Business Context and Reporting Period
The provided filing is a Form 10-Q for A-Mark Precious Metals, Inc., not Gold.Com, Inc. It covers the quarter and nine months ended March 31, 2016, within the fiscal year ending June 30, 2016. The filing is unaudited and identifies A-Mark as a full-service precious metals trading, financing, storage, logistics and secured-lending company.
A-Mark reported approximately 6,996,964 common shares outstanding as of May 10, 2016. The company operated as one reportable segment and began operating its Las Vegas logistics facility in July 2015.
Key Financial Metrics
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Nine months ended March 31, 2016 | Nine months ended March 31, 2015 |
|---|---|---|---|---|
| Revenue | $1.513 billion | $1.624 billion | $5.049 billion | $4.617 billion |
| Gross profit | $6.9 million | $5.6 million | $27.0 million | $18.5 million |
| Gross margin | 0.453% | 0.346% | 0.534% | 0.402% |
| Net income | $1.2 million | $1.7 million | $8.2 million | $4.5 million |
| Diluted earnings per share | $0.17 | $0.24 | $1.15 | $0.64 |
| Interest income | $2.3 million | $1.6 million | $6.4 million | $4.5 million |
| Interest expense | $1.7 million | $1.2 million | $4.2 million | $3.2 million |
Revenue declined 6.9% in the quarter but increased 9.4% for the nine-month period. Quarterly net income declined 29.1%, primarily because of higher operating expenses and a substantially higher effective tax rate of 42.8%, compared with 9.5% in the prior-year quarter. Nine-month net income increased 82.9%, while the effective tax rate increased to 38.9% from 31.7%.
Financial Position, Cash Flow, Debt and Liquidity
- Total assets were $417.4 million at March 31, 2016, compared with $325.9 million at June 30, 2015.
- Cash was $13.0 million, down from $20.9 million at June 30, 2015.
- Inventory increased to $274.0 million from $191.5 million, including $93.2 million of restricted inventory supporting the product financing arrangement.
- Secured loans receivable increased to $64.8 million from $49.3 million. The loans carried a weighted-average effective interest rate of 8.2%.
- Total liabilities increased to $354.4 million from $269.9 million. Stockholders’ equity increased to $63.0 million from $56.0 million.
- Borrowings under the Trading Credit Facility were $190.0 million, compared with $147.0 million at June 30, 2015. The facility provides access of up to $275.0 million, subject to borrowing-base availability; $28.8 million was available based on the latest approved borrowing base.
- The Trading Credit Facility has a one-year maturity, is secured by substantially all company assets, and bears interest at one-month LIBOR plus 2.50% for revolving borrowings and 4.50% for bridge loans. The company was in compliance with its financial covenants at March 31, 2016.
- The product financing obligation increased to $93.2 million from $39.4 million. Borrowed-metal liabilities declined to $5.6 million from $9.5 million.
- For the nine months, operating activities used $81.0 million of cash, investing activities used $22.3 million, and financing activities provided $95.3 million. The resulting decrease in cash was $8.0 million.
- Financing cash inflows primarily reflected $53.7 million from product financing and $43.0 million of net borrowings under lines of credit.
Material Changes Versus the Prior Comparable Period
- Precious-metal volumes increased despite lower average prices. Quarterly gold ounces sold rose 15.3% and silver ounces sold rose 21.2%; nine-month gold and silver volumes increased 43.6% and 51.3%, respectively.
- Quarterly gross profit increased 21.9%, and nine-month gross profit increased 45.3%. Management attributed the improvement primarily to product mix, higher premium spreads and, earlier in the fiscal year, higher volatility and supply constraints.
- Selling, general and administrative expense increased 31.2% in the quarter and 24.8% for nine months, driven primarily by performance-based compensation and costs associated with the new logistics facility.
- Interest income increased 40.0% in the quarter and 42.0% for nine months, reflecting growth in secured loans and finance products. The number of secured loans at period-end increased to 775 from 194.
- Interest expense increased 43.3% in the quarter and 32.1% for nine months because of greater credit-facility usage, higher inventory levels and higher LIBOR.
- The company purchased additional shares of an investee in January 2016, increasing ownership from 15% to 20%. The investment was reclassified to the equity method and contributed $0.6 million of other income for the nine-month period.
- The company established a new syndicated Trading Credit Facility on March 31, 2016, replacing its previous borrowing facility.
- The quarterly dividend was increased from $0.05 to $0.07 per share. A further $0.07 per-share dividend was declared on April 29, 2016.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide formal earnings or revenue guidance. It stated that volatility, commodity prices, product volumes, supply conditions and trading spreads materially affect results, and that unusually strong market conditions early in fiscal 2016 may not represent normal conditions. Management expects available cash, operating cash flow and unused Trading Credit Facility capacity to satisfy working-capital, capital-expenditure, investment and commitment requirements for at least the next twelve months.
- The business operates on high volume and low margins; reported revenue can change substantially with precious-metal prices without corresponding changes in physical volumes.
- Commodity derivatives are used to hedge inventory and commitments rather than for speculation. At March 31, 2016, inventory subject to commodity price risk was $344.1 million and hedging instruments totaled $343.1 million, leaving reported net inventory exposure of approximately $1.0 million.
- The company is highly dependent on its uncommitted, secured, variable-rate Trading Credit Facility. Failure to renew or replace it, an acceleration following default, or reduced borrowing-base availability could materially restrict operations.
- Customer concentration is significant. Two customers accounted for 28.1% of nine-month revenue, and three customers represented 54.8% of net accounts receivable at March 31, 2016.
- The City of Santa Monica is challenging A-Mark’s historical classification as an agent or broker for business-license-fee purposes and has made a preliminary assessment for potentially material fees, penalties and interest. The company disputes the claim, and the amount and outcome cannot currently be determined.
- Other principal risks include counterparty and credit losses, loss or theft of precious metals, fraud and counterfeiting, commodity-price volatility, derivative-counterparty default, regulatory changes, cybersecurity and systems interruption, competition, logistics execution, and dependence on key personnel and government-mint distribution arrangements.
- The company reported no material legal proceeding expected by management to adversely affect financial position, cash flows or operations, other than the unresolved Santa Monica matter described above.
Investor Verification Checklist
- Confirm the issuer and period: the source text is for A-Mark Precious Metals, Inc. and the quarter ended March 31, 2016, despite the request identifying Gold.Com and “2015 Q3.”
- Review the terms, borrowing base and renewal requirements of the March 31, 2016 Trading Credit Facility, including covenant compliance and available capacity.
- Assess the sustainability of earnings given the very low gross margins, reliance on market volatility and the unusually strong first fiscal quarter.
- Reconcile operating cash usage with the growth in inventory, secured loans and product financing obligations.
- Evaluate customer concentration, collateral quality and loan-to-value trends, including the increase in secured loans to $64.8 million.
- Monitor the Santa Monica business-license dispute and any related tax, penalty or interest exposure.
- Verify the effect of the new logistics facility on future SG&A, inventory control, insurance exposure and operating cash flow.
- Review the continued ability to pay quarterly dividends in light of debt covenants, liquidity requirements and negative operating cash flow.