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 is exposed to the effects of the COVID-19 pandemic. The extent to which this outbreak impacts our results of operations, cash flows and financial condition will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity and duration of this outbreak and the actions taken by governmental authorities and us to contain it or treat its impact.
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.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:
• 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.
• 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 five performance
metrics: (i) Ounces of gold and silver sold, (ii) Wholesale trading ticket
volume, (iii) Direct Sales ticket volume, (iv) inventory turnover ratio
and (v) number of secured loans at period-end.
• Segment results of operations . This section provides an analysis of
our results of operations presented for our three segments:
o Wholesale Trading & Ancillary Services,
o Secured Lending , and
o Direct Sales
for the comparable periods.
• Liquidity and financial condition . This section provides an analysis
of our cash flows, as well as a discussion of our outstanding debt as of
March 31, 2020 . Included in this section is a discussion of our:
outstanding debt, the amount of financial capacity available to fund our
future commitments and other financing arrangements.
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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 of the notes to the condensed consolidated financial
statements.
• 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: (1) Wholesale Trading & Ancillary Services, (2) Secured Lending and (3) Direct Sales.
Wholesale Trading & Ancillary Services Segment
The Company operates its Wholesale Trading & Ancillary Services segment through
The Wholesale Trading & Ancillary Services segment operates as a full-service
precious metals trading 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 200 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 throughout the European continent. 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. Our storage business generated less than 1% of total revenues for each of the periods presented.
The Company's wholly-owned subsidiary,
Through our partially-owned subsidiary, AMST, the Company designs and produces
minted silver products. The Company operates the Mint pursuant to a joint
venture agreement with
Secured Lending Segment
The Company operates its Secured Lending segment through its wholly-owned
subsidiaries,
CFC is a
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AMCF, a wholly-owned subsidiary of CFC, 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
Direct Sales Segment
The Company operates its Direct Sales segment through its wholly-owned
subsidiaries
The Company acquired Goldline in
AMIP, a wholly owned subsidiary of Goldline, manages its intellectual property.
In fiscal 2019, the Company formed and capitalized PMPP, a 50%-owned subsidiary of Goldline, 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. In fiscal 2020, PMPP commenced its operations.
Our Strategy
The Company was formed in 1965 and has grown into a significant participant in
the bullion and coin markets, with approximately
• the depth of our customer relationships; • our access to market makers, suppliers and government mints and other mints; • our trading systems in theU.S. andEurope ; • our expansive precious metals dealer network; • our depository relationships around the world; • our knowledge of secured lending; • our logistics capabilities; • our trading expertise; and • 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, and collectors. The Company makes a two way market, which results in many customers also operating as our suppliers. This diverse base of customers purchases a variety of products from the Company in a multitude of grades, primarily in the form of coins and bars.
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Factors Affecting Revenues, Gross Profits, Interest Income, and Interest Expense
Revenues. The Company enters into transactions to sell and deliver gold, silver, platinum, and palladium 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 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 a 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.
However, unlike futures contracts which do not impact the Company's revenue, forward sales contracts by their nature are required to be included in revenues. The decision to use a forward contract verses another derivative type 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. These revenue streams are complementary to our trading activity, and represent less than 1% of our 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 change 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 trading 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 trading 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 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, related-party debt, product financing agreements for the transfer and subsequent re-acquisition of gold and silver 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").
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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 and 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 to 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 Trading Ticket Volume and Direct Sales Ticket Volume. Another measure of our business that is unaffected by changes in commodity pricing, is ticket volume. Ticket volume for the Wholesale Trading & Ancillary Services and Direct Sales segments measures the total number of orders processed by our trading desks. 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. Generally, the ounces sold on a per-trading-ticket basis is substantially higher for orders placed telephonically compared to those placed on our online portal platform.
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 of the notes to 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. Management's analysis includes the following:
• 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, there is
a tendency that this type of inventory does not turn over as quickly as
other types of inventory.
• 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 retains legal title to this
inventory, the Company 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, there is a tendency
that this type of inventory does not 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 indicate an increase in the ratio rather than remaining constant.
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 the fiscal quarter. Typically, the number of loans increases during periods of increasing precious metal pricing and decrease during periods of declining precious metal prices.
The Company calculates its loan-to-value ("LTV") ratio 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.
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COVID-19
On
Macroeconomic events 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 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 (Goldline) businesses, which we attribute to certain customers seeking to assure a supply of precious metals necessary for the operation of their businesses, and other customers' 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 have also experienced certain negative effects in the precious metals market. Through our CFC finance subsidiary, we make loans to our customers secured by coins and precious metals. Numerous CFC loans were paid off when the market experienced a temporary drop in precious metal prices, reducing collateral coverage. This has had the effect of decreasing the size of our loan portfolio and the interest earned on the portfolio. It has also required us to substitute cash and our own precious metals inventory as collateral under our AMCF securitization program, as the pool of loans securing the program has declined. While we did not experience any related losses, there is no assurance that this might not occur in the future.
Fiscal Year
Our fiscal year end is
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RESULTS OF OPERATIONS
Overview of Results of Operations for the Three Months Ended
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