshore funds liquidated in November 2013. The Company recorded advisory and performance fees from these clients totaling $52,790 and $105,068 for the three and six months ended December 31, 2013, respectively, and $79,012 and $169,574 for the corresponding periods in fiscal 2013. Frank Holmes, CEO, serves as a director of the offshore clients.
At December 31, 2013, total assets under management as of period-end, including both SEC-registered funds and offshore clients, were $0.972 billion versus $1.610 billion at December 31, 2012, a decrease of 39.6 percent. During the six months ended December 31, 2013, average assets under management were $1.153 billion versus $1.671 billion during the six months ended December 31, 2012. Total assets under management as of period-end at December 31, 2013, were $0.972 billion versus $1.162 billion at June 30, 2013, the Company’s prior fiscal year end.
 

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

The following tables summarize the changes in assets under management for the SEC-registered funds for the three and six months ended December 31, 2013, and 2012:
 
 
 
Changes in Assets Under Management (in thousands)
 
 
Three Months Ended December 31, 2013
 
 
Equity
 
Money Market
and
Fixed Income
 
Total
Beginning Balance
 
$
898,486

 
$
267,003

 
$
1,165,489

Market appreciation (depreciation)
 
(27,804
)
 
722

 
(27,082
)
Dividends and distributions
 
(20,287
)
 
(401
)
 
(20,688
)
Net shareholder redemptions
 
(32,366
)
 
(130,213
)
 
(162,579
)
Ending Balance
 
$
818,029

 
$
137,111

 
$
955,140

Average investment management fee
 
0.94
%
 
0.00
%
 
0.75
%
Average net assets
 
$
860,075

 
$
232,322

 
$
1,092,397

 
 
Changes in Assets Under Management (in thousands)
 
 
Three Months Ended December 31, 2012
 
 
Equity
 
Money Market
and
Fixed Income
 
Total
Beginning Balance
 
$
1,436,690

 
$
294,443

 
$
1,731,133

Market appreciation (depreciation)
 
(71,492
)
 
185

 
(71,307
)
Dividends and distributions
 
(14,981
)
 
(437
)
 
(15,418
)
Net shareholder redemptions
 
(58,922
)
 
(5,926
)
 
(64,848
)
Ending Balance
 
$
1,291,295

 
$
288,265

 
$
1,579,560

Average investment management fee
 
0.97
%
 
0.00
%
 
0.80
%
Average net assets
 
$
1,352,879

 
$
294,107

 
$
1,646,986

 
 
Changes in Assets Under Management (in thousands)
 
 
Six Months Ended December 31, 2013
 
 
Equity
 
Money Market
and
Fixed Income
 
Total
Beginning Balance
 
$
857,302

 
$
283,144

 
$
1,140,446

Market appreciation
 
43,379

 
863

 
44,242

Dividends and distributions
 
(20,287
)
 
(845
)
 
(21,132
)
Net shareholder redemptions
 
(62,365
)
 
(146,051
)
 
(208,416
)
Ending Balance
 
$
818,029

 
$
137,111

 
$
955,140

Average investment management fee
 
0.95
%
 
0.00
%
 
0.74
%
Average net assets
 
$
877,243

 
$
255,450

 
$
1,132,693

 
 
Changes in Assets Under Management (in thousands)
 
 
Six Months Ended December 31, 2012
 
 
Equity
 
Money Market
and
Fixed Income
 
Total
Beginning Balance
 
$
1,289,160

 
$
302,770

 
$
1,591,930

Market appreciation
 
118,514

 
1,025

 
119,539

Dividends and distributions
 
(14,981
)
 
(832
)
 
(15,813
)
Net shareholder redemptions
 
(101,398
)
 
(14,698
)
 
(116,096
)
Ending Balance
 
$
1,291,295

 
$
288,265

 
$
1,579,560

Average investment management fee
 
0.97
%
 
0.00
%
 
0.80
%
Average net assets
 
$
1,340,888

 
$
297,917

 
$
1,638,805


As shown above, period-end assets under management were lower at December 31, 2013, compared to December 31, 2012. Also, average net assets for the three- and six-month periods in the current fiscal year were lower than the same periods in the previous fiscal year. Net shareholder redemptions and market depreciation adversely affected assets in both the current quarter and the same quarter in the previous year. The money market funds in both periods decreased as shareholders sought alternatives to low yields. During December 2013, the U.S. Government Securities Savings Fund converted from a money

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

market fund to a bond fund, the U.S. Government Ultra-Short Bond Fund, and the U.S. Treasury Securities Cash Fund was liquidated. The conversion and liquidation of these funds also contributed to lower assets under management. The six-month periods for both fiscal years had net shareholder redemptions offset by market appreciation, resulting in an overall decrease in net assets.
The average annualized investment management fee rate (total mutual fund advisory fees, excluding performance fees, as a percentage of average assets under management) was 75 basis points in the second quarter of fiscal 2014 and 80 basis points in the same period in fiscal 2013. The average investment management fee for the fixed income funds was nil for the periods. This is due to fee waivers on these funds as discussed in Note 5 to the financial statements, including a voluntary agreement to support the yields for the money market funds. 
 
Investment Activities
Management believes it can more effectively manage the Company’s cash position by broadening the types of investments used in cash management and continues to believe that such activities are in the best interest of the Company. The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices. This source of revenue does not remain consistent and is dependent on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions.
As of December 31, 2013, the Company held investments with a market value of approximately $26.0 million and a cost basis of approximately $25.5 million. The market value of these investments is approximately 69.7 percent of the Company’s total assets. See Note 2 (Investments) and Note 3 (Fair Value Disclosures) for additional detail regarding investment activities.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31, 2013 AND 2012

The Company posted net loss of $1,165,207 ($0.08 per share loss) for the three months ended December 31, 2013, compared with net income of $165,985 ($0.01 per share) for the three months ended December 31, 2012, a decrease of $1,331,192, or 802.0 percent.
Operating Revenues
Total consolidated operating revenues for the three months ended December 31, 2013, decreased $2,233,479, or 44.9 percent, compared with the three months ended December 31, 2012. This decrease was primarily attributable to the following:
 
•
Mutual fund advisory fees decreased by $1,726,416, or 49.4 percent, as a result of lower assets under management and increased performance fee adjustments. Mutual fund advisory fees are comprised of two components: a base management fee and a performance fee. The performance fee, which applies to the equity funds only, is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a Fund’s performance and that of its designated benchmark index over the prior rolling 12 months.
•
Base management fees decreased $1,258,496 as a result of lower assets under management due to market depreciation and shareholder redemptions in the natural resources and emerging markets funds.
•
Performance fee adjustments paid out in the current period increased $467,920 versus the prior period.
•
Distribution fee revenue, shareholder services fee revenue and administrative services fee revenue decreased by $275,745, $130,020, and $75,076, or 35.3 percent, 36.0 percent and 29.2 percent, respectively, as a result of lower average net assets under management upon which these fees are based.
Operating Expenses
Total consolidated operating expenses for the three months ended December 31, 2013, decreased $606,692, or 12.6 percent, compared with the three months ended December 31, 2012. This was largely attributable to the following:
 
•
Employee compensation and benefits decreased by $445,004, or 19.2 percent, primarily as a result of lower performance-based bonuses and fewer employees.
•
Platform fees decreased $280,951, or 38.3 percent, primarily due to lower assets held through broker-dealer platforms.
•
These decreases were partially offset by an increase in general and administrative expenses of $177,825, or 12.6 percent, primarily due to expenses related to strategic fund restructurings.
 

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

Other Income
•
Total consolidated other income for the three months ended December 31, 2013, increased $120,341, or 74.8 percent, compared with the three months ended December 31, 2012. This was largely attributable to increases in dividend and interest income during the three months ended December 31, 2013.
Loss on Discontinued Operations
Total loss on discontinued operations for the three months ended December 31, 2013, increased by $195,786, or 1,666.7 percent, compared to the prior period as a result of lower revenue and higher expenses in the current period due to transition of the transfer agency to a third party.

RESULTS OF OPERATIONS – SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
The Company posted net loss of $1,202,620 ($0.08 per share loss) for the six months ended December 31, 2013, compared with net income of $214,785 ($0.01 per share) for the six months ended December 31, 2012, a decrease of $1,417,405, or 659.9 percent.
Operating Revenues
Total consolidated operating revenues for the six months ended December 31, 2013, decreased $3,594,022, or 38.3 percent, compared with the six months ended December 31, 2012. This decrease was primarily attributable to the following:
 
•
Mutual fund advisory fees decreased by $2,606,479, or 40.6 percent, as a result of lower assets under management and increased performance fee adjustments. Mutual fund advisory fees are comprised of two components: a base management fee and a performance fee. The performance fee, which applies to the equity funds only, is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a Fund’s performance and that of its designated benchmark index over the prior rolling 12 months.
•
Base management fees decreased $2,352,862 as a result of lower assets under management due to market depreciation and shareholder redemptions in the natural resources and emerging markets funds.
•
Performance fee adjustments paid out in the current period increased $253,617 versus the prior period.
•
Distribution fee revenue, shareholder services fee revenue and administrative services fee revenue decreased by $516,386, $248,695 and $157,956, or 33.3 percent, 33.6 percent and 30.9 percent, respectively, as a result of lower average net assets under management upon which these fees are based.
Operating Expenses
Total consolidated operating expenses for the six months ended December 31, 2013, decreased $935,083, or 10.1 percent, compared with the six months ended December 31, 2012. This was largely attributable to the following:
 
•
Employee compensation and benefits decreased by $720,431, or 16.1 percent, primarily as a result of lower performance-based bonuses and fewer employees.
•
Platform fees decreased $487,594, or 33.7 percent, primarily due to lower assets held through broker-dealer platforms.
•
These decreases were partially offset by an increase in general and administrative expenses of $363,227, or 13.2 percent, primarily due to expenses related to strategic fund restructurings.
 
Other Income
•
Total consolidated other income for the six months ended December 31, 2013, increased $732,470, or 202.5 percent, compared with the six months ended December 31, 2012. This was largely attributable to gains realized upon sales of available-for-sale securities during the six months ended December 31, 2013.
Loss on Discontinued Operations
Total loss on discontinued operations for the six months ended December 31, 2013, increased by $180,191, or 321.8 percent, compared to the prior period as a result of lower revenue and higher expenses in the current period due to transition of the transfer agency to a third party.

LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2013, the Company had net working capital (current assets minus current liabilities) of approximately $23.5 million and a current ratio (current assets divided by current liabilities) of 11.8 to 1. With approximately $4.6 million in cash and cash equivalents and approximately $26.0 million in marketable securities, the Company has adequate liquidity to meet its

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

current obligations. Total shareholders’ equity is approximately $35.1 million, with cash, cash equivalents, and marketable securities comprising 82.0 percent of total assets.
As of December 31, 2013, the Company has no long-term liabilities. The Company has access to a $1 million credit facility with a one-year maturity for working capital purposes. The credit agreement requires the Company to maintain certain quarterly financial covenants to access the line of credit. The Company has been in compliance with all financial covenants during the fiscal year. As of December 31, 2013, this credit facility remained unutilized by the Company.
Management believes current cash reserves, financing available, and potential cash flow from operations will be sufficient to meet foreseeable cash needs or capital necessary for the above-mentioned activities and allow the Company to take advantage of opportunities for growth whenever available.
With the exception of the mutually agreed upon termination of the transfer agency agreement between USSI and USGIF, the investment advisory and related contracts between the Company or its subsidiaries and USGIF have been renewed through September 2014. The Company provided advisory services to three offshore clients for which the Company received a monthly advisory fee and performance fee, if any, based on agreed-upon performance measurements. One of the offshore funds liquidated in November 2013. The contracts between the Company and these offshore clients expire periodically, and management anticipates that its remaining offshore clients will renew the contracts.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of critical accounting policies that the Company follows, please refer to the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2013. As discussed in Note 1 of the Notes to Consolidated Financial Statements, the Company has adopted certain recently issued financial accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s balance sheet includes assets whose fair value is subject to market risks. Due to the Company’s investments in equity securities, equity price fluctuations represent a market risk factor affecting the Company’s consolidated financial position. The carrying values of investments subject to equity price risks are based on quoted market prices or, if not actively traded, management’s estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported 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 December 31, 2013, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.
 
 
 
Fair Value at
December 31, 2013
 
Hypothetical
Percentage Change
 
Estimated Fair
Value After
Hypothetical Price
Change
 
Increase (Decrease) in
Shareholders’ Equity,
Net of Tax
Trading securities1
 
$
18,640,758

 
25% increase
 
$
23,300,948

 
$
3,075,725

 
 
 
 
25% decrease
 
$
13,980,569

 
$
(3,075,725
)
Available-for-sale2
 
$
7,343,679

 
25% increase
 
$
9,179,599

 
$
1,211,707

 
 
 
 
25% decrease
 
$
5,507,759

 
$
(1,211,707
)
1Unrealized and realized gains and losses on trading securities are included in earnings in the statement of operations.
2Unrealized and realized gains and losses on available-for-sale securities are excluded from earnings and recorded in other comprehensive income 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.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2013, was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of December 31, 2013.
There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

PART II. OTHER INFORMATION
ITEM 1A.    RISK FACTORS
For a discussion of risk factors which could affect the Company, please refer to Item 1A, “Risk Factors” in the Annual Report on Form 10-K for the year ended June 30, 2013. There have been no material changes since fiscal year end to the risk factors listed therein.
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
 
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
07-01-13 to 07-31-13
 
3,980

 
$
9,627

 
$
2.42

 
3,980

 
$
2,566,765

08-01-13 to 08-31-13
 
3,480

 
10,682

 
3.07

 
3,480

 
2,556,083

09-01-13 to 09-30-13
 
5,759

 
16,900

 
2.93

 
5,759

 
2,539,183

10-01-13 to 10-31-13
 
5,330

 
14,810

 
2.78

 
5,330

 
2,524,373

11-01-13 to 11-30-13
 
2,700

 
6,822

 
2.53

 
2,700

 
2,517,551

12-01-13 to 12-31-13
 
20,197

 
50,896

 
2.52

 
20,197

 
See Note 3

Total
 
41,446

 
$
109,737

 
$
2.65

 
41,446

 


1 
The Board of Directors of the company approved on December 7, 2012, a repurchase of up to $2.75 million of its outstanding class A common stock from time to time on the open market through calendar year 2013 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, and will continue through calendar year 2014. The total amount of shares that may be repurchased in 2014 under the renewed program is $2.75 million.
ITEM 5.    OTHER INFORMATION
Investors and others should note that the Company announces material financial information to its investors using the website, SEC filings, press releases, public conference calls and webcasts. The Company also uses social media to communicate with its customers and the public about the Company. It is possible that the information it posts on social media could be deemed to be material information. Therefore, the Company encourages investors, the media, and others interested in the Company to review the information it posts on social media channels listed below. This list may be updated from time to time.
https://www.facebook.com/USFunds
https://twitter.com/USFunds
Information contained on the Company’s website or on social media channels is not deemed part of this report.

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U.S. GLOBAL INVESTORS, INC.
DECEMBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

ITEM 6.    EXHBITS
1. Exhibits –
 
10.3
Amended and Restated Administrative Services Agreement, dated December 9, 2013, by and between U.S. Global Investors Funds and U.S. Global Investors, Inc., included herein

31
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
32
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document