A-MARK PRECIOUS METALS, INC. CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that are considered forward-looking statements. Forward-looking statements give the Company's current expectations and forecasts of future events. All statements other than statements of current or historical fact contained in this Quarterly Report, including statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans, and objectives of management for future operations, are forward-looking statements. The words "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "plan," and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. These statements are based on the Company's current plans, and the Company's actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Any or all of the forward-looking statements in this Quarterly Report may turn out to be inaccurate. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy, and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events occurring after the date hereof. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-Q.
In addition to the risks and uncertainties that may ordinarily influence our
business, the Company remains exposed to the effects of the COVID-19 pandemic.
The pandemic has caused significant disruption in the financial markets both
globally and in
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes contained elsewhere in this Form 10-Q, and in the consolidated financial statements and notes contained in the Form 10-K for the fiscal year ended 2021. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report, particularly in " Risk Factors ."
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying condensed consolidated financial statements and related notes to aid in the understanding of our results of operations and financial condition. Our discussion is organized as follows:
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Executive overview . This section provides a general description of our business, as well as significant transactions and events that we believe are important in understanding the results of operations.
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Results of operations . This section provides an analysis of our results of operations presented in the accompanying condensed consolidated statements of income by comparing the results for the respective periods presented. Included in our analysis is a discussion of six performance metrics: (i) ounces of gold and silver sold, (ii) Wholesale Sales ticket volume, (iii) Direct-to-Consumer ticket volume, (iv) number of Direct-to-Consumer customers, (v) inventory turnover ratio, and (vi) number of secured loans at period-end.
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Segment results of operations . This section provides an analysis of our results of operations presented for our three segments:
o
Wholesale Sales & Ancillary Services
o Direct-to-Consumer , and o Secured Lending for the comparable periods. •
Non-GAAP Measures. In addition to certain key operational metrics to assess the
performance of our business, management uses the financial performance measures
"adjusted net income before provision for income taxes" and "adjusted net income
before provision for income taxes per diluted share" that are not prepared in
accordance with
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Liquidity and financial condition . This section provides an analysis of our
cash flows, as well as a discussion of our outstanding debt as of
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Critical accounting policies . This section discusses critical accounting policies that are considered both important to our financial condition and results of operations and require management to make significant judgment and estimates. All of our significant accounting policies, including the critical accounting policies, are also summarized in Note 2 to the Company's condensed consolidated financial statements.
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Recent accounting pronouncements . This section discusses new accounting pronouncements, dates of implementation and their expected impact on our accompanying condensed consolidated financial statements.
EXECUTIVE OVERVIEW
Our Business
We conduct our operations in three reportable segments: (i) Wholesale Sales & Ancillary Services, (ii) Direct-to-Consumer and (iii) Secured Lending.
Wholesale Sales & Ancillary Services Segment
The Company operates its Wholesale Sales & Ancillary Services segment directly
and through its wholly-owned subsidiaries,
The Wholesale Sales & Ancillary Services segment operates as a full-service
precious metals company. We offer gold, silver, platinum, and palladium in the
form of bars, plates, powder, wafers, grain, ingots, and coins. Our Industrial
unit services manufacturers and fabricators of products utilizing or
incorporating precious metals. Our Coin and Bar unit deals in over 1,000 coin
and bar products in a variety of weights, shapes, and sizes for distribution to
dealers and other qualified purchasers. We have a marketing support office in
Through its wholly-owned subsidiary AMTAG, the Company promotes A-Mark's products and services to the international market. Through our wholly-owned subsidiary TDS, we offer a variety of managed storage options for precious metals products to financial institutions, dealers, investors, and collectors around the world.
The Company's wholly-owned subsidiary AMGL is based in
Through its wholly-owned subsidiary AMST, the Company designs and produces minted silver products. Our SilverTowne Mint operations allow us to provide greater product selection to our customers and greater pricing stability within the supply chain, as well as to gain increased access to silver during volatile market environments, which have historically created higher demand for precious metals products.
Direct-to-Consumer
The Company operates its Direct-to-Consumer segment through its wholly-owned
subsidiaries
JMB is a leading e-commerce retailer providing access to a broad array of gold, silver, copper, platinum, and palladium products through its websites and marketplaces. JMB operates five separately branded, company-owned websites targeting specific niches within the precious metals retail market, including JMBullion.com, ProvidentMetals.com, Silver.com, GoldPrice.org, and SilverPrice.org.
The Company acquired the 79.5% interest in JMB that it did not previously own in
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During the third quarter of fiscal 2022, JMB beta tested the CyberMetals online
platform, where customers may purchase fractional ounces of digital gold,
silver, platinum and palladium in a range of denominations. CyberMetals'
customers have the option to convert their digital holdings to fabricated
precious metals products via an integrated redemption flow with JMB. These
products may be designated for storage by the Company or shipped directly to the
customer. The CyberMetals platform was commercially launched in
The Company acquired Goldline in
PMPP was formed in in fiscal 2019 pursuant to terms of a joint venture agreement, for the purpose of purchasing precious metals from the partners' retail customers, and then reselling the acquired products back to affiliates of the partners. PMPP commenced operations in fiscal 2020.
Secured Lending
The Company operates its Secured Lending segment through its wholly-owned
subsidiary
CFC is a
AMCF was formed for the purpose of securitizing eligible secured loans of CFC.
AMCF issued, administers, and owns Secured Senior Term Notes: Series 2018-1,
Class A, with an aggregate principal amount of
CAI is a holding company that has an equity method interest in
Our Strategy
The Company was formed in 1965 and has grown into a significant participant in
the bullion and coin markets, with approximately
We intend to continue to grow by leveraging off the strengths of our existing integrated operations:
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our expertise in e-commerce and marketing;
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our expansive retail distribution network;
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the depth of our customer relationships;
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our access to market makers, suppliers, and sovereign and private mints;
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our trading systems in the
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our network of precious metals dealers;
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our depository relationships around the world;
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our knowledge of secured lending;
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our design and production of minted silver products;
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our ability to obtain more favorable pricing and financing terms due to our size;
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our distribution, storage and logistics capabilities; and
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the quality and experience of our management team.
Our Customers
Our customers include financial institutions, bullion retailers, industrial manufacturers and fabricators, sovereign mints, refiners, coin and metal dealers, investors, collectors, and e-commerce and other retail customers. The Company makes a two-way market in its wholesale operations, which results in many customers also operating as our suppliers in that segment. This diverse base of wholesale customers purchases a variety of products from the Company in a multitude of grades, primarily in the form of coins and bars. Our Direct-to-Consumer segment sells to (and, through JMB and PMPP, buys from) retail customers, with JMB focusing on e-commerce operations and Goldline marketing through various traditional channels to the investor community. The Direct-to-Consumer segment offers these customers a variety of gold, silver, copper, platinum, and palladium products.
Factors Affecting Revenues, Gross Profit, Interest Income, and Interest Expense
Set forth below are the key factors affecting the Company's revenues, gross
profit, interest income, and interest expense. These factors can result from
both the Company's ongoing business activities as well as from Company
acquisitions. For the three and nine months ended
Revenues. The Company enters into transactions to sell and deliver gold, silver, platinum, palladium, and rhodium to industrial and commercial users, coin and bullion dealers, mints, and financial institutions. The metals are investment or industrial grade and are sold in a variety of shapes and sizes.
The Company also sells and delivers gold, silver, platinum, palladium, and copper products directly to customers and the investor community through its Direct-to Consumer segment. Customers may place orders over the phone or online at one of the Company's websites.
The Company also sells precious metals on forward contracts at a fixed price based on current prevailing precious metal spot prices with a certain delivery date in the future (up to six months from inception date of the forward contract). The Company also uses other derivative products (primarily futures contracts) or combinations thereof to hedge commodity risks. We enter into these forward and future contracts as part of our hedging strategy to mitigate our price risk of holding inventory; they are not entered into for speculative purposes.
Forward sales contracts by their nature are required to be included in revenues, unlike futures contracts which do not impact the Company's revenue. The decision to use a forward contract versus another derivative type of product (e.g., a futures contract) for hedging purposes is based on the economics of the transaction. Since the volume of hedging can be significant, the movement in and out of forwards can substantially impact revenues, either positively or negatively, from period to period. For this reason, the Company believes ounces sold (excluding ounces sold on forward sales contracts) is a meaningful metric to assess our top line performance.
In addition, the Company earns revenue by providing storage solutions for precious metals and numismatic coins for financial institutions, dealers, investors and collectors worldwide and by providing storage and order-fulfillment services to our retail customers. The Company also earns revenue from advertisements placed on our Direct-to-Consumer websites. These revenue streams represent less than 1% of the Company's consolidated revenues.
The Company operates in a high volume/low margin industry. Revenues are impacted by three primary factors: product volume, market prices, and market volatility. A material changes in any one or more of these factors may result in a significant change in the Company's revenues. A significant increase or decrease in revenues can occur simply based on changes in the underlying commodity prices and may not be reflective of an increase or decrease in the volume of products sold.
Gross Profit. Gross profit is the difference between our revenues and the cost of our products sold. Since we quote prices based on the current commodity market prices for precious metals, we enter into a combination of forward and futures contracts to effect a hedge position equal to the underlying precious metal commodity value, which substantially represents inventory subject to price risk. We enter into these derivative transactions solely for the purpose of hedging our inventory, and not for speculative purposes. Our gross profit includes the gains and losses resulting from these derivative instruments. However, the gains and losses on the derivative instruments are substantially offset by the gains and losses on the corresponding changes in the market value of our precious metals inventory. As a result, our results of operations generally are not materially impacted by changes in commodity prices.
Volatility also affects our gross profit. Greater volatility typically causes the premium spreads to widen resulting in an increase in the gross profit. Product supply constraints during extended periods of higher volatility have historically resulted in a heightening of wider premium spreads resulting in further improvement in the gross profit.
Interest Income. The Company enters into secured loans and secured financing structures with its customers under which it charges interest. CFC acquires loan portfolios and originates loans that are secured by precious metal bullion and numismatic material owned by the borrowers and held by the Company for the term of the loan. Additionally, AMCF acquires certain loans from CFC that are secured by precious metal bullion to meet the collateral requirements of the Notes. Also, the Company offers a number of secured financing options to its customers to finance their precious metals purchases including consignments and other structured inventory
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--------------------------------------------------------------------------------finance products whereby the Company earns a fee based on the underlying value of the precious metal ("repurchase arrangements with customers").
Interest Expense. The Company incurs interest expense associated with its lines of credit, Notes, product financing agreements for the transfer and subsequent re-acquisition of gold, silver, and platinum at a fixed price with a third-party finance company ("product financing arrangements"), and short-term precious metal borrowing arrangements with our suppliers ("liabilities on borrowed metals").
Performance Metrics
In addition to financial statement indicators, management also utilizes certain key operational metrics to assess the performance of our business.
Gold and Silver Ounces Sold and Delivered to Customers. We look at the number of ounces of gold and silver sold and delivered to our customers (excluding ounces recorded on forward contracts). These metrics reflect our business volume without regard to changes in commodity pricing, which also impacts revenue, but can mask actual business trends.
The primary purpose of entering into forward sales transactions is to hedge commodity price risk. Although the revenues realized from these forward sales transactions are often significant, they generally have negligible impact on gross margins. As a result, the Company excludes the ounces recorded on forward contracts from its performance metrics, as the Company does not enter into forward sales transactions for speculative purposes.
Wholesale Sales Ticket Volume. Another measure of our business that is unaffected by changes in commodity pricing is ticket volume (or number of orders processed). Ticket volume for the Wholesale Sales & Ancillary Services segment measures the total number of wholesale orders processed during the period. In periods of higher volatility, there is generally increased trading in the commodity markets, causing increased demand for our products, resulting in higher business volume. During periods of heightened demand order size per ticket may increase.
Direct-to-Consumer Customers. We are focused on attracting new customers and retaining existing customers to drive revenue growth. We use the following three metrics as revenue growth indicators when assessing our customer base:
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New Direct-to-Consumer Customers means the number of customers that have registered or setup a new account or made a purchase for the first time.
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Active Direct-to-Consumer Customers means the number of customers that have made a purchase during the period.
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Total Direct-to-Consumer Customers means the aggregate number of customers that have registered or set up an account or have made a purchase in the past.
Direct-to-Consumer Ticket Volume. Ticket volume for the Direct-to-Consumer (or "DTC") segment measures the number of retail orders processed during the period. In periods of higher volatility, there is generally increased consumer demand for our products, resulting in higher business volume. We use the following three metrics indicators when assessing our ticket volume:
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Ticket Volume from new Direct-to-Consumer Customers means the number of retail orders processed from new customers (refer to the definition of new customers above).
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Ticket Volume from Pre-existing Direct-to-Consumer Customers means the number of retail orders processed from pre-existing retail customers.
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Total Ticket Volume from Direct-to-Consumer Customers means the aggregate number of retail orders processed during the period.
Inventory Turnover. Inventory turnover is another performance measure on which we are focused and is calculated as the cost of sales divided by the average inventory during the relevant period. Inventory turnover is a measure of how quickly inventory has moved during the period. A higher inventory turnover ratio, which we typically experience during periods of higher volatility when trading is more robust, typically reflects a more efficient use of our capital.
The period of time that inventory is held by the Company varies depending upon the nature of our inventory commitments with customers and suppliers. (See
Note 6 to the Company's condensed consolidated financial statements for a description of our classifications of inventory by type.) When management analyzes inventory turnover on a period over period basis, consideration is given to each inventory type and its corresponding impact on the inventory turnover calculation. For example:
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The Company enters into various structured borrowing arrangements that commit the Company's inventory (such as product financing arrangements or liabilities on borrowed metals) for an unspecified period of time. While the Company is able to obtain access to this inventory on demand, this type of inventory tends not to turn over as quickly as other types of inventory.
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The Company enters into repurchase arrangements with customers under which A-Mark holds precious metals which are subject to repurchase for an unspecified period of time. While the Company has legal title to this inventory, the Company
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--------------------------------------------------------------------------------is required to hold this inventory (or like-kind inventory) for the customer until the arrangement is terminated or the material is repurchased by the customer. As a result, this type of inventory tends not to turn over as quickly as other types of inventory.
Additionally, our inventory turnover ratio can be affected by hedging activity, as the period over period change of the inventory turnover ratio may be significantly impacted by a period over period change in hedging volume. For example, if trading activity were to remain constant over two periods, but there were significantly higher forward sales in the current period compared to a prior period, the calculated inventory turnover ratio would increase notwithstanding the constancy of the trading volume.
Number of Secured Loans. Finally, as a measure of the size of our Secured Lending segment, we look at the number of outstanding secured loans to customers that are primarily collateralized by precious metals at the end of each quarter. Typically, the number of loans increases during periods of increasing precious metal pricing and decreases during periods of declining precious metal prices.
The Company calculates a loan-to-value ("LTV") ratio for each loan as the principal amount of the loan divided by the liquidation value of the collateral, which is based on daily spot market prices of precious metal bullion. When the market price of the pledged collateral decreases and thereby increases the LTV ratio of a loan above a prescribed maximum ratio, usually 85%, the Company has the option to make a margin call on the loan. As a result, a decline of precious metal market prices may cause a decrease in the number of loans outstanding in a period.
Non-GAAP Financial Measures
In addition to certain key operational metrics to assess the performance of our
business, management uses financial performance measures that are not prepared
in accordance with
Fiscal Year
Our fiscal year end is
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--------------------------------------------------------------------------------Recent Developments
Recent events impacting our business are as follows:
COVID-19
The COVID-19 outbreak has caused significant disruption in the financial markets
both globally and in
Macroeconomic events have positively affected the Company's trading revenues and gross profit as the volatility of the price of precious metals and numismatics resulted in a material increase in the spread between bid and ask prices on these products. We also experienced substantially increased demand for products in each of our coin and bar, industrial and retail businesses. We attribute this to certain customers seeking to assure a supply of precious metals necessary for the operation of their businesses, and other customers, particularly in Goldline and our recently acquired JMB retail units, seeking the safety of investments in precious metals. In response to the heightened demand, in certain cases prices for the products we sell have also risen. We are uncertain of the duration of these conditions.
New Credit Facility
During the second quarter of fiscal 2022, the Company closed a new three-year,
committed
Launch of the CyberMetals Online Platform
During the third quarter of fiscal 2022, JMB beta tested the CyberMetals online
platform, where customers may purchase fractional ounces of digital gold,
silver, platinum and palladium in a range of denominations. CyberMetals'
customers have the option to convert their digital holdings to fabricated
precious metals products via an integrated redemption flow with JMB. These
products may be designated for storage by the Company or shipped directly to the
customer. The CyberMetals platform was commercially launched in
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Overview of Results of Operations for the Three Months Ended
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