A-Mark Precious Metals(AMRK) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Presents the company's condensed consolidated financial statements and management's analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements The company's condensed consolidated financial statements for the period ended March 31, 2020, reveal a significant increase in net income and total assets, with details on operating segments and accounting policies Condensed Consolidated Balance Sheets Details the company's financial position, including assets, liabilities, and equity, as of specific reporting dates Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Total Assets | $940,957 | $705,362 | | Cash | $95,503 | $8,320 | | Receivables, net | $96,753 | $26,895 | | Inventories | $413,129 | $292,861 | | Total Liabilities | $854,590 | $632,796 | | Lines of credit | $175,000 | $167,000 | | Accounts payable and other current liabilities | $231,920 | $62,180 | | Total Stockholders' Equity | $86,367 | $72,566 | - The company consolidates a variable interest entity (VIE), AM Capital Funding, LLC (AMCF), which holds total assets of $107.1 million as of March 31, 2020, primarily consisting of cash, secured loans, and inventories[8][10] Condensed Consolidated Statements of Income Reports the company's revenues, expenses, and net income over specific periods Key Income Statement Data (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Nine Months Ended Mar 31, 2020 | Nine Months Ended Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,258,722 | $1,266,986 | $3,795,326 | $3,932,988 | | Gross Profit | $22,475 | $8,716 | $38,946 | $25,508 | | Net Income | $11,608 | $961 | $13,166 | $3,097 | | Net Income Attributable to Company | $11,321 | $990 | $12,683 | $3,048 | | Diluted EPS | $1.61 | $0.14 | $1.80 | $0.43 | - Gross profit for the third quarter of fiscal 2020 increased significantly to $22.5 million from $8.7 million in the prior-year quarter, driving a substantial increase in net income and EPS despite slightly lower revenues[12] Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for Nine Months Ended March 31 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(13,775) | $20,359 | | Net cash provided by (used in) investing activities | $66,034 | $(5,656) | | Net cash provided by (used in) financing activities | $34,924 | $(16,245) | | Net increase (decrease) in cash | $87,183 | $(1,542) | - For the nine months ended March 31, 2020, the company experienced a net cash outflow from operations of $13.8 million, a significant shift from a $20.4 million inflow in the prior year, primarily due to changes in working capital items like receivables and inventories[17] Notes to Consolidated Financial Statements Provides detailed explanations and additional information supporting the condensed consolidated financial statements - The company operates in three reportable segments: Wholesale Trading & Ancillary Services, Secured Lending, and Direct Sales[19] - Effective July 1, 2019, the company adopted the new lease accounting standard (ASU 2016-02, Topic 842), resulting in the recognition of right-of-use assets of approximately $5.3 million and lease liabilities of approximately $6.3 million[97] - The company utilizes derivative instruments, such as futures and forward contracts, to hedge its inventory and mitigate market risk associated with precious metals price changes. Gains and losses on these instruments are substantially offset by changes in the fair market value of the underlying inventory[159][161] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant increase in Q3 FY2020 profitability to COVID-19-driven market volatility, detailing segment performance, liquidity, and critical accounting policies Executive Overview Introduces the company's business segments, strategic focus, and the impact of significant events like the COVID-19 pandemic on operations - The company's business is organized into three reportable segments: Wholesale Trading & Ancillary Services, Secured Lending, and Direct Sales[279] - The company's strategy focuses on growth by leveraging its integrated operations, including customer relationships, access to suppliers, trading systems, and logistics capabilities[292] - The COVID-19 pandemic has positively affected trading revenues and gross profit due to increased volatility and demand for precious metals, but has also negatively impacted the secured lending portfolio as customers paid off loans during a temporary price drop[315][316][317] Results of Operations Analyzes the company's financial performance, highlighting revenue, gross profit, and net income changes, and the impact of operational expenses and tax rates Q3 FY2020 vs Q3 FY2019 Performance (in thousands) | Metric | Q3 2020 | Q3 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $1,258,722 | $1,266,986 | (0.7)% | | Gross Profit | $22,475 | $8,716 | 157.9% | | Net Income | $11,608 | $961 | 1107.9% | - The increase in gross profit for Q3 2020 was driven by higher sales volumes of gold and silver (up 7.2% and 53.6% in ounces sold, respectively) and significantly wider trading spreads resulting from market volatility and supply constraints[329][330][337] - Selling, general, and administrative expenses increased by 25.8% in Q3 2020 compared to the prior year, primarily due to a $2.3 million increase in performance-based compensation accruals[342] - The effective tax rate for Q3 2020 was 13.5%, down from 29.5% in Q3 2019, largely due to the income tax rate benefit from carrying back NOLs under the newly enacted CARES Act[360] Segment Results of Operations Provides a detailed breakdown of financial performance across the Wholesale Trading & Ancillary Services, Secured Lending, and Direct Sales segments Net Income (Loss) Before Tax by Segment - Q3 (in thousands) | Segment | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Wholesale Trading & Ancillary Services | $11,439 | $1,304 | | Secured Lending | $1,006 | $523 | | Direct Sales | $977 | $(464) | - The Wholesale Trading & Ancillary Services segment's gross profit surged by 184.8% to $19.7 million in Q3 2020, driven by a 57.2% increase in trading ticket volume and wider spreads[365][376] - The Secured Lending segment's interest income grew 30.3% to $3.6 million in Q3 2020 due to higher average loan balances, despite an 83.3% decrease in the number of loans outstanding at period-end caused by liquidations during a price decline[391][395] - The Direct Sales segment's gross profit increased 53.0% to $2.7 million in Q3 2020, driven by a 140% increase in gold ounces sold and higher premiums, while SG&A expenses decreased by 22.1% due to cost reduction efforts[403][417] Liquidity and Financial Condition Assesses the company's ability to meet its short-term and long-term financial obligations, detailing sources of liquidity and cash flow activities - The company's primary sources of liquidity are cash from operations, its Trading Credit Facility, notes payable, liabilities on borrowed metals, and product financing arrangements[422][426] - As of March 31, 2020, the company had access to up to $270.0 million under its renewed Trading Credit Facility, with $175.0 million drawn[426] - For the nine months ended March 31, 2020, cash from financing activities was a source of $34.9 million, while operating activities used $13.8 million, a reversal from the prior year, mainly due to working capital changes[435][436][438] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting or impact from the COVID-19 pandemic - The company's Certifying Officers concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[474] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[476] PART II - OTHER INFORMATION Provides additional disclosures including risk factors, unregistered sales of equity securities, and a list of exhibits Item 1A. Risk Factors The company identifies key risks including dependence on its Trading Credit Facility, potential losses from financing, customer concentration, supply chain disruptions, commodity price volatility, and cybersecurity threats - The business is heavily dependent on its uncommitted demand Trading Credit Facility, which matures in March 2021. Lenders can decline to make loans at any time, and a failure to renew or replace the facility could severely limit operations[483][484][486] - The COVID-19 pandemic poses significant risks, including potential facility closures due to infection, disruption of third-party transportation, counterparty financial distress, and supply chain interruptions from mints and refineries[504] - The company faces significant customer concentration risk, with three customers accounting for 34.7% of revenues for the nine months ended March 31, 2020[497] - The business is exposed to commodity price risks. While the company maintains a policy to be substantially hedged, there is a risk of default by hedging counterparties, which could have a material adverse effect[544][545] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's authorized 500,000-share repurchase program, approved in April 2018, had no shares repurchased as of March 31, 2020 - As of March 31, 2020, no shares have been repurchased under the company's authorized 500,000-share repurchase program[557] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including Sarbanes-Oxley Act certifications and XBRL data files, incorporating previously filed documents by reference - Key exhibits filed with this report include Sarbanes-Oxley Act certifications (302 and 906) and XBRL data files[560]