A-Mark Precious Metals(AMRK) - 2019 Q4 - Annual Report

Part I Item 1. Description of Business A-Mark is a full-service precious metals trading company operating in wholesale, lending, and direct sales Overview and History A-Mark, founded in 1965, expanded its precious metals services to include financing, storage, and direct sales - A-Mark is a full-service precious metals trading company, acting as a wholesaler of gold, silver, platinum, and palladium bullion and related products[5] - The company's customer base includes mints, manufacturers, refiners, dealers, financial institutions, industrial users, investors, and retail customers across five continents[6] - Key historical developments include becoming an authorized purchaser for the U.S. Mint in 1986, launching financing subsidiary CFC in 2005, acquiring the Goldline retail business in 2017, and forming the AMCF financing vehicle in 2018[9][10][15] Business Segments The company operates three segments: Wholesale Trading, Secured Lending, and Direct Sales - The Wholesale Trading & Ancillary Services segment is the core business, dealing in over 200 different products and serving industrial users, coin dealers, and financial institutions. It is an authorized distributor for all major sovereign mints[18][19][21] - The Secured Lending segment, operated by subsidiary CFC, provides commercial loans collateralized by bullion and numismatic coins. As of June 30, 2019, it had an aggregate loan balance of approximately $125.3 million[31] - The Direct Sales segment, operated by subsidiary Goldline, markets precious metals directly to retail investors via radio, internet, and telephonic sales, enhancing the company's distribution capabilities[37][38][39] Business Operations and Strategy A-Mark's strategy leverages integrated operations and hedging to grow globally, facing competition and customer concentration - The business strategy focuses on leveraging integrated operations, an extensive customer base, secured financing capabilities, and access to primary suppliers to expand globally[16] - The company depends on its ability to obtain financing, primarily through an uncommitted line of credit of up to $260.0 million and $100.0 million in fixed-rate notes issued in September 2018[43] - A-Mark's policy is to remain substantially hedged against its inventory position and commitments to minimize the effect of commodity price changes, using financial derivatives like forward and futures contracts[46] - For the year ended June 30, 2019, one customer, HSBC Bank USA, comprised 26.0% of revenues, primarily from forward contract sales activity used for hedging[53][73] Item 1A. Risk Factors The company faces risks from credit facility dependence, customer concentration, commodity volatility, and stock characteristics Risks Relating to Our Business Generally Key business risks include reliance on an uncommitted credit facility, financing losses, customer concentration, and regulatory compliance - The business is heavily dependent on its Trading Credit Facility, which is an uncommitted demand facility that lenders may decline to fund at any time in their sole discretion[60][61] - One customer represented 26.0% of revenues for the year ended June 30, 2019, creating a significant customer concentration risk[73] - The business is subject to the risk of loss, damage, or theft of its significant quantities of high-value precious metals held on-site, at third-party depositories, and in transit[76] - Compliance with new data protection regulations like the EU's GDPR and California's CCPA could increase costs and expose the company to significant penalties for violations[104][106] Risks Relating to Commodities Profitability is sensitive to commodity price volatility, with risks from hedging counterparty defaults and inventory capacity - A primary driver of profitability is volatility in commodities prices; stagnant prices would likely reduce trading activity and demand for the company's services[114] - Although the company's policy is to remain substantially hedged, there is a risk of default by counterparties to the hedge, which could have a material adverse effect[116][117] Risks Relating to Our Common Stock Common stock risks include dividend suspension, anti-takeover provisions, and significant ownership concentration - The company has not paid a dividend since January 2018, and there is no assurance that it will resume paying dividends in the future[122][123] - Board members and management beneficially own approximately 40% of the outstanding common stock, giving them substantial influence over matters requiring a shareholder vote[127] Item 2. Properties The company operates from five owned or leased properties, including its headquarters and minting facility | Location | General Use of Facility | Square Footage | Ownership | Lease Term/Expiration | | :--- | :--- | :--- | :--- | :--- | | El Segundo, California | Corporate headquarters, trading desk, secured lending, marketing, and back-office operations | 9,000 | Leased | March 2026 | | Los Angeles, California | Direct Sales operations | 21,500 | Leased | February 2022 | | Las Vegas, Nevada | Storage and fulfillment logistics operations | 17,600 | Leased | April 2025 | | Winchester, Indiana | Minting operations | 11,400 | Owned | — | | Vienna, Austria | International marketing support operations | 248 | Leased | every three months | Item 3. Legal Proceedings The company is involved in incidental legal proceedings, but management does not expect a material adverse financial impact - The company does not expect that current legal proceedings or claims will have any material adverse impact on its future consolidated financial position, results of operations, or cash flows[132] Item 4. Mine Safety Disclosures No mine safety disclosures are reported - None[132] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with no dividends paid since 2018 and no shares repurchased | Quarter | 2019 High | 2019 Low | 2018 High | 2018 Low | | :--- | :--- | :--- | :--- | :--- | | First | $13.80 | $12.05 | $18.82 | $14.76 | | Second | $13.89 | $10.99 | $16.96 | $12.56 | | Third | $13.35 | $11.43 | $14.65 | $10.78 | | Fourth | $13.60 | $10.90 | $14.06 | $12.00 | - A stock repurchase program for up to 500,000 shares was authorized in April 2018, but as of September 6, 2019, no shares have been repurchased under this program[137][138] - The company has not made a dividend payment since January 2018, as the Board of Directors assesses capital resources quarterly to determine if a dividend is appropriate[141][142] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes FY2019 financial performance, noting decreased revenues but increased gross profit and net income Consolidated Results of Operations FY2019 revenues decreased to $4.78 billion, but gross profit increased, resulting in $2.2 million net income | Metric | FY 2019 | FY 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $4,783.2M | $7,606.2M | (37.1)% | | Gross Profit | $32.0M | $29.4M | 8.5% | | Net Income (Loss) Attributable to Company | $2.2M | ($3.4M) | 165.5% | | Diluted EPS | $0.31 | ($0.48) | 164.6% | - The $2.82 billion decrease in revenue was primarily due to lower forward sales (approx. $2.8 billion), which are used for hedging and have a negligible impact on gross margins[173][174] - Gold ounces sold decreased by 5.9% to 1.80 million ounces, while silver ounces sold increased by 45.5% to 67.62 million ounces[168][173] - Interest income increased 19.7% to $19.3 million, driven by higher interest rates and a larger secured loan portfolio, while interest expense rose 23.4% to $17.1 million due to higher average debt levels and rates[177][178] Segment Results of Operations Wholesale revenue decreased, but gross profit improved across segments, with Secured Lending income growing | Segment | Metric | FY 2019 | FY 2018 | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Wholesale Trading | Revenue | $4,733.8M | $7,538.9M | (37.2)% | | | Gross Profit | $26.3M | $24.1M | 9.0% | | Secured Lending | Interest Income | $10.7M | $9.6M | 10.6% | | | Net Income Before Tax | $2.1M | $2.5M | (14.1)% | | Direct Sales | Revenue | $49.4M | $67.4M | (26.8)% | | | Gross Profit | $5.7M | $5.3M | 6.6% | Liquidity and Financial Condition Liquidity is supported by operations and financing, including a $260 million credit facility and securitization notes - A substantial portion of assets (94%) are liquid, consisting of cash, receivables, derivatives, secured loans, and inventory measured at fair value[215] - The company renewed its uncommitted Trading Credit Facility, providing access up to $260.0 million, scheduled to mature on March 27, 2020[216] - In September 2018, the company completed a securitization, issuing $100.0 million in notes with a maturity date of December 15, 2023, providing an additional source of funding[219] Item 8. Consolidated Financial Statements and Supplementary Data This section presents audited consolidated financial statements for FY2019 and FY2018, with detailed notes Consolidated Financial Statements The audited financial statements show FY2019 assets of $705.4 million, liabilities of $632.8 million, and $2.23 million net income | Balance Sheet (in thousands) | June 30, 2019 | June 30, 2018 | | :--- | :--- | :--- | | Total Current Assets | $668,850 | $706,983 | | Total Assets | $705,362 | $743,001 | | Total Current Liabilities | $540,937 | $665,869 | | Total Liabilities | $632,796 | $673,893 | | Total Stockholders' Equity | $72,566 | $69,108 | | Statement of Operations (in thousands) | Year Ended June 30, 2019 | Year Ended June 30, 2018 | | :--- | :--- | :--- | | Revenues | $4,783,157 | $7,606,248 | | Gross Profit | $31,958 | $29,443 | | Net Income (Loss) Attributable to Company | $2,225 | ($3,397) | Notes to Consolidated Financial Statements The notes detail accounting policies, segments, and financial components, including fair value, loans, hedging, and financing - Note 11 details the company's hedging strategy, which uses derivative instruments like forwards and futures to manage commodity price risk. Net losses on derivative instruments were $(1.1) million in FY2019, compared to gains of $15.6 million in FY2018, which were substantially offset by changes in the fair value of inventory[355][364] - Note 13 discloses significant transactions with related parties, including Stack's Bowers Galleries and equity method investees. Sales to related parties totaled $551.9 million in FY2019[383][388] - Note 14 describes the company's major financing agreements, including the $260.0 million Trading Credit Facility and the $100.0 million securitization (Notes Payable) completed in September 2018[393][395] Item 9A. Controls and Procedures Management concluded disclosure controls and internal financial reporting controls were effective as of June 30, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[447] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of June 30, 2019[449] - In Q4 2019, a new financial accounting system was implemented for the Secured Lending segment, which was a change in internal control over financial reporting[451] Part III Items 10-14 Information for Items 10-14, covering governance, compensation, and related transactions, is incorporated by reference - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's Proxy Statement[453][454] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements and exhibits - This section lists the financial statements filed with the report and incorporates the Exhibit Index by reference[455][456]