10-Q 1 amrk-10q_20200331.htm 10-Q amrk-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

Commission File Number: 001-36347

 

A-MARK PRECIOUS METALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State of Incorporation)

 

11-2464169

(IRS Employer I.D. No.)

 

2121 Rosecrans Ave. Suite 6300
El Segundo, CA 90245

(Address of principal executive offices)(Zip Code)

(310) 587-1477

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

NASDAQ Global Select Market

 

Securities registered under Section 12 (g) of the Exchange Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes.    No. 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes.    No. 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes.    No. 

As of May 4, 2020, the registrant had 7,031,450 shares of common stock outstanding, par value $0.01 per share.

 

 

 

 


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the Nine Months Ended March 31, 2020

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Condensed Consolidated Financial Statements and Notes thereof

 

 

Page

Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019

3

Condensed Consolidated Statements of Income for the Three and Nine Months ended March 31, 2020 and 2019

5

Condensed Consolidated Statement of Stockholders' Equity for the Three and Nine Months ended March 31, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019

7

Notes to Consolidated Financial Statements

8

Note 1. Description of Business

8

Note 2. Summary of Significant Accounting Policies

9

Note 3. Assets and Liabilities, at Fair Value

19

Note 4. Receivables

22

Note 5. Secured Loans Receivable

23

Note 6. Inventories

25

Note 7. Property, Plant, and Equipment

27

Note 8. Goodwill and Intangible Assets

27

Note 9. Long-Term Investments

29

Note 10. Accounts Payable and Other Current Liabilities

29

Note 11. Derivative Instruments and Hedging Transactions

29

Note 12. Income Taxes

32

Note 13. Related Party Transactions

34

Note 14. Financing Agreements

36

Note 15. Commitments and Contingencies

39

Note 16. Stockholders' Equity

39

Note 17. Customer and Supplier Concentrations

41

Note 18. Segments and Geographic Information

42

Note 19. Subsequent Events

45

 

2


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except for share data) (unaudited)

 

 

 

 

 

March 31,

2020

 

 

June 30,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash(1)

 

$

95,503

 

 

$

8,320

 

Receivables, net(1)

 

 

96,753

 

 

 

26,895

 

Derivative assets

 

 

53,081

 

 

 

2,428

 

Secured loans receivable(1)

 

 

49,621

 

 

 

125,298

 

Precious metals held under financing arrangements

 

 

187,005

 

 

 

208,792

 

Inventories:

 

 

 

 

 

 

 

 

Inventories(1)

 

 

291,003

 

 

 

198,356

 

Restricted inventories

 

 

122,126

 

 

 

94,505

 

 

 

 

413,129

 

 

 

292,861

 

Income taxes receivable

 

 

1,438

 

 

 

1,473

 

Prepaid expenses and other assets(1)

 

 

3,149

 

 

 

2,783

 

Total current assets

 

 

899,679

 

 

 

668,850

 

Operating lease right of use assets, net

 

 

4,508

 

 

 

 

Property, plant, and equipment, net

 

 

5,953

 

 

 

6,731

 

Goodwill

 

 

8,881

 

 

 

8,881

 

Intangibles, net

 

 

5,234

 

 

 

5,852

 

Long-term investments

 

 

12,277

 

 

 

11,885

 

Deferred tax assets - non-current

 

 

925

 

 

 

3,163

 

Other long-term assets

 

 

3,500

 

 

 

 

Total assets

 

$

940,957

 

 

$

705,362

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Lines of credit

 

$

175,000

 

 

$

167,000

 

Liabilities on borrowed metals

 

 

178,604

 

 

 

201,144

 

Product financing arrangements

 

 

122,126

 

 

 

94,505

 

Accounts payable and other current liabilities

 

 

231,920

 

 

 

62,180

 

Derivative liabilities(1)

 

 

39,532

 

 

 

9,971

 

Accrued liabilities(1)

 

 

10,919

 

 

 

6,137

 

Total current liabilities

 

 

758,101

 

 

 

540,937

 

Notes payable(1)

 

 

92,347

 

 

 

91,859

 

Other liabilities

 

 

4,142

 

 

 

 

Total liabilities

 

 

854,590

 

 

 

632,796

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, authorized 10,000,000 shares; issued

   and outstanding: none as of March 31, 2020 and June 30, 2019

 

 

 

 

 

 

Common stock, par value $0.01; 40,000,000 shares authorized; 7,031,450

   shares issued and outstanding as of March 31, 2020 and June 30, 2019

 

 

71

 

 

 

71

 

Additional paid-in capital

 

 

27,087

 

 

 

26,452

 

Retained earnings

 

 

55,818

 

 

 

43,135

 

Total A-Mark Precious Metals, Inc. stockholders’ equity

 

 

82,976

 

 

 

69,658

 

Non-controlling interests

 

 

3,391

 

 

 

2,908

 

Total stockholders’ equity

 

 

86,367

 

 

 

72,566

 

Total liabilities, non-controlling interests and stockholders’ equity

 

$

940,957

 

 

$

705,362

 

 

(1)

Includes amounts of the consolidated variable interest entity, which is presented separately in the table below.

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

3


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands) (unaudited)

In September 2018, AM Capital Funding, LLC. (“AMCF”), a wholly owned subsidiary of CFC, completed an issuance  of Secured Senior Term Notes, Series 2018-1, Class A in the aggregate principal amount of $72.0 million and Secured Subordinated Term Notes, Series 2018-1, Class B in the aggregate principal amount of $28.0 million (collectively, the "Notes").  The Class A Notes bear interest at a rate of 4.98% and the Class B Notes bear interest at a rate of 5.98%.  The Notes have a maturity date of December 15, 2023.

The Company consolidates a variable interest entity ("VIE") if it is considered to be the primary beneficiary.  AMCF is a VIE because its equity may be insufficient to maintain its ongoing collateral requirements without additional financial support from the Company.   The securitization is primarily secured by bullion loans and precious metals, and the Company is required to continuously hedge the value of certain collateral and make future contributions as necessary.  The Company is the primary beneficiary of this VIE because the Company has the right to determine the type of collateral (i.e., secured loans or precious metals) placed into the entity, has the right to receive (and has received) the proceeds from the securitization transaction, earns on-going interest income from the secured loans (subject to collateral requirements), and has the obligation to absorb losses should AMCF's interest expense and other costs exceed its interest income.

The following table presents the assets and liabilities of this VIE, which is included in the condensed consolidated balance sheets above. The holders of the Notes have a first priority security interest in the assets as shown in the table below, which are in excess of the Notes' aggregate principal amount. Additionally, the liabilities of the VIE include intercompany balances, which are eliminated in consolidation. See Note 14 for additional information.

 

 

 

March 31,

2020

 

 

June 30,

2019

 

ASSETS OF THE CONSOLIDATED VIE

 

 

 

 

 

 

 

 

Cash

 

$

67,643

 

 

$

2,390

 

Receivables, net

 

 

 

 

 

1,664

 

Secured loans receivable

 

 

16,372

 

 

 

82,544

 

Inventories

 

 

23,079

 

 

 

16,867

 

Prepaid expenses and other assets

 

 

21

 

 

 

31

 

Total assets of the consolidated variable interest entity

 

$

107,115

 

 

$

103,496

 

LIABILITIES OF THE CONSOLIDATED VIE

 

 

 

 

 

 

 

 

Deferred payment obligations(1)

 

$

9,621

 

 

$

5,213

 

Derivative liabilities

 

 

 

 

 

1,241

 

Accrued liabilities

 

 

1,006

 

 

 

811

 

Notes payable(2)

 

 

97,347

 

 

 

96,859

 

Total liabilities of the consolidated variable interest entity

 

$

107,974

 

 

$

104,124

 

 

(1)

This is an intercompany balance, which is eliminated in consolidation and hence not shown on the consolidated balance sheets.

(2)

$5.0 million of the Notes are held by A-Mark, which is eliminated in consolidation and hence not shown on the consolidated balance sheets.

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

4


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except for share and per share data) (unaudited)

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

2020

 

 

March 31,

2019

 

 

March 31,

2020

 

 

March 31,

2019

 

Revenues

 

$

1,258,722

 

 

$

1,266,986

 

 

 

3,795,326

 

 

$

3,932,988

 

Cost of sales

 

 

1,236,247

 

 

 

1,258,270

 

 

 

3,756,380

 

 

 

3,907,480

 

Gross profit

 

 

22,475

 

 

 

8,716

 

 

 

38,946

 

 

 

25,508

 

Selling, general, and administrative expenses

 

 

(10,388

)

 

 

(8,258

)

 

 

(26,528

)

 

 

(24,080

)

Interest income

 

 

5,968

 

 

 

4,807

 

 

 

17,968

 

 

 

14,010

 

Interest expense

 

 

(5,051

)

 

 

(4,239

)

 

 

(15,274

)

 

 

(12,447

)

Other income, net

 

 

463

 

 

 

373

 

 

 

447

 

 

 

1,303

 

Unrealized loss on foreign exchange

 

 

(45

)

 

 

(36

)

 

 

(42

)

 

 

(54

)

Net income before provision for income taxes

 

 

13,422

 

 

 

1,363

 

 

 

15,517

 

 

 

4,240

 

Income tax expense

 

 

(1,814

)

 

 

(402

)

 

 

(2,351

)

 

 

(1,143

)

Net income

 

 

11,608

 

 

 

961

 

 

 

13,166

 

 

 

3,097

 

Net income (loss) attributable to non-controlling interests

 

 

287

 

 

 

(29

)

 

 

483

 

 

 

49

 

Net income attributable to the Company

 

$

11,321

 

 

$

990

 

 

$

12,683

 

 

$

3,048

 

Basic and diluted net income per share attributable

   to A-Mark Precious Metals, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.61

 

 

$

0.14

 

 

$

1.80

 

 

$

0.43

 

Diluted

 

$

1.61

 

 

$

0.14

 

 

$

1.80

 

 

$

0.43

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,031,400

 

 

 

7,031,400

 

 

 

7,031,400

 

 

 

7,031,400

 

Diluted

 

 

7,042,800

 

 

 

7,084,400

 

 

 

7,063,100

 

 

 

7,087,300

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

5


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except for share data) (unaudited)

 

 

 

 

Common

Stock

(Shares)

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Total

A-Mark

Precious

Metals, Inc.

Stockholders'

Equity

 

 

Non-

Controlling

Interests

 

 

Total

Stockholders’

Equity

 

Balance, June 30, 2018

 

 

7,031,450

 

 

$

71

 

 

$

24,717

 

 

$

40,910

 

 

$

65,698

 

 

$

3,410

 

 

$

69,108

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

1,481

 

 

 

1,481

 

 

 

(47

)

 

 

1,434

 

Share-based compensation

 

 

 

 

 

 

 

 

272

 

 

 

 

 

 

272

 

 

 

 

 

 

272

 

Transactions with non-controlling interest

 

 

 

 

 

 

 

 

639

 

 

 

 

 

 

639

 

 

 

(639

)

 

 

 

Balance, September 30, 2018

 

 

7,031,450

 

 

 

71

 

 

 

25,628

 

 

 

42,391

 

 

 

68,090

 

 

 

2,724

 

 

 

70,814

 

Net income

 

 

 

 

 

-

 

 

 

-

 

 

 

577

 

 

 

577

 

 

 

125

 

 

 

702

 

Share-based compensation

 

 

 

 

 

-

 

 

 

281

 

 

 

-

 

 

 

281

 

 

 

-

 

 

 

281

 

Balance, December 31, 2018

 

 

7,031,450

 

 

 

71

 

 

 

25,909

 

 

 

42,968

 

 

 

68,948

 

 

 

2,849

 

 

 

71,797

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

990

 

 

 

990

 

 

 

(29

)

 

 

961

 

Share-based compensation

 

 

 

 

 

 

 

 

289

 

 

 

 

 

 

289

 

 

 

 

 

 

289

 

Balance, March 31, 2019

 

 

7,031,450

 

 

$

71

 

 

$

26,198

 

 

$

43,958

 

 

$

70,227

 

 

$

2,820

 

 

$

73,047

 

 

 

 

 

Common

Stock

(Shares)

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Total

A-Mark

Precious

Metals, Inc.

Stockholders'

Equity

 

 

Non-

Controlling

Interests

 

 

Total

Stockholders’

Equity

 

Balance, June 30, 2019

 

 

7,031,450

 

 

$

71

 

 

$

26,452

 

 

$

43,135

 

 

$

69,658

 

 

$

2,908

 

 

$

72,566

 

Net income

 

 

 

 

 

 

 

 

 

 

 

128

 

 

 

128

 

 

 

175

 

 

 

303

 

Share-based compensation

 

 

 

 

 

 

 

 

166

 

 

 

 

 

 

166

 

 

 

 

 

 

166

 

Balance, September 30, 2019

 

 

7,031,450

 

 

 

71

 

 

 

26,618

 

 

 

43,263

 

 

 

69,952

 

 

 

3,083

 

 

$

73,035

 

Net income

 

 

 

 

 

-

 

 

 

-

 

 

 

1,234

 

 

 

1,234

 

 

 

21

 

 

 

1,255

 

Share-based compensation

 

 

 

 

 

-

 

 

 

244

 

 

 

-

 

 

 

244

 

 

 

-

 

 

 

244

 

Balance, December 31, 2019

 

 

7,031,450

 

 

 

71

 

 

 

26,862

 

 

 

44,497

 

 

 

71,430

 

 

 

3,104

 

 

$

74,534

 

Net income

 

 

 

 

 

 

 

 

 

 

 

11,321

 

 

 

11,321

 

 

 

287

 

 

 

11,608

 

Share-based compensation

 

 

 

 

 

 

 

 

225

 

 

 

 

 

 

225

 

 

 

 

 

 

225

 

Balance, March 31, 2020

 

 

7,031,450

 

 

$

71

 

 

$

27,087

 

 

$

55,818

 

 

$

82,976

 

 

$

3,391

 

 

$

86,367

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

6


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands) (unaudited)

 

 

Nine Months Ended March 31,

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

13,166

 

 

$

3,097

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Provision (reversal) for doubtful accounts

 

 

 

 

 

(30

)

Depreciation and amortization

 

 

2,217

 

 

 

2,088

 

Amortization of loan cost

 

 

1,139

 

 

 

854

 

Deferred income taxes

 

 

2,238

 

 

 

975

 

Interest added to principal of secured loans

 

 

(15

)

 

 

(16

)

Change in accrued earn-out

 

 

 

 

 

(504

)

Debt extinguishment costs

 

 

 

 

 

7

 

Share-based compensation

 

 

635

 

 

 

842

 

Earnings from equity method investments

 

 

(392

)

 

 

(934

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(69,858

)

 

 

20,161

 

Secured loans receivable

 

 

3,007

 

 

 

(1,747

)

Secured loans made to affiliates

 

 

2,315

 

 

 

4,007

 

Derivative assets

 

 

(50,653

)

 

 

1,152

 

Income taxes receivable

 

 

35

 

 

 

12

 

Precious metals held under financing arrangements

 

 

21,787

 

 

 

49,944

 

Inventories

 

 

(120,268

)

 

 

13,697

 

Prepaid expenses and other assets

 

 

(319

)

 

 

(447

)

Accounts payable and other current liabilities

 

 

169,740

 

 

 

14,680

 

Derivative liabilities

 

 

29,560

 

 

 

(18,350

)

Liabilities on borrowed metals

 

 

(22,540

)

 

 

(69,696

)

Accrued liabilities

 

 

4,431

 

 

 

567

 

Net cash (used in) provided by operating activities

 

 

(13,775

)

 

 

20,359

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property, plant, and equipment

 

 

(686

)

 

 

(290

)

Purchase of long-term investments

 

 

 

 

 

(2,300

)

Purchase of intangible assets

 

 

(150

)

 

 

 

Secured loans receivable, net

 

 

70,370

 

 

 

(3,066

)

Other loans originated

 

 

(3,500

)

 

 

 

Net cash provided by (used in) investing activities

 

 

66,034

 

 

 

(5,656

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Product financing arrangements, net

 

 

27,621

 

 

 

(48,217

)

Borrowings and repayments under lines of credit, net

 

 

8,000

 

 

 

(51,000

)

Repayments on notes payable to related party

 

 

 

 

 

(7,500

)

Proceeds from issuance of notes payable

 

 

 

 

 

90,000

 

Borrowings on unsecured advance

 

 

 

 

 

4,220

 

Debt funding issuance costs

 

 

(697

)

 

 

(3,748

)

Net cash provided by (used in) financing activities

 

 

34,924

 

 

 

(16,245

)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

87,183

 

 

 

(1,542

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

8,320

 

 

 

6,291

 

Cash, cash equivalents, and restricted cash, end of period

 

$

95,503

 

 

$

4,749

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

14,077

 

 

$

11,949

 

Income taxes

 

$

71

 

 

$

112

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Interest added to principal of secured loans

 

$

15

 

 

$

16

 

Investment transactions with non-controlling interest

 

$

 

 

$

639

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

7


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. DESCRIPTION OF BUSINESS

Basis of Presentation

The condensed consolidated financial statements comprise those of A-Mark Precious Metals, Inc. ("A-Mark" or the "Company") and its consolidated subsidiaries.

Business Segments

The Company conducts its operations in three reportable segments: (1) Wholesale Trading & Ancillary Services, (2) Secured Lending, and (3) Direct Sales. Each of these reportable segments represents an aggregation of operating segments that meets the aggregation criteria set forth in the Segment Reporting Topic 280 of the Financial Accounting Standards Board’s ("FASB") Accounting Standards Codification (“ASC”). (See Note 18.)

Wholesale Trading & Ancillary Services

The Wholesale Trading & Ancillary Services segment operates as a full-service precious metals trading company. The products that this segment sells include: gold, silver, platinum, and palladium primarily in the form of coins, rounds, bars, wafers, and grain. This segment's trading-related services include: consignment, storage, logistics, hedging, and various customized financial programs.

Through its wholly owned subsidiary, A-Mark Trading AG (“AMTAG”), the Company promotes A-Mark's products and services throughout the European continent. Transcontinental Depository Services (“TDS”), also a wholly owned subsidiary of the Company, offers worldwide storage solutions to institutions, dealers, and consumers.

The Company's wholly-owned subsidiary, A-M Global Logistics, LLC. ("Logistics"), operates the Company's logistics fulfillment center. Logistics provides customers an array of complementary services, including packaging, shipping, handling, receiving, processing, and inventorying of precious metals and custom coins on a secure basis.

Through our partially-owned subsidiary, AM&ST Associates, LLC. ("AMST" or "SilverTowne" or the "Mint"), the Company designs and produces minted silver products. The Company operates the Mint pursuant to a joint venture agreement with SilverTowne, L.P.  The Company and SilverTowne L.P. own 69% and 31%, respectively, of AMST.  The Company acquired its interest in AMST from SilverTowne L.P. 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 products during volatile market environments.

Secured Lending

The Company operates its Secured Lending segment through its wholly-owned subsidiary, Collateral Finance Corporation LLC. ("CFC".) CFC is a California licensed finance lender that originates and acquires commercial loans secured by bullion and numismatic coins. CFC's customers include coin and precious metal dealers, investors, and collectors.

AM Capital Funding, LLC. (“AMCF”), a wholly owned subsidiary of CFC, was formed for the purpose of securitizing eligible secured loans of CFC.  AMCF issued and administers Secured Senior Term Notes: Series 2018-1, Class A, with an aggregate principal amount of $72.0 million and Secured Subordinated Term Notes: Series 2018-1, Class B with an aggregate principal amount of $28.0 million (collectively, the "Notes".)  The Class A Notes bear interest at a rate of 4.98% and the Class B Notes bear interest at a rate of 5.98%.  The Notes have a maturity date of December 15, 2023. For additional information regarding this notes payable, see Note 14.

8


Direct Sales

The Company's wholly-owned subsidiary, Goldline, Inc. ("Goldline"), is a direct retailer of precious metals to the investor community.  Goldline markets its precious metal products primarily on radio and the internet.  Goldline sells gold and silver bullion in the form of coins, rounds, and bars.

AM IP LLC. ("AMIP"), a wholly owned subsidiary of Goldline, manages its intellectual property.

In the fourth quarter of 2019, Goldline entered into a joint venture agreement with one of the Company's related parties to form Precious Metals Purchasing Partners, LLC, ("PMPP"), a 50% owned subsidiary, primarily for the purpose of purchasing precious metals from the partners' retail customers for resale back into the marketplace.  PMPP was capitalized in fiscal 2019, and commenced operations in fiscal 2020.  Metals purchased by the joint venture are sold to the partners or their affiliates per terms of the joint venture agreement.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements reflect the financial condition, results of operations, statement of stockholder equity, and cash flows of the Company, and were prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). The Company consolidates its subsidiaries that are wholly-owned, majority owned, and entities that are variable interest entities where the Company is determined to be the primary beneficiary.   Our condensed consolidated financial statements include the accounts of: A-Mark, CFC, AMTAG, TDS, Logistics, Goldline, AMIP, AMST, AMCF, and PMPP (collectively the “Company”).  Intercompany accounts and transactions are eliminated.

Comprehensive Income

For the three and nine months ended March 31, 2020 and 2019, there were no items that gave rise to other comprehensive income or loss, and, as a result net income equaled comprehensive income.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates include, among others, determination of fair value, allowances for doubtful accounts, impairment assessments of property, plant and equipment and intangible assets, valuation allowance determination on deferred tax assets, contingent earn-out liabilities, determining the incremental borrowing rate for calculating right of use assets and lease liabilities, and revenue recognition judgments. Significant estimates also include the Company's fair value determination with respect to its financial instruments and precious metals inventory. Actual results could materially differ from these estimates.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the condensed consolidated balance sheets, condensed consolidated statements of income, condensed consolidated statement of stockholders’ equity, and condensed consolidated statements of cash flows for the periods presented in accordance with U.S. GAAP. Operating results for the nine months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020 or for any other interim period during such fiscal year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended 2019 (the “2019 Annual Report”), as filed with the SEC. Amounts related to disclosure of June 30, 2019 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in the 2019 Annual Report.

9


Fair Value Measurement

The Fair Value Measurements and Disclosures Topic 820 of the ASC ("ASC 820"), creates a single definition of fair value for financial reporting. The rules associated with ASC 820 state that valuation techniques consistent with the market approach, income approach, and/or cost approach should be used to estimate fair value. Selection of a valuation technique, or multiple valuation techniques, depends on the nature of the asset or liability being valued, as well as the availability of data. (See Note 3.)

Concentration of Credit Risk

Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances.

Assets that potentially subject the Company to concentrations of credit risk consist principally of receivables, loans of inventory to customers, and inventory hedging transactions. Concentration of credit risk with respect to receivables is limited due to the large number of customers composing the Company's customer base, the geographic dispersion of the customers, and the collateralization of substantially all receivable balances. Based on an assessment of credit risk, the Company typically grants collateralized credit to its customers. The Company enters into inventory hedging transactions, principally utilizing metals commodity futures contracts traded on national futures exchanges or forward contracts with credit worthy financial institutions.  Credit risk with respect to loans of inventory to customers is minimal. All of our commodity derivative contracts are under master netting arrangements and include both asset and liability positions. Substantially all of these transactions are secured by the underlying metals positions.

Foreign Currency

The functional currency of the Company is the United States dollar ("USD").  Also, the functional currency of the Company's wholly-owned foreign subsidiary, AMTAG, is USD, but it maintains its books of record in the European Union Euro. The Company remeasures the financial statements of AMTAG into USD. The remeasurement of local currency amounts into USD creates remeasurement gains and losses, which are included in the condensed consolidated statements of income.

To manage the effect of foreign currency exchange fluctuations, the Company utilizes foreign currency forward contracts.  These derivatives generate gains and losses when settled and/or marked-to-market.

Variable Interest Entity

A variable interest entity ("VIE") is a legal entity that has either i) a total equity investment that is insufficient to finance its activities without additional subordinated financial support or ii) whose equity investors as a group lack the ability to control the entity’s activities or lack the ability to receive expected benefits or absorb obligations in a manner that is consistent with their investment in the entity.

A VIE is consolidated for accounting purposes by its primary beneficiary, which is the party that has both the power to direct the activities that most significantly impact the VIE's economic performance, and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates VIE's when it is deemed to be the primary beneficiary. Management regularly reviews and reconsiders its previous conclusions regarding whether it holds a variable interest in potential VIEs, the status of an entity as a VIE, and whether the Company is required to consolidate such VIE's in the consolidated financial statements.

AMCF, a wholly owned subsidiary of CFC, is a special purpose entity ("SPE") formed as part of a securitization transaction in order to isolate certain assets and distribute the cash flows from those assets to investors. AMCF was structured to insulate investors from claims on AMCF’s assets by creditors of other entities.  The Company has various forms of ongoing involvement with AMCF, which may include (i) holding senior or subordinated interests in AMCF; (ii) acting as loan servicer for a portfolio of loans held by AMCF; and (iii) providing administrative services to AMCF. AMCF is required to maintain separate books and records. The assets and liabilities of this VIE, as of March 31, 2020 and June 30, 2019, are indicated on table that follows the condensed consolidated balance sheets.

AMCF is a VIE because the Company's initial equity investment may be insufficient to maintain its ongoing collateral requirements without additional financial support from the Company. The securitization is primarily secured by bullion loans and precious metals, and the Company is required to continuously hedge the value of certain collateral and make future contributions as necessary.  The Company is the primary beneficiary of this VIE because the Company has the right to determine the type of collateral (i.e., secured loans or precious metals), has the right to receive (and has received) the proceeds from the securitization transaction, earns on-going interest income from the secured loans (subject to collateral requirements), and has the obligation to absorb losses should AMCF's interest expense and other costs exceed its interest income. (See Note 14.)

10


Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. The Company does not have any cash equivalents as of March 31, 2020 and June 30, 2019.

As of March 31, 2020 and June 30, 2019, the Company has $0.2 million and $0.3 million, respectively, in a bank account that is restricted and serves as collateral against a standby letter of credit issued by the bank in favor of the landlord for our office space in Los Angeles, California.

Precious Metals held under Financing Arrangements

The Company enters into arrangements with certain customers under which A-Mark purchases precious metals from the customers which are subject to repurchase by the customer at the spot value of the product on the repurchase date. The precious metals purchased under these arrangements consist of rare and unique items, and therefore the Company accounts for these transactions as precious metals held under financing arrangements, which generate financing income rather than revenue earned from precious metals inventory sales. In these repurchase arrangements, the Company holds legal title to the metals and earns financing income for the duration of the agreement.

These arrangements are typically terminable by either party upon 14 days' notice.  Upon termination, the customer’s right to repurchase any remaining precious metal is forfeited, and the related precious metals are reclassified as inventory held for sale. As of March 31, 2020 and June 30, 2019, precious metals held under financing arrangements totaled $187.0 million and $208.8 million respectively.

The Company’s precious metals held under financing arrangements are marked-to-market.

Inventories

Inventories principally include bullion and bullion coins that are acquired and initially recorded at fair market value.  The fair market value of the bullion and bullion coins comprises two components: (1) published market values attributable to the costs of the raw precious metal, and (2) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form, and the market value attributable solely to the premium may be readily determined, as it is published by multiple reputable sources.

The Company’s inventory, except for certain lower of cost or net realizable value basis products (as discussed below), are subsequently recorded at their fair market values, that is, "marked-to-market."  The daily changes in the fair market value of our inventory are offset by daily changes in the fair market value of hedging derivatives that are taken with respect to our inventory positions; both the change in the fair market value of the inventory and the change in the fair market value of these derivative instruments are recorded in cost of sales in the condensed consolidated statements of income.

While the premium component included in inventory is marked-to-market, our commemorative coin inventory, including its premium component, is held at the lower of cost or net realizable value, because the value of commemorative coins is influenced more by supply and demand determinants than on the underlying spot price of the precious metal content of the commemorative coins.  Unlike our bullion coins, the value of commemorative coins is not subject to the same level of volatility as bullion coins because our commemorative coins typically carry a substantially higher premium over the spot metal price than bullion coins. Neither the commemorative coin inventory nor the premium component of our inventory is hedged. (See Note 6.)

Leased Right of Use Assets

We lease warehouse space, office facilities, and equipment. Our operating leases with terms longer than twelve months are recorded on the condensed consolidated balance sheets at the sum of  the present value of the lease's fixed minimum payments as operating lease right of use assets ("ROU assets") in the condensed consolidated balance sheets.  Our finance leases (previously considered by the Company as capital leases prior to our adoption of ASC 842) are another type of ROU asset, but are classified in the condensed consolidated balance sheets as a component of plant, property and equipment at the present value of the lease payments.

For leases that contain termination options, where the rights to terminate are held by either us, the lessor, or both parties and it is reasonably certain that we will exercise that option, we factor these extended or shortened lease terms into the minimum lease payments.  The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date and are reduced by lease incentives. We use our incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases, as our leases do not have readily determinable implicit discount rates. Our incremental borrowing rate is the rate of interest that we would incur to borrow on a collateralized basis over a similar term and amount in a similar economic environment.

11


Operating lease cost is recognized on a straight-line basis over the lease term. Finance lease cost is recognized as a combination of the amortization expense for the ROU assets and interest expense for the outstanding lease liabilities using the discount rate discussed above. The depreciable life of ROU assets are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any significant residual value guarantees or material restrictive covenants. Income from subleases was not significant for any period presented.

During the three months ended March 31, 2020, we incurred lease costs of $0.4 million, which is primarily comprised of operating lease cost of $0.3 million.  During the nine months ended March 31, 2020, we incurred lease costs of $1.3 million, which is primarily comprised of operating lease cost of $1.0 million. The other costs are insignificant and relate to our finance leases, short-term leases, and variable lease payments.

For the nine months ended March 31, 2020, we made cash payments of $1.1 million for operating lease obligations. These payments are included in operating cash flows.  At March 31, 2020, the weighted-average remaining lease term under our capitalized operating leases was 4.7 years, while the weighted-average discount rate for our operating leases was approximately 4.9%.

The following represents our future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities, as of March 31, 2020:

 

Years ending June 30,

 

Operating

Leases

 

 

2020 (excluding the nine months ended March 31, 2020)

 

$

378

 

 

2021

 

 

1,526

 

 

2022

 

 

1,313

 

 

2023

 

 

834

 

 

2024

 

 

860

 

 

Thereafter

 

 

1,184

 

 

Total lease payments

 

 

6,095

 

 

Less imputed interest

 

 

(672

)

 

 

 

$

5,423

 

(1)

Operating lease liability - current

 

$

1,281

 

(2)

Operating lease liability - long-term

 

 

4,142

 

(3)

 

 

$

5,423

 

(1)

 

 

(1)

Represents the present value of the capitalized operating lease liabilities as of March 31, 2020.

(2)

Current operating lease liabilities are presented within accrued liabilities on our condensed consolidated balance sheets.

(3)

Long-term operating lease liabilities are presented within other liabilities on our condensed consolidated balance sheets.

 

Following is a summary of our future minimum operating lease commitments, as determined under ASC 840, for all non-cancelable lease agreements, for each of the next five years and in the aggregate, as of June 30, 2019:

 

Years ending June 30,

 

Operating

Leases

 

2020

 

$

1,488

 

2021

 

 

1,526

 

2022

 

 

1,313

 

2023

 

 

834

 

2024

 

 

860

 

Thereafter

 

 

1,184

 

 

 

$

7,205

 

 

The Company has no related party leases. We do not have leases that have not yet commenced, which would create significant rights and obligations for us, including any involvement with the construction or design of the underlying asset. (Refer to the section below captioned Recently Adopted Accounting Pronouncements for the elections adopted pursuant to ASU 2016-02, Leases (Topic 842).)

12


Property, Plant, and Equipment

Property, plant, and equipment is stated at cost less accumulated depreciation.  Depreciation is calculated using a straight line method based on the estimated useful lives of the related assets, ranging from three years to twenty-five years. Depreciation commences when the related assets are placed into service. Internal-use software development costs are capitalized during the application development stage. Internal-use software costs incurred during the preliminary project stage are expensed as incurred. Land is recorded at historical cost and is not depreciated. Repair and maintenance costs are expensed as incurred. We have no major planned maintenance activities related to our plant assets associated with our minting operations.

The Company reviews the carrying value of these assets for impairment whenever events and circumstances indicate that the carrying value of the asset may not be recoverable.  In evaluating for impairment, the carrying value of each asset or group of assets is compared to the undiscounted estimated future cash flows expected to result from its use and eventual disposition. An impairment loss is recognized for the difference when the carrying value exceeds the discounted estimated future cash flows. The factors considered by the Company in performing this assessment include current and projected operating results, trends and prospects, the manner in which these assets are used, and the effects of obsolescence, demand and competition, as well as other economic factors.

Finite-lived Intangible Assets

Finite-lived intangible assets consist primarily of customer relationships, non-compete agreements, and employment contracts which are amortized on a straight-line basis over their economic useful lives ranging from three years to fifteen years. We review our finite-lived intangible assets for impairment under the same policy described above for property, plant, and equipment; that is, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Goodwill and Indefinite-lived Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill and other indefinite-lived intangibles (such as trade names) are not subject to amortization, but are evaluated for impairment at least annually.  However, for tax purposes, goodwill acquired in connection with a taxable asset acquisition is generally deductible.

The Company evaluates its goodwill and other indefinite-lived intangibles for impairment in the fourth quarter of the fiscal year (or more frequently if indicators of potential impairment exist) in accordance with the Intangibles - Goodwill and Other Topic 350 of the ASC.  Goodwill is reviewed for impairment at a reporting unit level, which in our case, corresponds to the Company’s reportable operating segments.

Evaluation of goodwill for impairment

The Company has the option to first qualitatively assess whether relevant events and circumstances make it more likely than not that the fair value of the reporting unit's goodwill is less than its carrying value. A qualitative assessment includes analyzing current economic indicators associated with a particular reporting unit such as changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of a particular reporting unit.  If the qualitative assessment indicates a stable or improved fair value, no further testing is required.

If, based on this qualitative assessment, management concludes that goodwill is more likely than not to be impaired, or elects not to perform the qualitative assessment, then it is required to perform a quantitative analysis to determine the fair value of the business, and compare the calculated fair value of the reporting unit with its carrying amount, including goodwill. If through this quantitative analysis the Company determines the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is considered not to be impaired. If the Company concludes that the fair value of the reporting unit is less than its carrying value, a goodwill impairment loss will be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. (See Note 8.)

13


Evaluation of indefinite-lived intangible assets for impairment

The Company evaluates its indefinite-lived intangible assets (i.e., trademarks and trade-names) for impairment. In assessing its indefinite-lived intangible assets for impairment, the Company has the option to first perform a qualitative assessment to determine whether events or circumstances exist that lead to a determination that it is unlikely that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If the Company determines that it is unlikely that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the Company is not required to perform any additional tests in assessing the asset for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform a quantitative analysis to determine if the fair value of an indefinite-lived intangible asset is less than its carrying value. If through this quantitative analysis the Company determines the fair value of an indefinite-lived intangible asset exceeds its carrying amount, the indefinite-lived intangible asset is considered not to be impaired. If the Company concludes that the fair value of an indefinite-lived intangible asset is less than its carrying value, an impairment loss will be recognized for the amount by which the carrying amount exceeds the indefinite-lived intangible asset’s fair value.

The methods used to estimate the fair value measurements of the Company’s reporting units and indefinite-lived intangible assets include those based on the income approach (including the discounted cash flow and relief-from-royalty methods) and those based on the market approach (primarily the guideline transaction and guideline public company methods). (See Note 8.)

Long-Term Investments

Investments in privately-held entities that are at least 20% but less than 50% owned by the Company are accounted for using the equity method. Under the equity method, the carrying value of the investment is adjusted for the Company’s proportionate share of the investee’s earnings or losses, with the corresponding share of earnings or losses reported in other income (expense), net. The carrying value of the investment is reduced by the amount of the dividends received from the equity-method investee, as they are considered a return of capital.

We evaluate our long-term investments for impairment quarterly or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Additionally, the Company performs an on-going evaluation of its equity method investments with which the Company has variable interests to determine if any of these entities are VIEs that are required to be consolidated.

Other Long-Term Assets

Notes and other receivables, with terms greater than one year, are carried at amortized cost, net of any unamortized origination fees, which are recognized over the life of the note.  The determination of an allowance is based on historical experience and, as a result, can differ from actual losses incurred in the future. We charge off receivables at such time as it is determined collection will not occur.

On September 19, 2019, the Company, as lender, entered into a convertible revolving credit facility with one of its privately-held customers (the borrower) that provides the borrower an aggregate principal amount of up to $4.0 million, bearing interest at 12.0% per annum.  The facility expires on September 18, 2022.  The borrower has the right to prepay the credit facility at any time without premium or penalty. Outstanding principal amounts under the credit facility may, at the lender's discretion, be converted into up to 22.0% of the borrower's issued and outstanding common stock. The credit facility also grants the lender the right to repay the borrower's outstanding unrelated third-party debt, at any time, in exchange for up to 27.5% of the borrower’s issued and outstanding common stock.  In the event the borrower sells all or substantially all of its assets or has a change of control during the term of the facility, the lender is entitled to additional interest equal to 10.0% of the gross sales price in excess of $9.9 million. The credit facility collateral includes all: (i) account receivables; (ii) inventory; (iii) fixed assets; (iv) intellectual property; (v) contract rights; and (vi) deposit accounts, in each case subordinated to an unrelated third-party lender’s security interest.

Revenue Recognition

Settlement Date Accounting

Substantially all of the Company’s sales of precious metals are conducted using sales contracts that meet the definition of derivative instruments in accordance with the Derivatives and Hedging Topic 815 of the ASC ("ASC 815").  The contract underlying A-Mark’s commitment to deliver precious metals is referred to as a “fixed-price forward commodity contract” because the price of the commodity is fixed at the time the order is placed.  Revenue is recognized on the settlement date, which is defined as the date on which:  (1) the quantity, price, and specific items being purchased have been established, (2) metals have been delivered to the customer, and (3) payment has been received or is covered by the customer’s established credit limit with the Company

14


All derivative instruments are marked-to-market during the interval between the trade date and the settlement date, with the changes in the fair value charged to cost of sales.   The Company’s hedging strategy to mitigate the market risk associated with its sales commitments is described separately below under the caption “Hedging Activities.”

Types of Trades Orders that are Physically Delivered

The Company’s contracts to sell precious metals to customers are usually settled with the physical delivery of metals to the customer, although net settlement (i.e., settlement at an amount equal to the difference between the contract value and the market price of the metal on the settlement date) is permitted.  Below is a summary of the Company’s major trade order types and the key factors that determine when settlement occurs and when revenue is recognized for each type:

 

Traditional physical trade orders The quantity, specific product, and price are determined on the trade date.  Payment or sufficient credit is verified prior to delivery of the metals on the settlement date.

 

Consignment trade orders The Company delivers the items requested by the customer prior to establishing a firm trade order with a price.  Settlement occurs and revenue is recognized once the customer confirms its order (quantity, specific product, and price) and remits full payment for the sale.

 

Provisional trade orders The quantity and type of metal is established at the trade date, but the price is not set. The customer commits to purchasing the metals within a specified time period, usually within one year, at the then-current market price.  The Company delivers the metal to the customer after receiving the customer’s deposit, which is typically based on 110% of the prevailing current spot price.  The unpriced metal is subject to a margin call if the deposit falls below 105% of the value of the unpriced metal. The purchase price is established and revenue is recognized at the time the customer notifies the Company that it desires to purchase the metal.

 

Margin trade orders The quantity, specific product, and price are determined at trade date; however, the customer is allowed to finance the transaction through the Company and to defer delivery by committing to remit a partial payment (approximately 20%) of the total order price. With the remittance of the partial payment, the customer locks in the purchase price for a specified time period (usually up to two years from the trade date). Revenue on margin trade orders is recognized when the order is paid in full and delivered to the customer.

 

Borrowed precious metals trade orders for unallocated positions Customers may purchase unallocated metal positions in the Company's inventory.  The quantity and type of metal is established at the trade date, but the specific product is not yet determined.  Revenue is not recognized until the customer selects the specific precious metal product it wishes to purchase, full payment is received, and the product is delivered to the customer.

In general, unshipped orders for which a customer advance has been received by the Company are classified as advances from customers. Orders that have been paid for and shipped, but not yet delivered to the customer are classified as deferred revenue.  Both customer advances and deferred revenue are components of accounts payable and other current liabilities in the condensed consolidated balance sheets.

Hedging Activities

The value of our inventory and our purchase and sale commitments are linked to the prevailing price of the underlying precious metal commodity.  The Company seeks to minimize the effect of price changes of the underlying commodity and enters into inventory hedging transactions, principally utilizing metals commodity futures contracts traded on national futures exchanges or forward contracts with credit worthy financial institutions.  The Company hedges by each commodity type (gold, silver, platinum, and palladium). All of our commodity derivative contracts are under master netting arrangements and include both asset and liability positions.

Commodity forward, futures, and option contracts entered into for hedging purposes are recorded at fair value on the trade date and are marked-to-market each period. The difference between the original contract values and the market values of these contracts are reflected as derivative assets or derivative liabilities in the condensed consolidated balance sheets at fair value, with the corresponding unrealized gain or losses included as a component of cost of sales. When these contracts are net settled, the unrealized gains and losses are reversed and the realized gains and losses for forward contracts are recorded in revenue and cost of sales and the net realized gains and losses for futures and option contracts are recorded in cost of sales.

The Company enters into futures, forward, and option contracts solely for the purpose of hedging our inventory holding risk and our liability on price protection programs, and not for speculative market purposes. The Company’s gains (losses) on derivative instruments are substantially offset by the changes in the fair market value of the underlying precious metals inventory, which is also recorded in cost of sales in the condensed consolidated statements of income. (See Note 11.)

15


Other Sources of Revenue

The Company recognizes its storage, logistics, licensing, and other services revenues in accordance with the FASB's release ASU 2014-09  Revenue From Contracts With Customers Topic 606 ("ASC 606"),  which follows five basic  steps to determine whether revenue can be recognized: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company recognizes revenue when or as it satisfies its obligation by transferring control of the good or service to the customer. This is either satisfied over time or at a point in time. A performance obligation is satisfied over time if one of the following criteria are met: (1) the customer simultaneously receives and consumes the benefits as the Company performs, (2) the Company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (3) the Company's performance does not create an asset with an alternative use to the Company, and the Company has an enforceable right for payment of performance completed-to-date.  When none of those are met, a performance obligation is satisfied at a point-in-time.

The Company recognizes storage revenue over time, as the customer simultaneously receives and consumes the storage services (e.g., fixed storage fees based on the passage of time).  The Company recognizes logistics (i.e., fulfillment) revenue at a point-in-time, when the customer receives the benefit of the services (e.g., stated number of packages are shipped on behalf of the customer during a month).  The Company recognizes revenue from the licensing of its functional intellectual property ("IP"), which include customer lists and sales lead information, at the point in time when the right to use the IP is transferred to the licensee. Any revenue generated from usage-based royalties associated with the licensing of the IP is recognized at the point in time when the licensee converts and actualizes customers from the IP.  In aggregate, these types of service revenues account for less than 1% of the Company's combined revenue from all revenue streams.

Interest Income

In accordance with the Interest Topic 835 of the ASC ("ASC 835") following are interest income generating activities of the Company:

 

Secured Loans —  The Company uses the effective interest method to recognize interest income on its secured loans transactions.  The Company maintains a security interest in the precious metals and records interest income over the terms of the secured loan receivable. Recognition of interest income is suspended and the loan is placed on non-accrual status when management determines that collection of future interest income is not probable. The interest income accrual is resumed, and previously suspended interest income is recognized, when the loan becomes contractually current and/or collection doubts are resolved. Cash receipts on impaired loans are recorded first against the principal and then to any unrecognized interest income. (See Note 5.)

 

Margin accounts —  The Company earns a fee (interest income) under financing arrangements related to margin trade orders over the period during which customers have opted to defer making full payment on the purchase of metals.

 

Repurchase agreements —  Repurchase agreements represent a form of secured financing whereby the Company sets aside specific metals for a customer and charges a fee on the outstanding value of these metals.  The customer is granted the option (but not the obligation) to repurchase these metals at any time during the open reacquisition period.  This fee is earned over the duration of the open reacquisition period and is classified as interest income.

 

Spot deferred trade orders —  Spot deferred trade orders are a special type of forward delivery trade that enable customers to purchase or sell certain precious metals from/to the Company at an agreed upon price but, are allowed to delay remitting or taking delivery up to a maximum of two years from the date of trade.  Even though the contract allows for physical delivery, it rarely occurs for this type of trade.  As a result, revenue is not recorded from these transactions, because no product is delivered to the customer.  Spot deferred trades are considered a type of financing transaction, where the Company earns a fee (interest income) under spot deferred arrangements over the period in which the trade is open.

Interest Expense

The Company accounts for interest expense on the following arrangements in accordance with Interest Topic 835 of the ASC ("ASC 835"):

 

Borrowings —  The Company incurs interest expense from its lines of credit, its debt obligations, and notes payable using the effective interest method. (See Note 14.)  Additionally, the Company amortizes capitalized loan costs to interest expense over the period of the loan agreement.

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Loan servicing fees —  When the Company purchases loan portfolios, the Company may have the seller service the loans that were purchased.  The Company incurs a fee based on total interest charged to borrowers over the period the loans are outstanding.  The servicing fee incurred by the Company is charged to interest expense.

 

Product financing arrangements —  The Company incurs financing fees (classified as interest expense) from its product financing arrangements (also referred to as reverse-repurchase arrangements) with third party finance companies for the transfer and subsequent option to reacquire its precious metal inventory at a later date.  These arrangements are accounted for as secured borrowings. During the term of this type of agreement, the third party charges a monthly fee as a percentage of the market value of the designated inventory, which the Company intends to reacquire in the future.  No revenue is generated from these trades.  The Company enters this type of transaction for additional liquidity.

 

Borrowed and leased metals fees —  The Company may incur financing costs from its borrowed metal arrangements. The Company borrows precious metals (usually in the form of pool metals) from its suppliers and customers under short-term arrangements using other precious metals as collateral. Typically, during the term of these arrangements, the third party charges a monthly fee as a percentage of the market value of the metals borrowed (determined at the spot price) plus certain processing and other fees.

Leased metal transactions are a similar type of transaction, except the Company is not required to pledge other precious metal as collateral for the precious metal received. The fees charged by the third party are based on the spot value of the pool metal received.

Both borrowed and leased metal transactions provide an additional source of liquidity, as the Company usually monetizes the metals received under such arrangements.  Repayment is usually in the same form as the metals advanced, but may be settled in cash.

Other Income and Expense, Net

The Company's other income and expense is derived from the Company's proportional interest in the reported net income or loss of our investees that are accounted for under the equity method of accounting (see Note 9), earn-out revaluation adjustments related to a contingent payable due to SilverTowne L.P, and costs associated with the settlement of our purchase of Goldline (see Note 15).

Advertising

Advertising expense was $0.8 million and $0.6 million, respectively, for the three months ended March 31, 2020 and 2019.  Advertising expense was $1.6 million and $1.9 million, respectively, for the nine months ended March 31, 2020 and 2019.

Shipping and Handling Costs

Shipping and handling costs represent costs associated with shipping product to customers, and receiving product from vendors and are included in cost of sales in the condensed consolidated statements of income.  Shipping and handling costs incurred totaled $3.7 million and $1.7 million, respectively, for the three months ended March 31, 2020 and 2019.  Shipping and handling costs incurred totaled $6.5 million and $4.8 million, respectively, for the nine months ended March 31, 2020 and 2019.

Share-Based Compensation

The Company accounts for equity awards under the provisions of the Compensation - Stock Compensation Topic 718 of the ASC ("ASC 718"), which establishes fair value-based accounting requirements for share-based compensation to employees. ASC 718 requires the Company to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees as expense over the service period in the Company's condensed consolidated financial statements.  The expense is adjusted for actual forfeitures of unvested awards as they occur.  (See Note 16.)

Income Taxes

As part of the process of preparing its condensed consolidated financial statements, the Company is required to estimate its provision for income taxes in each of the tax jurisdictions in which it conducts business, in accordance with the Income Taxes Topic 740 of the ASC ("ASC 740"). The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Significant judgment is required in determining the Company's annual tax rate and in evaluating uncertainty in its tax positions. The Company has adopted the provisions of ASC 740-10, which clarifies the accounting for uncertain tax positions. ASC 740-10 requires that the Company recognizes the impact of a tax position in the financial statements if the position is not more likely than not to be sustained upon examination based on the technical merits of the position. The Company recognizes interest and penalties related to certain uncertain tax positions as a component of income tax expense and the accrued interest and penalties are included in deferred and income taxes payable in the Company’s condensed consolidated balance sheets. See Note 12 for more information on the Company’s accounting for income taxes.

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Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The factors used to assess the likelihood of realization include the Company's forecast of the reversal of temporary differences, future taxable income, and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company's effective tax rate on future earnings. Based on our assessment, it appears more likely than not that all of the net deferred tax assets will be realized through future taxable income.

The Company's condensed consolidated financial statements recognizes the current and deferred income taxes consequences that result from the Company's activities during the current and preceding periods, as if the Company were a separate taxpayer prior to the date of the spinoff of the Company when it was a member of the consolidated income tax return group of Spectrum Group International, Inc. ("SGI"). Following its spin-off, the Company separately files its federal and state income tax filings. The Company recognizes current and deferred income taxes as a separate taxpayer for periods ending after the date of the spinoff.

Earnings per Share ("EPS")

The Company computes and reports both basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings (losses) by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings (losses) by the sum of the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity awards, including unexercised stock options, utilizing the treasury stock method.

A reconciliation of shares used in calculating basic and diluted earnings per common shares for the three and nine months ended March 31, 2020 and 2019, is presented below.

 

in thousands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended