Business Context and Reporting Period
The provided filing is for A-Mark Precious Metals, Inc., not Gold.Com, Inc. It is a Form 10-K for the fiscal year ended June 30, 2014; the request metadata references “2013 Q4,” but the filing’s fourth-quarter data are for fiscal 2014. A-Mark is a full-service precious-metals wholesaler and market maker offering bullion trading, financing, hedging, storage, consignment, logistics and related services across one reportable segment.
A-Mark was spun off from Spectrum Group International, Inc. (SGI) on March 14, 2014, and began trading on Nasdaq under “AMRK” on March 17, 2014. Historical financial statements include periods when A-Mark operated as part of SGI and therefore may not reflect the costs of operating as a standalone public company.
Financial Performance and Position
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $5.979 billion | $7.248 billion | Down 17.5% |
| Gross profit | $27.4 million | $30.3 million | Down 9.6% |
| Gross margin | 0.46% | 0.42% | Improved |
| Net income | $8.3 million | $12.5 million | Down 34.0% |
| Diluted EPS | $1.09 | $1.59 | Down 31.4% |
| Operating cash flow | $(16.7) million | $(1.2) million | Greater use of cash |
| Cash at year-end | $13.2 million | $21.6 million | Down $8.4 million |
- Fiscal 2014 gross profit was supported by higher demand for custom gold and silver products with higher premiums and margins. Selling, general and administrative expense increased 10.3% to $15.6 million, reflecting a new logistics center, additional personnel, legal and accounting costs, and public-company expenses.
- Interest income declined 28.2% to $5.6 million despite secured loans increasing to 128 from 73 at year-end. Interest expense increased 12.7% to $3.9 million.
- Total assets were $305.1 million and stockholders’ equity was $49.5 million at June 30, 2014. Inventories were $175.6 million, receivables were $102.8 million, and approximately 95% of assets consisted of cash, receivables and precious-metals inventory.
- Lines of credit were $135.2 million at year-end versus $95.0 million in 2013. The Trading Credit Facility had a maximum commitment of $170.0 million, leaving $34.8 million of formula-based availability. Borrowings were payable on demand and secured by receivables and inventory.
- Other financing obligations included $8.7 million of borrowed-metals liabilities and $24.6 million of product-financing obligations.
- Cash used in investing activities was $5.6 million, primarily for secured-loan acquisitions, capital expenditures, technology and a $0.5 million cost-method investment. Financing activities provided $14.0 million, including $40.2 million of net additional line-of-credit borrowings, partly offset by $10.0 million of dividends to SGI and $13.9 million of reduced product financing.
Fiscal 2014 Fourth Quarter
| Metric | Q4 Fiscal 2014 | Q4 Fiscal 2013 |
|---|---|---|
| Revenue | $1.413 billion | $2.098 billion |
| Gross profit | $5.0 million | $11.5 million |
| Net income | $1.5 million | $5.7 million |
| Basic EPS | $0.21 | $0.75 |
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower gold and silver prices and lower gold ounces sold, partly offset by higher silver ounces sold.
- Gross margin improved modestly because custom-product distribution programs generated higher premiums, but gross profit declined because of lower overall revenue.
- Inventory turnover fell to 35.2 from 47.2, reflecting longer carry periods for custom programs and increased inventory held in foreign locations.
- Operating cash flow deteriorated to a $16.7 million use, driven largely by deferred-tax and working-capital changes.
- Customer concentration changed materially: HSBC Bank USA represented 25.9% of fiscal 2014 revenue, while the top three customers represented 33.9%, compared with 33.3% in fiscal 2013.
- Product-financing obligations decreased from $38.6 million to $24.6 million, and borrowed-metals liabilities declined from $20.1 million to $8.7 million.
- Shares outstanding declined from 7.40 million to 6.96 million, primarily due to the repurchase and retirement of 379,033 shares for approximately $2.2 million.
Outlook, Risks, Contingencies and Unusual Items
- No quantitative revenue or earnings guidance was provided. Management’s strategy is to expand trading volume, international operations, value-added products, financing, storage and logistics services, with emphasis on Europe and Asia.
- An electronic trading platform was in beta rollout and was expected to become fully operational by late 2014. Management expected it to improve transaction efficiency and make smaller orders more economical.
- Management stated that cash, operating cash generation and available credit were expected to fund working capital, capital expenditures and commitments for at least the next twelve months.
- The principal liquidity risk is the demand-based Trading Credit Facility. Lenders may withdraw participation or demand repayment at any time. Interest rates are variable and based primarily on LIBOR plus a margin.
- After year-end, effective September 12, 2014, the Trading Credit Facility increased from $170.0 million to $220.0 million, while the minimum tangible-net-worth covenant increased from $25.0 million to $35.0 million.
- A-Mark substantially hedges commodity exposure. At June 30, 2014, inventory and commitments subject to price risk totaled $426.5 million, compared with $427.0 million of related forward and futures contracts, leaving reported net exposure of approximately $(0.6) million. Counterparty default, exchange disruption and hedging ineffectiveness remain risks.
- The company identified a material weakness in internal control over financial reporting as of June 30, 2013 and March 31, 2014, related to inadequate accounting and finance resources. Management believed remediation during fiscal 2014 addressed the weakness, but the first formal year-end assessment was deferred until June 30, 2015.
- Because A-Mark was newly public, the filing did not include management’s assessment or an auditor attestation on internal control over financial reporting under the applicable transition rules.
- SGI was under IRS examination for tax years 2004 through 2013. Under the tax separation agreement, A-Mark may bear taxes attributable to its business arising from adjustments to SGI tax filings. The tax-free status of the spinoff could also be challenged, although management considered the risk remote.
- Contractual obligations totaled $626.2 million, including $135.2 million of credit-facility borrowings, $489.9 million of precious-metals purchase commitments and $1.1 million of operating leases. Purchase commitments were partly offset by $205.9 million of corresponding sales commitments and generally settled within two business days.
- A subsequent agreement contemplated up to a $2.0 million investment for up to 9% of an online bullion retailer, together with a three-year exclusive supply arrangement. CFC also acquired an additional $3.7 million portfolio of secured loan receivables on July 1, 2014.
Important Facts for Investors to Verify
- Confirm the filing identity and period: A-Mark Precious Metals, Inc., fiscal year ended June 30, 2014, rather than Gold.Com, Inc. or a calendar 2013 fourth quarter.
- Reconcile the effects of the SGI spinoff, including historical cost allocations, share-count adjustments, related-party balances and dividend payments to SGI.
- Assess liquidity under the demand-based credit facility, including post-year-end expansion to $220.0 million, covenant requirements and lender withdrawal rights.
- Evaluate customer concentration, particularly HSBC Bank USA’s 25.9% share of fiscal 2014 revenue.
- Review the material-weakness remediation and the subsequent fiscal 2015 internal-control assessment.
- Analyze cash conversion, inventory turnover and the effects of precious-metals prices and volatility on narrow trading margins.
- Review tax exposure associated with SGI audits, the tax separation agreement and the tax-free spinoff opinion.
- Verify the economics, conditions and accounting treatment of the post-year-end retailer investment and exclusive supply agreement.