NOTES TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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, which includes a variable interest entity ("VIE"). Intercompany accounts and transactions have been eliminated.
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 for storage and delivery primarily in the form of coins, bars, wafers and grain. Also, this segment's trading-related services include financing, consignment, logistics, hedging and various customized financial programs.
Through its wholly owned subsidiary, A-Mark Trading AG (“AMTAG”), the Company promotes A-Mark bullion products 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 based in Las Vegas, Nevada. 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.
In August 2016, the Company formed AM&ST Associates, LLC ("AMST"), a joint venture with SilverTowne, L.P., referred to as SilverTowne, an Indiana-based producer of minted silver that resulted in the Company and SilverTowne, L.P. owning
55%
and
45%
, respectively, of AMST. During the
three months ended September 30, 2018
, the Company increased its ownership interest in AMST, with the result that as of
September 30, 2018
the Company and SilverTowne, L.P. own
69%
and
31%
, respectively, of AMST. The Company acquired its interest in AMST to provide greater product selection to our customers and greater pricing stability within the supply chain, as well as to gain increased access to silver during volatile market environments.
Secured Lending
The Company operates its Secured Lending segment through its wholly-owned subsidiary, CFC. CFC has been in operation since 2005. 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.
On September 14, 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 million
. 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 Notes were issued under a Master Indenture and the Series 2018-1 Supplement thereto, each dated as of the Closing Date, between AMCF and Citibank, N.A., as trustee. The Company holds
$10.0 million
of the Notes. The Notes are not insured or guaranteed by A-Mark or CFC. CFC acts as servicer with respect to the Notes.
AMCF applied the net proceeds from the sale of the Notes to purchase loans and precious metals inventory, and to pay certain costs and expenses.
AMCF is a special purpose entity whose sole activity consists of operating, owning, and financing indentured assets. The Notes are primarily payable from, and secured by, (i) precious metals obtained by AMCF from third parties, and (ii) a portfolio of loans collateralized by precious metals, which loans were originated by either CFC or acquired by CFC from third parties and conveyed by CFC to AMCF. The indenture requires AMCF to maintain a specified level of collateral. The indenture also provides that AMCF’s assets are not to be commingled with those of CFC or A-Mark (or any affiliate), and that AMCF is to maintain separate books and records.
CFC and A-Mark may from time to time also contribute cash or sell precious metals to AMCF in exchange for cash or subordinated, deferred payment obligations from AMCF. In addition, AMCF may from time to time sell precious metals to A-Mark for cash. For additional information regarding this securitization, see
Note 14
, "
Notes Payable
".
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, the internet and television. Goldline sells gold and silver bullion in the form of coins, and bars, as well as numismatic coins.
The Company entered into the Direct Sales segment through its acquisition of substantially all of the assets of Goldline, LLC ("Goldline, LLC" or the "Seller"), pursuant to the terms of an Asset Purchase Agreement (the “Purchase Agreement”), dated August 14, 2017, between Goldline (then known as Goldline Acquisition Corp.) and the Seller. The transaction closed on
August 28, 2017
(the "Closing Date"). On the Closing Date, the estimated
purchase price for the net assets was approximately
$10.0 million
(the “Initial Provisional Purchase Price”), which was based on the Seller’s preliminary balance sheet dated as of July 31, 2017. The net assets acquired consisted of both intangible assets, which the parties agreed had an aggregate fair value of
$6.4 million
, and specified net tangible assets of the Seller, which the parties initially agreed had an estimated aggregate fair value of
$3.6 million
, subject to post-closing adjustment as described below. In connection with the closing, Goldline paid to the Seller an amount equal to the Initial Provisional Purchase Price less
$1.5 million
(the "Holdback Amount"), which amount was held back and deposited into escrow to serve as security for the Seller’s indemnification obligations under the Purchase Agreement. As of
September 30, 2018
, pursuant to the terms of Purchase Agreement,
$0.8 million
of the Holdback Amount was allowed to be released to the Seller.
From the Closing Date and through
September 30, 2018
, the Company conducted net tangible asset value adjustment procedures pursuant to the terms of the Purchase Agreement. As a result of these procedures, the Company has adjusted the estimated total purchase price for the net assets from
$10.0 million
to
$9.5 million
(the “Revised Provisional Purchase Price”). The fair value of the acquired net tangible assets as of the Closing Date is still being reviewed by the Company and the Seller and therefore the total purchase price is subject to further adjustment. Under the terms of the Purchase Agreement, any amounts due back to the Company from the Seller as a result of the final determination of the fair value of the acquired net tangible assets is to be paid within three business days following such determination. Refer to Note 1 of the Notes to Consolidated Financial Statements reported on Form 10-K for the fiscal year ended 2018, for information relating to purchase price allocation of the provisional purchase price of
$9.5 million
to the acquired net assets purchased based on their fair values.
Pro-Forma Information
The following table compares the unaudited consolidated financial information for the
three months ended September 30, 2018
to unaudited pro-forma consolidated financial information for the
three months ended September 30, 2017
, whereby the Company assumed that the acquisition of the net assets of Goldline, LLC occurred on July 1, 2017, that is, on the first day of fiscal year 2018, rather than on the actual acquisition date of August 28, 2017.
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in thousands, except for EPS
|
|
(Unaudited)
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Pro-forma revenue
|
|
$
|
1,565,090
|
|
|
$
|
2,166,054
|
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Pro-forma net income
|
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$
|
1,481
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|
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$
|
216
|
|
|
Pro-forma basic earnings per share
|
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$
|
0.21
|
|
|
$
|
0.03
|
|
|
Pro-forma dilutive earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.03
|
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|
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The above pro-forma supplemental information does not purport to be indicative of what the Company's operations would have been had these transactions occurred on July 1, 2017 and should not be considered indicative of future operating results. The Company believes the assumptions used provide a reasonable basis for reflecting the significant pro-forma effects directly attributable to the acquisition of Goldline. The unaudited pro-forma information accounts for amortization of acquired intangible assets (based on the preliminary purchase price allocation and an estimate of their useful lives), incremental financing costs resulting from the acquisition, elimination of prior sales and purchases between the entities, elimination of acquisition costs and an application of the Company's tax rate. For the
three months ended September 30, 2018 and 2017
the Company used the tax rate of
25.8%
and
37.5%
, respectively. The unaudited pro-forma results do not include any anticipated cost savings or other effects of the integration of Goldline.
Related Agreements
In connection with the closing of the acquisition, Goldline entered into a privately placed credit facility in the amount of
$7.5 million
(the “Goldline Credit Facility”) with various lenders (the "Goldline Lenders"), which include some directors from
the Company's Board, effective August 28, 2017 (see
Note 14
). Borrowings under the Goldline Credit Facility were used to finance a portion of the consideration payable under the Purchase Agreement.
On the Closing Date, the Seller and Goldline entered into a transition services agreement, pursuant to which Goldline will provide reasonable assistance to the Seller at no cost to the Seller (including access to records and services of transferring employees) for a period of
two
years following the closing date in connection with assisting the Seller with its continuing obligations for its retained liabilities that were not assumed by Goldline.
Also on the Closing Date, the Seller and the former CEO of the Seller also agreed that, for the period commencing on the closing date until the third anniversary thereof, neither they nor any of their affiliates will, directly or indirectly own, manage, operate, join, control, participate in, invest in or otherwise provide assistance to, in any manner, any “competing business” (as defined in the Purchase Agreement).
Spinoff from Spectrum Group International, Inc.
On March 14, 2014, the Company's former parent, Spectrum Group International, Inc. (including its subsidiaries, "SGI" or the "Former Parent"), effected a spinoff (the "spinoff" or the "Distribution") of the Company from SGI. As a result of the Distribution, the Company became a publicly traded company independent from SGI. On March 17, 2014, A-Mark’s shares of common stock commenced trading on the NASDAQ Global Select Market under the symbol "AMRK."
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”). These
condensed consolidated
financial statements include the accounts of A-Mark, and its wholly owned subsidiaries, CFC, AMTAG, TDS, Logistics, Goldline, its majority owned affiliate AMST, and its variable interest entity ("VIE") AMCF (collectively the “Company”). For the
three months ended September 30, 2018 and 2017
, net income equaled comprehensive income as there were no items of 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 plant, property and equipment and intangible assets, valuation allowance determination on deferred tax assets, contingent earn-out liabilities, contingent interest 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 operations,
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
three months ended September 30, 2018
are not necessarily indicative of the results that may be expected for the fiscal year ending
June 30, 2019
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 2018 (the “
2018 Annual Report
”), as filed with the SEC. Amounts related to disclosure of
June 30, 2018
balances within these interim
condensed consolidated
financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in the
2018 Annual Report
.
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 Euros. 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 operations.
To manage the effect of foreign currency exchange fluctuations, the Company utilizes foreign currency forward contracts. These derivatives generate gains and losses when they are settled and/or when they are marked to market.
Business Combinations
The Company accounts for business combinations by applying the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805,
Business Combinations
. The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. Transaction costs related to the acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and liabilities.
Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business is measured at fair value on the acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value included in net income.
Net cash paid to acquire a business is classified as investing activities on the accompanying
condensed consolidated
statements of cash flow.
Variable Interest Entities
A variable interest entity ("VIE") is a legal entity that has either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or whose equity investors 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.
The most common type of VIE is a special purpose entity ("SPE"). SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.
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 VIEs 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 VIEs in the consolidated financial statements.
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 (see Note 14).
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
September 30, 2018
and
June 30, 2018
.
As of
September 30, 2018
and
June 30, 2018
, the Company has
$0.4 million
and
$0.4 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 (see
Note 15
).
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 substance of these transactions are precious metals owned by the Company that generate financing income from customers and are not metals held as inventory for sale. As such, the Company has classified this material as "precious metals held under financing arrangements", rather than as "inventory - repurchase arrangements with customers". 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
September 30, 2018
and
June 30, 2018
, precious metals held under financing arrangements totaled
$232.5 million
and
$262.6 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 is comprised of 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 inventories, except for certain lower of cost or market 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 operations.
While the premium component included in inventories is marked-to-market, our commemorative coin inventory, including its premium component, is held at the lower of cost or market, 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
.)
Plant, Property and Equipment
Plant, property 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 plant, property, 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
).
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 more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If the Company determines that it is not more likely than not 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). 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.
Investments in privately-held entities that are less than 20% owned by the Company are accounted for using the cost method, unless the Company can exercise significant influence or the investee is economically dependent upon the Company, in which case the equity method is used. Under the cost method, investments are carried at cost and other income is recorded when dividends are received from the cost-method investee.
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. As of
September 30, 2018
and
June 30, 2018
, the Company did not identify any impairments.
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
.)
Contingent Earn-out Liability
We record an estimate of the fair value of contingent consideration related to the earn-out obligation to SilverTowne LP related to the SilverTowne Mint acquisition. On a quarterly basis, we revalue the liability and record increases or decreases in the fair value as an adjustment to earnings. Changes to the contingent consideration liability can result from adjustments to the discount rate, or from changes to the estimates of future throughput activity of AMST, which are considered Level 3 inputs (see
Note 3
). Consequentially, the assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. As of
September 30, 2018
and
June 30, 2018
the balance of the contingent liability was
$588,000
and
$588,000
respectively, and the non-current portion of this liability is shown as a component in other long-term liabilities. The remaining
two
annual contingent payout obligations, if achieved, would become due on August 31, 2019 and on October 30, 2019. Below is a reconciliation of the contingent earn out liability for the
three months ended September 30, 2018
.
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in thousands
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Contingent
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Liabilities at fair value, based on Level 3 inputs:
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Consideration
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Balance at June 30, 2018
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$
|
588
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Revaluation adjustment
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—
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Amount paid to SilverTowne
|
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—
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Balance at September 30, 2018
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$
|
588
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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.
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:
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•
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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.
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•
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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.
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•
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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.
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•
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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.
|
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 operations (see
Note 11
.)
Other Sources of Revenue
The Company recognizes its storage, logistics and other services revenues in accordance with the FASB's release ASU 2014-09
Revenue From Contracts With Customers
Topic 606 ("ASC 606"), which requires that five basic criteria be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company recognizes revenue when 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). 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.
|
|
|
•
|
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 metals fees --
The Company may incur financing costs from its liabilities on 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 collateral (determined at the spot price) plus certain processing and other fees. The Company enters this type of transaction as an additional source of liquidity, and usually monetizes the metals received under such arrangements. Repayment is usually required in the same form as the metals advanced, or in cash.
|
Other Income
The Company's other income is derived from the Company's proportional interest in the reported net income or net loss in an investee accounted for under the equity method of accounting and the gains or losses associated with revaluation adjustments to the contingent earn-out liability associated with its AMST investment.
The Company's proportional interest in the investee's reported net income (loss) from its equity method investment was
$248,000
and
$57,000
for the
three months ended September 30, 2018 and 2017
, respectively.
Advertising
Advertising expense was
$590,000
and
$517,000
, respectively, for the
three months ended September 30, 2018 and 2017
.
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 operations. Shipping and handling costs incurred totaled
$1,740,000
and
$1,084,000
, respectively, for the
three months ended September 30, 2018 and 2017
.
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.
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 recognizes a benefit for tax positions that it believes will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that the Company believes has more than a 50% probability of being realized upon settlement. The Company regularly monitors its tax positions and adjusts the amount of recognized tax benefit based on its evaluation of information that has become available since the end of its last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits, the Company does not consider new information that has become available after the balance sheet date, but does disclose the effects of new information whenever those effects would be material to the Company's
condensed consolidated
financial statements. The difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting represents unrecognized tax benefits. These unrecognized tax benefits are presented in the
condensed consolidated
balance sheets principally within accrued liabilities.
The Company accounts for uncertainty in income taxes under the provisions of ASC 740. These provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise's financial statements, and prescribe a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions also provide guidance on de-recognition, classification, interest, and penalties, accounting in interim periods, disclosure, and transition. The potential interest and/or penalties associated with an uncertain tax position are recorded in provision for income taxes on the
condensed consolidated
statements of operations. Please refer to
Note 12
for further discussion regarding these provisions.
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 recognized the current and deferred income tax 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 Distribution of the company when it was a member of the consolidated income tax return group of its Former Parent (Spectrum Group International, Inc.). Following its spin-off, the Company files federal and state income tax filings that are separate from the Former Parent's tax filings. The Company recognizes current and deferred income taxes as a separate taxpayer for periods ending after the date of Distribution.
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 months ended September 30, 2018 and 2017
, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Basic weighted average shares outstanding
|
|
7,031
|
|
|
7,031
|
|
|
Effect of common stock equivalents — stock issuable under outstanding equity awards
|
|
61
|
|
|
91
|
|
|
Diluted weighted average shares outstanding
|
|
7,092
|
|
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Dividends are recorded if and when they are declared by the Board of Directors. See
Note 16
for a schedule showing dividends that have been declared.
Recently Adopted Accounting Pronouncements
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, (“ASU 2017-01”). The objective of ASU 2017-01 is to clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation.
In August 2016 the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15")
.
This new standard makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”). The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”). The amendments in ASU 2016-10 clarify aspects relating to the identification of performance obligations and improve the operability and understandability of the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12("ASU 2016-12"),
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The amendments in ASU 2016-12 address certain issues identified on assessing collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition. The Company implemented these pronouncements in this quarter, which did not have a significant effect on the financial results of the Company since a substantially all of the Company's revenue in fiscal years 2018 and 2017, fell under the authoritative guidance of ASC 815, which is outside the scope of ASC 606.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, FASB issued ASU No. 2016-02, (“ASU 2016-02”),
Leases (Topic 842)
. The amendments in this update require lessees to recognize a lease liability measured on a discounted basis and a right-of-use asset for all leases at the commencement date. This update is effective for the Company, on July 1, 2019 (for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years), and is to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are evaluating the new guidelines, but believe that adoption will not have a material impact on our consolidated financial position, results of operations or cash flows and related disclosures, as the Company has minimal lease commitments.
In June 2016, the FASB issued ASU No. 2016-13, (“ASU 2016-13”),
Financial Instruments - Credit Loss(Topic 326
), which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. This update is effective for the Company, on July 1, 2020 (for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years.) The Company is currently evaluating the potential impact of the adoption of the new standard on its consolidated statements of financial condition and results of operations.
3
. ASSETS AND LIABILITIES, AT FAIR VALUE
Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of
September 30, 2018
and
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
|
Carrying Amount
|
|
Fair value
|
|
Carrying Amount
|
|
Fair value
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
22,714
|
|
|
$
|
22,714
|
|
|
$
|
6,291
|
|
|
$
|
6,291
|
|
Receivables, net
|
|
57,332
|
|
|
57,332
|
|
|
35,856
|
|
|
35,856
|
|
Secured loans receivable
|
|
81,891
|
|
|
81,891
|
|
|
110,424
|
|
|
110,424
|
|
Derivative asset on open sale and purchase commitments, net
|
|
1,981
|
|
|
1,981
|
|
|
2,274
|
|
|
2,274
|
|
Derivative asset on option contracts
|
|
392
|
|
|
392
|
|
|
390
|
|
|
390
|
|
Derivative asset on futures contracts
|
|
140
|
|
|
140
|
|
|
238
|
|
|
238
|
|
Derivative asset on forward contracts
|
|
193
|
|
|
193
|
|
|
4,493
|
|
|
4,493
|
|
Income taxes receivable
|
|
1,561
|
|
|
1,561
|
|
|
1,553
|
|
|
1,553
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Lines of credit
|
|
$
|
179,000
|
|
|
$
|
179,000
|
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Debt obligation (related party)
|
|
7,257
|
|
|
7,257
|
|
|
7,226
|
|
|
7,226
|
|
Liability on borrowed metals
|
|
227,198
|
|
|
227,198
|
|
|
280,346
|
|
|
280,346
|
|
Product financing arrangements
|
|
53,126
|
|
|
53,126
|
|
|
113,940
|
|
|
113,940
|
|
Derivative liability on margin accounts
|
|
3,728
|
|
|
3,728
|
|
|
3,804
|
|
|
3,804
|
|
Derivative liability on price protection programs
|
|
116
|
|
|
116
|
|
|
168
|
|
|
168
|
|
Derivative liability on open sale and purchase commitments, net
|
|
25,488
|
|
|
25,488
|
|
|
16,485
|
|
|
16,485
|
|
Derivative liability on futures contracts
|
|
2,163
|
|
|
2,163
|
|
|
—
|
|
|
—
|
|
Derivative liability on forward contracts
|
|
4,479
|
|
|
4,479
|
|
|
—
|
|
|
—
|
|
Accounts payable
|
|
60,993
|
|
|
60,993
|
|
|
45,997
|
|
|
45,997
|
|
Accrued liabilities
|
|
4,838
|
|
|
4,838
|
|
|
5,129
|
|
|
5,129
|
|
Other long-term liabilities (related party)
(1)
|
|
296
|
|
|
296
|
|
|
798
|
|
|
798
|
|
Notes payable
|
|
87,056
|
|
|
87,056
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
(1) Includes estimated contingent amounts due to SilverTowne.
|
|
|
|
|
|
|
|
|
|
The fair values of the financial instruments shown in the above table as of
September 30, 2018
and
June 30, 2018
represent the amounts that would be received upon the sale of those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk adjusted discount rates, and available observable and unobservable inputs.
The carrying amounts of cash, secured loans receivable, receivables, income taxes receivable, accounts payable, income taxes payable, note payable, and accrued liabilities approximate fair value due to their short-term nature. The carrying amounts of derivative assets and derivative liabilities, liability on borrowed metals and product financing arrangements are marked-to-market on a daily basis to fair value. The carrying amounts of lines of credit and debt obligation approximate fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The carrying value of other long-term liabilities represents the long-term portion of contingent earn-out liabilities that are remeasured on a quarterly basis.
Valuation Hierarchy
Topic 820 of the ASC established a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
|
|
•
|
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
•
|
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
•
|
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The significant assumptions used to determine the carrying value and the related fair value of the assets and liabilities measured at fair value on a recurring basis are described below:
Inventory
.
Inventories, principally include bullion and bullion coins, are acquired and initially recorded at fair market value. The fair market value of the bullion and bullion coins are comprised of 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 is readily determined, as it is published by multiple reputable sources. Except for commemorative coin inventory, which are included in inventory at the lower of cost or market, the Company’s inventories are subsequently recorded at their fair market values on a daily basis. The fair value for commodities inventory (i.e., inventory excluding commemorative coins) is determined using pricing data derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory are classified in Level 1 of the valuation hierarchy.
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 substance of these transactions are precious metals owned by the Company that generate financing income from customers and are not metals held as inventory for sale. As such, the Company has classified this material as "precious metals held under financing arrangements", rather than as "inventory - repurchase arrangements with customers". In these repurchase arrangements, the Company holds legal title to the metals and earns financing income for the duration of the agreement. The fair value for precious metals held under financing arrangements, (a commodity, like inventory above) is determined using pricing data derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory are classified in Level 1 of the valuation hierarchy.
Derivatives
.
Futures contracts, forward contracts, option contracts and open sale and purchase commitments are valued at their fair values, based on the difference between the quoted market price and the contractual price (i.e., intrinsic value,) and are included within Level 1 of the valuation hierarchy.
Margin and Borrowed Metals Liabilities
.
Margin and borrowed metals liabilities consist of the Company's commodity obligations to margin customers and suppliers, respectively. Margin liabilities and borrowed metals liabilities are carried at fair value, which is determined using quoted market pricing and data derived from the markets on which the underlying commodities are traded. Margin and borrowed metals liabilities are classified in Level 1 of the valuation hierarchy.
Product Financing Arrangements
.
Product financing arrangements consist of financing agreements for the transfer and subsequent re-acquisition of the sale of gold and silver at an agreed-upon price based on the spot price with a third party. Such transactions allow the Company to repurchase this inventory on the termination (repurchase) date. The third party charges monthly interest as a percentage of the market value of the outstanding obligation, which is carried at fair value. The obligation is stated at the amount required to repurchase the outstanding inventory. Fair value is determined using quoted market pricing and data derived from the markets on which the underlying commodities are traded. Product financing arrangements are classified in Level 1 of the valuation hierarchy.
Liability on Price Protection Programs
.
The Company records an estimate of the fair value of the liability on price protection programs based on the difference between the contractual price at trade date and the retail price at the remeasurement date (i.e., quarter-end) based on the expected redemption rate of each program. As of
September 30, 2018
, the Company used the quoted market price based on the current spot rate and used an expected redemption rate of
100%
for the price shield program, the most significant of the price protection programs. The use of a throughput rate of each program ignores the future price volatility that would affect the timing and rate of redemption under these programs, and, as a result, the liability on price protection programs is classified in Level 3 of the valuation hierarchy.
Contingent Earn-out Liability
.
The Company records an estimate of the fair value of contingent consideration related to the earn-out obligation to SilverTowne LP related to the SilverTowne Mint transaction. On a quarterly basis, the liability is remeasured and increases or decreases in the fair value are recorded as an adjustment to other income on the
condensed consolidated
statements of operations. Changes to the contingent consideration liability can result from adjustments to the discount rate, or from changes to the estimates of future throughput activity of AMST. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. The key inputs in determining fair value of our contingent consideration obligations include the changes in the assumed timing and amounts of future throughputs (i.e., operating income, operating cost per unit, and production volume) which affects the timing and amount of future earn-out payments. Contingent earn-out liability is classified in Level 3 of the valuation hierarchy.
The Company values the contingent obligation by determining the likelihood that the company has achieved the following targeted amount of performance thresholds for each annual earn-out period. Such thresholds include (1) Producing a targeted amount of silver ounces, (2) Earning a targeted amount of operating income, and (3) Generating an operating cost per ounce that is less than a targeted level. Each category triggers a different annual payout obligation if achieved over a 3 year period, and as of
September 30, 2018
, the remaining
two
annual contingent payout obligations, if achieved, would become due on August 31, 2019 and on October 30, 2019. The company re-assesses this contingent obligation each quarter based on the most current facts and market conditions. The obligation continues to remain as a liability at its original recorded value unless, based on each quarterly evaluation, it becomes evident the Company will not achieve all or part of the threshold performance targets. In such case, the obligation is adjusted to its more current estimated value.
The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of
September 30, 2018
and
June 30, 2018
, aggregated by the level in the fair value hierarchy within which the measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Quoted Price in
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
for Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
|
in thousands
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Inventory
(1)
|
|
$
|
289,719
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
289,719
|
|
Precious metals held under financing arrangements
|
|
232,476
|
|
|
|
|
|
|
232,476
|
|
Derivative assets — open sale and purchase commitments, net
|
|
1,981
|
|
|
—
|
|
|
—
|
|
|
1,981
|
|
Derivative assets — option contracts
|
|
392
|
|
|
—
|
|
|
—
|
|
|
392
|
|
Derivative assets — futures contracts
|
|
140
|
|
|
—
|
|
|
—
|
|
|
140
|
|
Derivative assets — forward contracts
|
|
193
|
|
|
—
|
|
|
—
|
|
|
193
|
|
Total assets, valued at fair value
|
|
$
|
524,901
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
524,901
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Liability on borrowed metals
|
|
$
|
227,198
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
227,198
|
|
Product financing arrangements
|
|
53,126
|
|
|
—
|
|
|
—
|
|
|
53,126
|
|
Derivative liabilities — price protection programs
|
|
—
|
|
|
—
|
|
|
116
|
|
|
116
|
|
Derivative liabilities — liability on margin accounts
|
|
3,728
|
|
|
—
|
|
|
—
|
|
|
3,728
|
|
Derivative liabilities — open sale and purchase commitments, net
|
|
25,488
|
|
|
—
|
|
|
—
|
|
|
25,488
|
|
Derivative liabilities — future contracts
|
|
2,163
|
|
|
—
|
|
|
—
|
|
|
2,163
|
|
Derivative liabilities — forward contracts
|
|
4,479
|
|
|
—
|
|
|
—
|
|
|
4,479
|
|
Contingent earn-out liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
588
|
|
|
$
|
588
|
|
Total liabilities, valued at fair value
|
|
$
|
316,182
|
|
|
$
|
—
|
|
|
$
|
704
|
|
|
$
|
316,886
|
|
____________________
(1)
Commemorative coin inventory totaling
$86,000
is held at lower of cost or market and is thus excluded from this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Quoted Price in
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
for Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
|
in thousands
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Inventory
(1)
|
|
$
|
280,017
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
280,017
|
|
Precious metals held under financing arrangements
|
|
262,566
|
|
|
—
|
|
|
—
|
|
|
262,566
|
|
Derivative assets — open sale and purchase commitments, net
|
|
2,274
|
|
|
—
|
|
|
—
|
|
|
2,274
|
|
Derivative assets — option contracts
|
|
390
|
|
|
—
|
|
|
—
|
|
|
390
|
|
Derivative assets — futures contracts
|
|
238
|
|
|
—
|
|
|
—
|
|
|
238
|
|
Derivative assets — forward contracts
|
|
4,493
|
|
|
—
|
|
|
—
|
|
|
4,493
|
|
Total assets, valued at fair value
|
|
$
|
549,978
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
549,978
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Liability on borrowed metals
|
|
$
|
280,346
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
280,346
|
|
Product financing arrangements
|
|
113,940
|
|
|
—
|
|
|
—
|
|
|
113,940
|
|
Derivative liabilities — price protection programs
|
|
—
|
|
|
—
|
|
|
168
|
|
|
168
|
|
Derivative liabilities — liability on margin accounts
|
|
3,804
|
|
|
—
|
|
|
—
|
|
|
3,804
|
|
Derivative liabilities — open sale and purchase commitments, net
|
|
16,485
|
|
|
—
|
|
|
—
|
|
|
16,485
|
|
Contingent earn-out liability
|
|
—
|
|
|
—
|
|
|
588
|
|
|
588
|
|
Total liabilities, valued at fair value
|
|
$
|
414,575
|
|
|
$
|
—
|
|
|
$
|
756
|
|
|
$
|
415,331
|
|
____________________
(1)
Commemorative coin inventory totaling
$99,000
is held at lower of cost or market and is thus excluded from this table.
There were no transfers in or out of Level 2 or 3 from other levels within the fair value hierarchy during the reported periods.
Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only under certain circumstances. These include: cost method and equity method investments that are written down to fair value when a decline in the fair value is determined to be other-than-temporary, and plant, property and equipment, intangibles or goodwill, which are written down to fair value when they are held for sale or determined to be impaired. The resulting fair value measurements of the assets are considered to be Level 3 measurements. Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, long-term growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows. The cash flows employed in the analyses are based on the Company’s estimated outlook and various growth rates. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. In assessing the reasonableness of its determined fair values, the Company evaluates its results against other value indicators, such as comparable transactions and comparable public company trading values.
The Company evaluates its goodwill and other indefinite-lived intangibles for impairment on non-recurring basis in the fourth quarter of the fiscal year, or more frequently if indicators of potential impairment exist. As of
June 30, 2018
, the carrying value of the Company's indefinite-lived intangible and goodwill assets totaled
$3.2 million
and
$8.9 million
, respectively. In the fourth quarter of fiscal 2018, the Company recorded an impairment loss of
$1.3 million
and
$1.4 million
to indefinite-lived intangible and goodwill assets, respectively, based on our quantitative assessment of the fair value of the Direct Sales segment (i.e., Goldline). As of
September 30, 2018
, the carrying value of the Company's indefinite-lived intangible and goodwill assets totaled
$3.2 million
and
$8.9 million
, respectively (see
Note 8
).
The Company's
two
investments in noncontrolled entities do not have readily determinable fair values. Quoted prices of the investments are not available, and the Company identified no impairment indicators that may affect the carrying value of these investments. Based on the Company's assessment of the carrying value of these assets, during the
three months ended September 30, 2018 and 2017
the Company did not record any impairments related to these investments. As of
September 30, 2018
and
June 30, 2018
, the carrying value of the Company's investments totaled
$8.6 million
and
$8.4 million
, respectively.
Receivables consist of the following as of
September 30, 2018
and
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
|
|
|
|
|
|
Customer trade receivables
|
|
$
|
31,006
|
|
|
$
|
22,813
|
|
|
Wholesale trade advances
|
|
25,423
|
|
|
10,722
|
|
|
Due from brokers
|
|
933
|
|
|
2,351
|
|
|
Subtotal
|
|
57,362
|
|
|
35,886
|
|
|
Less: allowance for doubtful accounts
|
|
(30
|
)
|
|
(30
|
)
|
|
Receivables, net
|
|
$
|
57,332
|
|
|
$
|
35,856
|
|
|
|
|
|
|
|
|
Customer Trade Receivables.
Customer trade receivables represent short-term, non-interest bearing amounts due from precious metal sales, advances related to financing products, and other secured interests in assets of the customer.
Wholesale Trade Advances.
Wholesale trade advances represent advances of various bullion products and cash advances for purchase commitments of precious metal inventory. Typically, these advances are unsecured, short-term, and non-interest bearing, and are made to wholesale metals dealers and government mints.
Due from Brokers
. Due from brokers principally consists of the margin requirements held at brokers related to open futures contracts (see
Note 11
).
Allowance for Doubtful Accounts
An allowance for doubtful accounts is a reduction of the total amount of receivables appearing on the Company’s
condensed consolidated
balance sheets. The allowance for doubtful accounts represents our estimate of the amount of accounts receivable that may not be paid by customers. A summary of the activity in the allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
Period ended:
|
|
Beginning Balance
|
|
Provision
|
|
Charge-off
|
|
Ending Balance
|
|
Three Months Ended September 30, 2018
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
Year Ended June 30, 2018
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
|
|
5.
|
SECURED LOANS RECEIVABLE
|
Below is a summary of the carrying value of our secured loans as of
September 30, 2018
and
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
|
|
|
|
|
|
Secured loans originated
|
|
$
|
25,951
|
|
|
$
|
23,300
|
|
|
Secured loans originated - with a related party
|
|
5,699
|
|
|
12,523
|
|
|
|
|
31,650
|
|
|
35,823
|
|
|
Secured loans acquired
|
|
50,241
|
|
(1)
|
74,601
|
|
(2)
|
Secured loans
|
|
$
|
81,891
|
|
|
$
|
110,424
|
|
|
_________________________________
(1) Includes
$29,000
of loan premium as of
September 30, 2018
.
(2) Includes
$54,000
of loan premium as of
June 30, 2018
.
Secured Loans - Originated
:
Secured loans include short-term loans, which include a combination of on-demand lines and short term facilities, and long-term loans that are made to our customers. These loans are fully secured by the customers' assets that include bullion, numismatic and semi-numismatic material, which are typically held in safekeeping by the Company. (See
Note 13
for further information regarding our secured loans made to related parties.)
Secured Loans - Acquired
:
Secured loans also include short-term loans, which include a combination of on-demand lines and short term facilities that are purchased from our customers. The Company acquires a portfolio of their loan receivables at a price that approximates the aggregate carrying value of each loan in the portfolio, as determined on the effective transaction date. Each loan in the portfolio is fully secured by the borrowers' assets, which include bullion, numismatic and semi-numismatic material that are held in safekeeping by the Company. Typically, the seller of the loan portfolio retains the responsibility for the servicing and administration of the loans.
As of
September 30, 2018
and
June 30, 2018
, our secured loans carried weighted-average effective interest rates of
9.6%
and
9.6%
, respectively, and mature in periods generally ranging typically from on-demand to one year.
The secured loans that the Company generates with active customers of A-Mark are reflected as an operating activity on the
condensed consolidated
statements of cash flows. The secured loans that the Company generates with borrowers who are not active customers of A-Mark are reflected as an investing activity on the
condensed consolidated
statements of cash flows as secured loans, net. For the secured loans that (i) are reflected as an investing activity and have terms that allow the borrowers to increase their loan balance (at the discretion of the Company) based on the excess value of their collateral compared to their aggregate principal balance of loan, and (ii) are repayable on demand or in the short-term, the borrowings and repayments are netted on the
condensed consolidated
statements of cash flows.
Credit Quality of Secured Loans Receivables and Allowance for Credit Losses
The Company applies a systematic methodology to determine the allowance for credit losses for secured loan receivables. The secured loan receivables portfolio is comprised solely of secured loans with similar risk profiles. This similarity allows the Company to apply a standard methodology to determine the credit quality for each loan. The credit quality of each loan is generally determined by the secured material, the initial and ongoing collateral value determination and the assessment of loan-to-value determination. Typically, the Company's secured loan receivables within its portfolio have similar credit risk profiles and methods for assessing and monitoring credit risk.
The Company evaluates its loan portfolio in one of
two
classes of secured loan receivables: those loans secured by: 1) bullion items, and 2) numismatic and semi-numismatic coins. The Company's secured loans by portfolio class, which align with management reporting, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Bullion
|
|
$
|
51,015
|
|
|
62.3
|
%
|
|
$
|
72,128
|
|
|
65.3
|
%
|
|
Numismatic and semi-numismatic
|
|
30,876
|
|
|
37.7
|
|
|
38,296
|
|
|
34.7
|
|
|
|
|
$
|
81,891
|
|
|
100.0
|
%
|
|
$
|
110,424
|
|
|
100.0
|
%
|
|
Each of the two classes of secured loans receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. The methodology of assessing the credit quality of the secured loans acquired by the Company is similar to the secured loans originated by the Company; they are administered using the same internal reporting system, collateralized by precious metals, for which loan-to-value determination procedures are applied.
Credit Quality of Loans and Non-Performing Status
Generally, interest is due and payable within
30 days
. A loan is considered past due if interest is not paid in
30 days
or collateral calls are not met timely. Typically, loans do not achieve the threshold of non-performing status due to the fact that customers are generally put into default for any interest past due over
30 days
and for unsatisfied collateral calls. When this occurs the loan collateral is typically liquidated within
90 days
.
For certain secured loans, interest is billed monthly and, if not paid, is added to the outstanding loan balance. These secured loans are considered past due if their current loan-to-value ratio fails to meet established minimum equity levels, and the borrower fails to meet the collateral call required to reestablish the appropriate loan-to-value ratio.
Non-performing loans have the highest probability for credit loss. The allowance for credit losses attributable to non-performing loans is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, the Company estimates the current market value of the collateral and considers credit enhancements such as additional collateral and third-party guarantees. Due to the accelerated liquidation terms of the Company's loan portfolio, all past due loans are generally liquidated within
90 days
of default.
Further information about the Company's credit quality indicators includes differentiating by categories of current loan-to-value ratios. The Company desegregates its secured loans that are collateralized by precious metal products, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
Loan-to-value of 75% or more
|
|
$
|
50,307
|
|
|
61.4
|
%
|
|
$
|
69,629
|
|
|
63.1
|
%
|
Loan-to-value of less than 75%
|
|
31,584
|
|
|
38.6
|
|
|
40,795
|
|
|
36.9
|
|
Secured loans collateralized by precious metal products
|
|
$
|
81,891
|
|
|
100.0
|
%
|
|
$
|
110,424
|
|
|
100.0
|
%
|
The Company had
no
loans with a loan-to-value ratio in excess of
100%
at
September 30, 2018
or
June 30, 2018
.
Impaired loans
A loan is considered impaired if it is probable, based on current information and events, that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Customer loans are reviewed for impairment and include loans that are past due, non-performing or in bankruptcy. 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. Accrual is resumed, and previously suspended interest income is recognized, when the loan becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans are recorded first against the receivable and then to any unrecognized interest income.
All loans are contractually subject to margin calls. As a result, loans typically do not become impaired due to the fact the Company has the ability to require margin calls which are due upon receipt. Per the terms of the loan agreement, the Company has the right to liquidate the loan collateral in the event of a default. The collateral material is highly liquid and can easily be sold by the Company to pay off the loan. In such circumstances, this would result in a short term impairment that would typically result in full repayment of the loan and fees due to the Company.
For the
three months ended September 30, 2018 and 2017
, the Company incurred
no
loan impairment costs.
Our inventory consists of the precious metals that the Company has physically received, and inventory held by third-parties, which, at the Company's option, it may or may not receive. Below, our inventory is summarized by classification at
September 30, 2018
and
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
Inventory held for sale
|
|
$
|
127,986
|
|
|
$
|
32,605
|
|
Repurchase arrangements with customers
|
|
82,495
|
|
|
104,907
|
|
Consignment arrangements with customers
|
|
7,507
|
|
|
10,785
|
|
Commemorative coins, held at lower of cost or market
|
|
86
|
|
|
99
|
|
Borrowed precious metals
|
|
18,605
|
|
|
17,780
|
|
Product financing arrangements, restricted
|
|
53,126
|
|
|
113,940
|
|
|
|
$
|
289,805
|
|
|
$
|
280,116
|
|
Inventory Held for Sale.
Inventory held for sale represents precious metals, excluding commemorative coin inventory, that have been received by the Company that is not subject to repurchase or consignment arrangements with third parties. As of
September 30, 2018
and
June 30, 2018
, the inventory held for sale totaled
$128.0 million
and
$32.6 million
, respectively.
Repurchase Arrangements with Customers.
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 fair value of the product on the repurchase date. Under these arrangements, the Company, which holds legal title to the metals, earns financing income until the time the arrangement is terminated or the material is repurchased by the customer. In the event of a repurchase by the customer, the Company records a sale.
These arrangements are typically terminable by either party upon 14 days' notice. Upon termination, the customer’s rights to repurchase any remaining inventory is forfeited. As of
September 30, 2018
and
June 30, 2018
, included within inventory is
$82.5 million
and
$104.9 million
, respectively, of precious metals products subject to repurchase arrangements with customers.
Consignment Arrangements with Customers.
The Company periodically loans metals to customers on a short-term consignment basis. Inventories loaned under consignment arrangements to customers as of
September 30, 2018
and
June 30, 2018
totaled
$7.5 million
and
$10.8 million
, respectively. Such transactions are recorded as sales and are removed from the Company's inventory at the time the customer elects to price and purchase the precious metals.
Commemorative Coins.
Our commemorative coin inventory, including its premium component, is held at the lower of cost or market, 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. Our commemorative coins are not hedged, and are included in inventory at the lower of cost or market and totaled
$86,000
and
$99,000
as of
September 30, 2018
and
June 30, 2018
, respectively.
Borrowed Precious Metals.
Borrowed precious metals inventories include: (1) metals held by suppliers as collateral on advanced pool metals, (2) amounts due to suppliers for the use of consigned inventory, (3) unallocated metal positions held by customers in the Company’s inventory, and (4) shortages in unallocated metal positions held by the Company in the supplier’s inventory. Unallocated or pool metal represents an unsegregated inventory position that is due on demand, in a specified physical form, based on the total ounces of metal held in the position. Amounts due under these arrangements require delivery either in the form of precious metals, or cash. The Company's inventories included borrowed precious metals with market values totaling
$18.6 million
and
$17.8 million
as of
September 30, 2018
and
June 30, 2018
, respectively, with a corresponding offsetting obligation reflected as liabilities on borrowed metals on the
condensed consolidated
balance sheets.
Product Financing Arrangements.
In substance, these inventories represent amounts held as security by lenders for obligations under product financing arrangements. The Company enters into a product financing agreement for the transfer and subsequent re-acquisition of gold and silver at an agreed-upon price based on the spot price with a third party finance company. This inventory is restricted and is held at a custodial storage facility in exchange for a financing fee, paid to the third party finance company. During the term of the financing, the third party finance company holds the inventory as collateral, and both parties intend for the inventory to be returned to the Company at an agreed-upon price based on the spot price on the finance arrangement termination date. These transactions do not qualify as sales and have been accounted for as financing arrangements in accordance with ASC 470-40
Product Financing Arrangements
. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the product financing and the underlying inventory are carried at fair value, with changes in fair value included in cost of sales in the
condensed consolidated
statements of operations. Such obligations totaled
$53.1 million
and
$113.9 million
as of
September 30, 2018
and
June 30, 2018
, respectively.
The Company mitigates market risk of its physical inventories and open commitments through commodity hedge transactions (see
Note 11
.) As of
September 30, 2018
and
June 30, 2018
, the unrealized losses resulting from the difference between market value and cost of physical inventories were
$6.5 million
and
$5.4 million
, respectively.
Premium component of inventory
The Company's inventories primarily include bullion and bullion coins and are acquired and initially recorded at fair market value. The fair market value of the bullion and bullion coins is comprised of two components: (1) published market values attributable to the cost 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 is readily determined, as it is published by multiple reputable sources. The premium is included in the cost of the inventory, paid at acquisition, and is a component of the total fair market value of the inventory. The precious metal component of the inventory may be hedged through the use of precious metal commodity positions, while the premium component of our inventory is not a commodity that may be hedged.
The Company’s inventories are subsequently recorded at their fair market values, that is, "marked-to-market", except for our commemorative coin inventory. The daily changes in the fair market value of our inventory are offset by daily changes in fair market value of hedging derivatives that are taken with respects 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 operations.
The premium component, at market value, included in the inventories as of
September 30, 2018
and
June 30, 2018
totaled
$4.0 million
and
$3.5 million
, respectively.
7
. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consists of the following at
September 30, 2018
and
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Office furniture, and fixtures
|
|
$
|
2,056
|
|
|
$
|
2,056
|
|
|
Computer equipment
|
|
757
|
|
|
757
|
|
|
Computer software
|
|
3,471
|
|
|
3,471
|
|
|
Plant equipment
|
|
2,821
|
|
|
2,701
|
|
|
Building
|
|
315
|
|
|
315
|
|
|
Leasehold improvements
|
|
2,798
|
|
|
2,796
|
|
|
Total depreciable assets
|
|
12,218
|
|
|
12,096
|
|
|
Less: accumulated depreciation
|
|
(6,043
|
)
|
|
(5,597
|
)
|
|
Property and equipment not placed in service
|
|
1,483
|
|
|
1,483
|
|
|
Land
|
|
36
|
|
|
36
|
|
|
Plant, property and equipment, net
|
|
$
|
7,694
|
|
|
$
|
8,018
|
|
|
Depreciation expense for the
three months ended September 30, 2018 and 2017
was
$445,000
and
$374,000
, respectively.
8
. GOODWILL AND INTANGIBLE ASSETS
In connection with the acquisition of A-Mark by Former Parent on July 1, 2005, the accounts of the Company were adjusted using the push down basis of accounting to recognize the allocation of the consideration paid to the respective net assets acquired. In accordance with the push down basis of accounting, the Company's net assets were adjusted to their fair values as of the date of the acquisition based upon an independent appraisal.
Due to the Company's business combination with AMST that closed on August 31, 2016, the Company recorded an additional
$2.5 million
and
$4.3 million
of identifiable intangible assets and goodwill, respectively; these values were based upon an independent appraisal. The Company’s investment in AMST has resulted in synergies between the acquired minting operation and the Company’s established distribution network by providing a more steady and reliable fabricated source of silver during times of market volatility. The Company considers that much of the acquired goodwill relates to the “ready state” of AMST's established minting operation with existing quality processes, procedures and ability to scale production to meet market needs.
Due to the Company's acquisition of Goldline (see
Note 1
), the Company recorded
$5.0 million
and
$1.4 million
of additional identifiable intangible assets and goodwill, respectively; these values were based upon an independent appraisal and represents their fair values at the acquisition date. The Company’s investment in Goldline created synergies between Goldline's direct marketing operation and the Company’s established distribution network, secured storage and lending operations that is expected to lead to increased product margin spreads, lower distribution and storage costs for Goldline, and a larger customer base for the Company's secured lending operations.
The carrying value of goodwill and other purchased intangibles as of
September 30, 2018
and
June 30, 2018
is as described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Estimated Useful Lives (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net Book Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net Book Value
|
Identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing customer relationships
|
5 - 15
|
|
8,848
|
|
|
(5,694
|
)
|
|
—
|
|
|
3,154
|
|
|
8,848
|
|
|
(5,467
|
)
|
|
—
|
|
|
3,381
|
|
Non-compete and other
|
3 - 5
|
|
2,300
|
|
|
(2,072
|
)
|
|
—
|
|
|
228
|
|
|
2,300
|
|
|
(2,056
|
)
|
|
—
|
|
|
244
|
|
Employment agreement
|
3
|
|
295
|
|
|
(231
|
)
|
|
—
|
|
|
64
|
|
|
295
|
|
|
(222
|
)
|
|
—
|
|
|
73
|
|
Intangibles subject to amortization
|
|
11,443
|
|
|
(7,997
|
)
|
|
—
|
|
|
3,446
|
|
|
11,443
|
|
|
(7,745
|
)
|
|
—
|
|
|
3,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
Indefinite
|
|
$
|
4,454
|
|
|
$
|
—
|
|
|
$
|
(1,291
|
)
|
|
$
|
3,163
|
|
|
$
|
4,454
|
|
|
$
|
—
|
|
|
$
|
(1,291
|
)
|
|
$
|
3,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
$
|
15,897
|
|
|
$
|
(7,997
|
)
|
|
$
|
(1,291
|
)
|
|
$
|
6,609
|
|
|
$
|
15,897
|
|
|
$
|
(7,745
|
)
|
|
$
|
(1,291
|
)
|
|
$
|
6,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
Indefinite
|
|
$
|
10,245
|
|
|
$
|
—
|
|
|
$
|
(1,364
|
)
|
|
$
|
8,881
|
|
|
$
|
10,245
|
|
|
$
|
—
|
|
|
$
|
(1,364
|
)
|
|
$
|
8,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company's intangible assets are subject to amortization except for trade-names, which have an indefinite life. Intangible assets subject to amortization are amortized using the straight-line method over their useful lives, which are estimated to be
three
to
fifteen
years. Amortization expense related to the Company's intangible assets for the
three months ended September 30, 2018 and 2017
was
$252,000
and
$157,000
, respectively.
Impairment
The accumulated impairment charge of
$2.7 million
(goodwill and indefinite-lived intangible assets) was a one-time charge for fiscal 2018. No further impairment of goodwill or intangible assets has occurred for the
three months ended September 30, 2018
.
Estimated Amortization
Estimated amortization expense on an annual basis for the succeeding five years is as follows (in thousands):
|
|
|
|
|
|
Fiscal Year Ending June 30,
|
|
Amount
|
2019 (9 months remaining)
|
|
$
|
759
|
|
2020
|
|
1,011
|
|
2021
|
|
599
|
|
2022
|
|
571
|
|
2023
|
|
128
|
|
Thereafter
|
|
378
|
|
Total
|
|
$
|
3,446
|
|
|
|
9
.
|
LONG-TERM INVESTMENTS
|
The Company has
two
investments in privately-held entities, both of which are online precious metals retailers and customers of the Company. The Company has exclusive supplier agreements with each entity, for which these customers have agreed to purchase all bullion products required for their businesses exclusively from A-Mark, subject to certain limitations. The Company also provides fulfillment services to both of these customers. The following table shows the carrying value of the Company's investments in the privately held companies, categorized by type of investment:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Equity method investment
|
|
$
|
8,136
|
|
|
$
|
7,888
|
|
|
Cost method investment
|
|
500
|
|
|
500
|
|
|
|
|
$
|
8,636
|
|
|
$
|
8,388
|
|
|
Equity Method Investment
The Company applies the equity method of accounting for its investment in which it has aggregate ownership interest of
20.6%
. Under the equity method of accounting, the carrying value of the investment is adjusted for the Company's proportional share of the investee's reported earnings or losses with the corresponding share of earnings or losses reported in other income (expense) on the
condensed consolidated
statements of operations. The Company's proportionate share of the investee’s net income totaled
$248,000
and
$57,000
for the
three months ended September 30, 2018 and 2017
, respectively.
Cost Method Investment
The Company applies the cost method to its investment in which its ownership percentage, based on the number of fully dilutive common shares outstanding, was
2.5%
as of
September 30, 2018
and
June 30, 2018
. As of
September 30, 2018
and
June 30, 2018
, the aggregate carrying balance of this investment was
$0.5 million
.
Accounts payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Trade payables to customers
|
|
$
|
866
|
|
|
$
|
175
|
|
|
Advances from customers
|
|
56,710
|
|
|
42,615
|
|
|
Deferred revenue
|
|
2,074
|
|
|
2,107
|
|
|
Other accounts payable
|
|
1,343
|
|
|
1,100
|
|
|
|
|
$
|
60,993
|
|
|
$
|
45,997
|
|
|
|
|
11
.
|
DERIVATIVE INSTRUMENTS AND HEDGING TRANSACTIONS
|
The Company is exposed to market risk, such as changes in commodity prices, and foreign exchange rates. To manage the volatility relating to these exposures, the Company enters into various derivative products, such as forwards and futures contracts. By policy, the Company historically has entered into derivative financial instruments for the purpose of hedging substantially all of Company's market exposure to precious metals prices, and not for speculative 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, both of which are recorded in cost of sales in the consolidated statements of operations.
Commodity Price Management
The Company manages the value of certain assets and liabilities of its trading business, including trading inventories, by employing a variety of hedging strategies. These strategies include the management of exposure to changes in the market values of the Company's trading inventories through the purchase and sale of a variety of derivative instruments, such as, forwards and futures contracts.
The Company enters into derivative transactions solely for the purpose of hedging its inventory subject to price risk, and not for speculative market purposes. Due to the nature of the Company's global hedging strategy, the Company is not using hedge accounting as defined under Topic 815 of the ASC, whereby the gains or losses would be deferred and included as a component of other comprehensive income
.
Instead, gains or losses resulting from the Company's futures and forward contracts and open sale and purchase commitments are reported in the
condensed consolidated
statement of operations as unrealized gains or losses on commodity contracts (a component of cost of sales) with the related unrealized amounts due from or to counterparties reflected as a derivative asset or liability on the
condensed consolidated
balance sheets.
The Company's trading inventories and purchase and sale transactions consist primarily of precious metal products. The value of these assets and liabilities are marked-to-market daily to the prevailing closing price of the underlying precious metals. The Company's precious metals inventories are subject to market value changes, created by changes in the underlying commodity market prices. Inventories purchased or borrowed by the Company are subject to price changes. Inventories borrowed are considered natural hedges, since changes in value of the metal held are offset by the obligation to return the metal to the supplier.
The Company’s open sale and purchase commitments typically settle within
2
business days, and for those commitments that do not have stated settlement dates, the Company has the right to settle the positions upon demand. Futures and forwards contracts open at end of any period typically settle within
30
days. Open sale and purchase commitments are subject to changes in value between the date the purchase or sale price is fixed (the trade date) and the date the metal is received or delivered (the settlement date). The Company seeks to minimize the effect of price changes of the underlying commodity through the use of forward and futures contracts.
The Company's policy is to substantially hedge its inventory position, net of open sale and purchase commitments that are subject to price risk. The Company regularly enters into precious metals commodity forward and futures contracts with financial institutions to hedge price changes that would cause changes in the value of its physical metals positions and purchase commitments and sale commitments. The Company has access to all of the precious metals markets, allowing it to place hedges. The Company also maintains relationships with major market makers in every major precious metals dealing center.
The Company’s management sets credit and position risk limits. These limits include gross position limits for counterparties engaged in sales and purchase transactions with the Company. They also include collateral limits for different types of sale and purchase transactions that counterparties may engage in from time to time.
Derivative Assets and Liabilities
The Company's derivative assets and liabilities represent the net fair value of the difference (or intrinsic value) between market values and trade values at the trade date for open precious metals sale and purchase contracts, as adjusted on a daily basis for changes in market values of the underlying metals, until settled. The Company's derivative assets and liabilities represent the net fair value of open precious metals forwards and futures contracts. The precious metals forwards and futures contracts are settled at the contract settlement date.
All of our commodity derivative contracts are under master netting arrangements and include both asset and liability positions (i.e., offsetting derivative instruments). As such, for the Company's derivative contracts with the same counterparty, the receivables and payables have been netted on the
condensed consolidated
balance sheets. Such derivative contracts include open sale and purchase commitments, futures, forwards and margin accounts. In the table below, the aggregate gross and net derivative receivables and payables balances are presented by contract type and type of hedge, as of
September 30, 2018
and
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
|
|
|
|
in thousands
|
|
Gross Derivative
|
|
Amounts Netted
|
|
Cash Collateral Pledge
|
|
Net Derivative
|
|
Gross Derivative
|
|
Amounts Netted
|
|
Cash Collateral Pledge
|
|
Net Derivative
|
Nettable derivative assets:
|
Open sale and purchase commitments
|
|
$
|
3,144
|
|
|
$
|
(1,163
|
)
|
|
$
|
—
|
|
|
$
|
1,981
|
|
|
$
|
2,602
|
|
|
$
|
(328
|
)
|
|
$
|
—
|
|
|
$
|
2,274
|
|
Option contracts
|
|
392
|
|
|
—
|
|
|
—
|
|
|
392
|
|
|
390
|
|
|
—
|
|
|
—
|
|
|
390
|
|
Future contracts
|
|
140
|
|
|
—
|
|
|
—
|
|
|
140
|
|
|
238
|
|
|
—
|
|
|
—
|
|
|
238
|
|
Forward contracts
|
|
193
|
|
|
—
|
|
|
—
|
|
|
193
|
|
|
4,577
|
|
|
(84
|
)
|
|
—
|
|
|
4,493
|
|
|
|
$
|
3,869
|
|
|
$
|
(1,163
|
)
|
|
$
|
—
|
|
|
$
|
2,706
|
|
|
$
|
7,807
|
|
|
$
|
(412
|
)
|
|
$
|
—
|
|
|
$
|
7,395
|
|
Nettable derivative liabilities:
|
Open sale and purchase commitments
|
|
$
|
25,875
|
|
|
$
|
(387
|
)
|
|
$
|
—
|
|
|
$
|
25,488
|
|
|
$
|
17,132
|
|
|
$
|
(647
|
)
|
|
$
|
—
|
|
|
$
|
16,485
|
|
Margin accounts
|
|
5,629
|
|
|
—
|
|
|
(1,901
|
)
|
|
3,728
|
|
|
5,988
|
|
|
—
|
|
|
(2,184
|
)
|
|
3,804
|
|
Liability of price protection programs
|
|
116
|
|
|
—
|
|
|
—
|
|
|
116
|
|
|
168
|
|
|
—
|
|
|
—
|
|
|
168
|
|
Future contracts
|
|
2,163
|
|
|
—
|
|
|
—
|
|
|
2,163
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forward contracts
|
|
5,216
|
|
|
(737
|
)
|
|
—
|
|
|
4,479
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
38,999
|
|
|
$
|
(1,124
|
)
|
|
$
|
(1,901
|
)
|
|
$
|
35,974
|
|
|
$
|
23,288
|
|
|
$
|
(647
|
)
|
|
$
|
(2,184
|
)
|
|
$
|
20,457
|
|
Gains or Losses on Derivative Instruments
The Company records the derivative at the trade date with a corresponding unrealized gain (loss), shown as a component of cost of sales in the
condensed consolidated
statements of operations. The Company adjusts the derivatives to fair value on a daily basis until the transactions are settled. 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 contacts are recorded in cost of sales.
Below is a summary of the net gains (losses) on derivative instruments for the
three months ended September 30, 2018 and 2017
.
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Gains (losses) on derivative instruments:
|
|
Unrealized gains (losses) on open future commodity and forward contracts and open sale and purchase commitments, net
|
|
$
|
(19,898
|
)
|
|
$
|
12,257
|
|
|
Realized gains on future commodity contracts, net
|
|
4,765
|
|
|
2,387
|
|
|
|
|
$
|
(15,133
|
)
|
|
$
|
14,644
|
|
|
The Company’s net gains on derivative instruments, as shown in the table above, were substantially offset by the changes in fair market value of the underlying precious metals inventory and open sale and purchase commitments, which were also recorded in cost of sales in the
condensed consolidated
statements of operations.
Summary of Hedging Positions
In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. The following table summarizes the results of our hedging activities, which shows the precious metal commodity inventory position, net of open sale and purchase commitments, that is subject to price risk as of
September 30, 2018
and at
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Inventory
|
|
$
|
289,805
|
|
|
$
|
280,116
|
|
|
Precious metals held under financing arrangements
|
|
232,476
|
|
|
262,566
|
|
|
|
|
522,281
|
|
|
542,682
|
|
|
|
|
|
|
|
|
Less unhedgeable inventory:
|
|
|
|
|
|
Commemorative coin inventory, held at lower of cost or market
|
|
(86
|
)
|
|
(99
|
)
|
|
Premium on metals position
|
|
(3,970
|
)
|
|
(3,530
|
)
|
|
Precious metal value not hedged
|
|
(4,056
|
)
|
|
(3,629
|
)
|
|
|
|
|
|
|
|
|
|
518,225
|
|
|
539,053
|
|
|
|
|
|
|
|
|
Commitments at market:
|
|
|
|
|
|
|
|
Open inventory purchase commitments
|
|
264,037
|
|
|
342,287
|
|
|
Open inventory sales commitments
|
|
(215,464
|
)
|
|
(138,022
|
)
|
|
Margin sale commitments
|
|
(5,674
|
)
|
|
(5,988
|
)
|
|
In-transit inventory no longer subject to market risk
|
|
(1,334
|
)
|
|
(1,060
|
)
|
|
Unhedgeable premiums on open commitment positions
|
|
910
|
|
|
541
|
|
|
Borrowed precious metals
|
|
(227,198
|
)
|
|
(280,346
|
)
|
|
Product financing arrangements
|
|
(53,126
|
)
|
|
(113,940
|
)
|
|
Advances on industrial metals
|
|
7,489
|
|
|
6,044
|
|
|
|
|
(230,360
|
)
|
|
(190,484
|
)
|
|
|
|
|
|
|
|
Precious metal subject to price risk
|
|
287,865
|
|
|
348,569
|
|
|
|
|
|
|
|
|
Precious metal subject to derivative financial instruments:
|
|
|
|
|
|
Precious metals forward contracts at market values
|
|
197,419
|
|
|
274,994
|
|
|
Precious metals futures contracts at market values
|
|
90,828
|
|
|
72,421
|
|
|
Total market value of derivative financial instruments
|
|
288,247
|
|
|
347,415
|
|
|
|
|
|
|
|
|
Net precious metals subject to commodity price risk
|
|
$
|
(382
|
)
|
|
$
|
1,154
|
|
|
Notional Balances of Derivatives
The notional balances of the Company's derivative instruments, consisting of contractual metal quantities, are expressed at current spot prices of the underlying precious metal commodity. As of
September 30, 2018
and
June 30, 2018
, the Company had the following outstanding commitments and open forward and future contracts:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Purchase commitments
|
|
$
|
264,037
|
|
|
$
|
342,287
|
|
|
Sales commitments
|
|
$
|
(215,464
|
)
|
|
$
|
(138,022
|
)
|
|
Margin sales commitments
|
|
$
|
(5,674
|
)
|
|
$
|
(5,988
|
)
|
|
Open forward contracts
|
|
$
|
197,419
|
|
|
$
|
274,994
|
|
|
Open futures contracts
|
|
$
|
90,828
|
|
|
$
|
72,421
|
|
|
The contract amounts (i.e., notional balances) of the Company's forward and futures contracts and the open sales and purchase commitments are not reflected in the accompanying
condensed consolidated
balance sheet. The Company records the difference between the market price of the underlying metal or contract and the trade amount at fair value.
The Company is exposed to the risk of failure of the counterparties to its derivative contracts. Significant judgment is applied by the Company when evaluating the fair value implications. The Company regularly reviews the creditworthiness of its major counterparties and monitors its exposure to concentrations. At
September 30, 2018
, the Company believes its risk of counterparty default is mitigated as a result of such evaluation and the short-term duration of these arrangements.
Foreign Currency Exchange Rate Management
The Company utilizes foreign currency forward contracts to manage the effect of foreign currency exchange fluctuations on its sale and purchase transactions. These contracts generally have maturities of less than one week. The accounting treatment of our foreign currency exchange derivative instruments is similar to the accounting treatment of our commodity derivative instruments, that is, the change in the value in the financial instrument is immediately recognized as a component of cost of sales. Unrealized losses on foreign exchange derivative instruments shown on the face of the
condensed consolidated
statements of operations totaled
$70,000
and
$101,000
for the
three months ended September 30, 2018 and 2017
, respectively. The market values (fair values) of the Company’s foreign exchange forward contracts and the net open sale and purchase commitment transactions, denominated in foreign currencies, outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
September 30, 2018
|
|
June 30, 2018
|
Foreign exchange forward contracts
|
|
$
|
4,104
|
|
|
$
|
4,130
|
|
Open sale and purchase commitment transactions, net
|
|
$
|
6,271
|
|
|
$
|
3,026
|
|
|
|
|
|
|
12
. INCOME TAXES
Income (loss) from operations before provision for income taxes is shown below:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Year Ended
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
U.S.
|
|
$
|
1,925
|
|
|
$
|
684
|
|
|
Foreign
|
|
8
|
|
|
34
|
|
|
Net income before provision for income taxes
|
|
$
|
1,933
|
|
|
$
|
718
|
|
|
|
|
|
|
|
|
The Company files a consolidated federal income tax return based on a June 30 tax year end. The expense from provision for income taxes for the
three months ended September 30, 2018 and 2017
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Year Ended
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Federal
|
|
$
|
419
|
|
|
$
|
252
|
|
|
State and local
|
|
78
|
|
|
21
|
|
|
Foreign
|
|
2
|
|
|
1
|
|
|
Provision for income taxes
|
|
$
|
499
|
|
|
$
|
274
|
|
|
|
|
|
|
|
|
The effective tax rate for the
three months ended September 30, 2018 and 2017
are set forth below:
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Effective tax rate
|
|
25.8
|
%
|
|
38.2
|
%
|
|
|
|
|
|
|
|
Tax Cuts and Jobs Act
The comparability of our effective tax rate in the first quarter of fiscal 2019 compared to the corresponding prior year period was impacted by the U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act), which was effective for the Company starting in our second quarter of fiscal 2018. Information regarding our adoption and prospective impacts of the Tax Act on our tax is included in our Annual Report on Form 10-K for our fiscal year ended June 30, 2018. The initial one-time tax expense related to the enactment of the Tax Act has been accounted for in the prior fiscal year ended June 30,2018 based on provisional estimates pursuant to ASU 2018-05. Subsequent adjustments, if any, related to our enactment of the Tax Act will be accounted for within the measurement period in accordance with SAB 118 in the period such adjustments are identified. This one-time provisional tax expense incorporate, among other factors, assumptions made based on interpretations of the Tax Act and existing tax laws along with a range of historical financial and tax-specific facts and information, including estimates of deferred tax balances pending finalization of those balances.
Tax Balances and Activity
Income Taxes Receivable and Payable
As of
September 30, 2018
and
June 30, 2018
, income taxes receivable totaled
$1.6 million
and
$1.6 million
, respectively.
Deferred Tax Assets and Liabilities
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized by evaluating both positive and negative evidence. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of
September 30, 2018
and
June 30, 2018
, management concluded that it was more likely than not that the Company would be able to realize the benefit of the U.S. federal and state deferred tax assets. We based this conclusion on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets.
As of
September 30, 2018
, the consolidated balance sheet reflects the deferred tax items for each tax-paying component (i.e., federal and state), resulting in a state deferred tax asset of
$1.6 million
and a federal deferred tax asset of
$1.8 million
. As of
June 30, 2018
, the consolidated balance sheet reflects the deferred tax items for each tax-paying component (i.e., federal and state), resulting in a state deferred tax asset of
$1.7 million
and a federal deferred tax asset of
$2.2 million
.
Net Operating Loss Carryforwards
As of
September 30, 2018
and
June 30, 2018
, the Company has approximately
$3.3 million
and
$2.9 million
of federal net operating loss carryforwards and approximately
$15.6 million
and
$15.5 million
, state and city net operating loss carryforwards, respectively. The Company's combined federal, state and city tax-effected net operating loss carryforwards totaled, as of
September 30, 2018
and
June 30, 2018
,
$1.8 million
and
$1.7 million
, respectively. These net operating loss carryforwards start to expire in the year ending
June 30, 2022
.
Unrecognized Tax Benefits
The Company has taken or expects to take certain tax benefits on its income tax return filings that it has not recognized a tax benefit (i.e., an unrecognized tax benefit) on its consolidated statements of operations. The Company's measurement of its uncertain tax positions is based on management's assessment of all relevant information, including, but not limited to prior audit experience, audit settlement, or lapse of the applicable statute of limitations. For the
three months ended September 30, 2018
there was no material movement in unrecognized tax benefits including interest and penalties.
Tax Examinations
There has been no material change to our open tax examinations, except for the closing of the IRS examination of the Company's fiscal 2015 federal income tax return. Information related to open tax examinations is included in our
2018 Annual Report
on Form 10-K for fiscal
year ended June 30, 2018
.
13
. RELATED PARTY TRANSACTIONS
Former Parent and its Subsidiaries
In addition to transactions with other affiliates as indicated below, the Company engages with Stack’s Bowers Numismatics LLC ("Stack's Bowers"), a wholly owned subsidiary of the Former Parent, in (i) sales and purchase transactions, and (ii) transactions in which the Company assists Stack’s Bowers in financing the purchase of rare coins and precious metals products, both through precious metal repurchase arrangements in which the Company receives a fee based upon the commodity value of the coins, and through loans to Stack’s Bowers from CFC secured by the coins or precious metal. The effect of these transactions is included in the following tables.
Balances with Affiliated Companies or Persons
As of
September 30, 2018
and
June 30, 2018
, the Company had related party receivables and payables balances as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
|
|
Receivables
|
|
Payables
|
|
Receivables
|
|
Payables
|
|
Former Parent/Stack's Bowers
|
|
$
|
6,226
|
|
(1)
|
$
|
—
|
|
|
$
|
13,240
|
|
|
$
|
—
|
|
|
Equity method investee
|
|
—
|
|
|
1,265
|
|
(2)
|
—
|
|
|
920
|
|
|
SilverTowne
|
|
—
|
|
|
332
|
|
(3)
|
—
|
|
|
242
|
|
|
Goldline Lenders
|
|
—
|
|
|
7,712
|
|
(4)
|
—
|
|
|
7,710
|
|
|
|
|
$
|
6,226
|
|
|
$
|
9,309
|
|
|
13,240
|
|
|
$
|
8,872
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________________________
|
|
(1) Balance principally includes two secured lines of credit with a balance of $3.7 million and $2.0 million (shown as a component of secured loans receivables). See "Secured Lines of Credit with Stack's Bowers", below.
|
|
(2) Balance represents primarily open trade payables.
|
|
(3) Balance (net) includes (a) a trade receivables of $0.3 million (shown as a component of receivables), and (b) a contingent earn-out liability of $0.6 million (shown as a component of other long-term liabilities).
|
|
(4) Balance includes the face value of the Goldline Credit Facility of $7.5 million, and the associated estimated debt funding fees payable of $0.2 million (shown as debt obligation - related party). The Goldline Credit facility and the debt funding fee are payable in August 2020.
|
|
|
|
|
|
|
|
|
|
|
|
Secured Lines of Credit with Stack's Bowers
On September 19, 2017, CFC entered into a loan agreement with Stack's Bowers providing a secured line of credit, bearing interest at a competitive rate per annum, with a maximum borrowing line of
$5.3 million
. The loan is secured by precious metals and numismatic products. As of
September 30, 2018
and
June 30, 2018
, the aggregate carrying value of this loan was
$3.7 million
and
$3.0 million
, respectively.
On March 1, 2018, CFC entered into a loan agreement with Stack's-Bowers providing a secured line of credit on the wholesale value (i.e., the excess over the spot value of the metal), of numismatic products bearing interest at a competitive rate per annum, with a maximum borrowing line of
$10.0 million
. In addition to the annual rate of interest, the Company is entitled to receive a participation interest equal to
10%
of the net profits realized by Stack's Bowers on the ultimate sale of the products. As of
September 30, 2018
and
June 30, 2018
, the aggregate carrying value of this loan was
$2.0 million
and
$9.5 million
, respectively.
Long Term Debt Obligation with Goldline Lenders
As of
September 30, 2018
, the carrying value of the long term debt obligation payable to Goldline Lenders totaled
$7.3 million
, and is shown in the
condensed consolidated
balance sheets as debt obligation (related party). The face value of this debt obligation is
$7.5 million
and the related unamortized loan funding fee, a contra-liability, totaled
$243,000
as of
September 30, 2018
(see
Note 14
). The estimated loan funding fee payable to Goldline Lenders as of
September 30, 2018
totaled
$212,000
and is shown on the
condensed consolidated
balance sheets as component of other long-term liabilities.
Activity with Affiliated Companies or Persons
Sales and Purchases Made to Affiliated Companies
During the
three months ended September 30, 2018 and 2017
, the Company made sales and purchases to various companies, which have been deemed to be related parties, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
|
|
Sales
|
|
Purchases
|
|
Sales
|
|
Purchases
|
|
Former Parent/Stack's Bowers
|
|
$
|
17,475
|
|
|
$
|
16,772
|
|
|
$
|
4,432
|
|
|
$
|
2,389
|
|
|
Equity method investee
|
|
100,564
|
|
|
2,362
|
|
|
81,971
|
|
|
358
|
|
|
SilverTowne
|
|
4,138
|
|
|
461
|
|
|
3,150
|
|
|
99
|
|
|
|
|
$
|
122,177
|
|
|
$
|
19,595
|
|
|
$
|
89,553
|
|
|
$
|
2,846
|
|
|
Interest Income Earned from Affiliated Companies
During the
three months ended September 30, 2018 and 2017
, the Company earned interest income related to loans made to Stack's Bowers and related to financing arrangements (including repurchase agreements) with affiliated companies, as set forth below:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Interest income from secured loans receivables
|
|
$
|
214
|
|
|
$
|
2
|
|
|
Interest income from finance products and repurchase arrangements
|
|
1,723
|
|
|
544
|
|
|
|
|
$
|
1,937
|
|
|
$
|
546
|
|
|
|
|
|
|
|
|
Interest Expense Incurred Related to Notes Payable and Long-Term Debt Obligation
During the
three months ended September 30, 2018 and 2017
, the Company incurred interest expense (including debt amortization costs) related to the debt payable to SilverTowne and the Goldline Lenders, as set forth below:
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Interest expense incurred related to notes payable
|
|
$
|
—
|
|
|
$
|
2
|
|
|
Interest expense incurred related to long-term debt obligation
|
|
$
|
195
|
|
|
$
|
73
|
|
|
|
|
$
|
195
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
Other Income Earned from Equity Method Investee
During the
three months ended September 30, 2018 and 2017
, the Company recorded its proportional share of its equity method investee's net income as other income that total
$248,000
and
$57,000
, respectively. As of
September 30, 2018
and
June 30, 2018
, the carrying balance of the equity method investment was
$8.1 million
and
$7.9 million
, respectively.
|
|
14
.
|
FINANCING AGREEMENTS
|
Lines of Credit
The Company has an uncommitted demand revolving credit facility ("Trading Credit Facility”) provided to the Company by a syndicate of financial institutions, with Coöperatieve Rabobank U.A. ("Rabobank") acting as lead lender and administrative agent and Natixis, New York Branch acting as syndication agent. The Trading Credit Facility is secured by substantially all of the Company’s assets on a first priority basis. As of
September 30, 2018
, the Trading Credit Facility provided the Company with access up to
$260.0 million
, featuring a
$210.0 million
base, with a
$50.0 million
accordion option. The Trading Credit Facility is scheduled to mature on
March 29, 2019
. As of
September 30, 2018
, the Company incurred
$2.6 million
of loan costs in connection with the Trading Credit Facility, which was capitalized and is being amortized over the term of the Trading Credit Facility. As of
September 30, 2018
and
June 30, 2018
, the remaining unamortized balance was approximately
$0.3 million
and
$0.5 million
, respectively.
The Company routinely uses the Trading Credit Facility to purchase and finance precious metals and for operating cash flow purposes. Amounts under the Trading Credit Facility bear interest based on London Interbank Offered Rate (“LIBOR”) plus a
2.50%
margin for revolving credit line loans and a
4.50%
margin for bridge loans (that is, for loans that exceed the available revolving credit line). The
one-month LIBOR
rate was approximately
2.26%
and
2.09%
as of
September 30, 2018
and
June 30, 2018
, respectively. Borrowings are due on demand and totaled
$179.0 million
and
$200.0 million
at
September 30, 2018
and at
June 30, 2018
, respectively. The amounts available under the respective borrowing facilities are determined at the end of each week following a specified borrowing base formula. The Company is able to access additional credit as needed to finance operations, subject to the overall limits of the borrowing facilities and lender approval of the revised borrowing base calculation. Based on the latest approved borrowing bases in effect, the amounts available under the Trading Credit Facility after taking into account current borrowings, totaled
$3.5 million
and
$22.1 million
as determined on the Friday before
September 30, 2018
and on Friday,
June 30, 2018
, respectively.
The Trading Credit Facility has certain restrictive financial covenants, including one requiring the Company to maintain a minimum tangible net worth. As of
September 30, 2018
the minimum tangible net worth financial covenant under the Trading Credit Facility was
$47.5 million
. The Company is in compliance with all restrictive financial covenants as of
September 30, 2018
.
Interest expense related to the Company’s lines of credit totaled
$2.0 million
and
$1.7 million
, which represents
57.2%
and
63.5%
of the total interest expense recognized, for the
three months ended September 30, 2018 and 2017
, respectively. Our lines of credit carried a daily weighted average effective interest rate of
4.54%
and
3.75%
, respectively, for the
three months ended September 30, 2018 and 2017
.
Debt obligation with Goldline Lenders
On August 28, 2017, in connection with the closing of the Goldline acquisition (see
Note 1
), Goldline, then known as Goldline Acquisition Corp., entered into a privately placed credit facility in the amount of
$7.5 million
(the “Goldline Credit Facility”) with various lenders (the "Goldline Lenders"). Borrowings under the Goldline Credit Facility were used to finance a portion of the consideration payable pursuant to the Goldline acquisition.
The Goldline Credit Facility is secured by a first priority lien on substantially all of the assets of Goldline , and is guaranteed by the Company. Interest on the Goldline Credit Facility is payable quarterly in arrears at the rate of
8.5%
per annum, and the Goldline Lenders under the Goldline Credit Facility are entitled to an additional funding fee payment at maturity equal to the greater of
3.0%
of the principal amount of the Goldline Credit Facility and
10.0%
of cumulative EBITDA (for the periods ending June 30, 2018, 2019 and 2020) of Goldline in excess of
$10.0 million
, on a pro rata basis. The Goldline Credit Facility has a
three
-year maturity, and all outstanding principal and unpaid interest is due upon maturity (August 28, 2020).
As of
September 30, 2018
and
June 30, 2018
, the carrying balance of the Goldline Credit facility was
$7.3 million
and
$7.2 million
, respectively, and the remaining unamortized loan cost balance was approximately
$0.2 million
and
$0.3 million
, respectively, which is amortized ratably through the maturity date. As of
September 30, 2018
, the balance of the loan fee payable was
$0.2 million
.
Interest expense related to the Goldline Credit Facility (including debt loan amortization costs) totaled
$195,000
which represents
5.5%
of the total interest expense recognized, for the
three months ended September 30, 2018
. The Goldline Credit Facility's weighted average effective interest rate was
8.84%
for the
three months ended September 30, 2018
. Interest expense related to the Goldline Credit Facility (including debt loan amortization costs) totaled
$79,000
which represents
2.9%
of the total interest expense recognized, for the
three months ended September 30, 2017
. The Goldline Credit Facility's weighted average effective interest rate was
9.38%
for the
three months ended September 30, 2017
.
The obligations of Goldline and the Company under the Goldline Credit Facility are subordinated to the Company’s obligations under the Trading Credit Facility (see Lines of Credit, above in
Note 14
). Under the subordination agreements, the
Goldline Lenders are permitted to collect quarterly interest-only payments and a balloon payment of principal and accrued interest at the end of the loan term, provided that no event of default is continuing under the Trading Credit Facility and the Company is in pro-forma compliance with the financial covenants under the Trading Credit Facility.
Goldline Lenders
The following table shows the directors, executive officer and principal stockholder that participated in the Goldline Credit Facility transaction, and provides related information:
|
|
|
|
|
|
|
|
|
Goldline Lenders
|
|
Position/Relationship
|
|
Amount of Company Indebtedness Acquired
(1)
|
|
|
|
|
|
|
|
Gregory N. Roberts
|
|
Chief Executive Officer, Director and principal stockholder
|
(2)
|
$
|
587,500
|
|
(2)
|
William D. Richardson
|
|
Principal stockholder
|
(3)
|
587,500
|
|
(3)
|
Jeffrey D. Benjamin
|
|
Chairman of the Board and Director
|
|
1,000,000
|
|
|
Ellis Landau
|
|
Director
|
|
375,000
|
|
|
William Montgomery
|
|
Director
|
|
1,500,000
|
|
|
Jess Ravich
|
|
Director
|
|
500,000
|
|
(4)
|
|
|
|
|
4,550,000
|
|
|
7 other persons
|
|
Non-affiliated members
|
|
2,950,000
|
|
|
|
|
|
|
$
|
7,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________________________
|
|
|
|
|
(1)
|
|
The amount shown is expected to remain outstanding throughout the term of the Goldline Credit Facility, with repayment due in August 2020.
|
|
|
|
|
|
(2)
|
|
Silver Bow Ventures LLC (“Silver Bow”) is the Lender. Mr. Roberts holds 50% of the ownership interests in and controls Silver Bow. Accordingly, the amount of indebtedness shown, and the interest amounts potentially payable on such indebtedness shown, represent 50% of the aggregate amounts of indebtedness held by and potential interest payable to Silver Bow.
|
|
|
|
|
|
(3)
|
|
Silver Bow is the Lender. Mr. Richardson holds 50% of the ownership interests in and controls Silver Bow. Accordingly, the amount of indebtedness shown, and the interest amounts potentially payable on such indebtedness shown, represent 50% of the aggregate amounts of indebtedness held by and potential interest payable to Silver Bow.
|
|
(4)
|
|
Libra Securities Holdings, LLC is the Lender. Mr. Ravich and a trust for his family members holds 100% of the ownership interests and controls Libra Securities Holdings, LLC.
|
|
Notes Payable
Securitization/Variable Interest Entity
On September 14, 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 (the “Class A Notes”) in the aggregate principal amount of
$72.0 million
and Secured Subordinated Term Notes, Series 2018-1, Class B (the “Class B Notes” and together with the Class A Notes, the “
Notes
”) in the aggregate principal amount of
$28 million
. 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 Notes were issued under a Master Indenture and the Series 2018-1 Supplement thereto, each dated as of the Closing Date, between AMCF and Citibank, N.A., as trustee. The Company holds
$10.0 million
of the Notes. The Notes are not insured or guaranteed by A-Mark or CFC. CFC acts as servicer with respect to the Notes.
AMCF applied the net proceeds from the sale of the Notes to purchase loans and precious metals inventory, and to pay certain costs and expenses.
AMCF is a special purpose entity whose sole activity consists of operating, owning, and financing indenture assets. The Notes are primarily payable from, and secured by, (i) precious metals obtained by AMCF from third parties, and (ii) a portfolio of loans collateralized by precious metals, which loans were originated by either CFC or acquired by CFC from third parties and conveyed by CFC to AMCF. The indenture requires AMCF to maintain a specified level of collateral. The indenture also provides that AMCF’s assets are not to be commingled with those of CFC or A-Mark (or any affiliate), and that AMCF is to maintain separate books and records.
CFC and A-Mark may from time to time also contribute cash or sell precious metals to AMCF in exchange for cash or subordinated, deferred payment obligations from AMCF. In addition, AMCF may from time to time sell precious metals to A-Mark for cash.
As of
September 30, 2018
, the carrying balance of the Note was
$87.1 million
(which excludes the
$10.0 million
note that the Company retained) , and the remaining unamortized loan cost balance was approximately
$2.9 million
, which is amortized using the effective interest method through the maturity date. As of
September 30, 2018
, the balance of the interest payable was
$234,000
.
Interest on the Note is payable monthly in arrears at the aggregate rate of
5.26%
per annum. The interest expense related to the Note (including debt loan amortization costs) totaled
$254,000
which represents
7.2%
of the total interest expense recognized by the Company, for the
three months ended September 30, 2018
. The Notes' weighted average effective interest rate was
5.88%
for the
three months ended September 30, 2018
The Company has both the power to direct the activities that most significantly impact AMCF’s economic performance, and the obligation to absorb losses or the right to receive benefits of AMCF that could potentially be significant to AMCF. Therefore, the Company has determined AMCF is a variable interest entity ("VIE") and that the Company is the primary beneficiary of the VIE. Therefore, the Company consolidates AMCF for accounting purposes. See
Note 2
for additional information about our VIE policy.
Liability on Borrowed Metals
The Company recorded liabilities on borrowed precious metals with market values totaling
$227.2 million
and
$280.3 million
as of
September 30, 2018
and
June 30, 2018
, respectively, with the corresponding metals reflected on the
condensed consolidated
balance sheets.
Advanced pool metals
The Company borrows precious metals (usually in the form of pool metals) from its suppliers and customers under short-term agreements using other precious metals from its inventory as collateral. Amounts under these arrangements require repayment either in the same form of the metals borrowed or in cash. The Company has the ability to sell the metals and to repurchase similar metals as needed, under the terms of the arrangement, in order to repay the obligation. Once the obligation is repaid, the metals held as collateral are released back to the Company.
Liability on borrowed metals
—
Other
Liabilities may also arise from: (1) unallocated metal positions held by customers in the Company’s inventory, (2) amounts due to suppliers for the use of consigned inventory, and (3) shortages in unallocated metal positions held by the Company in the supplier’s inventory. Unallocated or pool metal represent an unsegregated inventory position that is due on demand, is a specified physical form, based on the total ounces of metal held in the position. Amounts due under these arrangements require delivery either in the form of precious metals, or in cash.
Product Financing Arrangements
The Company has agreements with financial institutions (third parties) that allows the Company to transfer its gold and silver inventory at an agreed-upon price based on the spot price with these third parties. Such agreements allow the Company to repurchase this inventory at an agreed-upon price based on the spot price on the repurchase date. The third party charges a monthly fee as a percentage of the market value of the outstanding obligation; such monthly charges are classified in interest expense. These transactions do not qualify as sales, and therefore have been accounted for as financing arrangements and are reflected in the
condensed consolidated
balance sheet as product financing arrangements. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the product financing obligation and the underlying inventory (which is entirely restricted) are carried at fair value, with changes in fair value recorded as a component of cost of sales in the
condensed consolidated
statements of operations. Such obligation totaled
$53.1 million
and
$113.9 million
as of
September 30, 2018
and
June 30, 2018
, respectively.
15
. COMMITMENTS AND CONTINGENCIES
Refer to Note 15 of the Notes to Consolidated Financial Statements in the
2018 Annual Report
for information relating to minimum rental payments under operating and capital leases, consulting and employment contracts, and other commitments. The Company is not aware of any material changes to commitments as summarized the
2018 Annual Report
.
|
|
16
.
|
STOCKHOLDERS’ EQUITY
|
Payment of Dividends
In fiscal 2015, the Board of Directors of the Company initiated a cash dividend policy that calls for the payment of quarterly dividends. The table below summarizes the eight most recent quarterly dividends declared pursuant to this policy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
Declaration Date
|
|
Record Date
(at close of Business)
|
|
Type of Dividend
|
|
Basis of Payment
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2016
|
|
May 13, 2016
|
|
Cash
|
|
$
|
0.07
|
|
per common share
|
|
May 27, 2016
|
|
September 7, 2016
|
|
September 19, 2016
|
|
Cash
|
|
$
|
0.07
|
|
per common share
|
|
October 7, 2016
|
|
November 1, 2016
|
|
November 14, 2016
|
|
Cash
|
|
$
|
0.07
|
|
per common share
|
|
December 1, 2016
|
|
January 26, 2017
|
|
February 8, 2017
|
|
Cash
|
|
$
|
0.08
|
|
per common share
|
|
February 24, 2017
|
|
May 2, 2017
|
|
May 15, 2017
|
|
Cash
|
|
$
|
0.08
|
|
per common share
|
|
May 25, 2017
|
|
August 30, 2017
|
|
September 18, 2017
|
|
Cash
|
|
$
|
0.08
|
|
per common share
|
|
September 27, 2017
|
|
November 13, 2017
|
|
November 24, 2017
|
|
Cash
|
|
$
|
0.08
|
|
per common share
|
|
December 13, 2017
|
|
January 30, 2018
|
|
February 13, 2018
|
|
Cash
|
|
$
|
0.08
|
|
per common share
|
|
February 27, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
The Board of Directors has determined to suspend the Company's quarterly dividend in order to increase its financial flexibility and strengthen its balance sheet. Going forward, the Board of Directors will re-assess its capital resources and may or may not determine to reinstate the dividend based on that assessment.
2014 Stock Award and Incentive Plan
Prior to the Distribution, the Company’s Board of Directors ("Board") adopted and the Company's then sole stockholder approved the 2014 Stock Award and Incentive Plan, which was approved by the Company's stockholders in February 2015. On November 2, 2017, the Company's stockholders approved the amended and restated 2014 Stock Award and Incentive Plan (the "2014 Plan"), to (i) increase the available shares authorized for issuance under the plan by
525,000
shares, (ii) extend the term of the 2014 Plan until 2027, an additional five years, and (iii) eliminate provisions that add back to the share reserve shares surrendered or withheld to pay the exercise price of an option or withheld to cover tax withholding obligations for any type of award, and shares as to which a stock appreciation right is exercised that exceed the number of shares actually delivered.
Under the 2014 Plan, the Company may grant options and other equity awards as a means of attracting and retaining officers, employees, non-employee directors and consultants, to provide incentives to such persons, and to align the interests of such persons with the interests of stockholders by providing compensation based on the value of the Company's stock. Awards under the 2014 Plan may be granted in the form of incentive or non-qualified stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards (which may include outright grants of shares). The 2014 Plan also authorizes grants of performance-based cash incentive awards. The 2014 Plan is administered by the Compensation Committee of the Board of Directors, which, in its discretion, may select officers and other employees, directors (including non-employee directors) and consultants to the Company and its subsidiaries to receive grants of awards. The Board of Directors itself may perform any of the functions of the Compensation Committee under the 2014 Plan.
Under the 2014 Plan, the exercise price of options and base price of SARs, as set by the Compensation Committee, generally may not be less than the fair market value of the shares on the date of grant, and the maximum term of stock options and SARs is
10 years
. The 2014 Plan limits the number of share-denominated awards that may be granted to any one eligible person to
250,000
shares in any fiscal year. Also, in the case of non-employee directors, the 2014 Plan limits the maximum grant-date fair value at
$300,000
of stock-denominated awards granted to a director in a given fiscal year, except for a non-employee Chairman of the Board whose grant-date fair value maximum is
$600,000
per fiscal year. The 2014 Plan will terminate when no shares remain available for issuance and no awards remain outstanding; however, the authority to grant new awards will terminate on December 13, 2022.
As of
September 30, 2018
,
428,395
shares were available for grant under the 2014 Plan.
Valuation and Significant Assumptions of Equity Awards Issued
The Company uses the Black-Scholes option pricing model, which uses various inputs such as the estimated common share price, the risk-free interest rate, volatility, expected life and dividend yield, all of which are estimates.
Stock Options
During the
three months ended September 30, 2018 and 2017
, the Company incurred
$272,681
and
$436,407
of compensation expense related to stock options, respectively. As of
September 30, 2018
, there was total remaining compensation expense of
$1.7 million
related to employee stock options, which will be recorded over a weighted average period of approximately
2.1 years
.
The following table summarizes the stock option activity for the
three months ended September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average Exercise Price Per Share
|
|
Aggregate Intrinsic Value
(in thousands)
|
|
Weighted Average Grant Date Fair Value Per Award
|
Outstanding at June 30, 2018
|
|
842,515
|
|
|
$
|
17.59
|
|
|
$
|
821
|
|
|
$
|
5.99
|
|
Granted
|
|
95,050
|
|
|
$
|
13.6
|
|
|
|
|
|
Cancellations, expirations and forfeitures
|
|
(400
|
)
|
|
$
|
16.52
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
937,165
|
|
|
$
|
17.18
|
|
|
$
|
767
|
|
|
$
|
6.12
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
554,281
|
|
|
$
|
17.18
|
|
|
$
|
767
|
|
|
$
|
5.90
|
|
|
Following is a summary of the status of stock options outstanding at
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Price Ranges
|
|
Number of Shares Outstanding
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Weighted Average Exercise Price
|
|
Number of Shares Exercisable
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Weighted Average Exercise Price
|
From
|
|
To
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
10.00
|
|
|
134,239
|
|
|
4.10
|
|
$
|
8.39
|
|
|
134,239
|
|
|
4.10
|
|
$
|
8.39
|
|
$
|
10.01
|
|
|
$
|
15.00
|
|
|
233,938
|
|
|
7.36
|
|
$
|
12.78
|
|
|
98,888
|
|
|
4.03
|
|
$
|
11.94
|
|
$
|
15.01
|
|
|
$
|
25.00
|
|
|
468,988
|
|
|
7.89
|
|
$
|
20.12
|
|
|
271,154
|
|
|
7.78
|
|
$
|
20.26
|
|
$
|
25.01
|
|
|
$
|
60.00
|
|
|
100,000
|
|
|
7.39
|
|
$
|
25.50
|
|
|
50,000
|
|
|
7.39
|
|
$
|
25.50
|
|
|
|
|
|
937,165
|
|
|
7.16
|
|
$
|
17.18
|
|
|
554,281
|
|
|
6.19
|
|
$
|
16.37
|
|
Certain Anti-Takeover Provisions
The Company’s certificate of incorporation and by-laws contain certain anti-takeover provisions that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company without negotiating with its Board. Such provisions could limit the price that certain investors might be willing to pay in the future for the Company’s securities. Certain of such provisions provide for a Board with staggered terms, allow the Company to issue preferred stock with rights senior to those of the common stock, or impose various procedural and other requirements which could make it more difficult for stockholders to effect certain corporate actions.
17
. CUSTOMER AND SUPPLIER CONCENTRATIONS
Customer Concentration
Customers providing 10 percent or more of the Company's revenues for the
three months ended September 30, 2018 and 2017
are presented on a comparative basis in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Total revenue
|
|
$
|
1,565,090
|
|
|
100.0
|
%
|
|
$
|
2,163,790
|
|
|
100.0
|
%
|
|
Customer concentrations
|
|
|
|
|
|
|
|
|
|
HSBC Bank USA
(1)
|
|
$
|
380,122
|
|
|
24.3
|
%
|
|
$
|
511,264
|
|
|
23.6
|
%
|
|
Mitsubishi Intl. Corp.
(1)
|
|
250,906
|
|
|
16.0
|
|
|
537,113
|
|
|
24.9
|
|
|
|
|
|
$
|
631,028
|
|
|
40.3
|
%
|
|
$
|
1,048,377
|
|
|
48.5
|
%
|
|
________________________________
|
|
(1)
|
Sales with this trading partner is primarily comprised of sales on forward contracts that entered into for hedging purposes rather than sales characterized with the physical delivery of precious metal product.
|
|
Customers providing 10 percent or more of the Company's accounts receivable as of
September 30, 2018
and
June 30, 2018
are presented on a comparative basis in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
|
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Total accounts receivable, net
|
|
$
|
57,332
|
|
|
100.0
|
%
|
|
$
|
35,856
|
|
|
100.0
|
%
|
Customer concentrations
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
25,354
|
|
|
44.2
|
%
|
|
$
|
14,967
|
|
|
41.7
|
%
|
Customer B
|
|
6,915
|
|
|
12.1
|
|
|
7,468
|
|
|
20.8
|
|
|
|
$
|
32,269
|
|
|
56.3
|
%
|
|
$
|
22,435
|
|
|
62.5
|
%
|
The loss of any of the above listed customers could have a material adverse effect on the operations of the Company.
Supplier Concentration
The Company buys precious metals from a variety of sources, including through brokers and dealers, from sovereign and private mints, from refiners and directly from customers. The Company believes that no one or small group of suppliers is critical to its business, since other sources of supply are available that provide similar products on comparable terms.
|
|
18
.
|
SEGMENTS AND GEOGRAPHIC INFORMATION
|
The Company evaluates segment reporting in accordance with FASB ASC 280,
Segment Reporting
, each reporting period, including evaluating the organizational structure and the reporting package that is reviewed by the Chief Operating Decision Makers (“CODM”). The Company's operations are organized under
three
business segments — Wholesale Trading & Ancillary Services, Secured Lending, and Direct Sales.
Revenue
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Revenue by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
1,554,313
|
|
|
$
|
2,153,420
|
|
|
Direct Sales
|
|
10,777
|
|
(1)
|
10,370
|
|
(2)
|
Total revenue
|
|
$
|
1,565,090
|
|
|
$
|
2,163,790
|
|
|
|
|
|
|
|
|
_________________________________
|
|
|
|
|
|
(1) Includes $0.8 million of intercompany sales from the Direct Sales segment to the Wholesale Trading & Ancillary Services segment. The elimination of these intercompany sales are reflected in the Wholesale Trading & Ancillary Services segment. Inte
rcompany sales are transacted at prices consistent with arms-length transactions with third-parties.
|
|
|
|
(2) Includes $6.9 million of intercompany sales from the Direct Sales segment to the Wholesale Trading & Ancillary Services segment. The elimination of these intercompany sales are reflected in the Wholesale Trading & Ancillary Services segment. Inte
rcompany sales are transacted at prices consistent with arms-length transactions with third-parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Revenue by geographic region
(as determined by the shipping address or where the services were performed)
:
|
|
United States
|
|
$
|
1,375,636
|
|
|
$
|
2,051,921
|
|
|
Europe
|
|
90,152
|
|
|
54,358
|
|
|
North America, excluding United States
|
|
96,384
|
|
|
54,878
|
|
|
Asia Pacific
|
|
2,343
|
|
|
1,352
|
|
|
Africa
|
|
1
|
|
|
—
|
|
|
Australia
|
|
574
|
|
|
1,281
|
|
|
Total revenue
|
|
$
|
1,565,090
|
|
|
$
|
2,163,790
|
|
|
|
|
|
|
|
|
Gross Profit and Gross Margin Percentage
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Gross profit by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
7,412
|
|
|
$
|
5,645
|
|
|
Direct Sales
|
|
1,063
|
|
|
1,661
|
|
|
Total gross profit
|
|
$
|
8,475
|
|
|
$
|
7,306
|
|
|
Gross margin percentage by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
0.477
|
%
|
|
0.262
|
%
|
|
Direct Sales
|
|
9.864
|
%
|
|
16.017
|
%
|
|
Weighted average gross margin percentage
|
|
0.542
|
%
|
|
0.338
|
%
|
|
|
|
|
|
|
|
Operating income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Operating income and expenses by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(5,258
|
)
|
|
$
|
(5,410
|
)
|
|
Interest income
|
|
$
|
2,052
|
|
|
$
|
1,058
|
|
|
Interest expense
|
|
$
|
(1,880
|
)
|
|
$
|
(1,519
|
)
|
|
Other income, net
|
|
$
|
178
|
|
|
$
|
(40
|
)
|
|
Secured Lending
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(345
|
)
|
|
$
|
(383
|
)
|
|
Interest income
|
|
$
|
2,499
|
|
|
$
|
2,103
|
|
|
Interest expense
|
|
$
|
(1,477
|
)
|
|
$
|
(1,135
|
)
|
|
Direct Sales
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(2,116
|
)
|
|
$
|
(1,183
|
)
|
|
Interest expense
|
|
$
|
(195
|
)
|
|
$
|
(79
|
)
|
|
Net (loss) income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Net (loss) income before provision for income taxes by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
2,504
|
|
|
$
|
(266
|
)
|
|
Secured Lending
|
|
677
|
|
|
585
|
|
|
Direct Sales
|
|
(1,248
|
)
|
|
399
|
|
|
Total n
et (loss) income before provision for income taxes
|
|
$
|
1,933
|
|
|
$
|
718
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Depreciation and amortization by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
(396
|
)
|
|
$
|
(391
|
)
|
|
Direct Sales
|
|
(301
|
)
|
|
(138
|
)
|
|
Total depreciation and amortization
|
|
$
|
(697
|
)
|
|
$
|
(529
|
)
|
|
Advertising expense
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Advertising expense by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
(107
|
)
|
|
$
|
(101
|
)
|
|
Secured Lending
|
|
(3
|
)
|
|
(11
|
)
|
|
Direct Sales
|
|
(480
|
)
|
|
(405
|
)
|
|
Total advertising expense
|
|
$
|
(590
|
)
|
|
$
|
(517
|
)
|
|
Precious metals held under financing arrangements
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Precious metals held under financing arrangements by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
232,476
|
|
|
$
|
262,566
|
|
|
Total precious metals held under financing arrangements
|
|
$
|
232,476
|
|
|
$
|
262,566
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Inventories by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
282,420
|
|
|
$
|
272,034
|
|
|
Direct Sales
|
|
7,385
|
|
|
8,082
|
|
|
Total inventories
|
|
$
|
289,805
|
|
|
$
|
280,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Inventories by geographic region
|
|
|
|
|
|
United States
|
|
$
|
281,101
|
|
|
$
|
273,008
|
|
|
Europe
|
|
2,604
|
|
|
1,965
|
|
|
North America, excluding United States
|
|
5,991
|
|
|
4,976
|
|
|
Asia
|
|
109
|
|
|
167
|
|
|
Total inventories
|
|
$
|
289,805
|
|
|
$
|
280,116
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Assets by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
629,231
|
|
|
$
|
616,522
|
|
|
Secured Lending
|
|
83,019
|
|
|
111,304
|
|
|
Direct Sales
|
|
14,302
|
|
|
15,175
|
|
|
Total assets
|
|
$
|
726,552
|
|
|
$
|
743,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Assets by geographic region
|
|
|
|
|
|
United States
|
|
$
|
711,048
|
|
|
$
|
733,131
|
|
|
Europe
|
|
9,404
|
|
|
4,727
|
|
|
North America, excluding United States
|
|
5,991
|
|
|
4,976
|
|
|
Asia
|
|
109
|
|
|
167
|
|
|
Total assets
|
|
$
|
726,552
|
|
|
$
|
743,001
|
|
|
Long-term Assets
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Long-term assets by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
30,871
|
|
|
$
|
31,328
|
|
|
Secured Lending
|
|
103
|
|
|
102
|
|
|
Direct Sales
|
|
4,263
|
|
|
4,588
|
|
|
Total long-term assets
|
|
$
|
35,237
|
|
|
$
|
36,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Long-term assets by geographic region
|
|
|
|
|
|
United States
|
|
$
|
35,184
|
|
|
$
|
35,965
|
|
|
Europe
|
|
53
|
|
|
53
|
|
|
Total long-term assets
|
|
$
|
35,237
|
|
|
$
|
36,018
|
|
|
Capital Expenditures for Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Capital expenditures on plant, property and equipment by segment
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
122
|
|
|
$
|
194
|
|
|
Direct Sales
|
|
—
|
|
|
124
|
|
|
Total capital expenditures on property and equipment
|
|
$
|
122
|
|
|
$
|
318
|
|
|
|
|
|
|
|
|
Goodwill and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Goodwill and Intangibles by segment
|
|
|
|
|
|
Wholesale Trading & Ancillary Services
|
|
$
|
12,409
|
|
|
$
|
12,516
|
|
|
Direct Sales
|
|
3,081
|
|
|
3,226
|
|
|
Total goodwill and intangible assets
|
|
$
|
15,490
|
|
|
$
|
15,742
|
|
|
None.