10-Q 1 amrk-10q_20200930.htm 10-Q amrk-10q_20200930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

OR

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

 

For the transition period from ________ to ________

Commission File Number: 001-36347

 

A-MARK PRECIOUS METALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State of Incorporation)

 

11-2464169

(IRS Employer I.D. No.)

 

2121 Rosecrans Ave. Suite 6300
El Segundo, CA 90245

(Address of principal executive offices)(Zip Code)

(310) 587-1477

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section  12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

AMRK

 

NASDAQ Global Select Market

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

As of November 5, 2020, the registrant had 7,090,066 shares of common stock outstanding, par value $0.01 per share.

 

 

 


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the Three Months Ended September 30, 2020

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Condensed Consolidated Financial Statements and Notes thereof

 

 

Page

Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020

3

Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2020 and 2019

5

Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended September 30, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

Note 1. Description of Business

8

Note 2. Summary of Significant Accounting Policies

9

Note 3. Assets and Liabilities, at Fair Value

19

Note 4. Receivables

21

Note 5. Secured Loans Receivable

22

Note 6. Inventories

24

Note 7. Property, Plant, and Equipment

25

Note 8. Goodwill and Intangible Assets

26

Note 9. Long-Term Investments

27

Note 10. Accounts Payable and Other Current Liabilities

27

Note 11. Derivative Instruments and Hedging Transactions

27

Note 12. Income Taxes

31

Note 13. Related Party Transactions

32

Note 14. Financing Agreements

34

Note 15. Commitments and Contingencies

36

Note 16. Stockholders' Equity

36

Note 17. Customer and Supplier Concentrations

38

Note 18. Segments and Geographic Information

38

Note 19. Subsequent Events

42

 

2


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

September 30,

2020

 

 

 

June 30,

2020

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash(1)

 

$

24,370

 

 

 

$

52,325

 

Receivables, net(1)

 

 

75,668

 

 

 

 

49,142

 

Derivative assets(1)

 

 

113,600

 

 

 

 

46,325

 

Secured loans receivable(1)

 

 

84,223

 

 

 

 

63,710

 

Precious metals held under financing arrangements(1)

 

 

158,756

 

 

 

 

178,577

 

Inventories:

 

 

 

 

 

 

 

 

 

Inventories(1)

 

 

311,582

 

 

 

 

246,603

 

Restricted inventories

 

 

101,599

 

 

 

 

74,678

 

 

 

 

413,181

 

 

 

 

321,281

 

Prepaid expenses and other assets(1)

 

 

3,128

 

 

 

 

2,659

 

Total current assets

 

 

872,926

 

 

 

 

714,019

 

Operating lease right of use assets

 

 

3,935

 

 

 

 

4,223

 

Property, plant, and equipment, net

 

 

5,799

 

 

 

 

5,675

 

Goodwill

 

 

8,881

 

 

 

 

8,881

 

Intangibles, net

 

 

4,820

 

 

 

 

4,974

 

Long-term investments

 

 

20,889

 

 

 

 

16,763

 

Other long-term assets

 

 

3,500

 

 

 

 

3,500

 

Total assets

 

$

920,750

 

 

 

$

758,035

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Lines of credit

 

$

214,000

 

 

 

$

135,000

 

Liabilities on borrowed metals

 

 

153,752

 

 

 

 

168,206

 

Product financing arrangements

 

 

101,599

 

 

 

 

74,678

 

Accounts payable and other current liabilities

 

 

210,922

 

 

 

 

140,930

 

Derivative liabilities(1)

 

 

13,497

 

 

 

 

25,414

 

Accrued liabilities(1)

 

 

9,222

 

 

 

 

10,397

 

Income tax payable

 

 

2,906

 

 

 

 

2,135

 

Total current liabilities

 

 

705,898

 

 

 

 

556,760

 

Notes payable(1)

 

 

92,692

 

 

 

 

92,517

 

Deferred tax liabilities

 

 

62

 

 

 

 

62

 

Other liabilities

 

 

3,457

 

 

 

 

3,802

 

Total liabilities

 

 

802,109

 

 

 

 

653,141

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

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

   and outstanding: none as of September 30, 2020 and June 30, 2020

 

 

 

 

 

 

 

Common stock, par value $0.01; 40,000,000 shares authorized; 7,066,530

   and 7,031,500 shares issued and outstanding as of September 30, 2020

   and June 30, 2020, respectively

 

 

71

 

 

 

 

71

 

Additional paid-in capital

 

 

27,883

 

 

 

 

27,289

 

Retained earnings

 

 

86,174

 

 

 

 

73,644

 

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

 

 

114,128

 

 

 

 

101,004

 

Non-controlling interests

 

 

4,513

 

 

 

 

3,890

 

Total stockholders’ equity

 

 

118,641

 

 

 

 

104,894

 

Total liabilities, non-controlling interests and stockholders’ equity

 

$

920,750

 

 

 

$

758,035

 

 

(1)

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

 

See accompanying Notes to Condensed Consolidated Financial Statements

3


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands) (unaudited)

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

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

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

 

 

 

September 30,

2020

 

 

 

June 30,

2020

 

ASSETS OF THE CONSOLIDATED VIE

 

 

 

 

 

 

 

 

 

Cash

 

$

7,892

 

 

 

$

26,697

 

Receivables, net

 

 

393

 

 

 

 

3,005

 

Derivative assets

 

 

791

 

 

 

 

 

Secured loans receivable

 

 

57,729

 

 

 

 

34,739

 

Precious metals held under financing arrangements

 

 

19,959

 

 

 

 

20,968

 

Inventories

 

 

24,360

 

 

 

 

24,057

 

Prepaid expenses and other assets

 

 

49

 

 

 

 

16

 

Total assets of the consolidated variable interest entity

 

$

111,173

 

 

 

$

109,482

 

LIABILITIES OF THE CONSOLIDATED VIE

 

 

 

 

 

 

 

 

 

Deferred payment obligations(1)

 

$

15,998

 

 

 

$

13,275

 

Derivative liabilities

 

 

 

 

 

 

541

 

Accrued liabilities

 

 

610

 

 

 

 

387

 

Notes payable(2)

 

 

97,692

 

 

 

 

97,517

 

Total liabilities of the consolidated variable interest entity

 

$

114,300

 

 

 

$

111,720

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

(2)

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

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

4


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 

 

 

Three Months Ended

 

 

 

September 30,

2020

 

 

 

September 30,

2019

 

Revenues

 

$

1,866,116

 

 

 

$

1,481,014

 

Cost of sales

 

 

1,829,971

 

 

 

 

1,472,674

 

Gross profit

 

 

36,145

 

 

 

 

8,340

 

Selling, general, and administrative expenses

 

 

(10,006

)

 

 

 

(8,270

)

Interest income

 

 

3,983

 

 

 

 

5,768

 

Interest expense

 

 

(4,293

)

 

 

 

(5,142

)

Other income (expense), net

 

 

4,485

 

 

 

 

(166

)

Unrealized losses on foreign exchange

 

 

(97

)

 

 

 

(122

)

Net income before provision for income taxes

 

 

30,217

 

 

 

 

408

 

Income tax expense

 

 

(6,511

)

 

 

 

(105

)

Net income

 

 

23,706

 

 

 

 

303

 

Net income attributable to non-controlling interests

 

 

623

 

 

 

 

175

 

Net income attributable to the Company

 

$

23,083

 

 

 

$

128

 

Basic and diluted net income per share attributable

   to A-Mark Precious Metals, Inc.:

 

 

 

 

 

 

 

 

 

Basic

 

$

3.28

 

 

 

$

0.02

 

Diluted

 

$

3.09

 

 

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

7,034,700

 

 

 

 

7,031,400

 

Diluted

 

 

7,475,000

 

 

 

 

7,091,000

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

5


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

 

 

 

Common

Stock

(Shares)

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Total

A-Mark

Precious

Metals, Inc.

Stockholders'

Equity

 

 

Non-

Controlling

Interests

 

 

Total

Stockholders’

Equity

 

Balance, June 30, 2019

 

 

7,031,450

 

 

 

71

 

 

 

26,452

 

 

 

43,135

 

 

 

69,658

 

 

 

2,908

 

 

 

72,566

 

Net income

 

 

 

 

 

 

 

 

 

 

 

128

 

 

 

128

 

 

 

175

 

 

 

303

 

Share-based compensation

 

 

 

 

 

 

 

 

166

 

 

 

 

 

 

166

 

 

 

 

 

 

166

 

Balance, September 30, 2019

 

 

7,031,450

 

 

 

71

 

 

 

26,618

 

 

 

43,263

 

 

 

69,952

 

 

 

3,083

 

 

 

73,035

 

 

 

 

Common

Stock

(Shares)

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Total

A-Mark

Precious

Metals, Inc.

Stockholders'

Equity

 

 

Non-

Controlling

Interests

 

 

Total

Stockholders’

Equity

 

Balance, June 30, 2020

 

 

7,031,500

 

 

 

71

 

 

 

27,289

 

 

 

73,644

 

 

 

101,004

 

 

 

3,890

 

 

 

104,894

 

Net income

 

 

 

 

 

 

 

 

 

 

 

23,083

 

 

 

23,083

 

 

 

623

 

 

 

23,706

 

Share-based compensation

 

 

 

 

 

 

 

 

178

 

 

 

 

 

 

178

 

 

 

 

 

 

178

 

Net settlement on issuance of common shares on exercise of options

 

 

35,030

 

 

 

 

 

 

416

 

 

 

 

 

 

416

 

 

 

 

 

 

416

 

Dividends declared ($1.50 per common share)

 

 

 

 

 

 

 

 

 

 

 

(10,553

)

 

 

(10,553

)

 

 

 

 

 

(10,553

)

Balance, September 30, 2020

 

 

7,066,530

 

 

 

71

 

 

 

27,883

 

 

 

86,174

 

 

 

114,128

 

 

 

4,513

 

 

 

118,641

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

6


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands) (unaudited)

 

Three Months Ended September 30,

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

23,706

 

 

$

303

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

501

 

 

 

668

 

Amortization of loan cost

 

 

396

 

 

 

353

 

Deferred income taxes

 

 

 

 

 

92

 

Interest added to principal of secured loans

 

 

(4

)

 

 

(5

)

Share-based compensation

 

 

178

 

 

 

166

 

Earnings from equity method investments

 

 

(4,126

)

 

 

(11

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(26,526

)

 

 

3,252

 

Secured loans receivable

 

 

(358

)

 

 

1,543

 

Secured loans made to affiliates

 

 

4,642

 

 

 

5,154

 

Derivative assets

 

 

(67,275

)

 

 

(17,118

)

Income tax receivable

 

 

 

 

 

(27

)

Precious metals held under financing arrangements

 

 

19,821

 

 

 

7,983

 

Inventories

 

 

(91,900

)

 

 

(79,337

)

Prepaid expenses and other assets

 

 

(292

)

 

 

(17

)

Accounts payable and other current liabilities

 

 

69,992

 

 

 

23,225

 

Derivative liabilities

 

 

(11,917

)

 

 

(3,281

)

Liabilities on borrowed metals

 

 

(14,454

)

 

 

(4,406

)

Accrued liabilities

 

 

(1,227

)

 

 

(1,016

)

Income tax payable

 

 

771

 

 

 

 

Net cash used in operating activities

 

 

(98,072

)

 

 

(62,479

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property, plant, and equipment

 

 

(476

)

 

 

(137

)

Secured loans receivable, net

 

 

(24,793

)

 

 

(31,868

)

Other loans originated

 

 

 

 

 

(3,000

)

Net cash used in investing activities

 

 

(25,269

)

 

 

(35,005

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Product financing arrangements, net

 

 

26,921

 

 

 

64,625

 

Dividends paid

 

 

(10,553

)

 

 

 

Borrowings and repayments under lines of credit, net

 

 

79,000

 

 

 

37,000

 

Debt funding issuance costs

 

 

(398

)

 

 

 

Net settlement on issuance of common shares on exercise of options

 

 

416

 

 

 

 

Net cash provided by financing activities

 

 

95,386

 

 

 

101,625

 

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

 

 

(27,955

)

 

 

4,141

 

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

 

 

52,325

 

 

 

8,320

 

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

 

$

24,370

 

 

$

12,461

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

3,737

 

 

$

5,173

 

Income taxes paid

 

$

6,726

 

 

$

33

 

Income taxes refunded

 

$

(1,044

)

 

$

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Interest added to principal of secured loans

 

$

4

 

 

$

5

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

7


A-MARK PRECIOUS METALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. DESCRIPTION OF BUSINESS

Basis of Presentation

The condensed consolidated financial statements comprise those of A-Mark Precious Metals, Inc. ("A-Mark" or the "Company"), its wholly owned consolidated subsidiaries, and its joint ventures in which the Company has a controlling interest.

Business Segments

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

Wholesale Trading & Ancillary Services

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

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

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

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

Secured Lending

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

AM Capital Funding, LLC. (“AMCF”), a wholly owned subsidiary of CFC, was formed for the purpose of securitizing eligible secured loans of CFC.  AMCF issued and administers the Notes. For additional information, see Note 14.

8


Direct Sales

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

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

Precious Metals Purchasing Partners, LLC, ("PMPP") is a 50% owned subsidiary of Goldline.  PPMP acquires precious metals from retail customers and resells the metals to partners or affiliates of the joint venture.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Comprehensive Income

For the three months ended September 30, 2020 and 2019, there were no items that gave rise to other comprehensive income or loss, and, as a result net income equaled comprehensive income.

Use of Estimates

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

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the condensed consolidated balance sheets, condensed consolidated statements of income, condensed consolidated statement of stockholders’ equity, and condensed consolidated statements of cash flows for the periods presented in accordance with U.S. GAAP. Operating results for the three months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021 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 June 30, 2020 (the “2020 Annual Report”), as filed with the SEC. Amounts related to disclosure of June 30, 2020 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in the 2020 Annual Report.

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Fair Value Measurement

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

Concentration of Credit Risk

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

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

Foreign Currency

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

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

Variable Interest Entity

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

A VIE is consolidated for accounting purposes by its primary beneficiary, which is the party that has both the power to direct the activities that most significantly impact the VIE's economic performance, and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates 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 VIE's in the consolidated financial statements.

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

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

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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, 2020 and June 30, 2020.

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

Precious Metals held under Financing Arrangements

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

These arrangements are typically terminable by either party upon 14 days' notice.  Upon termination, the customer’s right to repurchase any remaining precious metal is forfeited, and the related precious metals are reclassified as inventory held for sale. As of September 30, 2020 and June 30, 2020, precious metals held under financing arrangements totaled $158.8 million and $178.6 million respectively.

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

Inventories

The Company's inventory primarily includes bullion and bullion coins, which is acquired and initially recorded at cost and then marked to fair market value.  The fair market value of the bullion and bullion coins comprises two components: (1) published market values attributable to the costs of the raw precious metal, and (2) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form, and the market value attributable solely to the premium may be readily determined, as it is published by multiple reputable sources.

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

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

Leased Right of Use Assets

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

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

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

During the three months ended September 30, 2020, we incurred lease costs of $0.5 million, which is primarily comprised of operating lease cost of $0.3 million.  The other costs are insignificant and relate to our finance leases, short-term leases, and variable lease payments.

For the three months ended September 30, 2020, we made cash payments of $0.4 million for operating lease obligations. These payments are included in operating cash flows.  At September 30, 2020, the weighted-average remaining lease term under our capitalized operating leases was 4.3 years, while the weighted-average discount rate for our operating leases was approximately 4.9%.

The following represents our future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities, as of September 30, 2020:

 

Years ending June 30,

 

Operating

Leases

 

 

2021 (9 months remaining)

 

 

1,147

 

 

2022

 

 

1,313

 

 

2023

 

 

834

 

 

2024

 

 

860

 

 

2025

 

 

816

 

 

Thereafter

 

 

368

 

 

Total lease payments

 

 

5,338

 

 

Less imputed interest

 

 

(547

)

 

 

 

$

4,791

 

(1)

Operating lease liability - current

 

$

1,334

 

(2)

Operating lease liability - long-term

 

 

3,457

 

(3)

 

 

$

4,791

 

(1)

 

 

(1)

Represents the present value of the capitalized operating lease liabilities as of September 30, 2020.

(2)

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

(3)

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

 

The Company has no related party leases. We do not have leases that have not yet commenced, which would create significant rights and obligations for us, including any involvement with the construction or design of the underlying asset.

Property, Plant, and Equipment

Property, plant, and equipment is stated at cost less accumulated depreciation and amortization.  Depreciation and amortization are 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 and amortization commence 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.

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Finite-lived Intangible Assets

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

Goodwill and Indefinite-lived Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill and other indefinite-lived intangibles (such as trade names and trademarks) 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 for the Company, 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., trade names and trademarks) for impairment. In assessing its indefinite-lived intangible assets for impairment, the Company has the option to first perform a qualitative assessment to determine whether events or circumstances exist that lead to a determination that it is unlikely that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If the Company determines that it is unlikely that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the Company is not required to perform any additional tests in assessing the asset for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform a quantitative analysis to determine if the fair value of an indefinite-lived intangible asset is less than its carrying value. If through this quantitative analysis the Company determines the fair value of an indefinite-lived intangible asset exceeds its carrying amount, the indefinite-lived intangible asset is considered not to be impaired. If the Company concludes that the fair value of an indefinite-lived intangible asset is less than its carrying value, an impairment loss will be recognized for the amount by which the carrying amount exceeds the indefinite-lived intangible asset’s fair value.

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

Long-Term Investments

Investments in privately-held entities are accounted for using the equity method when the Company has significant influence but not control over the investee.  Significant influence is generally deemed to exist if the Company’s ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors are considered in determining whether the equity method of accounting is appropriate. 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, net. The

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carrying value of the investment is reduced by the amount of the dividends received from the equity-method investee, as they are considered a return of capital.

We evaluate our long-term investments for impairment quarterly or whenever events or changes in circumstances indicate that a decline in the fair value of these assets is determined to be other-than-temporary. Additionally, the Company performs an on-going evaluation of its equity method investments with which the Company has variable interests to determine if any of these entities are VIEs that are required to be consolidated.  None of the Company’s long-term investments are VIEs as of September 30, 2020 and June 30, 2020.

Other Long-Term Assets

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

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

Revenue Recognition

Settlement Date Accounting

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

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

 

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

 

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

 

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

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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.

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

Hedging Activities

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

Commodity forward and futures 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 gains 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 are recorded in cost of sales.

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

Other Sources of Revenue

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

The Company recognizes revenue when or as it satisfies its obligation by transferring control of the good or service to the customer. This is either satisfied over time or at a point in time. A performance obligation is satisfied over time if one of the following criteria are met: (i) the customer simultaneously receives and consumes the benefits as the Company performs, (ii) the Company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) 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 is met, a performance obligation is satisfied at a point-in-time.

The Company recognizes storage revenue 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 when the customer receives the benefit of the services.  In aggregate, these types of service revenues account for less than 1% of the Company's combined revenue from all revenue streams.

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

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

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

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Other Income and Expense, Net

The Company's other income and expense is derived from the Company's proportional interest in the reported net income or loss of our investees that are accounted for under the equity method of accounting (see Note 9), royalty income, and costs associated with the purchase of Goldline.

Advertising

Advertising expense is recorded as incurred and was $0.7 million and $0.5 million, respectively, for the three months ended September 30, 2020 and 2019.  

Shipping and Handling Costs

Shipping and handling costs represent costs associated with shipping product to customers, and receiving product from vendors and are included in cost of sales in the condensed consolidated statements of income.  Shipping and handling costs incurred totaled $3.2 million and $1.4 million, respectively, for the three months ended September 30, 2020 and 2019.

Share-Based Compensation

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

Income Taxes

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

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.

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.

17


A reconciliation of shares used in calculating basic and diluted earnings per common shares for the three months ended September 30, 2020 and 2019, is presented below.

 

in thousands

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30,

2020

 

 

September 30,

2019

 

Basic weighted average shares outstanding

 

 

7,035

 

 

 

7,031

 

Effect of common stock equivalents — stock issuable

   under outstanding equity awards

 

 

440

 

 

 

60

 

Diluted weighted average shares outstanding

 

 

7,475

 

 

 

7,091

 

 

Dividends

Dividends are recorded if and when they are declared by the Board of Directors.

On September 3, 2020, the Company's Board of Directors declared a non-recurring special dividend of $1.50 per share to common stock shareholders of record at the close of business on September 21, 2020, payable on or about September 25, 2020. The dividends paid totaled $10.6 million.

See Note 19 for information about a non-recurring special dividend declared by the Board of Directors in the second quarter of fiscal 2021.

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”).

We adopted ASU No. 2018-15, Intangibles—Goodwill and Other: Internal-Use Software (Subtopic 350-40), which provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. This guidance includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This guidance is effective immediately; however, it is only available through December 31, 2022. The Company will continue to evaluate the standard as well as additional changes, modifications, or interpretations which may impact the Company.

In December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements, and do not expect it to be material.

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, 2023 (for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years). We are currently evaluating the potential impact of this standard on our consolidated financial statements.

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3.  ASSETS AND LIABILITIES, AT FAIR VALUE

Fair Value of Financial Instruments

A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity. The fair value of financial instruments represents 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.

For most of the Company's financial instruments, the carrying amount approximates fair value. The carrying amounts of cash, receivables, secured loans receivable, accounts payable and other current liabilities, accrued liabilities, and income taxes payable approximate fair value due to their short-term nature. The carrying amounts of derivative assets and derivative liabilities, liabilities 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 approximate fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The carrying amounts of the Company's other long-term assets, which include a note receivable due from a customer, approximate fair value as of September 30, 2020.

The Company’s fixed-rate notes payable is reported at its aggregate principal amount less unamortized original issue discount and deferred financing costs on the accompanying consolidated balance sheets. The fair value of the notes payable is based on the present value of the expected coupon and principal payments using an estimated discount rate based on current market rates for debt with similar credit risk.  The following table presents the carrying amounts and estimated fair values of the Company’s fixed rate notes payable of September 30, 2020 and June 30, 2020:

 

in thousands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

June 30, 2020

 

 

 

Carrying

Amount

 

 

Fair value

 

 

Carrying

Amount

 

 

Fair value

 

Notes payable

 

$

92,692

 

 

$

101,407

 

 

$

92,517

 

 

$

101,017

 

 

Valuation Hierarchy

In determining the fair value of its financial instruments, the Company employs a fair value hierarchy that prioritizes the inputs for the valuation techniques used to measure fair value. 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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:

Inventories.  The Company's inventory primarily includes bullion and bullion coins, which is acquired and initially recorded at cost and then marked to fair market value.  The fair market value of the bullion and bullion coins comprises two components: i) published market values attributable to the costs of the raw precious metal, and ii) 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 net realizable value, the Company’s inventory is subsequently recorded at their fair market values on a daily basis.  The fair value for commodities inventory (i.e., inventory excluding

19


commemorative coins) is determined using pricing data derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory is 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 precious metals purchased under these arrangements consist of rare and unique items, and therefore the Company accounts for these transactions as precious metals held under financing arrangements, which generate financing income rather than revenue from precious metals inventory sales. In these repurchase arrangements, the Company holds legal title to the metals and earns financing income for the duration of the agreement. 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 held under financing arrangements are classified in Level 1 of the valuation hierarchy.

Derivatives.  Futures contracts and forward 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.

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and June 30, 2020, aggregated by the level in the fair value hierarchy within which the measurements fall:

 

in thousands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

 

for Identical

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Instruments

 

 

Inputs

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories(1)

 

$

413,172

 

 

$

 

 

$

 

 

$

413,172

 

Precious metals held under financing arrangements

 

 

158,756

 

 

 

 

 

 

 

 

 

158,756

 

Derivative assets — open sale and purchase commitments, net

 

 

79,180

 

 

 

 

 

 

 

 

 

79,180

 

Derivative assets — futures contracts

 

 

22,316

 

 

 

 

 

 

 

 

 

22,316

 

Derivative assets — forward contracts

 

 

12,104

 

 

 

 

 

 

 

 

 

12,104

 

Total assets, valued at fair value

 

$

685,528

 

 

$

 

 

$

 

 

$

685,528

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities on borrowed metals

 

$

153,752

 

 

$

 

 

$

 

 

$

153,752

 

Product financing arrangements

 

 

101,599

 

 

 

 

 

 

 

 

$

101,599

 

Derivative liabilities — margin accounts

 

 

3,279

 

 

 

 

 

 

 

 

 

3,279

 

Derivative liabilities — open sale and purchase commitments, net

 

 

2,958

 

 

 

 

 

 

 

 

 

2,958

 

Derivative liabilities — futures contracts

 

 

7,260

 

 

 

 

 

 

 

 

 

7,260

 

Total liabilities, valued at fair value