NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
. BASIS OF PRESENTATION
Basis of Presentation
The condensed consolidated financial statements reflect the financial condition, results of operations, and cash flows of Spectrum Group International, Inc. and its subsidiaries (the “Company” or “SGI”), and were prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). The Company conducts its operations in
two
reportable segments: Trading and Collectibles. Each of these reportable segments represent an aggregation of operating segments that meet the aggregation criteria set forth in the
Segment Reporting
Topic 280 of the FASB Accounting Standards Codification (“ASC”).
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
statements of comprehensive loss,
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 and
six
months
ended
December 31, 2013
are not necessarily indicative of the results that may be expected for the year ending
June 30, 2014
or for any other interim period during such 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, 2013
(the “
2013
Annual Report”), as filed with the SEC. Amounts related to disclosure of
June 30, 2013
balances within these interim
condensed consolidated
financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in the
2013
Annual Report.
The
condensed consolidated
financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant inter-company accounts and transactions including inter-company profits and losses, and inter-company balances have been eliminated in consolidation.
The preparation of 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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates include, among others, determination of lower of cost or market estimates for inventory and allowances for doubtful accounts, impairment assessments of long-lived assets and intangibles, valuation reserve determinations on deferred tax assets, calculations of loss accruals and other complex contingent liabilities, and revenue recognition judgments. Significant estimates also include the Company's fair value determinations with respect to its financial instruments and precious metals materials. Actual results could materially differ from those estimates.
Consolidated Joint Ventures and Variable Interest Entities
The Company's condensed consolidated financial statements also include the financial results of Calzona Ventures, LLC ("Calzona") and Spectrum Wine Auctions, LLC ("SWA"). Based on the Company's contractual arrangements with the members of Calzona and SWA, it has been determined that Calzona and SWA are variable interest entities or VIE, for which the Company is the primary beneficiary and both VIE's are required to be consolidated in accordance with ASC subtopic 810-10, or ASC 810-10,
Consolidation: Overall
.
Despite the Company's lack of greater than
50%
member interest ownership, there exists a parent-subsidiary relationship between SGI and Calzona, whereby through contractual arrangements, the member interest holders of Calzona have effectively assigned all of their voting rights underlying their member interest in Calzona to the Company. In addition, through these agreements, the Company has the ability and intention to absorb all of the expected losses of Calzona (Note 13).
During the 3 months ended December 31, 2013, the Company sold
60%
of their member interest in SWA. However, through contractual arrangements, SWA is considered a VIE and the Company has been determined to be the primary beneficiary. As such, the Company is required to consolidate the results of SWA in their condensed consolidated financial statements.
Business Segments
Trading Segment
The Company's trading business is conducted through its wholly-owned subsidiary, A-Mark Precious Metals, Inc. (“A-Mark”) and its subsidiaries. A-Mark is a full-service precious metals trading company. Its products include gold, silver, platinum and palladium for storage and delivery in the form of coins, bars, wafers and grain. The Company's trading-related services include financing, consignment, hedging and various customized financial programs.
A-Mark has a wholly owned subsidiary, Collateral Finance Corporation ("CFC"). Through CFC, a licensed California Finance Lender, A-Mark offers loans secured by precious metals, rare coins and other collectibles collateral to coin dealers, collectors and investors.
A-Mark has a wholly owned subsidiary, A-Mark Trading AG, ("AMTAG"). AMTAG promotes A-Mark bullion products in Central and Eastern Europe.
Another A-Mark wholly owned subsidiary, Transcontinental Depository Services, ("TDS") offers worldwide storage solutions to institutions, dealers and consumers.
Collectibles Segment
The Company's collectibles business operates as an integrated network of global companies concentrating on numismatic (coins and currencies) and rare and fine vintage wines. Products are offered by way of auction or private treaty sales. The Company has offices and auction houses in North America, Europe and Asia. In addition to traditional live auctions, the Company also conducts Internet and telephone auctions, and engages in retail sales. Until the first quarter of fiscal 2013, when the Company sold its Stamps division, it also was an auctioneer and merchant/dealer of philatelic materials.
European Operations
The European Operations (the “European Operations”) comprised European companies of the Stamps division (the “Stamps division”) of the Collectibles segment. The Stamps division was primarily engaged in the sale of philatelic (stamps) materials by auction. On September 13, 2012, the Company completed the sale of its Stamps division for approximately
$7.8 million
and recognized a gain on sale of
$0.02 million
. All but one of the European companies was sold on September 13, 2012. See discontinued operations, below (Note
3
).
Discontinued Operations
In accordance with the provisions of the
Presentation of Financial Statements
Topic 205 of the ASC, the results of the European Operations are presented as discontinued operations in the condensed consolidated financial statements through the date of dissolution, as applicable (Note
3
).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of Significant Accounting Policies
There have been no significant changes to the Company's significant accounting policies during the
six
months
ended
December 31, 2013
. See Note 2 to the Company's consolidated financial statements included in the Company's
2013
Annual Report on Form 10-K for a comprehensive description of the Company's significant accounting policies.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk vary based on the business segment. Both segments are subject to the risks associated with holding cash and cash equivalents. Cash and cash equivalents are maintained with several financial institutions and, at times, balances may exceed federally insured limits. All of the Company's non-interest bearing balances were fully insured from December 31, 2010 through December 31, 2012 due to a temporary federal program in effect. Beginning in calendar 2013, insurance coverage reverted to
$250,000
per depositor at each financial institution, and the Company's non-interest bearing cash balances may exceed federally insured limits.
Concentrations specific to the Company's business segments are as follows:
Trading Segment
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, as substantially all amounts are secured by letters of credit issued by creditworthy financial institutions. The Company enters into inventory hedging transactions, principally utilizing metals commodity futures contracts traded on national futures exchanges or forwards contracts with only major creditworthy financial institutions. Substantially all of these transactions are secured by the underlying metals positions.
Collectibles Segment
The Company may extend trade credit and release goods sold to the purchasers prior to the receipt of payments in connection with auction sales or private treaty sales. In addition, the Company may extend advances to consignors on collectibles inventory held for future auctions. The Company evaluates each customer's creditworthiness at period-end and specifically identifies trade receivables and consignor advances for risk of loss based on analysis of several factors including a specific review of the collectability of customer accounts, historical collection experience, current economic and business conditions, and aging of accounts, and provides an allowance for the portion of receivables or advances for which collection is doubtful. The Company continuously monitors payments from its customers and maintains allowances for doubtful accounts for estimated losses in the period they become known. The Company charges off uncollectible receivables and advances when management deems it appropriate based upon analysis of each account.
In limited situations, trade credit is extended in the sale of consigned products. When consigned goods are delivered to purchasers prior to the receipt of payments, the Company may be deemed to have assumed risk of loss associated with the trade credit, and the responsibility of collections from the purchasers. Losses to date under these situations have not been material. The terms and provisions of the Company's auctions and consignment agreements do not require the Company to extend such credit and obligate the Company to pay the consignors only after the Company has received payments from the purchasers.
Cash Equivalents
The Company considers all highly liquid investments with remaining maturities of three months or less, when purchased, to be cash equivalents. The Company had
zero
and
$185,000
of cash equivalents as of
December 31, 2013
and
June 30, 2013
, respectively.
Restricted Cash
During the fourth quarter of fiscal 2011, the Company purchased a building to serve as its new corporate headquarters. The building was acquired with cash and the assumption of a note, for which the lender required the Company to place
$1.1 million
of cash in escrow consisting of
$0.8 million
for building improvements and a leasing reserve totaling
$0.3 million
. As of
December 31, 2013
, the Company had a remaining restricted cash balance of
$0.6 million
, consisting of
$0.3 million
for building improvements and
$0.3 million
for leasing reserve. During the six months ended
December 31, 2013
, the Company spent $0 and added
$8,250
of restricted cash for building improvements.
Inventories
Trading Inventories
Inventories principally include bullion and bullion coins and are stated at published market values plus purchase premiums paid by the Company on acquisition of the metal. The Company also protects substantially all of its physical inventories from market risk through commodity hedge transactions (see Note 11). Market risk gains (losses) are generally offset by the results of hedging transactions, which have been reflected as net (gain) loss on derivative instruments, a component of cost of precious metals sold in the condensed consolidated statements of operations. Inventories include amounts borrowed from suppliers under arrangements to purchase precious metals on an unallocated basis. 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 under these arrangements require delivery either in the form of precious metals or cash, and the corresponding obligations related to liabilities on borrowed metals are reflected on the condensed consolidated balance sheets. The Company mitigates market risk of its physical inventories through commodity hedge transactions.
The Company periodically loans metals to customers on a short-term consignment basis, charging interest fees based on the value of the metals loaned. Such metal inventories are removed at the time the customers elect to price and purchase the metals, and the Company records a corresponding sale and receivable. Substantially all inventories loaned under consignment arrangements are secured by letters of credit issued by major financial institutions for the benefit of the Company or under an all-risk insurance policy with the Company as the loss-payee.
Inventory includes amounts for obligations under product financing agreements. A-Mark entered into an agreement for the sale of gold and silver at a fixed price to a third party. This inventory is restricted under this agreement and the Company is allowed to repurchase the inventory at an agreed-upon price based on the spot price on the repurchase date. The third party charges monthly interest 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 reflected in the condensed consolidated balance sheet under obligation under product financing arrangement. 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 included as a component of cost of precious metals sold.
Collectibles Inventories
The Collectibles segment's inventories are stated at the lower of cost or management's estimate of net realizable value, and are accounted for under the specific identification method in which the value is calculated based on a detailed physical count of the inventory and the cost on the purchase date. In instances where bulk purchases are made, the cost allocation is based on the relative market values of the respective goods. On a quarterly basis, the Company reviews the age and turnover of its inventory to determine whether any inventory has declined in value, and
incurs a charge to operations for such declines. The Company records write-downs based on two methodologies; specific write-downs on certain items based on declines in the marketplace, and estimated write-downs based on inventory aging depending on the category and type of inventory (where such percentages are supported by historical experience). If actual market conditions are less favorable than those projected by management and the Company's estimates prove to be inaccurate, additional write-downs or adjustments may be required.
The Company has agreements with certain suppliers and employees to share the net profits or losses attributable to the sale of specified items of inventory. The Company determines the selling price of the inventory and acts as the principal in these transactions; taking title to the inventory and bearing risk of loss, collection, delivery and return. The cost associated with the profit sharing is reflected in cost of collectibles sold for suppliers and salaries and wages expense for employees in the condensed consolidated statements of operations.
Derivative Financial Instruments
The Company’s inventory, purchase and sale commitment transactions consist of precious metals bearing products. The value of these assets and liabilities is intimately 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 only major credit worthy financial institutions. All of the Company's 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. Notional balances of the Company derivative instruments are reported in Note
11
.
Commodity futures and forward contract transactions are recorded at fair value on the trade date.
Open futures and forward contracts are reflected in receivables or payables in the condensed consolidated balance sheet as the difference between the original contract value and the market value; or at fair value. The change in unrealized gain (loss) on open contracts from one period to the next is reflected in net (gain) loss on derivative instruments, which is a component of cost of precious metals sold in the condensed consolidated statements of operations.
Net (gain) loss on derivative instruments, which is included in the cost of sales, includes amounts recorded on the Company's outstanding metals forwards and futures contracts and on open physical purchase and sale commitments. The Company records changes in the market value of its metals forwards and futures contracts as income or loss, the effect of which is to offset changes in market values of the underlying metals positions.
The Company records the difference between market value and trade value of the underlying commodity contracts as a derivative asset or liability, as well as recording an unrealized gain or loss on derivative instruments in the Company's consolidated statements of operations. During the
three
and
six
months
ended
December 31, 2013
, the Company recorded a net unrealized gain/(loss) on open future commodity and forward contracts and open purchase and sale commitments of
$14.0 million
and
$(1.8) million
, respectively, and a net realized loss on future commodity contracts of
$(6.5) million
and
$(8.2) million
, respectively. During the
three
and
six
months
ended
December 31, 2012
, the Company recorded a net unrealized loss on open future commodity and forward contracts and open purchase and sale commitments of
$(80.9) million
and
$(39.9) million
, respectively, and a net realized gain on future commodity contracts of
$52.5 million
and
$31.8 million
, respectively.
Goodwill and Other Purchased Intangible Assets
The Company evaluates goodwill and other indefinite life intangibles for impairment annually 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. Other finite life intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. The Company may 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. If, based on this qualitative assessment, we determine that goodwill is more likely than not to be impaired, the two-step impairment test is performed. This first step in this test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step in the test is performed, which is measurement of the impairment loss. The impairment loss is calculated by comparing the implied fair value of goodwill, as if the reporting unit has been acquired in a business combination, to its carrying amount. There were no impairment charges to the Company's goodwill and purchased intangibles during the
three
and
six
months ended
December 31, 2013
or
2012
.
The Company utilizes the discounted cash flow method to determine the fair value of its Stack's-Bowers Numismatics, LLC ("SBN") reporting unit. In calculating the implied fair value of the reporting unit's goodwill, the present value of the reporting unit's expected future cash flows is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the present value of the reporting unit's expected future cash flows over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. In calculating the implied value of the Company's trade names, the Company uses the present value of the relief from royalty method.
Estimates critical to these calculations include projected future cash flows, discount rates, royalty rates, customer attrition rates and foreign exchange rates. Imprecision in estimating unobservable market inputs can impact the carrying amount of assets in the balance sheet. Although the Company believes its valuation methods are appropriate, the use of different methodologies or assumptions to determine the fair value of certain assets could result in a different estimate of fair value at the reporting date.
Long-Lived Assets
Long-lived assets, other than goodwill and purchased intangible assets with indefinite lives, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. In evaluating impairment, the carrying value of the asset is compared to the undiscounted estimated future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is recognized when estimated future cash flows are less than the carrying amount. Estimates of future cash flows may be internally developed or based on independent appraisals and significant judgment is applied to make the estimates. Changes in the Company's strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. For the
six
months
ended
December 31, 2013
and
2012
,
no
impairment of long-lived assets was identified.
Consolidated Joint Ventures
The Company includes in its condensed consolidated financial statements the results of operations and financial position of joint ventures which are VIEs in which the Company or its wholly-owned subsidiary are the primary beneficiaries (Note 13). The joint ventures consist of Calzona and SWA. In determining that the Company or its subsidiaries is the primary beneficiary, the Company evaluated both qualitative and quantitative considerations of each VIE, including, among other things, its capital structure, terms of contracts between the Company and its subsidiaries and the VIE, which interests create or absorb variability, related party relationships and the design of the VIE.
Consignor Advances and Payables
Consignor advances are cash advances on inventory consigned from a third party for sale by the Company at a later date at which time the advance will be deducted from the proceeds due to the consignors if and when such inventory is sold. Consignor advances are short-term in duration and typically bear interest at prevailing rates. Consignor payables represent amounts due to consignors for the sale of their inventory by the Company. Such amounts do not bear interest.
Revenue Recognition
Trading Segment
Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collection is probable. The Company records sales of precious metals upon the transfer of title, which occurs upon receipt by customer. The Company records revenues from its metal assaying and melting services after the related services are completed, and the effects of forward sales contracts are reflected in revenue at the date the related precious metals are delivered or the contracts expire.
The Company accounts for its metals and sales contracts using settlement date accounting. Pursuant to such accounting, the Company recognizes sales or purchases of the metals at the settlement date. During the period between trade and settlement dates, the Company has essentially entered into a forward contract that meets the definition of a derivative in accordance with the
Derivatives and Hedging
Topic 815 of the ASC. The Company records the derivatives at the trade date with corresponding unrealized gains or losses which are reflected in the cost of precious metals sold in the condensed consolidated statements of operations. The Company adjusts the derivatives to fair value on a daily basis until the transactions are physically settled. Sales are recognized in the condensed consolidated statements of operations.
Collectibles Segment
The Company's Collectibles segment derives revenues from
two
primary sources: auctions and private treaty sales.
Auction Sales
In its role as auctioneer, the Company functions as an agent accepting properties on consignment from its selling clients. The Company sells properties as an agent of the consignors, billing the buyers for properties purchased, receiving payments from the buyers, and remitting to the consignors their portion of the buyers' payments after deducting the Company's commissions, expenses, applicable taxes and advances. Throughout this process, the Company does not take title to the properties consigned to it and risk of loss transfers from the consignor directly to the buyer of properties purchased. The Company's commissions include those earned from the buyers (“buyers' premium revenue”) and those earned from the consignors (“sellers' commission revenue”), both of which are calculated as a percentage of the value of the final bid at auction (the “hammer price”) of property sold at auction. The Company recognizes revenues, in the manner discussed in the following paragraph, from the buyers' premiums and sellers' commissions upon delivery of property sold at auction for owned property and at the close of the auction for consigned property. Commissions earned for the
six
months
ended
December 31, 2013
and
2012
, totaled
$9.6 million
and
$7.7 million
, respectively.
The Company currently recognizes revenue as follows:
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1.
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For auctions of consigned product, revenue is recognized upon delivery of the related service elements. The first service element in the auction of consigned product consists of cataloging, appraising, preparation and performance of the auction. Revenue related to this element is recognized upon completion of the auction. The second service element relates to the processing, packaging and delivery of the sold consigned product and the collection of the sales consideration on behalf of the consignor. Revenue related to this element is recognized upon cash receipt from the purchaser, and coincides with delivery of the consigned product to the purchaser. Since each
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delivered service element has standalone value to the customer and delivery or performance of any undelivered service elements is probable, revenue is allocated to each separate unit of accounting based on the relative selling price of the element as a result of the lack of reliable vendor specific objective evidence or third-party evidence of the selling price. Significant inputs in determining the selling price of each service element include employee time spent working on these elements and their cost plus a markup.
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2.
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For auctions of owned product, revenue is recognized when title of the product passes to the customer upon delivery, which, based on Company operational policies, usually occurs when the sales consideration is collected.
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3.
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For the wholesale sale of owned products, revenue is recognized upon the transfer of title to the customer, which occurs upon delivery.
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The Company does not provide guarantees with respect to the authenticity of property offered for sale at its live auctions, however it does authenticate the materials sold via its Internet auctions. All property presented for sale at live auction is sold as genuine and as described by the Company in its auction catalogues. In the event that auctioned property is deemed to be other than authentic (in the opinion of a competent authority mutually acceptable to the buyer and the Company), the Company refunds the purchase price if returned within a specified time period. Historically, returns have not been material and the Company sells large collections on an “as is” basis.
Private Treaty Sales
The Company engages in private treaty sales of both consigned property and sales of owned inventory to third parties (merchant/dealer relationships and direct to consumer sales). Private treaty sales of consigned property occur when an owner of property arranges with the Company to sell such consigned property to a third party at a privately negotiated price. In such a transaction, the owner may set selling price parameters for the Company, or the Company may solicit selling prices for the owner, and the owner may reserve the right to reject any selling price. The Company does not guarantee a fixed price to the owner, which would be payable regardless of the actual sales price ultimately received. The Company recognizes private treaty sales of consigned property at an amount equal to a percentage of the sales price. Such amounts of revenue are recorded on a net basis as commissions earned and are recognized upon delivery of property sold, which occurs upon cash receipt. The Company recognizes private treaty sales of owned property upon delivery of the property.
Stock Based Compensation
The Company has equity plans that provide for the awards of restricted stock, stock options and other equity grants to officers, employees, non-employee directors and consultants (Note
15
). The Company recognizes stock-based compensation expense in accordance with ASC Topic 718,
Stock Compensation
, based on the fair value of the stock award on the grant date, net of estimated forfeitures, recognized ratably over the service period of the award. The fair value of restricted stock grants is based on the quoted market price at the date of grant. The fair value of stock option grants is calculated using the Black-Scholes valuation model, which is consistent with the Company's valuation techniques previously utilized for options in footnote disclosures required under Topic 718 of the ASC. The Black-Scholes valuation model requires the input of subjective assumptions including estimating the length of time employees will retain their stock options before exercising them (the “expected term”), the estimated volatility of the common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in these subjective assumptions can materially affect the estimate of stock-based compensation and, consequently, the related amount recognized as an expense in the condensed consolidated statements of operations. As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may materially differ from the Company's current estimates.
Marketing
Marketing, advertising and promotion costs are expensed as incurred. Marketing, advertising and promotion expenses were
$0.9 million
and
$1.1 million
respectively, for the
three
and
six
months
ended
December 31, 2013
and were
$1.2 million
and
$1.6 million
, respectively for the
three
and
six
months ended
December 31, 2012
.
Shipping and Handling
Shipping and handling costs represent costs associated with shipping product to customers, and receiving product from vendors. Shipping and handling costs incurred totaled
$1.2 million
and
$3.1 million
respectively, for the
three
and
six
months
ended
December 31, 2013
and
$1.1 million
and
$2.2 million
for the
three
and
six
months ended
December 31, 2012
respectively, and are included in general and administrative expenses in the condensed consolidated statements of operations.
Income Taxes
The Company estimates its provision for income taxes in each of the tax jurisdictions in which it conducts business, in accordance with the provisions of the
Income Taxes
Topic 740 of the ASC. 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 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 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. The total unrecognized tax benefit is $
28.8 million
;
$10.5 million
of this amount is presented as an accrued liability in the consolidated balance sheet as of
December 31, 2013
and is presented within other long-term tax liabilities. The potential interest and/or penalties associated with an uncertain tax position are recorded in provision for income taxes (income tax benefit) in the condensed consolidated statements of operations.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
Changes in recognized tax benefits and changes in valuation allowances could be material to the Company's results of operations for any period, but is not expected to be material to the Company's consolidated financial position
The Company files a consolidated federal income tax return and combined or consolidated state income tax returns in various state jurisdictions. In addition, certain of the Company's subsidiaries file separate income tax returns in various state and foreign jurisdictions.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
This ASU requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. It is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 and December 15, 2014, for public and nonpublic entities, respectively. Early adoption and retrospective application are permitted. The adoption of the accounting principles in this update is not anticipated to have a material impact on the Company's consolidated financial position or results of operations.
In July 2012, the FASB issued ASU No. 2012-02,
Intangibles - Goodwill and Other, Testing Indefinite-Lived Intangible Assets for Impairment.
This ASU allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets. An organization that elects to perform a qualitative assessment no longer is required to perform the quantitative impairment test for an indefinite-lived intangible asset unless it is
more likely than not
that the asset is impaired. The ASU, which applies to all entities, is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company adopted this guidance in the first quarter of fiscal year 2013, as allowed by the early adoption provisions within the guidance. The adoption of the accounting principles in this update did not have a material impact on the Company's consolidated financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-11,
Disclosures about Offsetting Assets and Liabilities
. The amendments in this update require an entity to disclose gross and net information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. These amendments are effective for annual and interim periods beginning on or after January 1, 2013. The Company adopted this guidance in the third quarter of fiscal year 2013. The adoption of the accounting principles in this update did not have a material impact on the Company's consolidated financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income
, the objective of which is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendment eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholder's equity, requiring that all non-owner changes in stockholder's equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, except as it pertains to reclassifications out of accumulated other comprehensive income. The FASB has deferred such changes in ASU No. 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income
in Accounting Standards Update No. 2011-05
, which was issued in December 2011. The adoption of the accounting principles in these updates did not have a material impact on the Company's consolidated financial position or results of operations. The FASB issued ASU update No. 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, to address concerns raised in the initial issuance of ASU 2011-05,
Comprehensive Income
, for which the Board deferred the effective date of certain provisions relating to the presentation of reclassification adjustments in the income statement. With the issuance of ASU 2013-02 entities are now required to disclose:
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•
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For items reclassified out of accumulated other comprehensive income ("AOCI") and into net income in their entirety, the effect of the reclassification on each affected net income line item; and
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•
|
for AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures.
|
This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. However, an entity is prohibited from providing this information parenthetically on the face of the statement that reports net income if it has items that are not reclassified in their entirety into net income. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2012 and interim periods within those years. The Company adopted this guidance in the first quarter of fiscal year 2014. The adoption of the accounting principles in this update did not have a material impact on the Company's consolidated financial position or results of operations.
3
. DISCONTINUED OPERATIONS
Stamps Division
On September 13, 2012, the Company completed the sale of its Stamps division for approximately
$7.8 million
, of which
$400,000
was held in escrow. During the
six
months
ended
December 31, 2013
, the Company received all escrow funds. The Company recorded a gain on sale of
$0.02 million
from the transaction. In accordance with the provisions of
Presentation of Financial Statements
Topic 205 of the ASC, the results of the Stamps division are now presented in the condensed consolidated financial statements as discontinued operations.
The following results of operations of the Stamps division have been presented as discontinued operations in the
condensed consolidated
statements of operations for all periods presented.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
in thousands
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
185
|
|
|
|
Loss from discontinued operations:
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|
|
|
|
|
|
|
|
|
Loss from discontinued operations, excluding taxes and gain on sales of assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,080
|
)
|
|
|
Income tax benefit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(417
|
)
|
|
|
Loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(663
|
)
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|
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4.
|
CUSTOMER CONCENTRATIONS
|
Customers providing 10 percent or more of the Company's Trading segment revenues for the
three
and
six
months
ended
December 31, 2013
and
2012
are listed below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Total Trading segment revenue
|
$
|
1,484,083
|
|
|
100.0
|
%
|
|
$
|
1,688,625
|
|
|
100.0
|
%
|
|
$
|
2,976,196
|
|
|
100.0
|
%
|
|
$
|
3,302,240
|
|
|
100.0
|
%
|
|
Trading segment customer concentrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
$
|
393,148
|
|
|
26.5
|
%
|
|
$
|
162,748
|
|
|
9.6
|
%
|
|
$
|
705,693
|
|
|
23.7
|
%
|
|
$
|
257,967
|
|
|
7.8
|
%
|
|
Customer B
|
32,169
|
|
|
2.2
|
|
|
191,810
|
|
|
11.4
|
|
|
56,596
|
|
|
1.9
|
|
|
719,226
|
|
|
21.8
|
|
|
Total
|
$
|
425,317
|
|
|
28.7
|
%
|
|
$
|
354,558
|
|
|
21.0
|
%
|
|
$
|
762,289
|
|
|
25.6
|
%
|
|
$
|
977,193
|
|
|
29.6
|
%
|
Customers providing 10 percent or more of the Company's Trading segment's accounts receivable, excluding
$31.9 million
and
$35.6 million
of secured loans as of
December 31, 2013
and
June 30, 2013
, respectively, are listed below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
in thousands
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Trading segment accounts receivable
|
$
|
50,405
|
|
|
100.0
|
%
|
|
$
|
58,777
|
|
|
100.0
|
%
|
|
Trading segment customer concentrations
|
|
|
|
|
|
|
|
|
Customer C
|
$
|
34,240
|
|
|
67.9
|
%
|
|
$
|
44,185
|
|
|
75.2
|
%
|
|
Customer D
|
3,556
|
|
|
7.1
|
|
|
8,593
|
|
|
14.6
|
|
|
Total
|
$
|
37,796
|
|
|
75.0
|
%
|
|
$
|
52,778
|
|
|
89.8
|
%
|
Customers providing 10 percent or more of the Company's Trading segments' secured loans as of
December 31, 2013
and
June 30, 2013
, respectively, are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
in thousands
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Trading segment secured loans
|
$
|
31,935
|
|
|
100.0
|
%
|
|
$
|
35,585
|
|
|
100.0
|
%
|
|
Trading segment customer concentrations
|
|
|
|
|
|
|
|
|
Customer E
|
$
|
—
|
|
|
—
|
%
|
|
$
|
15,800
|
|
|
44.4
|
%
|
|
Customer F
|
2,046
|
|
|
6.4
|
|
|
3,659
|
|
|
10.3
|
|
|
Customer G
|
4,200
|
|
|
13.2
|
%
|
|
—
|
|
|
—
|
%
|
|
Total
|
$
|
6,246
|
|
|
19.6
|
%
|
|
$
|
19,459
|
|
|
54.7
|
%
|
The loss of any of the above customers of the Trading segment could have a material adverse effect on the operations of the Company.
For the
six
months
ended
December 31, 2013
and
2012
and as of
December 31, 2013
and
June 30, 2013
, the Collectibles segment had no reportable concentrations.
Receivables and secured loans from the Company's trading segment consist of the following as of
December 31, 2013
and
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
Customer trade receivables
|
$
|
29,706
|
|
|
$
|
38,154
|
|
|
Wholesale trade advances
|
11,790
|
|
|
20,623
|
|
|
Secured loans
|
31,935
|
|
|
35,585
|
|
|
Due from other brokers and other
|
8,909
|
|
|
—
|
|
|
Subtotal
|
82,340
|
|
|
94,362
|
|
|
Less: allowance for doubtful accounts
|
(30
|
)
|
|
(104
|
)
|
|
Subtotal
|
82,310
|
|
|
94,258
|
|
|
Derivative assets — futures contracts
|
10,921
|
|
|
14,967
|
|
|
Derivative assets — open purchase and sales commitments
|
3,374
|
|
|
—
|
|
|
Derivative assets — forward contracts
|
4,933
|
|
|
471
|
|
|
Receivables and secured loans, net — trading operations
|
$
|
101,538
|
|
|
$
|
109,696
|
|
Customer trade receivables represent short-term, non-interest bearing amounts due from metal sales and are secured by the related metals stored with the Company, a letter of credit issued on behalf of the customer, or other secured interests in assets of the customer.
Wholesale trade advances represent advances of refined materials to customers, secured by unrefined materials received from the customer. These advances are limited to a portion of the unrefined materials received. These advances are unsecured, short-term, non-interest bearing advances made to wholesale metals dealers and government mints.
Secured loans represent short term loans made to customers of CFC. Loans are fully secured by bullion, numismatic and semi-numismatic material which are held in safekeeping by CFC. As of
December 31, 2013
and
June 30, 2013
, the loans carried average effective interest rates of
8.7%
and
8.0%
, respectively. Due from brokers principally consists of the margin requirements held at brokers related to open futures contracts.
On September 27, 2013, CFC paid
$350 thousand
to a borrower of CFC in exchange for the right to assume a portfolio of short-term loan receivables totaling
$12.8 million
. The loans were used to satisfy the existing outstanding loan totaling
$12.8 million
with the borrower of CFC. The receivables were originated by the borrower and this transaction resulted in the assignment of those receivables to CFC. This premium will be amortized ratably as loans pay off. The loans are due on demand with the option to extend maturities for
180
days. For the three months ended
December 31, 2013
, a total of $3.9 million in loans were paid off and
$0.1 million
in premium amortization cost was recorded.
The Company's derivative liabilities (see Note
11
) represent the net fair value of the difference between market value and trade value at trade date for open metals purchases and sales contracts, as adjusted on a daily basis for changes in market values of the underlying metals, until settled. The Company's derivative assets represent the net fair value of open metals forwards and futures contracts. The metals forwards and futures contracts are settled at the contract settlement date.
Accounts receivable and consignor advances from the Company's Collectibles segment consist of the following as of
December 31, 2013
and
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
Auction and trade
|
$
|
5,866
|
|
|
$
|
10,827
|
|
|
Secured loan
|
1,514
|
|
|
1,258
|
|
|
Derivative assets — future contracts
|
—
|
|
|
569
|
|
|
Subtotal
|
7,380
|
|
|
12,654
|
|
|
Less: allowance for doubtful accounts
|
(297
|
)
|
|
(307
|
)
|
|
Accounts receivable and consignor advances, net — collectibles operations
|
$
|
7,083
|
|
|
$
|
12,347
|
|
The Company frequently extends trade credit in connection with its auction sales. The Company evaluates each customer's creditworthiness on a case-by-case basis. Typically, the customers that receive trade credit are established collectors and professional dealers that have regularly purchased property at the Company's auctions or whose reputation within the industry is known and respected by the Company. The Company makes judgments as to the ability to collect outstanding auction and consignor advance receivables and provides allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. The Company continuously monitors payments from its customers and records allowances for doubtful accounts for estimated losses in the period
they become probable. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, the Company believes its allowance for doubtful accounts as of
December 31, 2013
and
June 30, 2013
is adequate.
Activity in the allowance for doubtful accounts for the Trading and Collectible segments for the
six
months
ended
December 31, 2013
and year ended
June 30, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
Beginning balance
|
$
|
411
|
|
|
$
|
1,294
|
|
|
Provision for losses
|
—
|
|
|
(396
|
)
|
|
Charge-offs to reserve
|
(84
|
)
|
|
(488
|
)
|
|
Foreign currency exchange rate changes
|
—
|
|
|
1
|
|
|
Ending balance
|
$
|
327
|
|
|
$
|
411
|
|
Net charge-offs for the six months ended
December 31, 2013
and 2012 totaled $84 thousand and $383 thousand, respectively.
Credit Quality of Financing Receivables and Allowance for Credit Losses
The Company applies a systematic methodology to determine the allowance for credit losses for finance receivables. Based upon the Company's analysis of credit losses and risk factors, secured commercial loans are its sole portfolio segment. This is due to the fact that all loans are very similar in terms of secured material, method of initial and ongoing collateral value determination and assessment of loan to value determination. Typically, the Company's finance receivables within its portfolio have similar credit risk profiles and methods for assessing and monitoring credit risk.
The Company further evaluated its portfolio segments by the class of finance receivables, which is defined as a level of information in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. As a result, the Company determined that the secured commercial loans portfolio segment has
two
classes of receivables, those secured by bullion and those secured by collectibles.
The Company's classes, which align with management reporting, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Bullion
|
$
|
19,403
|
|
|
60.8
|
%
|
|
$
|
21,993
|
|
|
61.8
|
%
|
|
Collectibles
|
12,532
|
|
|
39.2
|
|
|
13,592
|
|
|
38.2
|
|
|
Total secured loans
|
$
|
31,935
|
|
|
100.0
|
%
|
|
$
|
35,585
|
|
|
100.0
|
%
|
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 income is suspended and the loan is placed on non-accrual status when management determines that collection of future income is not probable. Accrual is resumed, and previously suspended 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 income.
All loans are contractually subject to margin call. 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 rapidly liquidate the loan collateral in the event of a default. The material is highly liquid and easily sold to pay off the loan. Such circumstances would result in a short term impairment that would typically result in full repayment of the loan and fees due to the Company.
There were
no
impaired loans as of
December 31, 2013
and one impaired loan of
$70,000
as of
June 30, 2013
.
Credit quality of loans
All 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. Loans are considered non performing when customers are in 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
.
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 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 disaggregates its secured loans as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Loan-to-value of 75% or more
|
$
|
12,493
|
|
|
39.1
|
%
|
|
$
|
3,764
|
|
|
10.6
|
%
|
|
Loan-to-value of less than 75%
|
19,442
|
|
|
60.9
|
|
|
31,821
|
|
|
89.4
|
|
|
Total
|
$
|
31,935
|
|
|
100.0
|
%
|
|
$
|
35,585
|
|
|
100.0
|
%
|
No loans have a loan-to-value in excess of
100%
at
December 31, 2013
and
June 30, 2013
.
The Trading segment's inventories primarily include bullion and bullion coins and are stated at published market values plus purchase premiums paid on acquisition of the metal. The amount of premium included in the inventories as of
December 31, 2013
and
June 30, 2013
was
$3.3 million
and
$1.8 million
, respectively. The Company also protects substantially all of its physical inventories from market risk through commodity hedge transactions (Note
11
). For the
six
months
ended
December 31, 2013
and
2012
, the unrealized gains (losses) resulting from the difference between market value and cost of physical inventories were
$0.7 million
and
$4.3 million
, respectively. These unrealized gains (losses) are included in cost of precious metals sold in the accompanying condensed consolidated statements of operations. Such gains (losses) are generally offset by the results of hedging transactions, which have been reflected as a net gain (loss) on derivative instruments, which is a component of cost of precious metals sold in the condensed consolidated statements of operations.
The Trading segment's inventories include amounts borrowed from various suppliers under ongoing agreements to purchase precious metals on an unallocated basis. 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 under these arrangements require delivery either in the form of precious metals or cash. A corresponding obligation related to metals borrowed is reflected on the condensed consolidated balance sheets for
$11.2 million
and
$20.1 million
as of
December 31, 2013
and
June 30, 2013
, respectively. The Trading Segment also protects substantially all of its physical inventories from market risk through commodity hedge transactions.
The Trading segment's inventories also include amounts for obligation under a product financing arrangement. The Company entered into an agreement for the sale of gold and silver at a fixed price to a third party. This inventory is restricted under this agreement and the Company is allowed to repurchase the inventory at an agreed-upon price based on the spot price on the repurchase date. The third party charges monthly interest 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 reflected in the condensed consolidated balance sheet under obligation under product financing arrangement. 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 included as a component of cost of precious metals sold. Such obligation totaled
$25.5 million
and
$38.6 million
as of
December 31, 2013
and
June 30, 2013
respectively (See Note
10
).
The Trading segment periodically loans metals to customers on a short-term consignment basis, charging interest fees based on the value of the metal loaned. Inventories loaned under consignment arrangements to customers as of
December 31, 2013
and
June 30, 2013
totaled
$5.4 million
and
$2.6 million
, respectively. Such inventory is removed at the time the customer elects to price and purchase the metals, and the Company records a corresponding sale and receivable. Substantially all inventory loaned under consignment arrangements is secured by letters of credit issued by major financial institutions for the benefit of the Company or under an all-risk insurance policy with the Company as the loss-payee.
The Collectibles segment's inventories are stated at the lower of cost or management's estimate of net realizable value, and are accounted for under the specific identification method in which the value is calculated based on a detailed physical count of the inventory and the cost on the purchase date. In instances where bulk purchases are made, the cost allocation is based on the relative market values of the respective goods. The Company reviews the age and turnover of its inventory quarterly to determine whether any inventory has declined in value, and incur a charge to operations for such declines. The Company records write-downs based on two methodologies; specific write-downs on certain items based on declines in the marketplace, and estimated write-downs based on inventory aging depending on the category and type of inventory (where such percentages are supported by historical experience). If actual market conditions are less favorable than those projected by the Company and its estimates prove to be inaccurate, additional write-downs or adjustments may be required.
The Company has agreements with certain suppliers and employees to share the net profits or losses attributable to the sale of specified items of inventory. The Company determines the selling price of the inventory and acts as the principal in these transactions; taking title to the inventory and bearing risk of loss, collection, delivery and return. The cost associated with the profit sharing is reflected in cost of collectibles sold for suppliers and salaries and wages expense for employees in the condensed consolidated statements of operations.
Inventories as of
December 31, 2013
and
June 30, 2013
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
Trading
|
$
|
134,523
|
|
|
$
|
123,824
|
|
|
Collectibles
|
22,601
|
|
|
25,875
|
|
|
|
157,124
|
|
|
149,699
|
|
|
Restricted inventory - trading
|
25,506
|
|
|
38,554
|
|
|
Net inventory
|
$
|
182,630
|
|
|
$
|
188,253
|
|
7
. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill
The carrying values of goodwill by business segment as of
December 31, 2013
and
June 30, 2013
are described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Trading
|
|
Collectibles
|
|
Total
|
|
Balance as of December 31, 2013
|
|
|
|
|
|
|
Goodwill
|
$
|
4,884
|
|
|
$
|
5,363
|
|
|
$
|
10,247
|
|
|
Accumulated impairment losses
|
—
|
|
|
(5,363
|
)
|
|
(5,363
|
)
|
|
|
4,884
|
|
|
—
|
|
|
4,884
|
|
|
Balance as of June 30, 2013
|
|
|
|
|
|
|
Goodwill
|
4,884
|
|
|
5,363
|
|
|
10,247
|
|
|
Accumulated impairment losses
|
—
|
|
|
(5,363
|
)
|
|
(5,363
|
)
|
|
|
$
|
4,884
|
|
|
$
|
—
|
|
|
$
|
4,884
|
|
Cumulative goodwill impairment totaled
$5.4 million
as of
December 31, 2013
and
June 30, 2013
. There were
no
impairment charges to the Company's goodwill and purchased intangibles during the
six
months
ended
December 31, 2013
and 2012. In the fourth quarter of fiscal 2013, the Company had recorded a goodwill impairment charge primarily due to the operating loss incurred in SBN and management's evaluation of economic conditions and projected future performance in the business.
Other Purchased Intangibles, Net
The carrying value of other purchased intangibles as of
December 31, 2013
and
June 30, 2013
is as described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
in thousands
|
Estimated Useful Lives (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net Book Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net Book Value
|
|
Trademarks
|
Indefinite
|
|
$
|
3,479
|
|
|
$
|
—
|
|
|
$
|
(798
|
)
|
|
$
|
2,681
|
|
|
$
|
3,479
|
|
|
$
|
—
|
|
|
$
|
(798
|
)
|
|
$
|
2,681
|
|
|
Customer lists
|
5 - 15
|
|
9,057
|
|
|
(5,384
|
)
|
|
(419
|
)
|
|
3,254
|
|
|
9,057
|
|
|
(5,019
|
)
|
|
(419
|
)
|
|
3,619
|
|
|
Non-compete and other
|
0 - 4
|
|
2,270
|
|
|
(2,254
|
)
|
|
—
|
|
|
16
|
|
|
2,270
|
|
|
(2,253
|
)
|
|
—
|
|
|
17
|
|
|
Purchased intangibles subject to amortization
|
|
|
11,327
|
|
|
(7,638
|
)
|
|
(419
|
)
|
|
3,270
|
|
|
11,327
|
|
|
(7,272
|
)
|
|
(419
|
)
|
|
3,636
|
|
|
|
|
|
$
|
14,806
|
|
|
$
|
(7,638
|
)
|
|
$
|
(1,217
|
)
|
|
$
|
5,951
|
|
|
$
|
14,806
|
|
|
$
|
(7,272
|
)
|
|
$
|
(1,217
|
)
|
|
$
|
6,317
|
|
The Company's other purchased intangible assets are subject to amortization except for trademarks, which have an indefinite life. Amortization expense related to the Company's intangible assets for the
six
months
ended
December 31, 2013
and
2012
was
$0.4 million
and
$0.4 million
, respectively. Estimated amortization expense on an annual basis for the succeeding five years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year ending June 30,
|
|
|
|
2014 (remaining six months)
|
|
$
|
317
|
|
|
2015
|
|
567
|
|
|
2016
|
|
518
|
|
|
2017
|
|
479
|
|
|
2018
|
|
450
|
|
|
Thereafter
|
|
939
|
|
|
Total
|
|
$
|
3,270
|
|
|
|
|
|
8
.
|
ACCOUNTS PAYABLE AND CONSIGNOR PAYABLES
|
Accounts payable and consignor payables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
Trade payable to customers and consignor payables
|
$
|
7,779
|
|
|
$
|
8,094
|
|
|
Advances from customers
|
30,008
|
|
|
31,026
|
|
|
Liability on deferred revenue
|
10,434
|
|
|
14,985
|
|
|
Net liability on margin accounts
|
6,469
|
|
|
6,636
|
|
|
Due to brokers
|
1,711
|
|
|
4,985
|
|
|
Derivative liabilities — open purchases and sales commitments
|
32,027
|
|
|
30,113
|
|
|
Derivative liabilities — forward contracts
|
10
|
|
|
—
|
|
|
|
$
|
88,438
|
|
|
$
|
95,839
|
|
The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
Income tax provision on continuing operations for the
six
months
ended
December 31, 2013
and
2012
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
U.S.
|
|
$
|
1,586
|
|
|
$
|
403
|
|
|
$
|
59
|
|
|
$
|
282
|
|
|
Foreign
|
|
(71
|
)
|
|
659
|
|
|
2,156
|
|
|
888
|
|
|
Provision for income taxes — continuing operations
|
|
$
|
1,515
|
|
|
$
|
1,062
|
|
|
$
|
2,215
|
|
|
$
|
1,170
|
|
The effective tax rate for the
six
months
ended
December 31, 2013
and
2012
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
December 31, 2012
|
|
Effective tax rate
|
|
(226.33
|
)%
|
|
203.06
|
%
|
|
(183.07
|
)%
|
(809.37
|
)%
|
The effective tax rate varies significantly from the federal statutory rate due to permanent adjustments for nondeductible items, state taxes and foreign tax rate differentials. In addition, the U.S. tax rate is significantly higher than expected due to the accrual of
$3.1 million
related to income tax withholding on distributions from a foreign subsidiary to the U.S. parent. The withholding on the distribution generated a significant tax expense in the current quarter relative to the quarter to date pre-tax loss.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. 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. During the
six
months
ended
December 31, 2013
, the Company concluded that, with the exception of foreign tax credits which require foreign source income to be reported in the U.S., certain state net operating loss carryforwards and capital loss carryforwards, 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 in the future. The Company based this conclusion on historical and projected operating performance, as well as its expectation that its operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. There was no change to the valuation allowance recorded during the
six
months
ended
December 31, 2013
.
The Company will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required. The valuation allowance against deferred tax assets was
$8.9 million
as of
December 31, 2013
and
June 30, 2013
, respectively.
The non-current income tax receivable as of June 30, 2013 represents a
$1.2 million
carry-back claim for the 2007 taxable year, a
$1.5 million
carry-back claim for the 2008 taxable year, alternative minimum tax liability of
$0.2 million
related to the 2010 taxable year, and a balance due of
$0.7 million
related to the 2011 taxable year. The Company intends to effect the filing of such claims upon completion of the Internal Revenue Service ("IRS") examination (discussed below).
As of
December 31, 2013
, the Company had
$28.8 million
of unrecognized tax benefits and
$2.1 million
relating to interest and penalties. Of the total unrecognized tax benefits,
$28.8 million
would reduce the Company's effective tax rate, if recognized. The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company accrued additional interest and penalties of
$0.08 million
during the
six
months
ended
December 31, 2013
and
$0.2 million
during the
six
months
ended
December 31, 2012
.
Final determination of a significant portion of the Company's global unrecognized tax benefits that will be effectively settled remains subject to ongoing examination by various taxing authorities, including the IRS. The Company is actively pursuing strategies to favorably settle or resolve these liabilities for unrecognized tax benefits. If the Company is successful in mitigating these liabilities, in whole or in part, the impact will be recorded as an adjustment to income tax expense in the period of settlement. The Company is currently under examination by the IRS for the years ended June 30, 2004 through 2010 and by other taxing jurisdictions on certain tax matters, including challenges to certain positions the Company has taken. With few exceptions, examinations have either been completed by the tax authorities or the statute of limitations have expired for U.S. federal, state and local income tax returns filed by the Company for the years through 2003. The Company's Spanish operations are currently under examination as discussed below. For the Company's remaining foreign operations, examinations have either been completed by the tax authorities or the statute of limitations has expired for tax returns filed by the Company for the years through 2003. As of December 31, 2013 the Company anticipates closing the IRS examination within the next 12 months. Closing the IRS examination would materially impact the amount of unrecognized tax benefits. However, the Company is not able to predict the outcome of the IRS examination at this time.
IRS and New York Tax Audits
Audits of SGI's tax returns for fiscal 2004 through fiscal 2012 are currently under exam with the IRS. These audits are ongoing and the outcome cannot be determined at this time. Therefore, no accrual has been made with respect to this potential liability. In March 2008, the New York State Department of Taxation and Finance began an audit of the Company's tax returns for fiscal 2005, 2006 and 2007. These audits were concluded on June 2, 2011 and the New York State Department of Taxation and Finance accepted the return(s) as filed. The Company has been notified by the New York State Department of Taxation and by the New York City Department of Taxation of their intent to audit the Company's tax returns for fiscal 2010 and 2011. The Company is unable to determine the outcome at this time.
Tax Investigation in Spain
On November 17, 2005, the Spanish tax authorities commenced a tax examination of the Company's subsidiary, Central de Compras Collectionables, S.L.U. This examination, which now covers all periods from fiscal 2003 through fiscal 2006, is ongoing and the outcome cannot be determined at this time. Therefore, no accrual has been made with respect to this potential liability.
|
|
|
|
10
.
|
FINANCING AGREEMENTS
|
The Company has the following amounts outstanding under financing agreements as of
December 31, 2013
and
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
December 31, 2013
|
|
June 30, 2013
|
|
Liability on borrowed metals
|
|
$
|
11,226
|
|
|
$
|
20,117
|
|
|
Obligation under product financing agreement
|
|
$
|
25,506
|
|
|
$
|
38,554
|
|
|
Lines of credit:
|
|
|
|
|
|
Trading credit facility
|
|
$
|
106,000
|
|
|
$
|
95,000
|
|
|
Collectibles credit facility
|
|
5,000
|
|
|
5,000
|
|
|
SBN credit facility
|
|
135
|
|
|
857
|
|
|
Total lines of credit
|
|
$
|
111,135
|
|
|
$
|
100,857
|
|
|
Debt obligations:
|
|
|
|
|
|
Note payable for building, plus accrued interest
|
|
$
|
6,195
|
|
|
$
|
6,263
|
|
|
Note payable for repurchase of minority interest
|
|
2,687
|
|
|
2,675
|
|
|
Earn-out related to Stack's LLC minority interest repurchase
|
|
1,063
|
|
|
1,063
|
|
|
Other liabilities
|
|
739
|
|
|
836
|
|
|
Total debt obligations
|
|
$
|
10,684
|
|
|
$
|
10,837
|
|
Liability on Borrowed Metals
A-Mark borrows metals from several of its suppliers under short-term agreements bearing interest at a designated rate. Amounts under these agreements are due at maturity and require repayment either in the form of borrowed metals or cash. A-Mark's inventories included borrowed metals with market values totaling
$11.2 million
and
$20.1 million
as of
December 31, 2013
and
June 30, 2013
, respectively. Certain of these metals are secured by letters of credit issued under A-Mark's borrowing facility, which totaled
$0.0 million
and $
9.0 million
as of
December 31, 2013
and
June 30, 2013
, respectively.
Obligation Under Product Financing Arrangement
A-Mark entered into an agreement with a third party for the sale of gold and silver, at the option of the third party, at a fixed price. Such agreement allows 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 percentage of the market value of the outstanding obligation. These transactions do not qualify as sales and therefore have been accounted for as financing arrangements and reflected in the
condensed consolidated
balance sheet within "Obligation under product financing arrangement". 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 precious metals sold in the condensed consolidated statements of operations. Such obligation totaled
$25.5 million
and
$38.6 million
as of
December 31, 2013
and
June 30, 2013
, respectively.
Lines of Credit
Trading Credit Facility
A-Mark has a borrowing facility (“Trading Credit Facility”) with a group of financial institutions under an inter-creditor agreement, which provides for lines of credit including a sub-facility for letters of credit up to the maximum of the credit facility. As of
December 31, 2013
, the maximum of the Trading Credit Facility was
$170.0 million
. A-Mark routinely uses the Trading Credit Facility to purchase metals from its suppliers and for operating cash flow purposes. Amounts under the Trading Credit Facility bear interest based on London Interbank Offered Rate (“LIBOR”) plus a margin. The
one-month LIBOR
rate was approximately
0.17%
and
0.19%
as of
December 31, 2013
and
June 30, 2013
, respectively. Borrowings are due on demand and totaled
$106.0 million
and
$95.0 million
for lines of credit and
$0.0 million
and
$9.0 million
for letters of credit at
December 31, 2013
and at
June 30, 2013
, respectively. Amounts borrowed under the Trading Credit Facility are secured by A-Mark’s receivables and inventories. The amounts available under the Trading Credit Facility are formula based and totaled
$64.0 million
and
$66.0 million
at
December 31, 2013
and
June 30, 2013
, respectively. The Trading Credit Facility also limits A-Mark's ability to pay dividends to SGI. The Trading Credit Facility is cancelable by written notice from the financial institutions.
A-Mark’s Trading Credit Facility has certain restrictive financial covenants which require it and SGI to maintain a minimum tangible net worth, as defined, of
$25.0 million
and
$50.0 million
, respectively. A-Mark’s and SGI’s tangible net worth as of
December 31, 2013
was
$44.6 million
and
$61.3 million
, respectively. Accordingly, the Company is in compliance with all restrictive financial covenants. The Company's ability to pay dividends, if it were to elect to do so, could be limited as a result of these restrictions.
Interest expense related to A-Mark’s borrowing arrangements totaled
$0.9 million
and
$1.9 million
for the
three
and
six
months
ended
December 31, 2013
and
$0.9 million
and
$1.9 million
for the
three
and
six
months
ended December 31, 2012 respectively.
Collectibles Credit Facility
In May 2010, the Company and its wholly-owned numismatic subsidiaries, Spectrum Numismatics International, Inc. (“SNI”), B&M, and Teletrade, Inc. (“Teletrade”), entered into a borrowing facility with a lender, providing for a line of credit (the “Collectibles Credit Facility”) up to a maximum of
$5.0 million
. Amounts outstanding under the Collectibles Credit Facility are secured by the assets of SNI and B&M, and are further guaranteed by the Company. The Company's obligations under the guaranty are secured by the pledge of SNI shares owned by it. The Collectibles Credit Facility is due on demand, and interest on the outstanding amounts accrued at the lender's base rate of
4.75%
, which is subject to change. As of
December 31, 2013
and
June 30, 2013
borrowings are due on demand and totaled
$5.0 million
and
$5.0 million
, respectively.
Separately, A-Mark, the Company's precious metals trading subsidiary, has a line of credit with this lender totaling
$20.0 million
, which is a component of A-Mark's Trading Credit Facility. Total borrowing capacity between SNI and A-Mark cannot exceed
$23.0 million
with respect to this lender. As of
December 31, 2013
, the total amount borrowed with this lender was
$23.0 million
, which consisted of
$18.0 million
by A-Mark and
$5.0 million
by SNI. Amounts available for borrowing under this Collectible Credit Facility as of
December 31, 2013
and
June 30, 2013
were
$0.0 million
and
$0.0 million
, respectively.
Interest expense related to SNI's borrowing arrangements totaled
$56,000
and
$100,000
for the
three
and
six
months ended
December 31, 2013
and
$33,000
and
$68,000
for the
three
and
six
months ended December 31,
2012
, respectively.
SBN Credit Facility
SBN has a Revolving Credit Facility with its related party effective on January 1, 2011 and amended on April 28, 2011. This Revolving Credit Facility entitled SBN to draw upon it to cover certain costs, as defined. Under the terms of the agreement, this Revolving Credit Facility bears an interest rate of prime plus a stated rate and the agreement expires December 31, 2015. The maximum that can be drawn against the Revolving Credit Facility is
$2.0 million
. The proceeds can only be used to cover certain costs, as defined, and must be repaid within forty five days following the auction close. As of
December 31, 2013
and
June 30, 2013
, SBN had borrowed
$0.1 million
and
$0.9 million
, and incurred interest expense of
$2,000
and
$12,000
for the
three
and
six
months
ended
December 31, 2013
and
$8,000
and
$26,000
for the
three
and
six
months
ended December 31,
2012
, respectively.
Other Debt Obligations
Note Payable for Repurchase of Minority Interest
On April 30, 2013, the Company, through its subsidiaries B&M and SBN, purchased the remaining
49%
non-controlling interest in SBN/dba Stack's Bowers Galleries. As a result of this transaction, which was effective as of April 1, 2013, SBN/dba Stack's Bowers Galleries is now wholly owned by the Company. The purchase price consisted of
$2.3 million
in cash and
$2.7 million
evidenced by promissory note, bearing interest at
5.5%
per annum and maturing on April 1, 2015. The Company is a primary obligor on the note, which is interest-only until maturity. In addition, the Company agreed to pay the seller, Stack's, LLC, an earn-out based on the performance of Stack's Bowers Galleries for its fiscal years ending June 30, 2014, 2015 and 2016 (see Note 15). Per the earn-out agreement, the Company is to pay Stacks, LLC.
40%
of the pre-tax net profit of SBN in excess of
$2.2 million
for each of the fiscal years. As of
December 31, 2013
and
June 30, 2013
, the outstanding principal balance of the note was
$2.7 million
. For the
three
and
six
months
ended
December 31, 2013
interest expense was
$36,000
and
$73,000
, respectively. The Company also recorded a liability of
$1.1 million
as of
December 31, 2013
and June 30, 2013 in connection with the earn-out. The Company evaluated the earn-out as of
December 31, 2013
and no changes were necessary.
Note Payable for Building
On April 21, 2011, the Company, through its wholly-owned subsidiary, 1063 McGaw, LLC, purchased a
two
-story
54,239
square foot office building located in Irvine, California, to serve as its new corporate headquarters. The purchase price for the building was
$7.3 million
and was partly financed by the assumption of an existing loan with an outstanding principal balance of
$6.5 million
. The loan bears interest at the rate of
5.50%
per annum and is payable in equal monthly installments of principal and interest in the amount of
$40,540
. The loan matures on May 11, 2015, at which time the then outstanding principal balance of the loan is due and payable in full. As of
December 31, 2013
and
June 30, 2013
, the outstanding principal balance with accrued interest was
$6.2 million
and
$6.3 million
, respectfully, and interest expense was
$87,000
and
$174,000
for the
three
and
six
months
ended
December 31, 2013
and
$89,000
and
$178,000
for the
three
and
six
months
ended December 31,
2012
, respectfully.
The following table represents future obligations pertaining to the principal payments on the McGaw note:
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
Amount
|
|
|
|
|
|
in thousands
|
|
|
|
2014 (remaining six months)
|
|
$
|
72
|
|
|
2015
|
|
6,102
|
|
|
Total
|
|
$
|
6,174
|
|
|
|
|
|
11
.
|
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
|
The Company manages the value of certain specific assets and liabilities of its trading business, including trading inventories (see Note
6
), by employing a variety of 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 products such as metals forwards and futures.
The Company's trading inventories and purchase and sale transactions consist primarily of precious metal bearing products. The value of these assets and liabilities are linked to the prevailing 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 markets. 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.
Open purchase and sale 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 purchase and sales commitments that is subject to price risk. The Company regularly enters into metals commodity forward and futures contracts with major 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. However, the Company also maintains relationships with major market makers in every major precious metals dealing center.
Due to the nature of the Company's global hedging strategy, the Company is not using hedge accounting as defined under ASC 815,
Derivatives and Hedging.
Gains or losses resulting from the Company's futures and forward contracts are reported as unrealized gains or losses on commodity contracts with the related unrealized amounts due from or to counterparties reflected as a derivative asset or liability (see Notes
5
and
8
). Gains or losses resulting from the termination of hedge contracts are reported as realized gains or losses on commodity contracts. Realized and unrealized net gains/(losses) on derivative instruments in the condensed consolidated statements of operations for the
six
months
ended
December 31, 2013
and
2012
were $
(9.9) million
and
$(8.2) million
, respectively, and recorded to cost of goods sold.
The Company’s management sets credit and position risk limits. These limits include gross position limits for counterparties engaged in purchase and sales transactions with the Company. They also include collateral limits for different types of purchase and sale transactions that counterparties may engage in from time to time.
A summary of the market values of the Company’s physical inventory positions, purchase and sale commitments, and its outstanding forward and futures contracts is as follows at
December 31, 2013
and at
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
Trading Inventory, net
|
$
|
160,029
|
|
|
$
|
162,378
|
|
|
Less unhedgable inventory:
|
|
|
|
|
Premium on metals position
|
(3,336
|
)
|
|
(1,787
|
)
|
|
Subtotal
|
156,693
|
|
|
160,591
|
|
|
Commitments at market:
|
|
|
|
|
|
|
Open inventory purchase commitments
|
391,320
|
|
|
461,883
|
|
|
Open inventory sale commitments
|
(138,805
|
)
|
|
(272,044
|
)
|
|
Margin sale commitments
|
(15,765
|
)
|
|
(13,651
|
)
|
|
In-transit inventory no longer subject to market risk
|
(15,522
|
)
|
|
(24,221
|
)
|
|
Unhedgable premiums on open commitment positions
|
1,601
|
|
|
2,107
|
|
|
Inventory borrowed from suppliers
|
(11,226
|
)
|
|
(20,117
|
)
|
|
Product financing obligation
|
(25,506
|
)
|
|
(38,554
|
)
|
|
Advances on industrial metals
|
(3,254
|
)
|
|
33
|
|
|
Inventory subject to price risk
|
339,536
|
|
|
256,027
|
|
|
Inventory subject to derivative financial instruments:
|
|
|
|
|
Precious metals forward contracts at market values
|
167,928
|
|
|
84,999
|
|
|
Precious metals futures contracts at market values
|
171,728
|
|
|
171,272
|
|
|
Total market value of derivative financial instruments
|
339,656
|
|
|
256,271
|
|
|
Net inventory subject to price risk
|
$
|
(120
|
)
|
|
$
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
Effects of open related party transactions between A-Mark and affiliates:
|
|
|
|
|
Net inventory subject to price risk, Company consolidated basis
|
$
|
(120
|
)
|
|
$
|
(244
|
)
|
|
Open inventory sale commitments with affiliates
|
(256
|
)
|
|
(1,402
|
)
|
|
Open inventory purchase commitments with affiliates
|
287
|
|
|
1,282
|
|
|
Net inventory subject to price risk, A-Mark stand-alone basis
|
$
|
(89
|
)
|
|
$
|
(364
|
)
|
The unhedgable premium on open commitment positions is equal to total premium less hedgable premium, where the premium value is based upon a percentage of the underlying bullion value. At
December 31, 2013
, total premium on open commitment positions was
$1.6 million
, of which
zero
was deemed hedgable. At
June 30, 2013
, total premium on open commitment positions was
$2.1 million
, of which
zero
was deemed hedgable.
At
December 31, 2013
and
June 30, 2013
, the Company had the following outstanding commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
Purchase commitments
|
|
$
|
391,320
|
|
|
$
|
461,883
|
|
|
Sale commitments
|
|
(138,805
|
)
|
|
(272,044
|
)
|
|
Open forward contracts
|
|
167,928
|
|
|
84,999
|
|
|
Open futures contracts
|
|
171,728
|
|
|
171,272
|
|
The Company uses forward contracts and futures contracts to protect its inventories from market exposure.
At
December 31, 2013
and
June 30, 2013
, the Company had outstanding purchase commitments of
$391.3 million
and
$461.9 million
, respectively, and outstanding sale commitments of
$(138.8) million
and
$(272.0) million
, respectively, arising in the normal course of business; purchase commitments related to open forward contracts totaling
$167.9 million
and
$85.0 million
, respectively; and purchase and sale commitments related to open futures contracts totaling
$171.7 million
and
$171.3 million
, respectively. The Company uses forward contracts and futures contracts to protect its inventories from market exposure.
At
December 31, 2013
and
June 30, 2013
the net inventory subject to price risk of A-Mark on a stand-alone basis totaled
$(0.1) million
and
$(0.4) million
, respectively.
The difference between the market price of the underlying metal or contract and the trade amount is recorded at fair value. The Company’s open purchase and sales 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
December 31, 2013
are scheduled to settle within
30
days.
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
December 31, 2013
, the Company believes its risk of counterparty default is mitigated as a result of such evaluation and the short-term duration of these arrangements.
12
. RELATED PARTY TRANSACTIONS
Royalties to Former Owner
As part of the A-Mark sale agreement dated July 15, 2005, the former owner is paid royalties for his portion of income earned on a specific type of transaction. The Trading segment accrual for royalties was
$106,000
and
$312,000
as of
December 31, 2013
and
June 30, 2013
, respectively.
Transactions with Directors and Officers
From time to time certain of the Company's officers and directors may purchase from or consign collectibles to the Company. Each purchase and consignment is made under substantially the same conditions that are applicable to third parties. The Company's officers and directors purchased from the Company bullion and numismatic products totaling
$9,000
and
$176,000
during the
three
and
six
months ended
December 31, 2013
, respectively, and
$55,000
and
$84,000
during the
three
and
six
months ended December 31, 2012, respectively. The Company's officers and directors sold to or consigned for sale to the Company bullion and numismatic products totaling
$350,000
and
$364,000
during the
three
and
six
months ended December 31, 2013, respectively. There were
no
sales or consigned sales by the Company's officers and directors to the Company during the
three
and
six
months ended December 31, 2012.
Transactions with Other Related Parties
During the
three
and
six
months ended
December 31, 2013
, the Company purchased
$323,000
and
$1.5 million
in collectibles from other related parties of the Company, respectively. During the
three
and
six
months ended December 31, 2012, the Company purchased
$0
and
$2.5 million
in collectibles from other related parties of the Company, respectively. During the three and six months ended December 31, 2013, the Company sold
$436,000
and
$1.6 million
in collectibles to other related parties of the Company, respectively. During the
three
and
six
months ended December 31, 2012, the Company sold
$68,000
in collectibles to other related parties of the Company.
Securities Purchase Agreement
On September 25, 2012, the Company purchased from Afinsa and Auctentia a total of
15,609,796
shares of common stock, as a result of which the combined holdings of Afinsa and Auctentia was reduced from
57%
to
9.9%
of the Company's common stock outstanding. In addition, the Company purchased from Auctentia
20%
of the shares of the Company's subsidiary Spectrum PMI, Inc., which is the holding company for the Company's A-Mark Precious Metals, Inc. trading subsidiary. As a result, Spectrum PMI is now wholly owned by the Company. The purchase of the securities was pursuant to a Securities Purchase Agreement, dated March 5, 2012, as amended, among the Company, Afinsa and Auctentia, and the aggregate purchase price, including interest and other charges, was
$51.18 million
. The purchase price was funded through the proceeds of a rights offering and private placement of shares of common stock, which also closed on September 25, 2012, as well as the Company's cash on hand, resulting in a net impact to working capital of
$25.6 million
in cash and cash equivalents. The Company sold
12,004,387
shares in the
rights offering at a price of
$1.90
per share, for aggregate proceeds of
$22.31 million
, and
1,426,315
shares in the private placement at a price of
$1.90
per share, for aggregate proceeds of
$2.70 million
. In connection with the purchase of the securities from Afinsa and Auctentia, and in accordance with the terms of the Securities Purchase Agreement, George Lumby, a representative of Afinsa, resigned from the Company's board of directors. Antonio Arenas, Afinsa's other representative on the board, resigned his position as executive chairman, but remains a director of the Company. As provided in the Securities Purchase Agreement, Mr. Arenas will resign from the board when Afinsa and Auctentia collectively cease to hold at least
5%
of the Company's common stock. The Company agreed in the Securities Purchase Agreement to use its reasonable commercial efforts to assist Afinsa and Auctentia to sell their remaining shares of common stock in an orderly manner that will be non-disruptive to the public market for the common stock and that is intended to facilitate a sale at prices acceptable to Afinsa and Auctentia.
As of
December 31, 2013
, there are outstanding
30.8 million
shares of common stock, of which
3.0 million
shares are owned by Afinsa and Auctentia. Accordingly, Afinsa and Auctentia may be deemed to no longer control the Company.
Other Transactions with Afinsa
On June 27, 2011, the Company and Afinsa entered into a consignment agreement to auction philatelic materials owned by Afinsa. Under the terms of the consignment agreement, Heinrich Köhler Auktionshaus GmbH and Heinrick Köhler Briefmarkenhandel acted as the auctioneer for the sale of the philatelic materials owned by Afinsa. During the
six
months
ended
December 31, 2013
and 2012 respectively, Heinrich Köhler Auktionshaus GmbH and Heinrich Köhler Briefmarkenhandel earned
zero
and
$57,000
in related auction commissions.
|
|
|
|
13
.
|
NON-CONTROLLING INTERESTS
|
SWA
Effective December 1, 2013, the Company executed a binding purchase agreement whereby, for consideration received, the Company sold
60%
of its member interests in SWA, a California limited liability company. Although
60%
of the SWA's interest was sold through contractual arrangements, the Company maintained the power to direct activities of SWA that most significantly impact their economic performance. Additionally, the Company absorbs losses or the right to receive benefits significant to SWA. As such, SWA was deemed a VIE and the Company, as the primary beneficiary, consolidates SWA's results of operations in its condensed consolidated financial statements.
Calzona
On January 12, 2012, SNI formed Calzona with an outside partner for the purpose of selling precious metals and coins via the internet. SNI and the outside partner each contributed
$150,000
to Calzona in exchange for a
35%
and
65%
interest, respectively. The outside partner's interest is redeemable after five years at fair value and accordingly is classified as temporary equity in the condensed consolidated balance sheets. The Company has included in the condensed consolidated financial statements the financial position and results of operations of Calzona, a VIE, since SNI is the primary beneficiary. The Company recognizes the changes in the redemption value immediately as they occur and adjusts the carrying amount of the instrument to equal the redemption value at the end of each reporting period. Under this method, this is viewed at the end of the reporting period as if it were also the redemption date for the security.
As of
December 31, 2013
and
June 30, 2013
, the Company's condensed consolidated balances sheets include Calzona's redeemable
65%
interest presented as temporary equity of
$92,000
and
$160,000
respectively. Additionally, the Company's condensed consolidated balances sheet includes SWA's
60%
member interests as non-controlling interest as of
December 31, 2013
.
Redeemable non-controlling interest, VIE, represented by Calzona's redeemable 65% interest is determined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
160
|
|
|
$
|
124
|
|
|
Non-controlling interest in net income (loss) of Calzona
|
|
(68
|
)
|
|
36
|
|
|
Ending balance
|
|
$
|
92
|
|
|
$
|
160
|
|
Non-controlling interests, represented by SWA's
60%
member interest is determined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Contribution by non-controlling interest in SWA
|
|
240
|
|
|
—
|
|
|
Non-controlling interest in net income of SWA
|
|
89
|
|
|
—
|
|
|
Ending balance
|
|
$
|
329
|
|
|
$
|
—
|
|
The Company's condensed consolidated statements of operations for the three and
six
months
ended
December 31, 2013
and
2012
includes the following non-controlling interests in net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in thousands
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Auctentia 20% interest in Spectrum PMI through September 25, 2012 - (Spectrum PMI owned 100% of A-Mark Precious Metals)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
337
|
|
|
SBN 49% interest (up until March 31, 2013)
|
|
—
|
|
|
(702
|
)
|
|
—
|
|
|
(886
|
)
|
|
Calzona redeemable 65% interest
|
|
(27
|
)
|
|
3
|
|
|
(68
|
)
|
|
(66
|
)
|
|
SWA
|
|
89
|
|
|
—
|
|
|
89
|
|
|
—
|
|
|
|
|
$
|
62
|
|
|
$
|
(699
|
)
|
|
$
|
21
|
|
|
$
|
(615
|
)
|
14
. COMMITMENTS AND CONTINGENCIES
Refer to Note 15 of the Notes to Consolidated Financial Statements in the
2013
Annual Report for information relating to minimum rental payments under operating and capital leases, consulting and employment contracts, and other commitments.
Certain legal proceedings in which the Company is involved are discussed in Note 15 of the notes to the Consolidated Financial Statements in its
2013
Annual Report. There have been no material changes in those legal matters and the Company does not have any related legal reserves.
|
|
|
|
15
.
|
STOCKHOLDERS’ EQUITY
|
Repurchase of Common Shares
On February 8, 2013, the Company's board of directors approved a stock repurchase plan which authorizes the repurchase of up to
$5 million
of the Company's common stock. The authorization remains open through August 8, 2014. Purchases may be made from time to time by the
Company in the open market at prevailing market prices or in privately negotiated transactions. As of
December 31, 2013
,
203,423
shares of common stock at a weighted average price per share of
$2.00
had been repurchased by the Company under the plan.
Stock Option Plans
1997 Stock Incentive Plan
In 1997, the Company’s board of directors adopted and the Company's shareholders' approved the 1997 Stock Incentive Plan, as amended (the “1997 Plan”). Under the 1997 Plan, SGI has granted 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 SGI's stock. Awards under the 1997 Plan may be granted in the form of 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 1997 Plan currently is administered by the Board of Directors, which may in its discretion select officers and other employees, directors (including non-employee directors) and consultants to SGI and its subsidiaries to receive grants of awards.
Under the 1997 Plan, the exercise price of options and base price of SARs may be set at the discretion of the Board, and stock options and SARs may have any term. The majority of the stock options granted through June 30, 2008 under the 1997 Plan have been granted with an exercise price equal to market value on the date of grant. The 1997 Plan limits the number of stock options and SARs that may be granted to any one employee to
550,000
in any year. The 1997 Plan will terminate when no shares remain available for issuance and no awards remain outstanding. At
December 31, 2013
, there were no shares remaining available for future awards under the 1997 Plan, and on December 13, 2012, the 2012 Stock Award and Incentive Plan (the “2012 Plan”), which was previously approved by the Board of Directors, was approved by the Company's shareholders. The 2012 Plan replaces the 1997 Plan for new grants, but any outstanding awards under the 1997 Plan continue in accordance with the 1997 Plan terms.
2012 Stock Award and Incentive Plan
In 2012, the Company’s Board of Directors adopted and the Company's shareholders approved the 2012 Plan. Under the 2012 Plan, SGI 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 SGI's stock. Awards under the 2012 Plan may be granted in the form of incentive or non-qualified stock options, SARs, restricted
stock, restricted stock units, dividend equivalent rights and other stock-based awards (which may include outright grants of shares). The 2012 Plan currently is administered by the Compensation Committee of the Board of Directors, which may in its discretion select officers and other employees, directors (including non-employee directors) and consultants to SGI and its subsidiaries to receive grants of awards.
Under the 2012 Plan, the exercise price of options and base price of SARs may be set at the discretion of the Board, but 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
ten
years. The 2012 Plan limits the number of share-denominated awards that may be granted to any one employee to
750,000
in any year. The 2012 Plan will terminate when no shares remain available for issuance and no awards remain outstanding. At
December 31, 2013
, there were
1,192,500
shares remaining available for future awards under the 2012 Plan.
Employee Stock Options.
The Company recorded expense of
$52,000
and
$103,000
in the condensed consolidated statements of operations related to the vesting of issued employee stock options during the
three
and
six
months ended
December 31, 2013
, and expense of
$29,000
during the
three
and
six
months ended
December 31, 2012
. The Company estimates the fair value of its options on the date of grant using the Black-Scholes option-pricing model, which takes into account assumptions such as dividend yield, the risk-free interest rate, the expected stock price volatility and the expected life of the options.
No stock options were granted during the six months ended December 31, 2013.
The following table summarizes the stock option activity for the six months ended
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Intrinsic Value (in thousands)
|
|
Weighted Average per share Grant Date Fair Value
|
|
Outstanding at June 30, 2013
|
1,278,750
|
|
|
$
|
3.95
|
|
|
$
|
—
|
|
|
$
|
1.75
|
|
|
Exercised
|
(12,000
|
)
|
|
2.80
|
|
|
—
|
|
|
0.44
|
|
|
Cancellations, expirations and forfeitures
|
(141,750
|
)
|
|
3.15
|
|
|
—
|
|
|
0.84
|
|
|
Outstanding at December 31, 2013
|
1,125,000
|
|
|
4.06
|
|
|
$
|
—
|
|
|
1.88
|
|
|
Shares exercisable at December 31, 2013
|
695,000
|
|
|
5.33
|
|
|
$
|
—
|
|
|
1.99
|
|
Following is a summary of the status of stock options outstanding at
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Exercise Price
|
|
From
|
|
To
|
|
|
|
|
|
|
$
|
0.01
|
|
|
$
|
4.99
|
|
|
960,000
|
|
|
8.79
|
|
$
|
2.37
|
|
|
530,000
|
|
|
$
|
2.67
|
|
|
5.00
|
|
|
9.99
|
|
|
—
|
|
|
0.00
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.00
|
|
|
14.99
|
|
|
165,000
|
|
|
0.25
|
|
13.90
|
|
|
165,000
|
|
|
13.90
|
|
|
|
|
|
|
1,125,000
|
|
|
7.54
|
|
4.06
|
|
|
695,000
|
|
|
5.33
|
|
Restricted Stock Units.
The Company has issued restricted stock to certain members of management, key employees, and directors. During the six months ended
December 31, 2013
and
2012
, the Company granted
200,000
and
123,001
restricted shares at a weighted average issuance price of
$2.25
and
$1.59
, respectively. Such shares generally vest after
2
years from the date of grant. Total compensation expense recorded for restricted shares for the
three
and
six
months ended
December 31, 2013
was
$92,000
and
$184,000
, and for the
three
and
six
months ended
December 31, 2012
was
$90,000
and
$162,000
, respectively. The remaining compensation expense that will be recorded under restricted stock grants totals
$747,000
, which will be recorded over a weighted average period of approximately
1.97
years.
The following table summarizes the restricted stock activity for the
six
months
ended
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Share Price at Grant Date
|
|
Outstanding at June 30, 2013
|
362,500
|
|
|
$
|
2.36
|
|
|
Shares granted
|
200,000
|
|
|
2.25
|
|
|
Outstanding at December 31, 2013
|
562,500
|
|
|
2.32
|
|
|
Vested but unissued at December 31, 2013
|
2,500
|
|
|
1.68
|
|
No tax benefit was recognized in the condensed consolidated statements of operations related to share-based compensation for the
six
months
ended
December 31, 2013
and
2012
. No share-based compensation was capitalized for the
six
months
ended
December 31, 2013
and
2012
.
Stock Appreciation Rights
The Company, from time to time, enters into separate share-based payment arrangements with certain key employees and executive officers. The number of shares to be received under these awards ultimately depends on the appreciation in the Company’s common stock over a specified period of time, generally three years. At the end of the stated appreciation period, the number of shares of common stock issued will be equal in value to the appreciation in the shares of the Company’s common stock, as measured from the stocks closing price on the date of grant to the average price in the last month of the third year of vesting. As of
December 31, 2013
and
June 30, 2013
, there were
37,500
stock appreciation rights outstanding with an exercise price of
$12.06
. At
December 31, 2013
and
June 30, 2013
, there was no intrinsic value associated with these arrangements. The Company recorded the awards as a component of equity using the Black-Scholes valuation model. These awards are amortized on a straight-line basis over the vesting period. For the
six
months
ended
December 31, 2013
and
2012
, the Company recognized no pre-tax compensation expense related to these grants. There is no remaining compensation expense that will be recorded for these awards.
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 of Directors. 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 of Directors 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.
|
|
|
|
16
.
|
SEGMENT AND GEOGRAPHIC INFORMATION
|
The Company's operations are organized under
two
business segments - Trading and Collectibles (Note 1).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in thousands
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Trading
|
|
$
|
1,484,083
|
|
|
$
|
1,688,625
|
|
|
2,976,196
|
|
|
3,302,240
|
|
|
Collectibles:
|
|
|
|
|
|
|
|
|
|
Numismatics
|
|
24,738
|
|
|
47,006
|
|
|
67,027
|
|
|
97,592
|
|
|
Wine
|
|
695
|
|
|
658
|
|
|
1,093
|
|
|
1,324
|
|
|
Total Collectibles
|
|
25,433
|
|
|
47,664
|
|
|
68,120
|
|
|
98,916
|
|
|
Total revenue
|
|
$
|
1,509,516
|
|
|
$
|
1,736,289
|
|
|
$
|
3,044,316
|
|
|
$
|
3,401,156
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Revenue by geographic region (as determined by location of subsidiaries):
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,411,747
|
|
|
$
|
1,663,034
|
|
|
$
|
2,869,055
|
|
|
$
|
3,216,702
|
|
|
Europe
|
|
97,769
|
|
|
73,255
|
|
|
175,261
|
|
|
184,454
|
|
|
Total revenue
|
|
$
|
1,509,516
|
|
|
$
|
1,736,289
|
|
|
$
|
3,044,316
|
|
|
$
|
3,401,156
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Revenue by geographic region - Trading:
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,251,736
|
|
|
$
|
1,366,401
|
|
|
$
|
2,548,270
|
|
|
$
|
2,804,778
|
|
|
Europe
|
|
121,760
|
|
|
72,002
|
|
|
192,064
|
|
|
125,030
|
|
|
North America, excluding United States
|
|
100,502
|
|
|
166,377
|
|
|
177,268
|
|
|
265,860
|
|
|
Asia Pacific
|
|
9,206
|
|
|
82,744
|
|
|
56,533
|
|
|
105,224
|
|
|
Africa
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Australia
|
|
879
|
|
|
1,044
|
|
|
2,029
|
|
|
1,288
|
|
|
South America
|
|
—
|
|
|
57
|
|
|
32
|
|
|
57
|
|
|
Total revenue - Trading
|
|
$
|
1,484,083
|
|
|
$
|
1,688,625
|
|
|
$
|
2,976,196
|
|
|
$
|
3,302,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Consolidated income(loss) from continuing operations before taxes:
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
$
|
3,319
|
|
|
$
|
4,821
|
|
|
$
|
7,186
|
|
|
$
|
8,086
|
|
|
Collectibles
|
|
(1,315
|
)
|
|
(2,372
|
)
|
|
(914
|
)
|
|
(3,096
|
)
|
|
Corporate expenses
|
|
(4,829
|
)
|
|
(1,926
|
)
|
|
(7,482
|
)
|
|
(5,134
|
)
|
|
Total consolidated income (loss) from continuing operations before taxes
|
|
$
|
(2,825
|
)
|
|
$
|
523
|
|
|
$
|
(1,210
|
)
|
|
$
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Depreciation and amortization:
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
$
|
223
|
|
|
$
|
200
|
|
|
$
|
443
|
|
|
$
|
397
|
|
|
Collectibles
|
|
234
|
|
|
271
|
|
|
468
|
|
|
497
|
|
|
Corporate
|
|
122
|
|
|
97
|
|
|
225
|
|
|
179
|
|
|
Total depreciation and amortization
|
|
$
|
579
|
|
|
$
|
568
|
|
|
$
|
1,136
|
|
|
$
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
Inventories by segment/geographic region:
|
|
|
|
|
Trading:
|
|
|
|
|
United States
|
$
|
147,192
|
|
|
$
|
148,336
|
|
|
Europe
|
9,774
|
|
|
9,504
|
|
|
North America, excluding United States
|
2,471
|
|
|
4,423
|
|
|
Asia
|
592
|
|
|
115
|
|
|
Total Trading
|
160,029
|
|
|
162,378
|
|
|
Collectibles:
|
|
|
|
|
United States
|
22,601
|
|
|
25,875
|
|
|
Total Collectibles
|
22,601
|
|
|
25,875
|
|
|
Total inventories
|
$
|
182,630
|
|
|
$
|
188,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
Total assets by segment/geographic region:
|
|
|
|
|
Trading:
|
|
|
|
|
United States
|
$
|
251,436
|
|
|
$
|
264,043
|
|
|
Europe
|
3,208
|
|
|
2,473
|
|
|
Total Trading
|
254,644
|
|
|
266,516
|
|
|
Collectibles:
|
|
|
|
|
United States
|
64,464
|
|
|
86,460
|
|
|
Europe
|
182
|
|
|
275
|
|
|
Total Collectibles
|
64,646
|
|
|
86,735
|
|
|
Corporate and other
|
29,351
|
|
|
18,124
|
|
|
Total assets
|
$
|
348,641
|
|
|
$
|
371,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
Total long term assets by segment/geographic region:
|
|
|
|
|
Trading:
|
|
|
|
|
United States
|
$
|
9,014
|
|
|
$
|
9,201
|
|
|
Europe
|
98
|
|
|
90
|
|
|
Total Trading
|
9,112
|
|
|
9,291
|
|
|
Collectibles:
|
|
|
|
|
United States
|
4,559
|
|
|
4,983
|
|
|
Europe
|
12
|
|
|
22
|
|
|
Total Collectibles
|
4,571
|
|
|
5,005
|
|
|
Corporate and other
|
16,795
|
|
|
17,194
|
|
|
Total long term assets
|
$
|
30,478
|
|
|
$
|
31,490
|
|
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated comprehensive income consist primarily of foreign currency translation gain (loss), net of tax. During 2013, the component of accumulated comprehensive income associated with the sale of the Company's European Stamps division of
$1.02 million
was removed from its consolidated equity. The foreign currency translation gain relates to the Company's investment in its European and Asian subsidiaries and fluctuations in exchange rates between their local currencies and the U.S. dollar (Note 2).
As of
December 31, 2013
and
June 30, 2013
, the components of accumulated other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
Foreign currency translation gain, net of tax
|
$
|
6,605
|
|
|
$
|
7,628
|
|
|
Sale of stamps division - European operations
|
—
|
|
|
(1,023
|
)
|
|
Accumulated other comprehensive income
|
$
|
6,605
|
|
|
$
|
6,605
|
|
|
|
|
|
18.
|
FAIR VALUE MEASUREMENTS
|
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the principal or most advantageous market on the measurement date. The Company carries a portion of its assets and liabilities at fair value in accordance with the
Fair Value Measurements and Disclosures
Topic 820 of the ASC. The majority of such assets and liabilities are carried at fair value on a recurring basis. In addition, certain assets are carried at fair value on a nonrecurring basis, including goodwill and purchased intangible assets accounted for at fair value that are only subject to fair value adjustments under certain circumstances.
Fair value measurements are classified within one of three levels in a valuation hierarchy based upon the observability of significant inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets at the measurement date.
• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; 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 are unobservable inputs for the asset or liability for which there is limited or no market activity at the measurement date. For instruments classified within level 3 of the hierarchy, judgments are more significant. Such judgments include determining the appropriate model to use and an assessment of all relevant empirical data in deriving valuation inputs including but not limited to projected future cash flows, discount rates, royalty rates, interest rates, customer attrition rates and foreign exchange rates.
The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of
December 31, 2013
and
June 30, 2013
, aggregated by the level in the fair value hierarchy within which the measurements fall:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Quoted Price in
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
for Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
|
|
in thousands
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total Balance
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Commodities
|
|
$
|
160,029
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
160,029
|
|
|
Derivative assets — futures contracts
|
|
10,921
|
|
|
—
|
|
|
—
|
|
|
10,921
|
|
|
Derivative assets — forward contracts
|
|
4,933
|
|
|
—
|
|
|
—
|
|
|
4,933
|
|
|
Total assets valued at fair value:
|
|
$
|
175,883
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175,883
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Liability on borrowed metals
|
|
$
|
(11,226
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,226
|
)
|
|
Obligation under product financing arrangement
|
|
(25,506
|
)
|
|
—
|
|
|
—
|
|
|
(25,506
|
)
|
|
Liability on margin accounts
|
|
(6,469
|
)
|
|
—
|
|
|
—
|
|
|
(6,469
|
)
|
|
Derivative liabilities — open sales and purchase commitments
|
|
(32,027
|
)
|
|
—
|
|
|
—
|
|
|
(32,027
|
)
|
|
Total liabilities valued at fair value
|
|
$
|
(75,228
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(75,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
|
Quoted Price in
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
for Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Instruments
|
|
Inputs
|
|
Inputs
|
|
|
|
in thousands
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total Balance
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Commodities
|
|
$
|
162,378
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
162,378
|
|
|
Derivative assets — futures contracts
|
|
15,536
|
|
|
—
|
|
|
—
|
|
|
15,536
|
|
|
Derivative assets — forward contracts
|
|
471
|
|
|
—
|
|
|
—
|
|
|
471
|
|
|
Total assets valued at fair value:
|
|
$
|
178,385
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
178,385
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Liability on borrowed metals
|
|
$
|
(20,117
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(20,117
|
)
|
|
Obligation under product financing arrangement
|
|
(38,554
|
)
|
|
—
|
|
|
—
|
|
|
(38,554
|
)
|
|
Liability on margin accounts
|
|
(6,636
|
)
|
|
—
|
|
|
—
|
|
|
(6,636
|
)
|
|
Derivative liabilities — open sales and purchase commitments
|
|
(30,113
|
)
|
|
—
|
|
|
—
|
|
|
(30,113
|
)
|
|
Total liabilities valued at fair value
|
|
$
|
(95,420
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(95,420
|
)
|
There were no transfers in or out of Level 3 during the three months ended
December 31, 2013
and
2012
. The following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy:
Commodities
Commodities consisting of the precious metals component of the Company's inventories are carried at fair value. The fair value for commodities inventory is determined primarily using quoted market pricing and data derived from the markets on which the underlying commodities are traded. Precious metals commodities are classified in Level 1 of the valuation hierarchy.
Derivatives
Futures contracts, forward contracts and open purchase and sales commitments are valued at their intrinsic values, based on the difference between the quoted market price and the contractual price, 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 primarily 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.
Obligation Under Product Financing
Obligation under product financing is represented by the amount required to repurchase outstanding inventory under an agreement with a third party for the sale of gold and silver (Note
10
). This obligation is carried at fair value, which is determined primarily using quoted market pricing and data derived from the markets on which the underlying gold and silver are traded. The obligation is classified in Level 1 of the valuation hierarchy.
Assets Measured at Fair Value on a Non-Recurring Basis
The Company's goodwill and other purchased intangible assets are measured at fair value on a non-recurring basis. These assets are measured at cost but are written down to fair value if they are impaired. As of
December 31, 2013
, there were no indications present that the Company's goodwill or other purchased intangibles were impaired, and therefore were not measured at fair value. There were no gains or losses recognized in earnings associated with the above purchased intangibles during the three months ended
December 31, 2013
and
2012
.
Fair Value of Financial Instruments
The Company estimates the fair value of financial instruments that are not required to be carried in the condensed consolidated balance sheets at fair value on either a recurring or non-recurring basis as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
June 30, 2013
|
|
|
|
(in thousands)
|
|
Carrying amount
|
|
Fair value
|
|
Carrying amount
|
|
Fair value
|
|
Level in fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,918
|
|
|
$
|
16,918
|
|
|
$
|
23,643
|
|
|
$
|
23,643
|
|
|
1
|
|
Restricted cash
|
|
577
|
|
|
577
|
|
|
602
|
|
|
602
|
|
|
1
|
|
Receivables and secured loans
|
|
101,538
|
|
|
101,538
|
|
|
109,696
|
|
|
109,696
|
|
|
2
|
|
Accounts receivable and consignor advances
|
|
7,083
|
|
|
7,083
|
|
|
12,347
|
|
|
12,347
|
|
|
2
|
|
Accounts payable and consignor payables
|
|
88,438
|
|
|
88,438
|
|
|
95,839
|
|
|
95,839
|
|
|
2
|
|
Lines of credit
|
|
111,135
|
|
|
111,135
|
|
|
100,857
|
|
|
100,857
|
|
|
2
|
|
Notes payable
|
|
10,684
|
|
|
10,684
|
|
|
10,837
|
|
|
10,837
|
|
|
2
|
The carrying amounts of cash and cash equivalents, restricted cash, receivables and secured loans, accounts receivable and consignor advances, and accounts payable and consignor payables approximated fair value due to their short-term nature. The carrying amounts of lines of credit and notes payable approximate fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities.
19. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share utilizing the treasury stock method, adjusts the weighted average number of common shares for common stock issuable upon exercise of stock options and other commitments to issue common stock in periods in which they have a dilutive effect, and when the stock award's exercise price is lower than the Company's average share price for the period. Since the Company incurred a net loss for the
three
and
six
months
ended
December 31, 2013
, basic and diluted earnings per share were the same. For the
three
and
six
months
ended
December 31, 2013
, diluted earnings per share were the same because the inclusion of
1,725,000
potential common shares, related to
1,125,000
outstanding stock options,
562,500
restricted stock units and
37,500
stock appreciation rights ("SARS"), in the computation of net loss per share would have been anti-dilutive. For the
three
months
ended
December 31, 2012
, diluted earnings per share include the impact of
206,416
dilutive shares of unvested restricted stock units. For the
three
months
ended
December 31, 2012
, the Company excluded options to purchase
1,139,500
shares of common stock,
296,585
shares of unvested restricted stock and
37,500
SARS because inclusion would be anti-dilutive. For the
six
months
ended
December 31, 2012
, basic and diluted loss per share were the same because the inclusion of
1,682,501
potential common shares, related to
1,139,500
outstanding stock options,
505,501
restricted stock units, and
37,500
stock appreciation rights in the computation of net loss per share would have been anti-dilutive.
A reconciliation of shares used in calculating basic and diluted earnings per common shares follows. There is no dilutive effect of SAR's as such obligations are not settled and were out of the money for the
three
and
six
months
ended
December 31, 2013
and
2012
.
A reconciliation of basic and diluted shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in thousands
|
|
December 31, 2013
|
|
December 31, 2012
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding (1)
|
|
30,917
|
|
|
30,628
|
|
|
30,918
|
|
|
31,706
|
|
|
Effect of common stock equivalents — stock options and stock issuable under employee compensation plans
|
|
—
|
|
|
207
|
|
|
—
|
|
|
—
|
|
|
Diluted weighted average shares outstanding
|
|
30,917
|
|
|
30,835
|
|
|
30,918
|
|
|
31,706
|
|
|
|
|
|
(1)
|
Basic weighted average shares outstanding include the effect of vested but unissued restricted stock grants (see note
15
).
|
20. SUBSEQUENT EVENTS
On February 12, 2014, the Board of Directors of the Company formally declared the distribution of shares of common stock of A-Mark, its wholly owned subsidiary. The distribution will complete the spinoff of A-Mark from the Company. Following the distribution, A-Mark will be a publicly traded company independent from SGI. The distribution will be made on or about February 28, 2014 (the "Distribution Date") to SGI stockholders of record as of 5:00 p.m., Eastern Time, on February 12, 2014 (the "Record Date").
On the Distribution Date, SGI will distribute all of the shares of A-Mark common stock to SGI stockholders. Each SGI stockholder will receive one share of A-Mark common stock for each
four
shares of SGI common stock held on the Record Date. It is expected that on the first trading day after the Distribution Date, March 3, 2014, A-Mark’s shares of common stock will commence trading on the NASDAQ Global Select Market under the symbol "AMRK." Up to and including the distribution date, the SGI common stock will trade on the “regular-way” market; that is, with an entitlement to shares of A-Mark common stock distributed pursuant to the distribution. SGI common stock will not trade on an ex-distribution market; that is, without an entitlement to shares of A-Mark common stock distributed pursuant to the distribution.
Fractional shares of A-Mark common stock will not be distributed. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing rates and distribute the net cash from proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share. SGI has received an opinion of counsel to the effect that the spinoff will be tax-free to SGI shareholders for U.S. federal income tax purposes, except for any cash received in lieu of fractional shares.
Based on the
31,126,789
shares of SGI common stock outstanding on Record Date, approximately
7,781,697
of shares of A-Mark common stock will be distributed, subject to the treatment of fractional shares.
SGI stockholders are not required to take any action to receive A-Mark common stock in the distribution, and they will not be required to surrender or exchange their SGI shares. The distribution will be made in book-entry form.
A-Mark has filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 relating to the distribution, which was declared effective by the SEC on February 11, 2014.
Following the Distribution Date, SGI intends to reduce the number of record holders of its common stock to fewer than
300
through a 1-for-
1,000
reverse stock split and to terminate the registration of its common stock under the Securities Exchange Act, with the result that SGI will no longer be required to file periodic and other reports with the SEC. If the reverse stock split is consummated, stockholders of record who hold fewer than
1,000
shares of common stock before the reverse stock split will receive a cash payment of
$0.65
per pre-reverse stock split share in lieu of receiving a fractional post-reverse stock split share. It is expected that SGI common stock will be quoted on the OTC Pink market under the symbol “SPGZ” following the deregistration of its shares under the Securities Exchange Act. SGI intends to schedule a special meeting of SGI stockholders to approve an amendment to its certificate of incorporation for the purpose of effecting the reverse split. There is no assurance that the reverse split will be consummated.
Also on February 12, 2014, the Board of Directors of A-Mark declared a dividend to SGI in the amount of $5 million. The dividend will be paid prior to the Distribution Date.
