Business Context and Reporting Period
The filing is a Form 10-Q for A-Mark Precious Metals, Inc., although the request metadata identifies Gold.Com, Inc. The report covers the three months ended September 30, 2016, the first quarter of fiscal 2017. A-Mark is a full-service precious metals trading, financing, storage, logistics and minting company operating in one reportable segment.
On August 31, 2016, A-Mark formed AM&ST Associates, LLC with Silver Towne, L.P. A-Mark owns 55% and contributed cash, while Silver Towne contributed minting assets. AMST acquired Silver Towne’s remaining minting operations, creating a majority-owned subsidiary and non-controlling interest.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $1.806 billion | $2.007 billion | Down 10.0% |
| Gross profit | $8.1 million | $14.4 million | Down 44.1% |
| Gross margin | 0.447% | 0.719% | Down 27.2 basis points |
| Net income | $1.9 million | $5.6 million | Down 65.5% |
| Net income attributable to A-Mark | $2.0 million | $5.6 million | Down 65.3% |
| Diluted EPS | $0.27 | $0.80 | Down $0.53 |
| Net cash used in operating activities | $35.9 million | $54.5 million | Improved by $18.6 million |
| Net cash used in investing activities | $14.1 million | $1.5 million | Higher use of $12.6 million |
| Net cash provided by financing activities | $49.6 million | $40.2 million | Up $9.4 million |
Interest income increased 49.2% to $2.9 million, primarily from a larger secured-loan portfolio and higher fees from customer repurchase arrangements. Interest expense increased 81.6% to $2.2 million because of greater credit-facility usage, higher inventory levels and increased LIBOR.
The effective tax rate was 35.5%, compared with 38.2% in the prior-year quarter. The company reported a net loss attributable to non-controlling interests of $11,000.
Financial Position, Debt and Liquidity
- Cash was $16.8 million at September 30, 2016, compared with $17.1 million at June 30, 2016.
- Total assets were $483.5 million, up from $437.1 million, driven largely by higher inventory, secured loans, goodwill and intangibles.
- Inventory was $297.6 million, including $117.8 million of restricted inventory supporting product financing arrangements, versus total inventory of $245.1 million at June 30, 2016.
- Secured loans receivable increased to $82.8 million from $70.5 million. The weighted-average effective interest rate was 9.0%.
- Lines of credit totaled $203.0 million, down from $212.0 million. The Trading Credit Facility provides capacity of up to $275.0 million, subject to borrowing-base availability and lender approval.
- Available borrowing capacity under the facility was approximately $22.0 million at the latest approved borrowing base before September 30, 2016.
- Product financing arrangements increased to $117.8 million from $59.4 million and are secured by restricted precious metals inventory.
- Total liabilities were $415.0 million, compared with $373.8 million at June 30, 2016. Stockholders’ equity was $68.6 million, including $3.4 million of non-controlling interests.
- Management stated that cash, available credit, product financing arrangements and expected operating cash flows should provide sufficient liquidity for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Gold ounces sold fell 40.8% to 530,000 and silver ounces sold fell 46.2% to 21.8 million ounces. Management attributed the decline to a return to more typical activity and supply conditions following unusually strong market conditions in the prior-year quarter.
- Trading ticket volume declined 23.8% to 22,031, while inventory turnover fell to 6.6 from 8.9.
- Lower premium spreads and reduced trading activity caused gross profit and gross margin to decline materially.
- Secured loans outstanding at period-end increased to 1,667 from 470, primarily due to acquired bullion-based loan portfolios.
- Operating cash usage improved, but the company required increased financing, particularly through product financing arrangements, to support working capital and inventory.
- The AMST transaction added approximately $4.3 million of goodwill and $2.5 million of identifiable intangible assets. The purchase-price allocation remained subject to completion of valuation work.
Outlook, Risks, Contingencies and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management expects growth through trading volume, geographic expansion, complementary services and acquisitions.
- AMST arrangements require A-Mark to order at least 300,000 ounces of fabricated silver products per week on average over consecutive four-week periods during the initial three-year term and renewals. A-Mark also guaranteed certain AMST obligations relating to refined silver leased from Asahi.
- The company’s business is highly dependent on the availability and renewal of its one-year, uncommitted Trading Credit Facility. Borrowings are due on demand and subject to financial covenants. The company was in compliance with its covenants at September 30, 2016.
- Commodity price, interest-rate, counterparty, customer-credit and liquidity risks are significant. The company substantially hedges inventory and commitments, but hedges remain exposed to counterparty default and execution risk.
- Two customers represented 39.4% of revenue in the quarter, compared with 23.3% in the prior-year quarter. Customer concentration therefore increased materially.
- The company had $697.8 million of purchase commitments, $229.9 million of sales commitments, $401.8 million of open forward contracts and $225.8 million of open futures contracts. Management reported net inventory subject to commodity price risk of $1.8 million.
- The company reported no material legal proceedings and no impairment of goodwill, intangible assets or long-term investments.
- Unrecognized tax benefits, including accrued interest and penalties, totaled $501,000 at September 30, 2016.
- The Board declared a subsequent quarterly dividend of $0.07 per share on November 1, 2016, payable on or about December 1, 2016, subject to the stated record-date requirements.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for A-Mark Precious Metals, Inc. and trades under the symbol AMRK, not Gold.Com, Inc.
- Review the sustainability of liquidity given $203.0 million of line-of-credit borrowings, only approximately $22.0 million of borrowing-base availability and debt payable on demand.
- Assess the effect of the sharp increase in product financing arrangements and restricted inventory on leverage, interest expense and liquidity.
- Evaluate whether the lower trading volumes and compressed gross margin represent normalization after an unusually strong prior-year period or a longer-term deterioration.
- Review customer concentration, particularly the two customers contributing 39.4% of quarterly revenue.
- Examine the AMST acquisition valuation, contingent earn-out estimated at $1.5 million, required silver purchases and Asahi supply and guarantee arrangements.
- Monitor secured-loan credit quality, collateral values and loan-to-value ratios as the portfolio expands.
- Consider the company’s ability to continue quarterly dividends under credit-facility restrictions and fluctuating operating cash flows.