UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-11988
SPECTRUM GROUP INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State of Incorporation) | 22-2365834 (IRS Employer I.D. No.) |
Irvine, CA 92614
(Address of Principal Executive Offices) (Zip Code)
(949) 748-4800
__________________________________________________
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes. þ No. o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes. þ No. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of February 3, 2014, the registrant had 31,113,401 shares of Common Stock outstanding, par value $0.01 per share.
SPECTRUM GROUP INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended December 31, 2013
Table of Contents
Page | |||
Signatures | 50 | ||
2
PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, 2013 | June 30, 2013 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 16,918 | $ | 23,643 | |||
Receivables and secured loans, net — trading operations | 101,538 | 109,696 | |||||
Accounts receivable and consignor advances, net — collectibles operations | 7,083 | 12,347 | |||||
Inventories: | |||||||
Inventory, net | 157,124 | 149,699 | |||||
Restricted inventories | 25,506 | 38,554 | |||||
182,630 | 188,253 | ||||||
Prepaid expenses and other assets | 2,977 | 2,306 | |||||
Deferred tax assets | 3,630 | 3,630 | |||||
Total current assets | 314,776 | 339,875 | |||||
Property and equipment, net | 14,327 | 13,908 | |||||
Goodwill | 4,884 | 4,884 | |||||
Other purchased intangibles, net | 5,951 | 6,317 | |||||
Restricted cash | 577 | 602 | |||||
Income tax receivables | 4,448 | 1,836 | |||||
Deferred tax assets - non-current | 3,387 | 3,387 | |||||
Other assets | 291 | 566 | |||||
Total assets | $ | 348,641 | $ | 371,375 | |||
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and consignor payables | $ | 88,438 | $ | 95,839 | |||
Liability on borrowed metals | 11,226 | 20,117 | |||||
Obligation under product financing arrangement | 25,506 | 38,554 | |||||
Accrued expenses and other current liabilities | 7,233 | 10,693 | |||||
Income taxes payable | 8,173 | 6,364 | |||||
Lines of credit | 111,135 | 100,857 | |||||
Debt obligations, current portion | 166 | 161 | |||||
Total current liabilities | 251,877 | 272,585 | |||||
Long term tax liabilities | 10,477 | 9,322 | |||||
Debt obligations, net of current portion | 8,716 | 8,788 | |||||
Other long-term liabilities | 1,802 | 1,888 | |||||
Total liabilities | 272,872 | 292,583 | |||||
Commitments and contingencies | |||||||
Redeemable non-controlling interest, VIE | 92 | 160 | |||||
Stockholders’ equity: | |||||||
Preferred stock, $0.01 par value, authorized 10,000 shares; issued and outstanding: none | — | — | |||||
Common stock, $0.01 par value, authorized 40,000 shares; issued and outstanding: 30,841 and 30,909 at December 31, 2013 and June 30, 2013, respectively | 309 | 309 | |||||
Additional paid-in capital | 206,817 | 206,655 | |||||
Accumulated other comprehensive income | 6,605 | 6,605 | |||||
Accumulated deficit | (138,383 | ) | (134,937 | ) | |||
Total Spectrum Group International, Inc. stockholders’ equity | 75,348 | 78,632 | |||||
Non-controlling interests | 329 | — | |||||
Total stockholders’ equity | 75,677 | 78,632 | |||||
Total liabilities, redeemable non-controlling interests, and stockholders’ equity | $ | 348,641 | $ | 371,375 |
See accompanying Notes to Condensed Consolidated Financial Statements
3
SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||||
Revenues: | ||||||||||||||||
Sales of precious metals | $ | 1,484,083 | $ | 1,688,625 | $ | 2,976,196 | $ | 3,302,240 | ||||||||
Collectibles revenues: | ||||||||||||||||
Sales of inventory | 23,390 | 44,900 | 58,521 | 91,174 | ||||||||||||
Auction services | 2,043 | 2,764 | 9,599 | 7,742 | ||||||||||||
Total revenues | 1,509,516 | 1,736,289 | 3,044,316 | 3,401,156 | ||||||||||||
Cost of sales: | ||||||||||||||||
Cost of precious metals sold | 1,476,058 | 1,682,113 | 2,960,998 | 3,290,564 | ||||||||||||
Cost of collectibles sold | 21,405 | 41,829 | 55,134 | 85,246 | ||||||||||||
Auction services expense | 645 | 888 | 3,447 | 3,707 | ||||||||||||
Total cost of sales | 1,498,108 | 1,724,830 | 3,019,579 | 3,379,517 | ||||||||||||
Gross profit | 11,408 | 11,459 | 24,737 | 21,639 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 7,311 | 5,105 | 12,708 | 10,233 | ||||||||||||
M.F. Global, Inc. loss provision | — | (711 | ) | — | (711 | ) | ||||||||||
Salaries and wages | 6,796 | 6,383 | 13,065 | 12,167 | ||||||||||||
Depreciation and amortization | 579 | 568 | 1,136 | 1,073 | ||||||||||||
Total operating expenses | 14,686 | 11,345 | 26,909 | 22,762 | ||||||||||||
Operating income (loss) | (3,278 | ) | 114 | (2,172 | ) | (1,123 | ) | |||||||||
Interest and other income (expense): | ||||||||||||||||
Interest income | 1,483 | 2,464 | 3,117 | 4,652 | ||||||||||||
Interest expense | (1,065 | ) | (1,331 | ) | (2,264 | ) | (2,413 | ) | ||||||||
Other income, net | 19 | 83 | 68 | 222 | ||||||||||||
Unrealized gain (loss) on foreign exchange | 16 | (807 | ) | 41 | (1,482 | ) | ||||||||||
Total interest and other income | 453 | 409 | 962 | 979 | ||||||||||||
Income (loss) from continuing operations before provision for income taxes | (2,825 | ) | 523 | (1,210 | ) | (144 | ) | |||||||||
Provision for income taxes | 1,515 | 1,062 | 2,215 | 1,170 | ||||||||||||
Income (loss) from continuing operations | (4,340 | ) | (539 | ) | (3,425 | ) | (1,314 | ) | ||||||||
Loss from discontinued operations, net of tax, attributable to Spectrum Group International, Inc. | — | — | — | (663 | ) | |||||||||||
Net loss | (4,340 | ) | (539 | ) | (3,425 | ) | (1,977 | ) | ||||||||
Less: net loss (income) attributable to non-controlling interests | (62 | ) | 699 | (21 | ) | 615 | ||||||||||
Net income (loss) attributable to Spectrum Group International, Inc. | $ | (4,402 | ) | $ | 160 | $ | (3,446 | ) | $ | (1,362 | ) | |||||
Basic and diluted income (loss) per share attributable to Spectrum Group International, Inc.: | ||||||||||||||||
Basic - continuing operations | $ | (0.14 | ) | $ | 0.01 | $ | (0.11 | ) | $ | (0.02 | ) | |||||
Basic - discontinued operations | $ | — | $ | — | $ | — | $ | (0.02 | ) | |||||||
Diluted - continuing operations | $ | (0.14 | ) | $ | 0.01 | $ | (0.11 | ) | $ | (0.02 | ) | |||||
Diluted - discontinued operations | $ | — | $ | — | $ | — | $ | (0.02 | ) | |||||||
Basic - net income (loss) | $ | (0.14 | ) | $ | 0.01 | $ | (0.11 | ) | $ | (0.04 | ) | |||||
Diluted - net income (loss) | $ | (0.14 | ) | $ | 0.01 | $ | (0.11 | ) | $ | (0.04 | ) | |||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 30,917 | 30,628 | 30,918 | 31,706 | ||||||||||||
Diluted | 30,917 | 30,835 | 30,918 | 31,706 |
See accompanying Notes to Condensed Consolidated Financial Statements
4
SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||||
Net loss from continuing operations | $ | (4,340 | ) | $ | (539 | ) | $ | (3,425 | ) | $ | (1,314 | ) | ||||
Other comprehensive income before tax from continuing operations: | ||||||||||||||||
Foreign currency translation adjustments | — | 797 | — | 1,383 | ||||||||||||
Other comprehensive income before tax from continuing operations | — | 797 | — | 1,383 | ||||||||||||
Income tax expense (benefit) related to components of other comprehensive income from continuing operations | — | 712 | — | 574 | ||||||||||||
Other comprehensive loss, net of tax, from continuing operations | (4,340 | ) | (454 | ) | (3,425 | ) | (505 | ) | ||||||||
Other comprehensive income (loss), net of tax, from discontinued operations | — | 381 | — | (178 | ) | |||||||||||
Comprehensive loss | (4,340 | ) | (73 | ) | (3,425 | ) | (683 | ) | ||||||||
Less: comprehensive loss attributable to non-controlling interests | (62 | ) | 699 | (21 | ) | 615 | ||||||||||
Comprehensive income (loss) attributable to Spectrum Group International, Inc. | $ | (4,402 | ) | $ | 626 | $ | (3,446 | ) | $ | (68 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements
SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
(unaudited)
Common Stock (Shares) | Common Stock ($) | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Spectrum Group International, Inc. Stockholders’ Equity | Non-controlling Interests | Total Stockholders’ Equity | |||||||||||||||||||||
Balance, June 30, 2013 | 30,909 | $ | 309 | $ | 206,655 | $ | 6,605 | $ | (134,937 | ) | $ | 78,632 | $ | — | $ | 78,632 | ||||||||||||
Net loss | — | — | — | — | (3,446 | ) | (3,446 | ) | 89 | (3,357 | ) | |||||||||||||||||
Share based compensation | — | — | 287 | — | — | 287 | — | 287 | ||||||||||||||||||||
Issuance of common stock for stock option exercise | 12 | — | 33 | — | — | 33 | — | 33 | ||||||||||||||||||||
Repurchase/retirement of common stock | (80 | ) | — | (158 | ) | — | — | (158 | ) | — | (158 | ) | ||||||||||||||||
Non-controlling interests | — | — | — | — | — | 240 | 240 | |||||||||||||||||||||
Balance, December 31, 2013 | 30,841 | $ | 309 | $ | 206,817 | $ | 6,605 | $ | (138,383 | ) | $ | 75,348 | $ | 329 | $ | 75,677 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended | |||||||
(in thousands) | December 31, 2013 | December 31, 2012 | |||||
Cash flows from operating activities: | |||||||
Net loss | $ | (3,425 | ) | $ | (1,977 | ) | |
Loss from discontinued operations, net of tax, attributable to Spectrum Group International, Inc. | — | 663 | |||||
Loss from continuing operations | (3,425 | ) | (1,314 | ) | |||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities — continuing operations: | |||||||
Net unrealized (gains) losses on foreign currency | (41 | ) | 1,482 | ||||
Depreciation and amortization | 1,136 | 1,073 | |||||
Provision for bad debts | — | (660 | ) | ||||
Share based compensation | 287 | 191 | |||||
Gain on sale of Stamps business | — | (17 | ) | ||||
Loss on abandonment of property and equipment | — | 204 | |||||
Changes in assets and liabilities: | |||||||
Receivables and secured loans | 8,200 | 15,625 | |||||
Accounts receivable and consignor advances | 5,264 | 4,298 | |||||
Inventory | 5,623 | 11,307 | |||||
Prepaid expenses and other assets | (257 | ) | (1,407 | ) | |||
Liabilities on borrowed metals | (8,891 | ) | 8,063 | ||||
Accounts payable, consignor payables, accrued expenses and other liabilities | (10,838 | ) | 7,727 | ||||
Income taxes receivable/payable | 354 | (1,051 | ) | ||||
Deferred taxes and other long-term tax liabilities | — | (408 | ) | ||||
Net cash (used in) provided by operating activities — continuing operations | (2,588 | ) | 45,113 | ||||
Net cash used in operating activities — discontinued operations | — | (1,238 | ) | ||||
Net cash (used in) provided by operating activities | (2,588 | ) | 43,875 | ||||
Cash flows from investing activities: | |||||||
Capital expenditures for property and equipment | (1,189 | ) | (1,565 | ) | |||
Cash proceeds on sale of non-controlling interests | 100 | — | |||||
Change in restricted cash | 25 | (43 | ) | ||||
Cash transferred with sale of subsidiary | — | (3,935 | ) | ||||
Divestiture of business | — | 7,750 | |||||
Net cash (used in) provided by investing activities — continuing operations | (1,064 | ) | 2,207 | ||||
Net cash used in investing activities — discontinued operations | — | (22 | ) | ||||
Net cash (used in) provided by investing activities | (1,064 | ) | 2,185 | ||||
Cash flows from financing activities: | |||||||
Borrowings (repayments) under lines of credit, net | 10,278 | (12,035 | ) | ||||
Repayments on notes payable and capital lease obligations | (178 | ) | (55 | ) | |||
Obligation under product financing arrangement | (13,048 | ) | (10,798 | ) | |||
Issuance of common stock | — | 25,213 | |||||
Retirement of repurchased Afinsa and Auctentia common stock and interest in Spectrum Precious Metals, Inc. | — | (51,178 | ) | ||||
Repurchase of common stock | (158 | ) | — | ||||
Proceeds from exercise of stock options | 33 | — | |||||
Repurchase of restricted stock | — | (1 | ) | ||||
Net cash used in financing activities — continuing operations | (3,073 | ) | (48,854 | ) | |||
Net cash used in financing activities — discontinued operations | — | — | |||||
Net cash used in financing activities | (3,073 | ) | (48,854 | ) | |||
Effects of exchange rate changes on cash | — | (110 | ) | ||||
Net decrease in cash and cash equivalents | (6,725 | ) | (2,904 | ) | |||
Cash and cash equivalents, beginning of period | 23,643 | 25,305 | |||||
Cash and cash equivalents, end of period | $ | 16,918 | $ | 22,401 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid during the period for: | |||||||
Interest expense | $ | 2,065 | $ | 1,982 | |||
Income taxes | $ | 1,341 | $ | 3,099 | |||
Non-cash investing and financing activities: | |||||||
Purchase of equipment under capital lease | $ | — | $ | (573 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements
6
SPECTRUM GROUP INTERNATIONAL, INC.
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.
7
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.
8
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
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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.
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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:
1. | 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.
2. | 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. |
3. | For the wholesale sale of owned products, revenue is recognized upon the transfer of title to the customer, which occurs upon delivery. |
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
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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:
• | 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.
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: | |||||||||||||||||
Loss from discontinued operations, excluding taxes and gain on sales of assets | — | — | — | (1,080 | ) | ||||||||||||
Income tax benefit | — | — | — | (417 | ) | ||||||||||||
Loss from discontinued operations | $ | — | $ | — | $ | — | $ | (663 | ) |
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:
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:
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 | % |
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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.
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5. | RECEIVABLES |
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
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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.
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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.
6. | INVENTORIES |
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.
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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):
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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 |
9. | INCOME TAXES |
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.
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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.
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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.
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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.
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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.
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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.
25
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
26
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 |
27
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
28
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
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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 | ||||||||
30
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 |
31
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.
32
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:
33
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.
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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.
35
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that are considered forward-looking statements. Forward-looking statements give the Company's current expectations and forecasts of future events. All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. These statements are based on the Company's current plans, and the Company's actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Any or all of the forward-looking statements in this quarterly report may turn out to be inaccurate. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events occurring after the date hereof. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-Q.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes that appear elsewhere in this Form 10-Q. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q.
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying condensed consolidated financial statements and related notes to help provide an understanding of our financial condition, the changes in our financial condition and the results of operations. Our discussion is organized as follows:
• | Overview. This section provides a general description of our business, as well as recent significant transactions and events that we believe are important in understanding the results of operations, as well as to anticipate future trends in those operations. |
• | Results of operations. This section provides an analysis of our results of operations presented in the accompanying condensed consolidated statements of operations by comparing the results for the three and six months ended December 31, 2013 and 2012. |
• | Financial condition and liquidity and capital resources. This section provides an analysis of our cash flows, as well as a discussion of our outstanding debt that existed as of December 31, 2013. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund our future commitments, as well as a discussion of other financing arrangements. |
• | Critical accounting estimates. This section discusses those accounting policies that both are considered important to our financial condition and results, and require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including critical accounting policies, are summarized in Note 2 to the Consolidated Financial Statements in the 2013 Annual Report on Form 10-K. |
• | Recent accounting pronouncements. This section discusses new accounting pronouncements, dates of implementation and their impact on our accompanying condensed consolidated financial statements, if any. |
OVERVIEW
Business
We conduct our operations in two reportable segments: Trading and Collectibles.
For the three months ended December 31, 2013, our Trading and Collectibles segments represented $1.48 billion, or 98.3%, and $25.4 million, or 1.7%, of our total revenues of $1.51 billion, and achieved $3.3 million and $(2.5) million, respectively, in operating income (loss), contributing to total operating income (loss) of $(3.3) million after corporate expenses of $4.2 million. For the three months ended December 31, 2012, our Trading and Collectibles segments represented $1.69 billion, or 97.3%, and $47.7 million, or 2.7%, of our total revenues of $1.74 billion, and achieved $3.6 million and $(0.9) million, respectively, in operating income (loss), contributing to total operating income of $0.1 million.
For the six months ended December 31, 2013, our Trading and Collectibles segments represented $2.98 billion, or 97.8%, and $68.1 million, or 2.2%, of our total revenues of $3.04 billion, and achieved $6.7 million and $(2.1) million, respectively, in operating income (loss), contributing to total operating income (loss) of $(2.2) million after corporate expenses of $(6.8) million. For the six months ended December 31, 2012, our Trading and Collectibles segments represented $3.30 billion, or 97.1%, and $98.9 million, or 2.9%, of our total revenues of $3.40 billion, and achieved $5.8 million and $(1.7) million, respectively, in operating income (loss), contributing to total operating loss of $(1.1) million.
36
Trading
Our Trading segment operates in the United States and Europe through our wholly owned subsidiary A-Mark, a distributor and service provider to consumers, wholesalers, retailers and dealers of precious metals throughout the world operating from facilities located in Santa Monica, California and Vienna, Austria.
CFC, a licensed California finance lender and a wholly owned subsidiary of A-Mark, offers loans on precious metals, rare coins and other collectibles to coin dealers, collectors and investors.
Collectibles
Our Collectibles segment is a global integrated network of companies with operations in North America, Europe and Asia. Our Collectibles business is focused on numismatic (coins) and rare and fine vintage wine. We primarily sell these materials, both owned and consigned, through our auction subsidiaries and through wholesale merchant/dealer relationships. Until the first quarter of fiscal 2013, when we sold our stamp operations, we were also an auctioneer and merchant/dealer of philatelic (stamps) materials.
RESULTS OF OPERATIONS
Overview of Results of Operations for the Three and Six Months Ended December 31, 2013 and 2012
Condensed Consolidated Results of Operations
The operating results of our business for the three months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | |||||||||||||||||
in thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | ||||||||||||||
Revenue | $ | 1,509,516 | 100.0 | % | $ | 1,736,289 | 100.0 | % | $ | (226,773 | ) | (13.1 | )% | |||||||
Gross profit | 11,408 | 0.8 | % | 11,459 | 0.7 | % | (51 | ) | (0.4 | )% | ||||||||||
General and administrative expenses | 7,311 | 0.5 | % | 5,105 | 0.3 | % | 2,206 | 43.2 | % | |||||||||||
M.F. Global, Inc. loss provision | — | — | % | (711 | ) | — | % | 711 | NM | |||||||||||
Salaries and wages | 6,796 | 0.5 | % | 6,383 | 0.4 | % | 413 | 6.5 | % | |||||||||||
Depreciation and amortization | 579 | — | % | 568 | — | % | 11 | 1.9 | % | |||||||||||
Operating income (loss) | (3,278 | ) | (0.2 | )% | 114 | — | % | (3,392 | ) | NM | ||||||||||
Interest income | 1,483 | 0.1 | % | 2,464 | 0.1 | % | (981 | ) | (39.8 | )% | ||||||||||
Interest expense | (1,065 | ) | (0.1 | )% | (1,331 | ) | (0.1 | )% | (266 | ) | (20.0 | )% | ||||||||
Other income, net | 19 | — | % | 83 | — | % | (64 | ) | (77.1 | )% | ||||||||||
Unrealized gain (loss) on foreign exchange | 16 | — | % | (807 | ) | — | % | 823 | 102.0 | % | ||||||||||
Income (loss) from continuing operations before provision for income taxes | (2,825 | ) | (0.2 | )% | 523 | — | % | (3,348 | ) | (640.2 | )% | |||||||||
Provision for income taxes | 1,515 | 0.1 | % | 1,062 | 0.1 | % | 453 | 42.7 | % | |||||||||||
Loss from continuing operations | (4,340 | ) | (0.3 | )% | (539 | ) | — | % | (3,801 | ) | (705.2 | )% | ||||||||
Loss from discontinued operations, net of tax, attributable to Spectrum Group International, Inc. | — | — | % | — | — | % | — | — | % | |||||||||||
Net loss | (4,340 | ) | (0.3 | )% | (539 | ) | — | % | (3,801 | ) | (705.2 | )% | ||||||||
Less: net loss (income) attributable to the non-controlling interests | (62 | ) | — | % | 699 | — | % | (761 | ) | (108.9 | )% | |||||||||
Net income (loss) attributable to Spectrum Group International, Inc. | $ | (4,402 | ) | (0.3 | )% | $ | 160 | — | % | $ | (4,562 | ) | NM |
NM = Not Meaningful
37
Three Months Ended December 31, | ||||||||||||||||
Basic and diluted income (loss) per share attributable to Spectrum Group International, Inc.: | 2013 | 2012 | Increase / (decrease) | % of Increase / (decrease) | ||||||||||||
Basic - continuing operations | $ | (0.14 | ) | $ | 0.01 | $ | (0.15 | ) | NM | |||||||
Basic - discontinued operations | $ | — | $ | — | $ | — | — | % | ||||||||
Diluted - continuing operations | $ | (0.14 | ) | $ | 0.01 | $ | (0.15 | ) | NM | |||||||
Diluted - discontinuing operations | $ | — | $ | — | $ | — | — | % | ||||||||
Basic - net income (loss) | $ | (0.14 | ) | $ | 0.01 | $ | (0.15 | ) | NM | |||||||
Diluted - net income (loss) | $ | (0.14 | ) | $ | 0.01 | $ | (0.15 | ) | NM | |||||||
Weighted average shares outstanding (in thousands): | ||||||||||||||||
Basic | 30,917 | 30,628 | ||||||||||||||
Diluted | 30,917 | 30,835 | ||||||||||||||
The operating results of our business for the six months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | ||||||||||||||||||
in thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | |||||||||||||||
Revenue | $ | 3,044,316 | 100.0 | % | $ | 3,401,156 | 100.0 | % | $ | (356,840 | ) | (10.5 | )% | ||||||||
Gross profit | 24,737 | 0.8 | % | 21,639 | 0.6 | % | 3,098 | 14.3 | % | ||||||||||||
General and administrative expenses | 12,708 | 0.4 | % | 10,233 | 0.3 | % | 2,475 | 24.2 | % | ||||||||||||
M.F. Global, Inc. loss provision | — | — | % | (711 | ) | — | % | 711 | NM | ||||||||||||
Salaries and wages | 13,065 | 0.4 | % | 12,167 | 12,167 | 0.4 | % | 898 | 7.4 | % | |||||||||||
Depreciation and amortization | 1,136 | — | % | 1,073 | — | % | 63 | 5.9 | % | ||||||||||||
Operating loss | (2,172 | ) | (0.1 | )% | (1,123 | ) | — | % | (1,049 | ) | (93.4 | )% | |||||||||
Interest income | 3,117 | 0.1 | % | 4,652 | 0.1 | % | (1,535 | ) | (33.0 | )% | |||||||||||
Interest expense | (2,264 | ) | (0.1 | )% | (2,413 | ) | (0.1 | )% | (149 | ) | (6.2 | )% | |||||||||
Other income, net | 68 | — | % | 222 | — | % | (154 | ) | (69.4 | )% | |||||||||||
Unrealized gain (loss) on foreign exchange | 41 | — | % | (1,482 | ) | — | % | 1,523 | (102.8 | )% | |||||||||||
Loss from continuing operations before provision for income taxes | (1,210 | ) | — | % | (144 | ) | — | % | (1,066 | ) | (740.3 | )% | |||||||||
Provision for income taxes | 2,215 | 0.1 | % | 1,170 | — | % | 1,045 | 89.3 | % | ||||||||||||
Loss from continuing operations | (3,425 | ) | (0.1 | )% | (1,314 | ) | — | % | (2,111 | ) | (160.7 | )% | |||||||||
Loss from discontinued operations, net of tax, attributable to Spectrum Group International, Inc. | — | — | % | (663 | ) | — | % | 663 | (100.0 | )% | |||||||||||
Net loss | (3,425 | ) | (0.1 | )% | (1,977 | ) | (0.1 | )% | (1,448 | ) | (73.2 | )% | |||||||||
Less: net loss (income) attributable to the non-controlling interests | (21 | ) | — | % | 615 | — | % | (636 | ) | (103.4 | )% | ||||||||||
Net loss attributable to Spectrum Group International, Inc. | $ | (3,446 | ) | (0.1 | )% | $ | (1,362 | ) | — | % | $ | (2,084 | ) | (153.0 | )% |
NM = Not Meaningful
38
Six Months Ended December 31, | ||||||||||||||||
Basic and diluted income (loss) per share attributable to Spectrum Group International, Inc.: | 2013 | 2012 | Increase / (decrease) | % of Increase / (decrease) | ||||||||||||
Basic - continuing operations | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.09 | ) | (450.0 | )% | |||||
Basic - discontinued operations | $ | — | $ | (0.02 | ) | $ | 0.02 | 100.0 | % | |||||||
Diluted - continuing operations | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.09 | ) | (450.0 | )% | |||||
Diluted - discontinuing operations | $ | — | $ | (0.02 | ) | $ | 0.02 | 100.0 | % | |||||||
Basic - net income (loss) | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.07 | ) | (175.0 | )% | |||||
Diluted - net income (loss) | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.07 | ) | (175.0 | )% | |||||
Weighted average shares outstanding (in thousands): | ||||||||||||||||
Basic | 30,918 | 31,706 | ||||||||||||||
Diluted | 30,918 | 31,706 | ||||||||||||||
Revenues and Gross Profit
Revenues for the three months ended December 31, 2013 decreased $226.8 million, or 13.1%, to $1.51 billion from $1.74 billion in 2012. Revenues for the six months ended December 31, 2013 decreased $356.8 million, or 10.5%, to $3.04 billion from $3.40 billion in 2012. Our Trading segment revenues decreased $204.5 million, or 12.1%, for the three months ended December 31, 2013 and decreased $326.0 million, or 9.9%, for the six months ended December 31, 2013. Our Collectibles segment revenues decreased $22.2 million, or 46.6%, for the three months ended December 31, 2013 and decreased $30.8 million, or 31.1%, for the six months ended December 31, 2013. For further information regarding our revenues please refer to the discussions regarding our Trading and Collectible segments below.
Our gross profit for the three months ended December 31, 2013 decreased $0.1 million, or 0.4%, to $11.4 million, or a gross profit margin of
0.8%, from $11.5 million, or a gross profit margin of 0.7% in 2012. We experienced an increase in gross profit of $1.5 million, or 23.2%, to
$8.0 million, or a gross profit margin of 0.5%, in our Trading segment, while our Collectibles segment gross profit decreased by $1.6 million,
or 31.6%, to $3.4 million, or a gross profit margin of 13.3%, for the three months ended December 31, 2013. Our gross profit for the six months ended December 31, 2013 increased $3.1 million, or 14.3%, to $24.7 million, or a gross profit margin of 0.8%, from $21.6 million, or a gross profit margin of 0.6% in 2012. For a further discussion regarding gross profit and gross profit margins please refer to the discussions regarding our Trading and Collectibles segments, below.
Operating Expenses
General and administrative expenses increased $2.2 million, or 43.2%, to $7.3 million in the three months ended December 31, 2013 from $5.1 million in 2012. For the six months ended December 31, 2013 general and administrative expenses increased $2.5 million, or 24.2%, to $12.7 million from $10.2 million in 2012. The increase in both periods is primarily attributable to additional professional fees and outside consultant expenses incurred in connection with our proposed spin-off transaction, as disclosed in Note 20 of this Form 10-Q as well as IT costs incurred in the period to implement a new ERP system.
Salaries and wages increased $0.4 million, or 6.5%, to $6.8 million in the three months ended December 31, 2013 from $6.4 million in 2012. For the six months ended December 31, 2013, salaries and wages expenses increased $0.9 million, or 7.4%, to $13.1 million from $12.2 million in 2012. The increase in salaries and wages was primarily the result of additional overtime costs incurred during the transition to a new ERP system and overtime incurred related to the consolidation of the coin companies during the period.
Depreciation and amortization expense was comparable at $0.6 million for the three months ended December 31, 2013 from $0.6 million for the three months ended December 31, 2012. For the six months ended December 31, 2013, depreciation and amortization expense was $1.1 million compared to $1.1 million in 2012.
Interest Income
Interest income decreased $1.0 million, or 39.8%, to $1.5 million for the three months ended December 31, 2013 from $2.5 million in 2012. For the six months ended December 31, 2013, interest income decreased $1.5 million, or 33.0%, to $3.1 million from $4.7 million in 2012. The decreases were primarily due to decreases in our Trading segment's financing and liquidity service business.
Interest Expense
Interest expense for the three months ended December 31, 2013 decreased $266,000, or 20.0% to $1.1 million from $1.3 million in 2012. For the six months ended December 31, 2013, interest expense decreased $149,000, or 6.2% to $2.3 million from $2.4 million in 2012. The decrease was related primarily to usage of our Trading segment's line of credit (the “Trading Facility”) as well as our Collectibles line of credit (the “Collectibles
39
Facility”) and promissory note related to our minority interest repurchase of Stacks, LLC. Both our Trading and Collectibles segment utilize their lines of credit extensively for working capital requirements.
Net Other Income
Net other income for the three months ended December 31, 2013 decreased by $64,000 to $19,000 from $83,000 in 2012. For the six months ended December 31, 2013, net other income decreased by $154,000 to $68,000 from $222,000 in 2012.
Provision for Income Taxes
Our provision for income taxes on continuing operations was approximately $1.5 million and $1.06 million for the three months ended December 31, 2013 and 2012, respectively. Our effective tax rate was approximately (226.3%) and 203.1% for the three months ended December 31, 2013 and 2012, respectively. Our provision for income taxes on continuing operations was approximately $2.2 million and $1.2 million for the six months ended December 31, 2013 and 2012, respectively. The primary difference in the tax provision from December 31, 2012 to December 31, 2013 is the result of withholding tax of $3.1 million on the dividend from a foreign subsidiary which, relative to the second quarter pre-tax book loss, reduces the rate of the total tax benefit recognized and increases the total tax expense recognized in the current quarter. Our effective tax rate was approximately (183.1%) and (809.4%) for the six months ended December 31, 2013 and 2012, respectively. Our effective tax rate differs from the federal statutory rate due to permanent adjustments for nondeductible items, state taxes and foreign tax rate differentials. The primary difference in the effective tax rate between the six months ended December 31, 2013 and 2012 is the result of the Company recording discreet adjustments to tax expense as a result of a change in tax law that impacted the valuation of state deferred tax assets and the accrual of an uncertain tax position related to foreign income taxes in the six months ended December 31, 2012. This impact was partially offset by the recording of the withholding tax of $3.1 million as discussed above in the six months ended December 31, 2013. In addition, the U.S. rate is significantly higher than expected due to an increase in permanent differences caused by non-deductible transaction costs.
Our projected annual effective tax rate for the fiscal year ending June 30, 2014 is 53.1% compared to an actual rate of 34.1% for the fiscal year ended June 30, 2013. The primary difference in the projected annual effective tax rate from June 30, 2014 to actual rate at June 30, 2013 is the result of the write off of the deferred tax liability related to foreign currency translation differences during the year ended June 30, 2013. This write off had a beneficial rate impact on the June 30, 2013 tax year that is not expected to recur in the year ending June 30, 2014.
Our effective rate could be adversely affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. We are also subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate. Some of our net operating loss carry-forwards are set to expire beginning June 30, 2014, which may impact the Company's effective tax rate in future periods. Our effective rate can also be influenced by the tax effects of purchase accounting for acquisitions and non-recurring charges, which may cause fluctuations between reporting periods.
Non-controlling Interests
Net loss (income) attributable to non-controlling interests changed to net (income) attributable to non-controlling interests of $(62,000) for the three months ended December 31, 2013 compared to net loss attributable to non-controlling interests of $699,000 in 2012. For the six months ended December 31, 2013, net loss (income) attributable to non-controlling interests changed to net (income) of $(21,000) from net loss of $615,000 in 2012. The share of net loss attributable to non-controlling interests for the three and six months ended December 31, 2012 was primarily related to the 49% non-controlling interest in SBN. This 49% non-controlling interest was acquired by the Company effective April 1, 2013 and accordingly is not represented in net loss (income) attributable to non-controlling interests for the three and six months ended December 31, 2013. Share of net (income) attributable to non-controlling interests for the three and six months ended December 31, 2013 primarily represents the share of net (income) attributable to the 60% interest in SWA.
Net Income (Loss) Attributable to SGI
Net loss attributable to SGI increased $(4.6) million, to $(4.4) million in the three months ended December 31, 2013 from a net income of $0.2 million in 2012. For the six months ended December 31, 2013, net loss attributable to SGI increased $(2.1) million, or 153.0%, to $(3.4) million from $(1.4) million in 2012. The increase in net loss for the three months ended December 31, 2013 is due primarily to decreased operating income in our Collectibles segment of $1.5 million and increases in corporate operating expenses of $1.6 million. The increase in net loss for the six months ended December 31, 2013 is due primarily to increases in corporate operating expenses of $1.6 million and reduced interest income of $1.5 million.
Earnings (Loss) per Share
Basic earnings (loss) per share from continuing operations for the three months ended December 31, 2013, decreased $0.15 to $(0.14) from $0.01 in 2012, and diluted earnings per share from continuing operations decreased $0.15 to $(0.14) from $0.01 in 2012. For the six months ended December 31, 2013, basic earnings per share from continuing operations decreased $0.09 to $(0.11) from a loss of $(0.02) while diluted earnings per share from continuing operations decreased by $0.09 to $(0.11) from a loss of $(0.02) in 2012. The change in both basic and diluted earnings per share was primarily due to the increase in our net loss from the factors mentioned above.
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Trading Operations
The operating results of our Trading segment for the three months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | ||||||||||||||||||
In thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | |||||||||||||||
Trading revenues | $ | 1,484,083 | 100.0 | % | $ | 1,688,625 | 100.0 | % | $ | (204,542 | ) | (12.1 | )% | ||||||||
Gross profit | 8,025 | 0.5 | 6,512 | 0.4 | 1,513 | 23.2 | |||||||||||||||
General and administrative expenses | 1,745 | 0.1 | 948 | 0.1 | 797 | 84.1 | |||||||||||||||
M.F. Global, Inc. loss provision | — | — | (711 | ) | — | 711 | — | ||||||||||||||
Salaries and wages | 2,715 | 0.2 | 2,456 | 0.1 | 259 | 10.5 | |||||||||||||||
Depreciation and amortization | 222 | — | 200 | — | 22 | 11.0 | |||||||||||||||
Operating income | $ | 3,343 | 0.2 | % | $ | 3,619 | 0.2 | % | $ | (276 | ) | (7.6 | )% |
The operating results of our Trading segment for the six months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | ||||||||||||||||||
In thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | |||||||||||||||
Trading revenues | $ | 2,976,196 | 100.0 | % | $ | 3,302,240 | 100.0 | % | $ | (326,044 | ) | (9.9 | )% | ||||||||
Gross profit | 15,198 | 0.5 | 11,676 | 0.4 | 3,522 | 30.2 | |||||||||||||||
General and administrative expenses | 2,912 | 0.1 | 1,747 | 0.1 | 1,165 | 66.7 | |||||||||||||||
M.F. Global, Inc. loss provision | — | — | (711 | ) | — | 711 | — | ||||||||||||||
Salaries and wages | 5,177 | 0.2 | 4,457 | 0.1 | 720 | 16.2 | |||||||||||||||
Depreciation and amortization | 443 | — | 397 | — | 46 | 11.6 | |||||||||||||||
Operating income | $ | 6,666 | 0.2 | % | $ | 5,786 | 0.2 | % | $ | 880 | 15.2 | % |
Trading Revenues
Our Trading segment revenues decreased $204.5 million, or 12.1%, to $1.48 billion for the three months ended December 31, 2013 from $1.69 billion in 2012. For the six months ended December 31, 2013, our Trading segment revenues decreased $326.0 million, or 9.9%, to $2.98 billion from $3.30 billion in 2012. Our trading business has decreased primarily due to a decline in the commodity price for gold and silver, resulting in a decrease in ounces of gold sold offset by an increase in silver ounces sold during the three and six months ended December 31, 2013 compared to 2012.
Gross Profit
Gross profit in our Trading segment for the three months ended December 31, 2013 increased by $1.5 million, or 23.2%, to $8.0 million from $6.5 million in 2012. For the six months ended December 31, 2013, gross profit in our Trading segment increased by $3.5 million, or 30.2% to $15.2 million from $11.7 million in 2012. The increase during the three and six months ended December 31, 2013 is attributable to higher demand for silver products and more favorable impact on spreads during both periods.
General and Administrative Expenses
General and administrative expenses in our Trading segment increased $0.8 million, or 84.1%, to $1.7 million in the three months ended December 31, 2013 from $0.9 million in 2012. For the six months ended December 31, 2013, general and administrative expenses in our Trading segment increased $1.2 million, or 66.7%, to $2.9 million from $1.7 million in 2012. The increase is primarily due to recruiting and retention fees incurred during the period related to the addition of a key employee and a write-down in miscellaneous receivables.
M.F. Global, Inc. Loss Provision
During the second quarter of fiscal 2012, we recorded a $2.1 million reserve for a potential shortfall in our commodities accounts with M.F. Global, Inc. The account was settled in the second quarter of fiscal 2013, which resulted in a net gain of $0.7 million. Refer to note 5 to the accompanying condensed consolidated financial statements for further information
Salaries and Wages
Salaries and wages in our Trading segment increased $0.3 million, or 10.5%, to $2.7 million for the three months ended December 31, 2013, from $2.5 million in 2012. Salaries and wages in our Trading segment increased $0.7 million, or 16.2%, to $5.2 million for the six months ended
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December 31, 2013, from $4.5 million in 2012. The increase in salaries and wages was primarily the result of higher levels of discretionary based compensation expense and new hiring compared to the prior year quarter.
Depreciation and Amortization
Depreciation and amortization in our Trading segment for the three and six months ended December 31, 2013 was comparable to the same period in 2012.
Collectibles Operations
The revenues in our operations by collectible type for the three months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | ||||||||||||||||||
in thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | |||||||||||||||
Collectibles revenues | $ | 25,433 | 100.0 | % | $ | 47,664 | 100.0 | % | $ | (22,231 | ) | (46.6 | )% | ||||||||
Revenues by Collectible Type: | |||||||||||||||||||||
Numismatics | $ | 24,738 | 97.3 | % | $ | 47,006 | 98.6 | % | $ | (22,268 | ) | (47.4 | )% | ||||||||
Wine | 695 | 2.7 | 658 | 1.4 | 37 | 5.6 | |||||||||||||||
$ | 25,433 | 100.0 | % | $ | 47,664 | 100.0 | % | $ | (22,231 | ) | (46.6 | )% |
The revenues in our operations by collectible type for the six months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | ||||||||||||||||||
in thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | |||||||||||||||
Collectibles revenues | $ | 68,120 | 100.0 | % | $ | 98,916 | 100.0 | % | $ | (30,796 | ) | (31.1 | )% | ||||||||
Revenues by Collectible Type: | |||||||||||||||||||||
Numismatics | $ | 67,027 | 98.4 | % | $ | 97,592 | 98.7 | % | $ | (30,565 | ) | (31.3 | )% | ||||||||
Wine | 1,093 | 1.6 | 1,324 | 1.3 | (231 | ) | (17.4 | ) | |||||||||||||
$ | 68,120 | 100.0 | % | $ | 98,916 | 100.0 | % | $ | (30,796 | ) | (31.1 | )% |
Collectibles Revenue
Our Collectible segment revenues decreased by $22.2 million, or 46.6%, to $25.4 million in the three months ended December 31, 2013 from $47.7 million in 2012. This decrease is due primarily to lower numismatic demand this period compared to the prior period. Numismatic sales decreased $22.3 million, or 47.4% to $24.7 million for the three months ended December 31, 2013 from $47.0 million in 2012. Our numismatic business experienced weaker sales in the three months ended December 31, 2013 compared to 2012, which was due in part to lower overall hammer prices at auction impacting our commissions. Additionally, our wine revenues increased by $37,000 or 5.6% for the three months ended December 31, 2013 compared to 2012.
For the six months ended December 31, 2013, our Collectible segment revenues decreased by $30.8 million, or 31.1% , to $68.1 million from $98.9 million in 2012. This decreased is due primarily to lower numismatic demand this period compared to the prior period. Numismatic sales decreased $30.6 million, or 31.3% to $67.0 million for the six months ended December 31, 2013 from $97.6 million in 2012. Additionally, our wine revenues decreased by $231,000 or 17.4% for the six months ended December 31, 2013 compared to 2012.
The operating results of our Collectibles segment for the three months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | ||||||||||||||||||
in thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | |||||||||||||||
Collectibles revenue | $ | 25,433 | 100.0 | % | $ | 47,664 | 100.0 | % | $ | (22,231 | ) | (46.6 | )% | ||||||||
Gross profit | 3,383 | 13.3 | 4,947 | 10.4 | (1,564 | ) | (31.6 | ) | |||||||||||||
General and administrative expenses | 2,618 | 10.3 | 2,618 | 5.5 | — | — | |||||||||||||||
Salaries and wages | 2,994 | 11.8 | 2,997 | 6.3 | (3 | ) | (0.1 | ) | |||||||||||||
Depreciation and amortization | 234 | 0.9 | 271 | 0.6 | (37 | ) | (13.7 | ) | |||||||||||||
Operating income | $ | (2,463 | ) | (9.7 | )% | $ | (939 | ) | (2.0 | )% | $ | (1,524 | ) | (162.3 | )% |
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The operating results of our Collectibles segment for the six months ended December 31, 2013 and 2012 are as follows:
2013 | 2012 | $ | % | ||||||||||||||||||
in thousands | $ | % of revenue | $ | % of revenue | Increase/(decrease) | Increase/(decrease) | |||||||||||||||
Collectibles revenue | $ | 68,120 | 100.0 | % | $ | 98,916 | 100.0 | % | $ | (30,796 | ) | (31.1 | )% | ||||||||
Gross profit | 9,539 | 14.0 | 9,963 | 10.1 | (424 | ) | (4.3 | ) | |||||||||||||
General and administrative expenses | 5,321 | 7.8 | 5,393 | 5.5 | (72 | ) | (1.3 | ) | |||||||||||||
Salaries and wages | 5,830 | 8.6 | 5,784 | 5.8 | 46 | 0.8 | |||||||||||||||
Depreciation and amortization | 468 | 0.7 | 497 | 0.5 | (29 | ) | (5.8 | ) | |||||||||||||
Operating income | $ | (2,080 | ) | (3.1 | )% | $ | (1,711 | ) | (1.7 | )% | $ | (369 | ) | (21.6 | )% |
Gross Profit
Gross profit in our Collectibles segment for the three months ended December 31, 2013 decreased $1.6 million, or 31.6% to $3.4 million from $4.9 million in 2012. The decrease is due primarily to lower sales during the second quarter of fiscal 2014 which was partially offset by the sale of higher margin numismatic materials in the second quarter of fiscal 2014 as compared to 2013 resulting in higher margins for the quarter. For the six months ended December 31, 2013, gross profit in our Collectible segment decreased $0.4 million, or 4.3% to $9.5 million from $10.0 million in 2012. This decrease in both the three and six months ended December 31, 2013 is due primarily to lower numismatic demand this period compared to the prior period. Numismatic sales decreased $22.3 million, or 47.4% to $24.7 million for the three months ended December 31, 2013 from $47.0 million in 2012 and decreased $30.6 million or 31.3% to $67.0 million for the six months ended December 31, 2013 from $97.6 million in 2012. Our numismatic business experienced weaker sales in the three and six months ended December 31, 2013 compared to 2012, which was due in part to lower overall hammer prices at auction impacting our commissions. Additionally, our wine revenues increased by $37,000 or 5.6% for the three months ended December 31, 2013 compared to 2012 and decreased by $231,000 or 17.4% for the six months ended December 31, 2013 compared to 2012.
General and Administrative Expense
General and administrative expenses in our Collectibles segment was flat at $2.6 million for the three months ended December 31, 2013 compared to $2.6 million in 2012. For the six months ended December 31, 2013, general and administrative expenses in our Collectibles segment decreased $0.1 million, or 1.3%, to $5.3 million from $5.4 million in 2012. These decreases are mainly attributable to an effort to reduce general and administrative expenses, particularly outside consultants and travel.
Salaries and Wages
Salaries and wages in our Collectibles segment was flat at $3.0 million for the three months ended December 31, 2013 compared to $3.0 million in 2012. For the six months ended December 31, 2013, salaries and wages expense in our Collectibles segment was $5.8 million compared to $5.8 million in the prior period in 2012. The comparability in salaries and wages was primarily the result of similar headcount levels between the two periods.
Depreciation and Amortization
Depreciation and amortization in our Collectibles segment was comparable for the three and six months ended December 31, 2013 and 2012.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following summarizes cash flow components for the six months ended December 31, 2013 and 2012:
in thousands | 2013 | 2012 | ||||||
Cash (used in) provided by operating activities — continuing operations | $ | (2,588 | ) | $ | 45,113 | |||
Cash used in operating activities — discontinued operations | — | (1,238 | ) | |||||
Cash (used in) provided by operating activities | $ | (2,588 | ) | $ | 43,875 | |||
Cash (used in) provided by investing activities — continuing operations | $ | (1,064 | ) | $ | 2,207 | |||
Cash used in investing activities — discontinued operations | — | (22 | ) | |||||
Cash (used in) provided by investing activities | $ | (1,064 | ) | $ | 2,185 | |||
Cash used in financing activities — continuing operations | $ | (3,073 | ) | $ | (48,854 | ) | ||
Cash provided by financing activities — discontinued operations | — | — | ||||||
Cash used in financing activities | $ | (3,073 | ) | $ | (48,854 | ) |
Our principal capital requirements have been to fund (i) working capital, (ii) acquisitions and (iii) capital expenditures. Our working capital requirements fluctuate with market conditions, the availability of numismatic materials and the timing of our auctions.
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Operating activities from continuing operations used $2.6 million in cash for the six months ended December 31, 2013 and provided $45.1 million in cash for the six months ended December 31, 2012, respectively. Primary sources of cash in our operating cash flows from continuing operations for the six months ended December 31, 2013 include the impact of $8.2 million related to changes in receivables and secured loans in our Trading operations, $5.3 million related to accounts receivable and consignor advances and $5.6 million related to inventory. This was partially offset by a use of cash for the six months ended December 31, 2013 of $10.8 million and $8.9 million related to accounts payable, consignor payables, accrued expenses and other liabilities and liabilities on borrowed metals,. Primary sources of cash in operating cash flows from continuing operations for the six months ended December 31, 2012 include $7.7 million related to changes in accounts payable, consignor payables, accrued expenses and other liabilities, the impact of $15.6 million related to changes in receivables and secured loans in our Trading operations and $11.3 million related to changes in inventory. Discontinued operations, from our Stamps division, used cash of $1.2 million for the six months ended December 31, 2012. The Stamps division was sold during the first quarter of fiscal 2013.
Our investing activities from continuing operations used cash in the six months ended December 31, 2013 of $1.1 million and provided cash of $2.2 million in the six months ended December 31, 2012. A primary use of cash in the six months ended December 31, 2013 was capital expenditures for property and equipment of $1.2 million. Cash flows provided by investing activities of $2.2 million million during the six months ended December 31, 2012 was primarily attributable to the divestiture of our Stamps division.
Our financing activities from continuing operations used $3.1 million for the six months ended December 31, 2013 and used $48.9 million for the six months ended December 31, 2012. We repaid $10.3 million under lines of credit for the six months ended December 31, 2013 compared to net repayments of $12.0 million in the six months ended December 31, 2012. Additionally, during the six months ended December 31, 2013, we repaid $13.0 million via our obligation under product financing arrangement in our Trading operations. During the six months ended December 31, 2012, we also issued common stock for $25.2 million, repurchased and retired common stock from Afinsa and Auctentia for $51.2 million, and repaid $10.8 million of our obligation under product financing arrangement in our Trading operations.
Liability on Borrowed Metals
We borrow precious metals from its suppliers under short-term arrangements which bear interest at a designated rate. Amounts under these arrangements are due at maturity and require repayment either in the form of precious metals or cash. Our inventories included borrowed metals with market values totaling $11.2 million and $20.1 million at December 31, 2013 and at June 30, 2013, respectively.
Obligation Under Product Financing Agreement
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 we are allowed to repurchase this 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 consolidated balance sheet within the obligation under product financing arrangement. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the obligation under product financing arrangement and the underlying inventory (which is entirely restricted) are carried at fair value, with changes in fair value included as 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.
Lines of Credit
A-Mark's Trading Credit Facility is 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 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 at December 31, 2013 were $44.6 million and $61.3 million, respectively. Our ability to pay dividends, if it were to elect to do so, could be limited as a result of these restrictions.
We and our wholly-owned numismatic subsidiaries, SNI, B&M, and Stack's-Bowers Numismatics, LLC (collectively "SBN"), have 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 SBN, and are further guaranteed by us. Our 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, which is subject to change, plus a margin.
Separately, A-Mark 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
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borrowing under this Collectible Credit Facility as of December 31, 2013 were $0.0 million. As of June 30, 2013, the total amount borrowed was $23.0 million, $5.0 million by SNI and $18.0 million by A-Mark.
Contractual Obligations, Contingent Liabilities, and Commitments
We manage the value of certain specific assets and liabilities of our trading business, including trading inventories (see Note 10 in the accompanying condensed consolidated financial statements), by employing a variety of strategies. These strategies include the management of exposure to changes in the market values of our trading inventories through the purchase and sale of a variety of derivative products such as metals forward and futures contracts.
Our 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. Our precious metals inventories are subject to market value changes, created by changes in the underlying commodity markets. Inventories purchased or borrowed by us 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). We seek to minimize the effect of price changes of the underlying commodity through the use of forward and futures contracts.
Our policy is to substantially hedge our inventory position, net of open purchase and sales commitments, that is subject to price risk. We regularly enter 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. We have access to all of the precious metals markets, allowing us to place hedges. However, we also maintain relationships with major market makers in every major precious metals dealing center.
We set credit and position risk limits. These limits include gross position limits for counterparties engaged in purchase and sales transactions with us. They also include collateral limits for different types of purchase and sale transactions that counter parties may engage in from time to time.
Due to the nature of our global hedging strategy, we are not using hedge accounting as defined under ASC 815, Derivatives and Hedging. Gains or losses resulting from our 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, 7 and 10 to the accompanying condensed consolidated financial statements). 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 three and six months ended December 31, 2013 were $7.7 million and $(9.9) million, respectively. Realized and unrealized net gains (losses) on derivative instruments in the condensed consolidated statements of operations for the three and six months ended December 31, 2012 were $(28.4) million and $(8.2) million, respectively.
At December 31, 2013 and June 30, 2013, we had the following outstanding purchase and sale commitments:
(in thousands) | December 31, 2013 | June 30, 2013 | ||||||
Purchase commitments | $ | 391,320 | $ | 461,883 | ||||
Sales commitments | (138,805 | ) | (272,044 | ) | ||||
Margin sale commitments | (15,765 | ) | (13,651 | ) | ||||
Open forward contracts | 167,928 | 84,999 | ||||||
Open futures contracts | 171,728 | 171,272 |
The contract amounts of these forward and futures contracts and the open purchase and sale orders are not reflected in the accompanying condensed consolidated balance sheets. The difference between the market price of the underlying metal or contract and the trade amount is recorded at fair value. Our open purchase and sales commitments generally settle within 2 business days, and for those commitments that do not have stated settlement dates, we have the right to settle the positions upon demand. Futures and forwards contracts open at December 31, 2013 are scheduled to settle within 30 days.
We are exposed to the risk of failure of the counter parties to our derivative contracts. Significant judgment is applied by us when evaluating the fair value implications. We regularly review the creditworthiness of our major counterparties and monitor our exposure to concentrations. At December 31, 2013, we believe our risk of counterparty default is mitigated based on our evaluation, the strong financial condition of our counterparties, and the short-term duration of these arrangements.
* * *
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CRITICAL ACCOUNTING ESTIMATES
During the quarter ended December 31, 2013, there were no changes in the critical accounting policies or estimates that were described in Item 7 of our 2013 Annual Report. Readers of this report are urged to read that section of the 2013 Annual Report for a more complete understanding of our critical accounting policies and estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASC") 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 our 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. We 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. We 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 our 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 our consolidated financial position or results of operations. The FASB issued ASU 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:
• | 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 |
• | 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. We 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 our consolidated financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting companies
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer, with the assistance of other members of our management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of that date, our disclosure controls and procedures were not effective.
Our principal executive officer and principal financial officer have also concluded that there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company operated with inadequate and insufficient accounting and finance resources to ensure timely and reliable financial reporting. As a result of this material weakness, the Company's management has concluded that, as of December 31, 2013, its internal control over financial reporting was not effective. To remediate this material weakness, during fiscal 2014, we intend to:
• | Determine the appropriate complement of corporate accounting and finance personnel required to ensure timely and reliable financial reporting, and; |
• | Hire the requisite additional personnel and/or contractors with public company accounting and reporting experience, and; |
• | Organize and design our internal review and evaluation process to include more formal management oversight of the methods and review procedures utilized and the conclusions reached, including for purposes of evaluating and ensuring the sufficiency of accounting resources. |
We can give no assurance that the measures we take will remediate the material weakness that we identified or that any additional material weaknesses will not arise in the future. We will continue to monitor the effectiveness of these and other processes, procedures and controls and will make any further changes management determines appropriate.
The existence of one or more other material weaknesses or significant deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be adversely affected.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in which we are involved are discussed in Part I, Item 3 of our 2013 Annual Report on Form 10-K, and in Note 15 to the Notes to Consolidated Financial Statements in our 2013 Annual Report, which are incorporated into this filing by reference. There have been no material developments in those legal proceedings since the date of our 2013 Annual Report.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our 2013 Annual Report, which are incorporated by reference into this filing.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
During the quarter ended September 30, 2013, the Company did not issue any unregistered common shares.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
A stock repurchase plan was approved by the Board of Directors on February 8, 2013, and provided for repurchases of up to $5 million. The following table describes purchases by the Company of shares of its common stock which settled during each period set forth in the table. Purchases in column (c) were made pursuant to the Company's stock repurchase plan. The approximate dollar value of remaining shares that may be purchased under the stock repurchase plan of $4,593,815 remains open through August 8, 2014.
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Issuers Purchases of Equity Securities
(a) | (b) | (c) | (d) | |||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that may Yet be Purchased Under the Plans or Programs | ||
October 1 to October 31, 2013 | 7,253 | $1.81 | — | $4,593,815 | ||
November 1 to November 30, 2013 | — | $— | — | $4,593,815 | ||
December 1 to December 31, 2013 | — | $— | — | $4,593,815 | ||
Total | 7,253 | $1.81 | — |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Regulation S-K Exhibit Table Item No. | Description of Exhibit |
2.1 | Separation and Distribution Agreement between Spectrum Group International, Inc. and A-Mark Precious Metals, Inc., dated February 12, 2014. |
10.1 | Amendment No. 1 to Employment Agreement, as amended and restated as of February 14, 2013, between Spectrum Group International, Inc. and Gregory N. Roberts. |
10.2 | Secondment Agreement between Spectrum Group International, Inc. and A-Mark Precious Metals, Inc, dated February 12, 2014. |
10.3 | Tax Separation Agreement between Spectrum Group International, Inc. and A-Mark Precious Metals, Inc., dated February 12, 2014. |
31.1 | Certification by the Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification by the Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification by Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification by Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Calculation Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | February 14, 2014 | SPECTRUM GROUP INTERNATIONAL, INC. | |||
By: | /s/ Gregory N. Roberts | ||||
Name: | Gregory N. Roberts | ||||
Title: | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures | Title(s) | Date |
/s/ Gregory N. Roberts | President, Chief Executive Officer and Director | February 14, 2014 |
Gregory N. Roberts | (Principal Executive Officer) | |
/s/ Paul Soth | Chief Financial Officer and Executive Vice President | February 14, 2014 |
Paul Soth | (Principal Financial Officer) |
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