SEC Filing Summary
Filing and period: The provided document is A-Mark Precious Metals, Inc.’s Form 10-K for the fiscal year ended June 30, 2016, filed September 22, 2016. It does not appear to be a filing for Gold.Com, Inc. or for 2015 Q4; investors should verify the company and reporting period.
Business Context
A-Mark is a full-service precious-metals trading company operating in one reportable segment. It wholesales gold, silver, platinum and palladium products and provides financing, hedging, storage, consignment, logistics and customized financial services. Operations include Industrial, Coin & Bar, Trading, Finance, Collateral Finance Corporation, Transcontinental Depository Services and A-M Global Logistics.
- Customers include financial institutions, mints, refiners, manufacturers, dealers, retailers, investors and collectors across six continents.
- Logistics commenced operations in Las Vegas in July 2015.
- The Company had 83 full-time employees at June 30, 2016.
- Two customers represented 29.0% of fiscal 2016 revenue: HSBC Bank USA at 18.4% and JM Bullion at 10.6%.
Financial Results and Key Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $6.784 billion | $6.070 billion | +11.8% |
| Gross profit | $34.5 million | $24.5 million | +40.9% |
| Gross margin | 0.509% | 0.404% | +10.5 basis points |
| SG&A | $22.2 million | $17.1 million | +29.8% |
| Interest income | $8.8 million | $6.1 million | +44.8% |
| Interest expense | $6.3 million | $4.3 million | +46.6% |
| Income before taxes | $15.6 million | $9.1 million | +70.1% |
| Net income | $9.3 million | $7.1 million | +31.5% |
| Basic diluted EPS | $1.33 | $1.01 | +31.7% |
| Diluted EPS | $1.30 | $1.00 | +30.0% |
- Gold ounces sold increased 44.6% to 2.968 million; silver ounces sold increased 42.8% to 126.349 million.
- Trading ticket volume increased 4.0% to 88,486, while inventory turnover declined 6.1% to 30.9 times.
- Secured loans outstanding increased 239.0% to 1,173, primarily following acquisitions of bullion-based loan portfolios.
- Revenue growth reflected higher trading volumes and market volatility despite average gold and silver prices declining 4.7% and 10.8%, respectively.
- Gross-margin expansion was attributed principally to wider premium spreads during periods of higher volatility and constrained bullion supply, particularly in the first fiscal quarter.
Liquidity, Debt and Cash Flow
| Metric | June 30, 2016 | June 30, 2015 |
|---|---|---|
| Cash | $17.1 million | $20.9 million |
| Total assets | $437.1 million | $326.7 million |
| Total liabilities | $373.8 million | $270.7 million |
| Stockholders’ equity | $63.3 million | $56.0 million |
| Lines of credit | $212.0 million | $147.0 million |
| Product financing arrangement | $59.4 million | $39.4 million |
| Secured loans receivable | $70.5 million | $49.3 million |
| Inventory | $245.1 million | $191.5 million |
- Net cash used in operating activities was $56.2 million, compared with $4.7 million in FY2015, mainly due to increases in inventory, receivables and derivative assets.
- Net cash used in investing activities was $30.2 million, including $24.1 million of net secured-loan funding, $4.7 million of investments and $1.5 million of capital expenditures.
- Net cash provided by financing activities was $82.6 million, primarily reflecting $65.0 million of additional credit-facility borrowings and $19.9 million from product financing arrangements.
- The March 2016 Trading Credit Facility provides access of up to $275.0 million, consisting of a $225.0 million base and a $50.0 million accordion option. Borrowings bear interest at one-month LIBOR plus 2.50% for revolving loans and 4.50% for bridge loans.
- Availability after borrowings was approximately $17.8 million at the latest approved borrowing base before June 30, 2016. The Company reported compliance with its covenants, including a $35.0 million minimum tangible-net-worth requirement.
- Quarterly dividends increased from $0.05 to $0.07 per share during FY2016. Future dividends remain subject to Board approval, liquidity, performance and debt covenants.
Material Changes and Unusual Items
- The Company established and began operating its Las Vegas logistics facility, increasing SG&A and internalizing storage and fulfillment activities.
- SG&A increased due to performance-based compensation, logistics costs, information-technology development, higher salaries and the hiring of a CFO and other management personnel.
- The Company acquired additional interests in an online precious-metals retailer, increasing ownership to 20% and producing $0.7 million of equity-method income.
- Net derivative losses declined substantially to $5.9 million from $52.8 million in FY2015. The Company states that derivative results were substantially offset by changes in the value of hedged inventory and commitments.
- The effective tax rate increased to approximately 40.4% from 22.9%, primarily because FY2015 included non-recurring state-tax benefits.
- Inventory subject to price risk increased to $475.3 million, while the reported net inventory exposure after derivatives was only $0.3 million at June 30, 2016.
Outlook, Risks and Contingencies
Management intends to grow transaction volume, expand in Europe and Asia, increase complementary services and pursue selective acquisitions. The filing does not provide quantitative revenue or earnings guidance.
- Financing dependence: The business relies heavily on a one-year, uncommitted credit facility. Failure to renew, refinance or comply with covenants could materially restrict operations.
- Commodity and volatility risk: Profitability depends partly on market volatility, trading spreads, supply conditions and customer demand. Hedging may not fully protect against price movements or counterparty defaults.
- Credit risk: The Company provides trade credit, secured loans, advances and other financing. Losses could arise from inadequate collateral values, borrower defaults or insufficient reserves.
- Concentration risk: Two customers accounted for 29.0% of FY2016 revenue, and government mint distribution relationships may be terminated.
- Operational and custody risk: Precious metals held at Company and third-party facilities are exposed to theft, loss, damage, restricted access, fraud and counterfeiting. The new logistics facility increases direct responsibility and insurance exposure.
- Regulatory and technology risk: The Company is subject to financial-services, anti-money-laundering, derivatives, tax, cybersecurity and other regulatory requirements.
- Tax contingencies: The Company was subject to IRS examinations, including an examination for FY2015, and could be responsible for certain liabilities under its tax separation agreement with former parent Spectrum Group International.
- Subsequent events: In August 2016, a joint venture acquired a 55% interest in SilverTowne Mint for an aggregate investment of $4.2 million, including a $0.5 million promissory note and potential earn-out payments of up to $1.0 million annually for three years.
- The Company stated that disclosure controls and internal control over financial reporting were effective as of June 30, 2016. Because it was a smaller reporting company, no external auditor attestation report on internal control was required.
Investor Verification Checklist
- Verify that the intended issuer is A-Mark Precious Metals, Inc. rather than Gold.Com, Inc., and that the intended period is fiscal year 2016 rather than 2015 Q4.
- Reconcile the very low 0.509% gross margin with the Company’s high-volume precious-metals trading model and marked-to-market accounting.
- Review the borrowing-base calculation, facility maturity, covenant headroom and renewal terms for the $275.0 million Trading Credit Facility.
- Assess whether operating cash-flow use and increased inventory, secured loans and product-financing obligations create liquidity pressure.
- Evaluate customer concentration, related-party transactions and the $717.3 million of sales to the equity-method investee.
- Review the terms, funding requirements and earn-out exposure associated with the post-year-end SilverTowne Mint transaction.
- Examine the status and potential exposure from IRS and former-parent tax examinations and the tax separation agreement.
- Confirm the sustainability of the $0.07 quarterly dividend given cash needs, debt covenants and the Company’s reliance on external financing.