Filing Overview
Registrant: A-Mark Precious Metals, Inc. (the source filing is not for Gold.Com, Inc.)
Form 10-Q period: Three months ended September 30, 2017; fiscal year ending June 30. The interim financial statements are unaudited.
A-Mark operates two reportable segments: Wholesale Trading & Ancillary Services and Direct Sales. The Direct Sales segment began with the August 28, 2017 acquisition of substantially all assets of Goldline, LLC.
Financial Highlights
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $2.164 billion | $1.806 billion | +19.8% |
| Gross profit | $7.3 million | $8.1 million | -9.4% |
| Gross margin | 0.338% | 0.447% | Down 10.9 basis points |
| Net income | $444,000 | $1.939 million | -77.1% |
| Net income attributable to A-Mark | $478,000 | $1.950 million | -75.5% |
| Basic and diluted EPS | $0.07 | $0.28 basic; $0.27 diluted | Down approximately $0.20-$0.21 |
| Net cash used in operating activities | $34.3 million | $35.9 million | Use decreased by $1.5 million |
| Net cash used in investing activities | $5.2 million | $14.1 million | Use decreased by $8.9 million |
| Net cash provided by financing activities | $34.8 million | $49.6 million | Down $14.8 million |
Balance Sheet and Liquidity
- Cash was $8.4 million at September 30, 2017, down from $13.1 million at June 30, 2017.
- Total assets were $516.5 million, compared with $478.5 million at June 30, 2017. Inventory increased to $311.6 million from $284.7 million.
- Lines of credit were $219.0 million, compared with $180.0 million at June 30, 2017. The Trading Credit Facility provides capacity of up to $275.0 million and was scheduled to mature March 31, 2018.
- Available borrowing capacity under the Trading Credit Facility was approximately $30.0 million based on the latest approved borrowing base before September 30, 2017.
- The Company recorded $6.8 million of related-party debt from the Goldline Credit Facility, which has a $7.5 million face amount, bears interest at 8.5%, and matures August 28, 2020.
- Product financing arrangements were $124.9 million, down from $135.3 million. Liability on borrowed metals increased to $15.0 million from $5.6 million.
- Stockholders’ equity was $73.3 million, including $3.4 million of non-controlling interest.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher forward sales, although gold ounces sold declined 37.4% to 332,000 and silver ounces sold declined 33.3% to 14.5 million ounces. Management reported average gold and silver prices were down 4.5% and 12.8%, respectively.
- Gross profit declined despite higher revenue. Management attributed the margin reduction to subdued market conditions, lower trading volumes and profits, and a greater proportion of forward contracts, which increase revenue but have limited gross-margin impact.
- Wholesale Trading revenue increased 19.3% to $2.153 billion, while segment gross profit fell 30.0% to $5.6 million and gross margin declined to 0.262% from 0.447%.
- Goldline contributed $10.4 million of reported Direct Sales revenue, including $6.9 million of intercompany sales, $1.7 million of gross profit, and $399,000 of pretax income. The segment reported a 16.0% gross margin, but has no prior-period comparable segment results.
- SG&A increased 23.2% to $7.0 million, primarily because of Goldline expenses, SilverTowne minting costs and higher stock compensation, partly offset by lower incentive compensation.
- Interest income increased 9.6% to $3.2 million, supported by a 47.2% increase in secured loans outstanding to 2,454. Interest expense increased 22.0% to $2.7 million because of higher credit-facility usage, Goldline financing, product-financing costs, loan-fee amortization and higher LIBOR.
- Net derivative losses increased to $14.6 million from $3.9 million. Management stated that derivative results were substantially offset by changes in the value of the underlying inventory and commitments.
- Inventory turnover improved to 7.2 from 6.6. The Company’s reported net inventory exposure to commodity price risk was $712,000 at September 30, 2017, compared with $175,000 at June 30, 2017.
Acquisition, Outlook, Risks and Unusual Items
- Goldline was acquired for a revised provisional purchase price of approximately $9.5 million. The allocation included $5.0 million of identifiable intangible assets and $1.45 million of goodwill. The valuation and tangible-asset adjustment remained subject to further review.
- Acquisition costs totaled approximately $700,000, of which $500,000 was expensed during the quarter.
- Management expects to use Goldline to expand direct-to-consumer sales and cross-sell financing, fulfillment and storage services. The filing provides no formal earnings or revenue guidance.
- Management stated that current cash, Trading Credit Facility availability, product financing arrangements and anticipated operating cash generation should provide sufficient liquidity for at least the next twelve months.
- After quarter-end, the Trading Credit Facility was amended to eliminate the covenant limiting annual dividends to 35% of consolidated net income and to increase the minimum tangible net worth requirement to $47.5 million, retroactive to September 30, 2017. The Company stated it was in compliance with its covenants at quarter-end.
- The Board declared a quarterly dividend of $0.08 per share on November 13, 2017, scheduled for payment on or about December 13, 2017.
- Key risks include dependence on an uncommitted demand credit facility, potential acceleration of debt, variable interest rates, customer concentration, counterparty and collateral risk, precious-metal price volatility, inventory loss or theft, regulatory and compliance requirements, technology and cybersecurity risks, and integration and reputational risks associated with Goldline.
- HSBC Bank USA, Morgan Stanley and Mitsubishi International accounted for 60.5% of revenue, creating significant customer concentration.
- The Company reported no material legal proceedings and concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2017.
Investor Verification Checklist
- Verify the issuer identity: the supplied filing is A-Mark Precious Metals, Inc., not Gold.Com, Inc.
- Confirm renewal or replacement of the Trading Credit Facility before its scheduled March 31, 2018 maturity and assess the effect of its uncommitted, callable structure.
- Review Goldline’s post-acquisition performance, final purchase-price allocation, integration costs and the related-party lender arrangements.
- Assess whether lower trading volumes and compressed wholesale margins persist and whether Direct Sales can offset the weakness.
- Monitor customer concentration, counterparty exposures and the adequacy of commodity hedges, particularly given the large notional commitments.
- Evaluate cash generation and dividend sustainability in light of recurring operating cash outflows, increased borrowings and working-capital needs.