Gold.com, Inc. 10-Q

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. In addition to the risks and uncertainties that may ordinarily influence our business, the Company is exposed to the effects of the COVID-19 pandemic. The extent to which this outbreak ultimately impacts our results of operations, cash flows, and financial condition will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity and duration of this outbreak and the actions taken by governmental authorities and us to contain it or treat its impact. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes contained elsewhere in this Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report, particularly in “ Risk Factors .” 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 aid in the understanding of our results of operations and financial condition. Our discussion is organized as follows: • Executive overview. This section provides a general description of our business, as well as significant transactions and events that we believe are important in understanding the results of operations. • Results of operations . This section provides an analysis of our results of operations presented in the accompanying condensed consolidated statements of income by comparing the results for the respective periods presented. Included in our analysis is a discussion of five performance metrics: (i) Ounces of gold and silver sold, (ii) Wholesale trading ticket volume, (iii) Direct Sales ticket volume, (iv) inventory turnover ratio and (v) number of secured loans at period-end. • Segment results of operations . This section provides an analysis of our results of operations presented for our three segments: o Wholesale Trading & Ancillary Services , o Secured Lending , and o Direct Sales for the comparable periods. • Liquidity and financial condition . This section provides an analysis of our cash flows, as well as a discussion of our outstanding debt as of September 30, 2020. Included in this section is a discussion of our: outstanding debt, the amount of financial capacity available to fund our future commitments and other financing arrangements. 43 • Critical accounting policies . This section discusses critical accounting policies that are considered both important to our financial condition and results of op erations, and require management to make significant judgment and estimates. All of our significant accounting policies, including the critical accounting policies are also summarized in Note 2 of the notes to the condensed consolidated financial statements. • Recent accounting pronouncements . This section discusses new accounting pronouncements, dates of implementation and their expected impact on our accompanying condensed consolidated financial statements. EXECUTIVE OVERVIEW Our Business We conduct our operations in three reportable segments: (i) Wholesale Trading & Ancillary Services, (ii) Secured Lending and (iii) Direct Sales. Wholesale Trading & Ancillary Services Segment The Company operates its Wholesale Trading & Ancillary Services segment through A-Mark Precious Metals, Inc., and its wholly-owned subsidiaries, A-Mark Trading AG (“AMTAG”), Transcontinental Depository Services ("TDS" or “Storage”), and A-M Global Logistics, LLC. (“AMGL” or "Logistics"), and its partially-owned subsidiary, AM&ST Associates, LLC. ("AMST" or "SilverTowne" or the "Mint"). The Wholesale Trading & Ancillary Services segment operates as a full-service precious metals trading company. We offer gold, silver, platinum, and palladium in the form of bars, plates, powder, wafers, grain, ingots, and coins. Our Industrial unit services manufacturers and fabricators of products utilizing or incorporating precious metals. Our Coin and Bar unit deals in over 200 coin and bar products in a variety of weights, shapes, and sizes for distribution to dealers and other qualified purchasers. We have a marketing support office in Vienna, Austria, and a trading center in El Segundo, California. The trading center, for buying and selling precious metals, is available to receive orders 24 hours every day, even when many major world commodity markets are closed. In addition to wholesale trading activity, A-Mark offers its customers a variety of services, including financing, storage, consignment, logistics, and various customized financial programs. As a U.S. Mint-authorized purchaser of gold, silver, platinum, and palladium coins, A-Mark purchases product directly from the U.S. Mint and other sovereign mints for sale to its customers. Through its wholly owned subsidiary, AMTAG, the Company promotes A-Mark's products and services throughout the European continent. Through our wholly owned subsidiary TDS, we offer a variety of managed storage options for precious metals products to financial institutions, dealers, investors, and collectors around the world. Our storage business generated less than 1% of total revenues for each of the periods presented. The Company's wholly owned subsidiary, AMGL, is based in Las Vegas, Nevada, and provides our customers an array of complementary services, including receiving, handling, inventorying, processing, packing, and shipping of precious metals and custom coins on a secure basis. Our logistics business generated less than 1% of the total revenues for each of the periods presented. Through our partially owned subsidiary, AMST, the Company designs and produces minted silver products. The Company operates the Mint pursuant to a joint venture agreement with SilverTowne, L.P. The Company and SilverTowne L.P. own 69% and 31%, respectively, of AMST. AMST acquired the entire minting operations (referred to as SilverTowne Mint) of SilverTowne, L.P., with the goal of providing greater product selection to our customers and greater pricing stability within the supply chain, as well as to gain increased access to silver during volatile market environments, which have historically created higher demand for precious metals products. Secured Lending Segment The Company operates its Secured Lending segment through its wholly owned subsidiaries, Collateral Finance Corporation LLC. ("CFC") and AM Capital Funding, LLC. (“AMCF”). CFC is a California licensed finance lender that originates and acquires commercial loans secured by bullion and numismatic coins. CFC's customers include coin and precious metal dealers, investors, and collectors. As of September 30, 2020, CFC and AMCF had, in aggregate, approximately $84.2 million in secured loans outstanding, of which approximately 61.5% were acquired from third-parties (some of which may be customers of A-Mark) and approximately 38.5% were originated by CFC. 44 AMCF, a wholly owned subsidiary of CFC, was formed for the purpose of securitizing eligible secured loans of CFC. AMCF is sued, administers, and owns Secured Senior Term Notes: Series 2018-1, Class A, with an aggregate principal amount of $72.0 million and Secured Subordinated Term Notes, Series 2018-1, Class B in the aggregate principal amount of $28.0 million. The Class A Notes bear interest at a rate of 4.98%, and the Class B Notes bear interest at a rate of 5.98% (collectively referred to as the "Notes"). The Notes have a maturity date of December 15, 2023. For additional informa tion s ee Note 14 of the notes to condensed consolidated financial statements . Direct Sales Segment The Company operates its Direct Sales segment through its wholly owned subsidiaries Goldline Inc. (“Goldline”) and AM IP LLC. ("AMIP"), and through its 50%-owned subsidiary Precious Metals Purchasing Partners, LLC, ("PMPP"). The Company acquired Goldline in August 2017 through an asset purchase transaction with Goldline LLC. Goldline LLC. had been in operation since 1960. Goldline is a direct retailer of precious metals to the investor community. Goldline markets its precious metal products on television, radio, and the internet, as well as through telephonic sales efforts. Goldline's business has enhanced the Company’s distribution capabilities by adding a direct-to-client distribution channel that has diversified the product and services offered to Goldline's customers, through access to the Company’s wider assortment of precious metal coins and bars, including TDS’s storage and asset protection services. AMIP, a wholly owned subsidiary of Goldline, manages its intellectual property. In fiscal 2019, the Company formed and capitalized PMPP, a 50%-owned subsidiary of Goldline, pursuant to terms of a joint venture agreement, for the purpose of purchasing precious metals from the partners' retail customers, and then reselling the acquired products to affiliates of the partners. PMPP commenced its operations in fiscal 2020. Our Strategy The Company was formed in 1965 and has grown into a significant participant in the bullion and coin markets, with approximately $5.5 billion in revenues for fiscal year 2020. Our strategy continues to focus on growth, including the volume of our business, our geographic presence, and the scope of complementary products, services, and technological tools that we offer to our customers. We intend to promote our growth by leveraging off the strengths of our existing integrated operations: • the depth of our customer relationships; • our access to market makers, suppliers, and sovereign and private mints; • our trading systems in the U.S. and Europe; • our expansive precious metals dealer network; • our depository relationships around the world; • our knowledge of secured lending; • our logistics capabilities; • our trading expertise; and • the quality and experience of our management team. Our Customers Our customers include financial institutions, bullion retailers, industrial manufacturers and fabricators, sovereign mints, refiners, coin and metal dealers, investors, and collectors. The Company makes a two way market, which results in many customers also operating as our suppliers. This diverse base of customers purchases a variety of products from the Company in a multitude of grades, primarily in the form of coins and bars. 45 Factors Affecting Revenues, Gross Profits, Interest Income, and Interest Expen se Revenues . The Company enters into transactions to sell and deliver gold, silver, platinum, and palladium to industrial and commercial users, coin and bullion dealers, mints, and financial institutions. The metals are investment or industrial grade and are sold in a variety of shapes and sizes. The Company also sells precious metals on forward contracts at a fixed price based on current prevailing precious metal spot prices with a certain delivery date in the future (up to six months from inception date of the forward contract). The Company also uses other derivative products (primarily futures contracts) or a combinations thereof to hedge commodity risks. We enter into these forward and future contracts as part of our hedging strategy to mitigate our price risk of holding inventory; they are not entered into for speculative purposes. However, unlike futures contracts which do not impact the Company’s revenue, forward sales contracts by their nature are required to be included in revenues. The decision to use a forward contract verses another derivative type product (e.g., a futures contract) for hedging purposes is based on the economics of the transaction. Since the volume of hedging can be significant, the movement in and out of forwards can substantially impact revenues, either positively or negatively, from period to period. For this reason, the Company believes ounces sold (excluding ounces sold on forward sales contracts) is a meaningful metric to assess our top line performance. In addition, the Company earns revenue by providing storage solutions for precious metals and numismatic coins for financial institutions, dealers, investors and collectors worldwide and by providing storage and order-fulfillment services to our retail customers. These revenue streams are complementary to our trading activity and represent less than 1% of our revenues. The Company operates in a high volume/low margin industry. Revenues are impacted by three primary factors: product volume, market prices and market volatility. A material change in any one or more of these factors may result in a significant change in the Company’s revenues. A significant increase or decrease in revenues can occur simply based on changes in the underlying commodity prices and may not be reflective of an increase or decrease in the volume of products sold. Gross Profit . Gross profit is the difference between our revenues and the cost of our products sold. Since we quote prices based on the current commodity market prices for precious metals, we enter into a combination of forward and futures contracts to effect a hedge position equal to the underlying precious metal commodity value, which substantially represents inventory subject to price risk. We enter into these derivative transactions solely for the purpose of hedging our inventory, and not for speculative purposes. Our gross profit includes the gains and losses resulting from these derivative instruments. However, the gains and losses on the derivative instruments are substantially offset by the gains and losses on the corresponding changes in the market value of our precious metals inventory. As a result, our results of operations generally are not materially impacted by changes in commodity prices. Volatility also affects our gross profit. Greater volatility typically causes the premium spreads to widen resulting in an increase in the gross profit. Product supply constraints during extended periods of higher volatility have historically resulted in a heightening of wider premium spreads resulting in further improvement in the gross profit. Interest Income . The Company enters into secured loans and secured financing structures with its customers under which it charges interest. CFC acquires loan portfolios and originates loans that are secured by precious metal bullion and numismatic material owned by the borrowers and held by the Company for the term of the loan. Additionally, AMCF acquires certain loans from CFC that are secured by precious metal bullion to meet the collateral requirements of the Notes. Also, the Company offers a number of secured financing options to its customers to finance their precious metals purchases including consignments and other structured inventory finance products whereby the Company earns a fee based on the underlying value of the precious metal ("repurchase arrangements with customers"). Interest Expense . The Company incurs interest expense associated with its: lines of credit, notes, related-party debt, product financing agreements for the transfer and subsequent re-acquisition of gold and silver at a fixed price with a third-party finance company ("product financing arrangements"), and short-term precious metal borrowing arrangements with our suppliers ("liabilities on borrowed metals"). 46 Performance Metrics In addition to financial statement indicators, management also utilizes certain key operational metrics to assess the performance of our business. Gold and Silver Ounces Sold and Delivered to Customers . We look at the number of ounces of gold and silver sold and delivered to our customers (excluding ounces recorded on forward contracts). These metrics reflect our business volume without regard to changes in commodity pricing, which also impacts revenue but can mask actual business trends. The primary purpose of entering into forward sales transactions is to hedge commodity price risk. Although the revenues realized from these forward sales transactions are often significant, they generally have negligible impact to gross margins. As a result, the Company excludes the ounces recorded on forward contracts from its performance metrics, as the Company does not enter into forward sales transactions for speculative purposes. Wholesale Trading Ticket Volume and Direct Sales Ticket Volume . Another measure of our business that is unaffected by changes in commodity pricing, is ticket volume. Ticket volume for the Wholesale Trading & Ancillary Services and Direct Sales segments measures the total number of orders processed by our trading desks. In periods of higher volatility, there is generally increased trading in the commodity markets, causing increased demand for our products, resulting in higher business volume. Generally, the ounces sold on a per-trading-ticket basis is substantially higher for orders placed telephonically compared to those placed on our online portal platform. Inventory Turnover . Inventory turnover is another performance measure on which we are focused and is calculated as the cost of sales divided by the average inventory during the relevant period. Inventory turnover is a measure of how quickly inventory has moved during the period. A higher inventory turnover ratio, which we typically experience during periods of higher volatility when trading is more robust, typically reflects a more efficient use of our capital. The period of time that inventory is held by the Company varies depending upon the nature of our inventory commitments with customers and suppliers. (See Note 6 of the notes to condensed consolidated financial statements for a description of our classifications of inventory by type.) When management analyzes inventory turnover on a period over period basis, consideration is given to each inventory type and its corresponding impact on the inventory turnover calculation. Management's analysis includes the following: • The Company enters into various structured borrowing arrangements that commit the Company's inventory (such as; product financing arrangements or liabilities on borrowed metals) for an unspecified period of time. While the Company is able to obtain access to this inventory on demand, there is a tendency that this type of inventory does not turn over as quickly as other types of inventory. • The Company enters into repurchase arrangements with customers under which A-Mark holds precious metals which are subject to repurchase for an unspecified period of time. While the Company retains legal title to this inventory, the Company is required to hold this inventory (or like-kind inventory) for the customer until the arrangement is terminated or the material is repurchased by the customer. As a result, there is a tendency that this type of inventory does not turn over as quickly as other types of inventory. Additionally, our inventory turnover ratio can be affected by hedging activity, as the period over period change of the inventory turnover ratio may be significantly impacted by a period over period change in hedging volume. For example, if trading activity were to remain constant over two periods, but there were significantly higher forward sales in the current period compared to a prior period, the calculated inventory turnover ratio would indicate an increase in the ratio rather than remaining constant. Number of Secured Loans . Finally, as a measure of the size of our secured lending segment, we look at the number of outstanding secured loans to customers that are primarily collateralized by precious metals at the end of each quarter. Typically, the number of loans increases during periods of increasing precious metal pricing and decreases during periods of declining precious metal prices. The Company calculates its loan-to-value ("LTV") ratio as the principal amount of the loan divided by the liquidation value of the collateral, which is based on daily spot market prices of precious metal bullion. When the market price of the pledged collateral decreases and thereby increases the LTV ratio of a loan above a prescribed maximum ratio, usually 85%, the Company has the option to make a margin call on the loan. As a result, a decline of precious metal market prices may cause a decrease in the number of loans outstanding in a period. 47 COVID-19 On March 11, 2020, the World Health Organization announced that infections of COVID-19 had become pandemic, and on March 13, the U.S. President declared a national emergency due to the spread of the disease in the United States. The COVID-19 outbreak has caused significant disruption in the financial markets both globally and in the United States, and has severely constricted the level of economic activity worldwide. The resulting macroeconomic events contributed to an increase in the business conducted by the Company, but also pose certain risks and uncertainties for the Company. It is challenging to predict how long the COVID-19 pandemic will continue, the extent to which the effects that the Company has experienced from the pandemic thus far will persist, or whether other effects on the Company and its businesses will materialize in the short or long term. Macroeconomic events have positively affected the Company’s trading revenues and gross profit as the volatility of the price of precious metals and numismatics resulted in a material increase in the spread between bid and ask prices on these products. We also experienced substantially increased demand for products in each of our coin and bar, industrial and retail (Goldline) businesses, which we attribute to certain customers seeking to assure a supply of precious metals necessary for the operation of their businesses, and other customers’ seeking the safety of investments in precious metals. In response to the heightened demand, in certain cases prices for the products we sell have also risen. We have also experienced certain negative effects in the precious metals market. Through our CFC finance subsidiary, we make loans to our customers secured by coins and precious metals. Numerous CFC loans were paid off in March 2020 when the market experienced a temporary drop in precious metal prices, which reduced collateral coverage. This had the effect of decreasing the size of our loan portfolio and the interest earned on the portfolio. It also required us to substitute cash and our own precious metals inventory as collateral under our AMCF securitization program, as the pool of loans securing the program declined. While we did not experience any related losses, there is no assurance that this might not occur in the future. In the two successive quarters, as silver prices rebounded, the Company has experienced growth in its loan portfolio. Fiscal Year Our fiscal year end is June 30 each year. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. 48 RESULTS OF OPERA TIONS Overview of Results of Operations for the Three Months Ended September 30, 2020 and 2019 Condensed Consolidated Results of Operations The operating results of our business for the three months ended September 30, 2020 and 2019 are as follows: in thousands, except per share data and performance metrics Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Revenues $ 1,866,116 100.000 % $ 1,481,014 100.000 % $ 385,102 26.0 % Gross profit 36,145 1.937 % 8,340 0.563 % $ 27,805 333.4 % Selling, general, and administrative expenses (10,006 ) (0.536 )% (8,270 ) (0.558 )% $ 1,736 21.0 % Interest income 3,983 0.213 % 5,768 0.389 % $ (1,785 ) (30.9 %) Interest expense (4,293 ) (0.230 )% (5,142 ) (0.347 )% $ (849 ) (16.5 %) Other income (expense), net 4,485 0.240 % (166 ) (0.011 )% $ 4,651 2,801.8 % Unrealized losses on foreign exchange (97 ) (0.005 )% (122 ) (0.008 )% $ (25 ) (20.5 %) Net income before provision for income taxes 30,217 1.619 % 408 0.028 % $ 29,809 7,306.1 % Income tax expense (6,511 ) (0.349 )% (105 ) (0.007 )% $ 6,406 6,101.0 % Net income 23,706 1.270 % 303 0.020 % $ 23,403 7,723.8 % Net income attributable to non-controlling interests 623 0.033 % 175 0.012 % $ 448 256.0 % Net income attributable to the Company $ 23,083 1.237 % $ 128 0.009 % $ 22,955 17,933.6 % Basic and diluted net income per share attributable to A-Mark Precious Metals, Inc.: Per Share Data: Basic $ 3.28 $ 0.02 $ 3.26 16,300.0 % Diluted $ 3.09 $ 0.02 $ 3.07 15,350.0 % Performance Metrics: (1) Gold ounces sold (2) 721,000 576,000 145,000 25.2 % Silver ounces sold (3) 24,248,000 20,911,000 3,337,000 16.0 % Inventory turnover ratio (4) 5.0 4.4 0.6 13.6 % Number of secured loans at period end (5) 1,125 3,571 (2,446 ) (68.5 %) (1) See "Results of Segments" for ticket count volume by segment. (2) Gold ounces sold represents the ounces of gold product sold and delivered to the customer during the period, excluding ounces of gold recorded on forward contracts. (3) Silver ounces sold represents the ounces of silver product sold and delivered to the customer during the period, excluding ounces of silver recorded on forward contracts. (4) Inventory turnover ratio is the cost of sales divided by average inventory for the period presented above. This calculation excludes precious metals held under financing arrangements, which are not classified as inventory on the consolidated balance sheets. (5) Number of outstanding secured loans to customers at the end of the period. Revenues in thousands, except performance metrics Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Revenues $ 1,866,116 100.000 % $ 1,481,014 100.000 % $ 385,102 26.0 % Performance Metrics Gold ounces sold 721,000 576,000 145,000 25.2 % Silver ounces sold 24,248,000 20,911,000 3,337,000 16.0 % Revenues for the three months ended September 30, 2020 increased $385.1 million, or 26.0%, to $1.866 billion from $1.481 billion in 2019. Excluding a decrease of $111.2 million of forward sales, our revenues increased $496.3 million or 40.5% attributable to an increase in the total amount of gold and silver ounces sold and higher selling prices of gold and silver. Gold ounces sold for the three months ended September 30, 2020 increased 145,000 ounces, or 25.2%, to 721,000 ounces from 576,000 ounces in 2019. Silver ounces sold for the three months ended September 30, 2020 increased 3,337,000 ounces, or 16.0%, to 49 24,248,000 ounces from 20,911,000 ounces in 2019 . On average, selling prices for gold increased by 29.9% and selling prices for silver increased by 35.2% during the three months ended September 30, 2020 as compared to 2019 . A combination of price volatility, increased demand, and supply constraints led to a significant expansion in premium spreads in the precious metals market during the quarter. These factors were brought on by the volatility in precious metal prices caused by macroeconomic and other events. These conditions are not representative of normal market conditions, and we are uncertain of the duration of these conditions. Gross Profit in thousands, except performance metric Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Gross profit $ 36,145 1.937 % $ 8,340 0.563 % $ 27,805 333.4 % Performance Metric Inventory turnover ratio 5.0 4.4 0.6 13.6 % Gross profit for the three months ended September 30, 2020 increased by $27.8 million, or 333.4%, to $36.1 million from $8.3 million in 2019. The overall gross profit increase was due to higher gross profits from the Wholesale Trading & Ancillary Services and Direct Sales segments. The Company’s overall gross margin percentage increased by 137.4 basis points or 244.0% to 1.937% from 0.563% in 2019. The increase in gross margin percentage was mainly attributable to significantly wider premium spreads due to increased demand, higher trading profits due to higher volatility, and lower forward sales. Forward sales increase revenues but are associated with negligible gross margins. The Company enters into forward contracts to hedge its precious metals price risk exposure and not for speculative purposes. Our inventory turnover rate for the three months ended September 30, 2020 increased by 13.6%, to 5.0 from 4.4 in 2019. The increase in our inventory turnover ratio was primarily due to higher volume of ounces sold of precious metals, partially offset by lower volume of ounces sold on forward contracts as well as higher average inventory balances during the three months ended September 30, 2020 as compared to 2019. Selling, General and Administrative Expense in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Selling, general, and administrative expenses $ (10,006 ) (0.536 )% $ (8,270 ) (0.558 )% $ 1,736 21.0 % Selling, general and administrative expenses for the three months ended September 30, 2020 increased $1.7 million, or 21.0%, to $10.0 million from $8.3 million in 2019. The change was primarily due to increases in compensation expense (including performance-based accruals) of $1.8 million and computer software expense of $0.2 million, which were partially offset by decreases in operating expenses of $0.2 million associated with our Direct Sales segment, and depreciation and amortization expense of $0.1 million. Interest Income in thousands, except performance metric Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Interest income $ 3,983 0.213 % $ 5,768 0.389 % $ (1,785 ) (30.9 %) Performance Metric Number of secured loans at period-end 1,125 3,571 (2,446 ) (68.5 %) 50 Interest income for the three months ended September 30, 2020 decreased $1.8 millio n , or 30.9% , to $4.0 million from $5.8 million in 2019 . The aggregate decrease in interest income was primarily due to low er interest income earned by our Secured Lending segment , partially offset by higher other finance product income. The interest income from our Secured Lending segment decreased by $2.0 million or by 55.9%, which represents the majority of the aggregate decrease in interest income compared with the prior year. The decrease in interest income earned from the segment’s secured loan portfolio was primarily due to lower average monthly loan balances during the current period as compared to the average monthly loan balances for the comparable period. The number of secured loans outstanding decreased by 68.5% to 1,125 from 3,571 in 2019. Typically, the number of loans increases during periods of increasing precious metal prices and decreases during periods of declining precious metal prices. Silver prices declined significantly in the quarter ended March 31, 2020, resulting in an increase in margin calls and borrower loan liquidations due to a decline in the value of the precious metals collateral. The Company did not incur loan losses related to these margin calls or borrower loan liquidations. In the two successive quarters, as silver prices rebounded, the Company experienced growth in the number of loans in the portfolio. The Company did not incur loan losses related to the margin calls or borrower loan liquidations during the three months ended September 30, 2020 or the comparable period. The interest income from our finance products increased by $0.2 million in comparison to the same year-ago period. Interest Expense in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Interest expense $ (4,293 ) (0.230 )% $ (5,142 ) (0.347 )% $ (849 ) (16.5 %) Interest expense for the three months ended September 30, 2020 decreased $0.8 million, or 16.5% to $4.3 million from $5.1 million in 2019. The decrease was primarily due to reductions in interest expense related to our Trading Credit Facility and loan servicing fees, partially offset by increases in interest expense related to our liabilities on borrowed metals, and product financing arrangements. As compared to the same year-ago period, the interest expense decrease by component included: (i) $0.8 million related to the Trading Credit Facility (including debt amortization costs), (ii) $0.3 million of loan servicing fees, which were offset by increases of (iii) $0.1 million of liabilities on borrowed metals, and (iv) $0.1 million of product financing arrangements. Interest expense primarily decreased due to lower interest rates and lower loan servicing fees due to lower average monthly loan balances, as compared to the prior comparable period. Other income (expense), net in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Other income (expense), net $ 4,485 0.240 % $ (166 ) (0.011 )% $ 4,651 2,801.8 % Other income (expense), net for the three months ended September 30, 2020 increased $4.7 million, or 2801.8% to $4.5 million from $(0.2) million in 2019. The aggregate increase was primarily due to (i) an increase in the Company’s proportionate share of our equity-method investees' earnings by $4.1 million, (ii) an increase of $0.3 million in royalties earned, and (iii) a decrease of $0.2 million of costs associated with the settlement of the purchase price of Goldline, compared to the prior comparable period. 51 Provision for Income Taxes in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Income tax expense $ (6,511 ) (0.349 )% $ (105 ) (0.007 )% $ 6,406 6,101.0 % Our income tax expense was $6.5 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively. Our effective tax rate was approximately 21.5% and 25.7% for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020, our effective tax rate differs from the federal statutory rate primarily due to state taxes (net of federal tax benefit), Section 162(m) executive compensation disallowance, offset by the exclusion of profits related to the Company's minority interests, special deduction relating to foreign-derived intangible income, and stock-based - compensation. SEGMENT RESULTS OF OPERATIONS The Company conducts its operations in three reportable segments: (i) Wholesale Trading & Ancillary Services, (ii) Secured Lending and (iii) Direct Sales. Each of these reportable segments represents an aggregation of operating segments that meets the aggregation criteria set forth in the Segment Reporting Topic 280 of the FASB Accounting Standards Codification (“ASC”). Results of Operations — Wholesale Trading & Ancillary Services Segment The Company operates its Wholesale Trading & Ancillary Services segment through A-Mark Precious Metals, Inc., and its wholly owned subsidiaries, A-Mark Trading AG (“AMTAG”), Transcontinental Depository Services ("TDS"), and A-M Global Logistics, LLC. ("Logistics"), and its partially owned subsidiary, AM&ST Associates, LLC. ("AMST" or "SilverTowne" or the "Mint"). Also, the Wholesale Trading & Ancillary Services segment includes the consolidating eliminations of inter-segment transactions. Overview of Results of Operations for the Three Months Ended September 30, 2020 and 2019 — Wholesale Trading & Ancillary Services Segment The operating results of our Wholesale Trading & Ancillary Services segment for the three months ended September 30, 2020 and 2019 are as follows: in thousands, except performance metrics Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Revenues $ 1,813,708 100.000 % $ 1,460,933 100.000 % $ 352,775 24.1 % Gross profit 30,622 1.688 % 6,760 0.463 % $ 23,862 353.0 % Selling, general, and administrative expenses (7,607 ) (0.419 )% (5,802 ) (0.397 )% $ 1,805 31.1 % Interest income 2,438 0.134 % 2,262 0.155 % $ 176 7.8 % Interest expense (2,948 ) (0.163 )% (2,826 ) (0.193 )% $ 122 4.3 % Other income, net 4,126 0.227 % 12 0.001 % $ 4,114 34,283.3 % Unrealized losses on foreign exchange (97 ) (0.005 )% (122 ) (0.008 )% $ (25 ) (20.5 %) Net income before provision for income taxes $ 26,534 1.463 % $ 284 0.019 % $ 26,250 9,243.0 % Performance Metrics: Gold ounces sold (1) 704,000 566,000 138,000 24.4 % Silver ounces sold (2) 23,918,000 20,720,000 3,198,000 15.4 % Wholesale Trading ticket volume (3) 35,341 36,248 (907 ) (2.5 %) (1) Gold ounces sold represents the ounces of gold product sold and delivered to the customer during the period, excluding ounces of gold recorded on forward contracts. (2) Silver ounces sold represents the ounces of silver product sold and delivered to the customer during the period, excluding ounces of silver recorded on forward contracts. (3) Trading ticket volume represents the total number of product orders processed by A-Mark. 52 Revenues — Wholesale Trading & Ancillary Services in thousands, except performance metrics Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Revenues $ 1,813,708 100.000 % $ 1,460,933 100.000 % $ 352,775 24.1 % Performance Metrics Gold ounces sold 704,000 566,000 138,000 24.4 % Silver ounces sold 23,918,000 20,720,000 3,198,000 15.4 % Revenues for the three months ended September 30, 2020 increased $352.8 million, or 24.1%, to $1.814 billion from $1.461 billion in 2019. Excluding a decrease of $111.2 million of forwards sales, our revenues increased $464.0 million or 38.5% due to an increase in the total amount of gold and silver ounces sold and higher selling prices of gold and silver. Gold ounces sold for the three months ended September 30, 2020 increased 138,000 ounces, or 24.4%, to 704,000 ounces from 566,000 ounces in 2019. Silver ounces sold for the three months ended September 30, 2020 increased 3,198,000 ounces, or 15.4%, to 23,918,000 ounces from 20,720,000 ounces in 2019. On average, selling prices for gold increased by 29.5% and selling prices for silver increased by 34.9% during the three months ended September 30, 2020 as compared to 2019. A combination of price volatility, increased demand, and supply constraints led to a significant expansion in premium spreads in the precious metals market during the quarter. These factors were brought on by the volatility in precious metal prices caused by macroeconomic and other events. These conditions are not representative of normal market conditions, and we are uncertain of the duration of these conditions. Gross Profit — Wholesale Trading & Ancillary Services in thousands, except performance metric Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Gross profit $ 30,622 1.688 % $ 6,760 0.463 % $ 23,862 353.0 % Performance Metric Wholesale trading ticket volume 35,341 36,248 (907 ) (2.5 %) Gross profit for the three months ended September 30, 2020 increased by $23.9 million, or 353.0%, to $30.6 million from $6.8 million in 2019. The o verall gross profit increase was primarily due to higher sales volumes and increased premium spreads. This segment’s profit margin percentage increased by 122.5 basis points or 264.6% to 1.688% from 0.463% in 2019. The increase in gross margin percentage was mainly attributable to significantly wider premium spreads due to increased demand, higher trading profits due to higher volatility, and lower forward sales. Forward sales increase revenues but are associated with negligible gross margins. The Company enters into forward contracts to hedge its precious metals price risk exposure and not for speculative purposes. The wholesale trading ticket volume for the three months ended September 30, 2020 decreased by 907 tickets, or 2.5%, to 35,341 tickets from 36,248 tickets in 2019. The decrease in our trading ticket volume was primarily due to fewer online sales orders, which are typically for smaller orders, as compared to 2019. Selling, General and Administrative Expenses — Wholesale Trading & Ancillary Services in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Selling, general, and administrative expenses $ (7,607 ) (0.419 )% $ (5,802 ) (0.397 )% $ 1,805 31.1 % 53 Selling, general and administrative expenses for the three months ended September 30, 2020 increased $1.8 million , or 31.1% , to $7.6 million from $5.8 million in 2019 . The change was primarily due to increases in compensation accruals (including performanc e-based accruals) of $ 1 . 8 million . Interest Income — Wholesale Trading & Ancillary Services in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Interest income $ 2,438 0.134 % $ 2,262 0.155 % $ 176 7.8 % Interest income for the three months ended September 30, 2020 increased $0.2 million, or 7.8%, to $2.4 million from $2.3 million in 2019. The overall increase is primarily due to $0.2 million of finance product income and $0.1 million of interest income earned from a note receivable, partially offset by a $0.1 million decrease in margin interest income. Interest Expense — Wholesale Trading & Ancillary Services in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Interest expense $ (2,948 ) (0.163 )% $ (2,826 ) (0.193 )% $ 122 4.3 % Interest expense for the three months ended September 30, 2020 increased $0.1 million, or 4.3% to $2.9 million from $2.8 million in 2019. The net increase of $0.1 million was primarily related to our liability on borrowed metals transactions. Other income, net — Wholesale Trading & Ancillary Services in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Other income, net $ 4,126 0.227 % $ 12 0.001 % $ 4,114 34,283.3 % Other income, net for the three months ended September 30, 2020 increased $4.1 million or 34283.3% to $4.1 million from $0.0 million in 2019. The aggregate increase was primarily due the Company’s proportionate share of our equity-method investees' earnings. 54 Results of Operations — Secured Lending Segment The Company operates its Secured Lending segment through its wholly owned subsidiaries, Collateral Finance Corporation LLC. ("CFC") and AM Capital Funding, LLC. (“AMCF”). AMCF was formed in September 2018, and its financial activity was incorporated into the Secured Lending segment's results thereafter. Overview of Results of Operations for the Three Months Ended September 30, 2020 and 2019 — Secured Lending Segment The operating results of our Secured Lending segment for the three months ended September 30, 2020 and 2019 are as follows: in thousands, except performance metrics Three Months Ended September 30, 2020 2019 $ % $ % of interest income $ % of interest income Increase/ (decrease) Increase/ (decrease) Interest income $ 1,545 100.000 % $ 3,506 100.000 % $ (1,961 ) (55.9 %) Interest expense (1,345 ) (87.055 )% (2,316 ) (66.058 )% $ (971 ) (41.9 %) Selling, general and administrative expenses (496 ) (32.104 )% (348 ) (9.926 )% $ 148 42.5 % Other income, net 359 23.236 % 42 1.198 % $ 317 754.8 % Net income before provision for income taxes $ 63 4.078 % $ 884 25.214 % $ (821 ) (92.9 %) Performance Metric: Number of secured loans at period end (1) 1,125 3,571 (2,446 ) (68.5 %) (1) Number of outstanding secured loans to customers at the end of the period. Interest Income — Secured Lending in thousands, except performance metric Three Months Ended September 30, 2020 2019 $ % $ % of interest income $ % of interest income Increase/ (decrease) Increase/ (decrease) Interest income $ 1,545 100.000 % $ 3,506 100.000 % $ (1,961 ) (55.9 %) Performance Metric Number of secured loans at period-end 1,125 3,571 (2,446 ) (68.5 %) Interest income for the three months ended September 30, 2020 decreased $2.0 million, or 55.9%, to $1.5 million from $3.5 million in 2019. The decrease in interest income earned from the segment’s secured loan portfolio was primarily due to lower average monthly loan balances during the current period as compared to the average monthly loan balances for the comparable three-month period. The number of secured loans outstanding decreased by 68.5% to 1,125 from 3,571 in 2019. Typically, the number of loans increases during periods of increasing precious metal prices and decreases during periods of declining precious metal prices. Silver prices declined significantly in the quarter ended March 31, 2020, resulting in an increase in margin calls and borrower loan liquidations due to a decline in the value of the precious metals collateral. The Company did not incur loan losses related to these margin calls or borrower loan liquidations. In the two successive quarters, as silver prices rebounded, the Company experienced growth in the number of loans in the portfolio. The Company did not incur loan losses related to the margin calls or borrower loan liquidations during the three months ended September 30, 2020 or the comparable period. 55 Interest Expense — Secured Lending in thousands Three Months Ended September 30, 2020 2019 $ % $ % of interest income $ % of interest income Increase/ (decrease) Increase/ (decrease) Interest expense $ (1,345 ) (87.055 )% $ (2,316 ) (66.058 )% $ (971 ) (41.9 %) Interest expense for the three months ended September 30, 2020 decreased $1.0 million, or 41.9% to $1.3 million from $2.3 million in 2019. The change in interest expense is driven by the value of our secured loan portfolio, which is primarily financed through our notes payable and Trading Credit Facility. As compared to the same year-ago period, interest expense related to notes payable and Trading Credit Facility decreased by $0.7 million and loan servicing costs decreased by $0.3 million. Selling, General and Administrative Expenses — Secured Lending in thousands Three Months Ended September 30, 2020 2019 $ % $ % of interest income $ % of interest income Increase/ (decrease) Increase/ (decrease) Selling, general, and administrative expenses $ (496 ) (32.104 )% $ (348 ) (9.926 )% $ 148 42.5 % Selling, general and administrative expenses for the three months ended September 30, 2020 increased $0.1 million, or 42.5%, to $0.5 million from $0.4 million in 2019. The increase was primarily due to an increase in amortization and depreciation expense. Other Income — Secured Lending in thousands Three Months Ended September 30, 2020 2019 $ % $ % of interest income $ % of interest income Increase/ (decrease) Increase/ (decrease) Other income, net $ 359 23.236 % $ 42 1.198 % $ 317 754.8 % Other income, net for the three months ended September 30, 2020 increased $0.3 million, or 754.8%, to $0.4 million from $0.1 million in 2019. The increase of $0.3 million was due to royalty income earned from a related party. (See Note 13 of the notes to condensed consolidated financial statements.) 56 Results of Operations — Direct Sales Segment The Company operates its Direct Sales segment through its wholly-owned subsidiaries Goldline Inc. (“Goldline”) and AM IP LLC. ("AMIP"), and through its 50%-owned subsidiary Precious Metals Purchasing Partners, LLC. ("PMPP"). In fiscal 2018, management commenced our reporting of Direct Sales segment as a result of the acquisition of Goldline. In connection with our formation of AMIP in May 2018, the financial activity of AMIP was incorporated into the Direct Sales segment's fiscal 2019 results. In connection with the commencement of PMPP’s operations in July 2019, the financial activity of PMPP was incorporated into the Direct Sales segment's results. Overview of Results of Operations for the Three Months Ended September 30, 2020 and 2019 — Direct Sales Segment The operating results of our Direct Sales segment for the three months ended September 30, 2020 and 2019 are as follows: in thousands, except performance metrics Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Revenues $ 52,408 (a) 100.000 % $ 20,081 (c) 100.000 % $ 32,327 161.0 % Gross profit 5,523 10.538 % (b) 1,580 7.868 % (d) $ 3,943 249.6 % Selling, general and administrative expenses (1,903 ) (3.631 )% (2,120 ) (10.557 )% $ (217 ) (10.2 )% Other expense — 0.000 % (220 ) (1.096 )% $ (220 ) (100.0 )% Net income (loss) before provision for income taxes $ 3,620 6.907 % (760 ) (3.785 )% $ 4,380 576.3 % Performance Metrics: Gold ounces sold (1) 17,000 10,000 7,000 70.0 % Silver ounces sold (2) 330,000 191,000 139,000 72.8 % Direct Sales ticket volume (3) 4,607 3,476 1,131 32.5 % (a) Includes $4.7 million of inter-segment sales from the Direct Sales segment to the Wholesale Trading & Ancillary Services segment. (b) Gross profit percentage realized from sales, excluding inter-segment sales from the Direct Sales segment to the Wholesale Trading & Ancillary services segment, is 11.563% for the period. (c) Includes $8.6 million of inter-segment sales from the Direct Sales segment to the Wholesale Trading & Ancillary Services segment. (d) Gross profit percentage realized from sales, excluding inter-segment sales from the Direct Sales segment to the Wholesale Trading & Ancillary services segment, is 11.460% for the period. (1) Gold ounces sold represents the ounces of gold product sold during the three-month period. (2) Silver ounces sold represents the ounces of silver product sold during the three-month period. (3) Direct Sales segment trading ticket volume represents the total number of product orders processed by Goldline and PMPP. Segment Results — Direct Sales Revenues — Direct Sales in thousands, except performance metrics Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Revenues $ 52,408 100.000 % $ 20,081 100.000 % $ 32,327 161.0 % Performance Metrics: Gold ounces sold 17,000 10,000 7,000 70.0 % Silver ounces sold 330,000 191,000 139,000 72.8 % Revenues for the three months ended September 30, 2020 increased $32.3 million, or 161.0%, to $52.4 million from $20.1 million in 2019. Excluding inter-segment sales from the Direct Sales segment to the Wholesale Trading & Ancillary Services segment, revenues were $47.7 million for the three months ended September 30, 2020 and $11.5 million for the three months ended September 30, 2019. Gold ounces sold for the three months ended September 30, 2020 increased 7,000 ounces, or 70.0%, to 17,000 ounces from 10,000 ounces in 2019. Silver ounces sold for the three months ended September 30, 2020 increased 139,000 ounces, or 72.8%, to 330,000 ounces from 191,000 ounces in 2019. On average, the selling prices for gold increased by 44.1% and selling prices for silver increased by 46.1% during the three months ended September 30, 2020 as compared to 2019. 57 A combination of price volatility, increased demand, and supply constraints led to a significant expansion in premium spreads in the precious metals market during the last three successive quarters . These factors were brought on by the recent volatility in precious metal prices caused by macroeconomic and other events. These conditions are not representative of normal market conditions, and we are uncertain of the duration of these conditions. Gross Profit — Direct Sales in thousands, except performance metric Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Gross profit $ 5,523 10.538 % $ 1,580 7.868 % $ 3,943 249.6 % Performance Metric: Direct Sales ticket volume 4,607 3,476 1,131 32.5 % Gross profit for the three months ended September 30, 2020 increased by $3.9 million, or 249.6%, to $5.5 million from $1.6 million in 2019. The Company’s profit margin percentage increased by 267.0 basis points or by 33.9% to 10.538% from 7.868% in 2019. Excluding the impact of inter-segment sales from the Direct Sales segment to the Wholesale Trading & Ancillary Services segment, the Direct Sales segment's gross profit margin percentage increased by 10.3 basis points or by 0.9% to 11.563% from 11.460% in 2019. The Direct Sales ticket volume for the three months ended September 30, 2020 increased by 1,131 tickets, or 32.5%, to 4,607 tickets from 3,476 tickets in 2019. The increase in trading ticket volume was primarily due to higher demand as compared to 2019. Selling, General and Administrative Expense — Direct Sales in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Selling, general and administrative expenses $ (1,903 ) (3.631 )% $ (2,120 ) (10.557 )% $ (217 ) (10.2 )% Selling, general and administrative expenses for the three months ended September 30, 2020 decreased $0.2 million, or 10.2%, to $1.9 million from $2.1 million in 2019. The decrease in selling, general and administrative expenses was primarily due to cost reduction efforts implemented at Goldline, resulting in reductions of legal costs of $0.2 million, computer consulting costs of $0.1 million, and personnel costs of $0.1 million, which were partially offset by increases in advertising costs of $0.2 million. Other expense — Direct Sales in thousands Three Months Ended September 30, 2020 2019 $ % $ % of revenue $ % of revenue Increase/ (decrease) Increase/ (decrease) Other expense, net $ — 0.000 % $ (220 ) (1.096 )% $ (220 ) -100.0 % For the three months ended September 30, 2019, other expense of $0.2 million related to a one-time charge in connection with the settlement of the purchase price of Goldline. There was no activity for the current comparable quarter. 58 LIQUIDITY AND FIN ANCIAL CONDITION Primary Sources and Uses of Cash Overview Liquidity is defined as our ability to generate sufficient amounts of cash to meet all of our cash needs. Liquidity is of critical importance to us and imperative to maintain our operations on a daily basis. A substantial portion of our assets are liquid. As of September 30, 2020, approximately 94.5% of our assets consisted of cash, receivables, derivative assets, secured loans receivables, precious metals held under financing arrangements and inventories, measured at fair value. Cash generated from the sales of our precious metals products is our primary source of operating liquidity. Typically, the Company acquires its inventory by: (i) purchasing inventory from our suppliers by utilizing its own capital and lines of credit; (ii) borrowing precious metals from its suppliers under short-term arrangements which may bear interest at a designated rate, and (iii) repurchasing inventory at an agreed-upon price based on the spot price on the specified repurchase date. In addition to selling inventory, the Company generates cash from earning interest income. The Company enters into secured loans and secured financing structures with its customers under which it charges interest. The Company offers a number of secured financing options to its customers to finance their precious metals purchases including consignments and other structured inventory finance products. The loans are secured by precious metals and numismatic material owned by the borrowers and held by the Company as security for the term of the loan. Furthermore, our customers may enter into agreements whereby the customer agrees to repurchase our precious metals at the prevailing spot price for delivery of the product at a specific point in time in the future; interest income is earned from the contract date until the material is delivered and paid for in full. We continually review our overall credit and capital needs to ensure that our capital base, both stockholders’ equity and available credit facilities, can appropriately support our anticipated financing needs. The Company also continually monitors its current and forecasted cash requirements and draws upon and pays down its lines of credit so as to minimize interest expense. The Company believes that the Trading Credit Facility (as defined below), the notes payable, liabilities on borrowed metals, and product financing arrangements provide adequate means to capital for its operations. (See Note 14 of the notes to condensed consolidated financial statements.) Lines of Credit in thousands September 30, 2020 June 30, 2020 September 30, 2020 Compared to June 30, 2020 Lines of credit $ 214,000 $ 135,000 $ 79,000 Effective March 27, 2020, through an amendment and restatement of the applicable credit documents, A-Mark renewed its uncommitted demand borrowing facility ("Trading Credit Facility") with a syndicate of banks. Under the agreements, Coöperatieve Rabobank U.A. acts as joint lead lender and administrative agent and Natixis acts as joint lead arranger and syndication agent for the syndicate. As of September 30, 2020, the Trading Credit Facility provided the Company with access up to $270.0 million, featuring a $257.5 million base, with a $12.5 million accordion option. The maturity date of the credit facility is March 26, 2021. The Trading Credit Facility was formed on March 31, 2016, and the Company has successfully amended and extended the terms of the Trading Credit Facility each year since its inception. A-Mark routinely uses funds drawn under the Trading Credit Facility to purchase metals from its suppliers and for other operating cash flow purposes. Our CFC subsidiary also uses the funds drawn under the Trading Credit Facility to finance its lending activities. The cash generated from our operations typically increases during periods of high demand for our products, market supply constraints, and increased volatility of the price of precious metals. 59 Notes Payable in thousands September 30, 2020 June 30, 2020 September 30, 2020 Compared to June 30, 2020 Notes payable $ 92,692 $ 92,517 $ 175 On September 14, 2018, AM Capital Funding, LLC. (“AMCF”), a wholly owned subsidiary of CFC, completed an issuance of Secured Senior Term Notes, Series 2018-1, Class A in the aggregate principal amount of $72.0 million and Secured Subordinated Term Notes, Series 2018-1, Class B in the aggregate principal amount of $28.0 million. The Class A Notes bear interest at a rate of 4.98% and the Class B Notes bear interest at a rate of 5.98%. The Notes have a maturity date of December 15, 2023. As of September 30, 2020, the consolidated aggregate carrying balance of the Notes was $92.7 million (which excludes the $5.0 million Note that the Company retained), and the remaining unamortized loan cost balance was approximately $2.3 million, which is amortized using the effective interest method through the maturity date. (See Note 14 of the notes to condensed consolidated financial statements.) Liabilities on Borrowed Metals in thousands September 30, 2020 June 30, 2020 September 30, 2020 Compared to June 30, 2020 Liabilities on borrowed metals $ 153,752 $ 168,206 $ (14,454 ) We borrow precious metals from our suppliers and customers under short-term arrangements using other precious metal from our inventory or precious metals held under financing arrangements as collateral. Amounts under these arrangements require repayment either in the form of precious metals or cash. Liabilities also arise from unallocated metal positions held by customers in our inventory. Typically, these positions are due on demand, in a specified physical form, based on the total ounces of metal held in the position. Product Financing Arrangements in thousands September 30, 2020 June 30, 2020 September 30, 2020 Compared to June 30, 2020 Product financing arrangements $ 101,599 $ 74,678 $ 26,921 The Company has agreements with financial institutions and other third parties that allow the Company to transfer its gold and silver inventory to the third party at an agreed-upon price based on the spot price, which provides alternative sources of liquidity. During the term of the agreement both parties intend for inventory to be returned at an agreed-upon price based on the spot price on the termination (repurchase) date. The third parties charge monthly interest as a percentage of the market value of the outstanding obligation; such monthly charges are classified as 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 as product financing arrangements. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the product financing arrangements 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 sales. 60 Secured Loans Receivable in thousands September 30, 2020 June 30, 2020 September 30, 2020 Compared to June 30, 2020 Secured loans receivable $ 84,223 $ 63,710 $ 20,513 CFC is a California licensed finance lender that makes and acquires commercial loans secured by bullion and numismatic coins that affords our customers a convenient means of financing their inventory or collections. (See Note 5 of the notes to condensed consolidated financial statements.) AMCF also purchases and holds secured loans from CFC to meet its collateral requirements related to the Notes. (See Note 14 of the notes to condensed consolidated financial statements.) Most of the Company's secured loans are short-term in nature. The renewal of these instruments is at the discretion of the Company and, as such, provides us with some flexibility in regard to our capital deployment strategies. Dividends On September 3, 2020, the Company's Board of Directors declared a non-recurring special dividend of $1.50 per share to common stock shareholders of record at the close of business on September 21, 2020, payable on or about September 25, 2020. The dividends paid totaled $10.6 million. Cash Flows The majority of the Company’s trading activities involve two-day value trades under which payment is received in advance of delivery or product is received in advance of payment. The high volume, rapid rate of inventory turnover, and high average value per trade can cause material changes in the sources of cash used in or provided by operating activities on a daily basis. The Company manages these variances through its liquidity forecasts and counterparty limits by maintaining a liquidity reserve to meet the Company’s cash needs. The Company uses various short-term financial instruments to manage the rapid cycle of our trading activities from customer purchase order to cash collections and product delivery, which can cause material changes in the amount of cash used in or provided by financing activities on a daily basis. The following summarizes components of our condensed consolidated statements of cash flows for the three months ended September 30, 2020 and 2019: in thousands Year Ended September 30, 2020 September 30, 2019 September 30, 2020 Compared to September 30, 2019 Net cash used in operating activities $ (98,072 ) $ (62,479 ) $ (35,593 ) Net cash used in investing activities $ (25,269 ) $ (35,005 ) $ 9,736 Net cash provided by financing activities $ 95,386 $ 101,625 $ (6,239 ) Our principal capital requirements have been to fund (i) working capital and (ii) investing activity. Our working capital requirements fluctuate with market conditions, the availability of precious metals and the volatility of precious metals commodity pricing. Net cash used in operating activities Operating activities used $98.1 million and $62.5 million in cash for the three months ended September 30, 2020 and 2019, respectively, representing a $35.6 million increase in the use of cash compared to the three months ended September 30, 2019. This increase in cash used is mainly due to higher usage of working capital balances, offset by higher net income generated from increased demand for precious metal products. The use of cash due to changes in working capital balances included: derivative assets, receivables, inventories, and liabilities on borrowed metals, partially offset by an increase in cash due to changes in working capital balances of: accounts payable and other current liabilities and precious metals held under financing arrangements. 61 Net cash used in investing activities Investing activities used $25.3 million and $35.0 million in cash for the three months ended September 30, 2020 and 2019, respectively, representing a $9.7 million decrease in the use of cash compared to the three months ended September 30, 2019. This period over period decrease was due to the change in the use of cash for secured loans and other notes receivables of $7.1 million and $3.0 million respectively. Net cash provided by financing activities Financing activities provided $95.4 million and $101.6 million in cash for the three months ended September 30, 2020 and 2019, respectively, representing a $6.2 million decrease in the source of cash compared to the three months ended September 30, 2019. This period over period decrease was primarily due to a decrease in the source of cash from product financing arrangements of $37.7 million and dividends paid of $10.6 million; offset by an increase in the source of cash from the Trading Credit Facility of $42.0 million. CAPITAL RESOURCES We believe that our current cash availability under the Trading Credit Facility, product financing arrangements, financing derived from borrowed metals and the cash we anticipate to generate from operating activities will provide us with sufficient liquidity to satisfy our working capital needs, capital expenditures, investment requirements and commitments through at least the next twelve months. CONTRACTUAL OBLIGATIONS, CONTINGENT LIABILITIES AND COMMITMENTS Counterparty Risk We manage our counterparty risk by setting credit and position risk limits with our trading counterparties. These limits include gross position limits for counterparties engaged in sales and purchase transactions and inventory consignment transactions with us. They also include collateral limits for different types of sale and purchase transactions that counterparties may engage in from time to time. Commodities Risk and Derivatives We use a variety of strategies to manage our risk including fluctuations in commodity prices for precious metals. Our inventory consists of, and our trading activities involve, precious metals and precious metal products, whose prices are linked to the corresponding precious metal commodity prices. Inventory purchased or borrowed by us are subject to price changes. Inventory borrowed is considered natural hedges, since changes in value of the metal held are offset by the obligation to return the metal to the supplier or deliver metals to the customer. Open sale and purchase commitments in our trading activities 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 open sale and purchase 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. Our policy is to substantially hedge our underlying precious metal commodity inventory position. We regularly enter into metals commodity forward and futures contracts with financial institutions to hedge price changes that would cause changes in the value of our 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, which allows us to enter into contracts with market makers. Our forwards contracts open at September 30, 2020 are scheduled to settle within 60 days. Futures positions do not have settlement dates. The Company typically uses futures contracts for its shorter-term hedge positions and forward contracts for longer term hedge positions. The Company enters into these derivative transactions solely for the purpose of hedging our inventory holding risk, and not for speculative market purposes. Due to the nature of our hedging strategy, we are not using hedge accounting as defined under, Derivatives and Hedging Topic 815 of the Accounting Standards Codification ("ASC".) Unrealized gains or losses resulting from our futures and forward contracts are reported as cost of sales with the related amounts due from or to counterparties reflected as derivative assets or liabilities. The Company adjusts the derivatives to fair value on a daily basis until the transactions are settled. When these contracts are net settled, the unrealized gains and losses are reversed and the realized gains and losses for forward contracts are recorded in revenue and cost of sales and the net realized gains and losses for futures are recorded in cost of sales. 62 The Company’s net gains on derivative instruments for the three months ended September 30, 2020 and 2019 , totaled $ 78 . 3 million and $2 5 . 1 million , respectively. These net gains on derivative instruments were substantially offset by the changes in fair market value of the underlying precious metals inventory and open sale and purchase commitments, which is also recorded in cost of sales in the condensed conso lidated statements of income . The purpose of the Company's hedging policy is to substantially match the change in the value of the derivative financial instrument to the change in the value of the underlying hedged item. The following table summarizes the results of our hedging activities, showing the precious metal commodity inventory position, net of open sale and purchase commitments, which is subject to price risk, compared to change in the value of the derivative instruments as of September 30, 2020 and June 30, 2020: in thousands September 30, 2020 June 30, 2020 Inventories $ 413,181 $ 321,281 Precious metals held under financing arrangements 158,756 178,577 571,937 499,858 Less unhedgeable inventories: Commemorative coin inventory, held at lower of cost or net realizable value (9 ) (17 ) Premium on metals position (6,770 ) (3,684 ) Precious metal value not hedged (6,779 ) (3,701 ) 565,158 496,157 Commitments at market: Open inventory purchase commitments 711,710 514,553 Open inventory sales commitments (318,921 ) (309,134 ) Margin sale commitments (6,864 ) (14,652 ) In-transit inventory no longer subject to market risk (8,089 ) (3,605 ) Unhedgeable premiums on open commitment positions 2,970 2,779 Borrowed precious metals (153,752 ) (168,206 ) Product financing arrangements (101,599 ) (74,678 ) Advances on industrial metals 394 318 125,849 (52,625 ) Precious metal subject to price risk 691,007 443,532 Precious metal subject to derivative financial instruments: Precious metals forward contracts at market values 112,243 73,948 Precious metals futures contracts at market values 578,448 369,842 Total market value of derivative financial instruments 690,691 443,790 Net precious metals subject to commodity price risk $ 316 $ (258 ) We are exposed to the risk of default of the counterparties 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 September 30, 2020, we believe our risk of counterparty default is mitigated based on our evaluation of the creditworthiness of our major counterparties, the strong financial condition of our counterparties, and the short-term duration of these arrangements. Commitments and Contingencies Refer to Note 15 for information relating Company's commitments and contingencies. 63 OFF-BALANCE SHEET ARRANGEMENTS As of September 30, 2020 and June 30, 2020, we had the following outstanding sale and purchase commitments and open forward and future contracts, which are normal and recurring, in nature: in thousands September 30, 2020 June 30, 2020 Purchase commitments $ 711,710 $ 514,553 Sales commitments $ (318,921 ) $ (309,134 ) Margin sale commitments $ (6,864 ) $ (14,652 ) Open forward contracts $ 112,243 $ 73,948 Open futures contracts $ 578,448 $ 369,842 Foreign exchange forward contracts $ 6,349 $ 4,599 The notional amounts of the commodity forward and futures contracts and the open sales and purchase orders, as shown in the table above, are not reflected at the notional amounts in the condensed consolidated balance sheets. The Company records commodity forward and futures contracts at the fair value, which is the difference between the market price of the underlying metal or contract measured on the reporting date and the trade amount measured on the date the contract was transacted. The fair value of the open derivative contracts are shown as a component of derivative assets or derivative liabilities in the accompanying condensed consolidated balance sheets. The Company enters into the derivative forward and future transactions solely for the purpose of hedging its inventory holding risk, and not for speculative market purposes. The Company’s gains (losses) on derivative instruments are substantially offset by the changes in fair market value of the underlying precious metals inventory position, including our open sale and purchase commitments. The Company records the derivatives at the trade date, and any corresponding unrealized gains or losses are shown as a component of cost of sales in the condensed consolidated statements of income. We adjust the carrying value of the derivatives to fair value on a daily basis until the transactions are physically settled. (See Note 11 of the notes to condensed consolidated financial statements.) CRITICAL ACCOUNTING POLICIES Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our condensed consolidated financial statements are prepared. On a regular basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could materially differ from our estimates. Our significant accounting policies are discussed in Note 2 of the Notes to condensed consolidated financial statements. We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. Revenue Recognition The Company accounts for its metals and sales contracts using settlement date accounting. Pursuant to such accounting, the Company recognizes the sale or purchase of the metals at settlement date. During the period between the trade and settlement dates, the Company has 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 derivative at the trade date with any corresponding unrealized gain (loss), shown as component of cost of sales in the condensed consolidated statements of income. The Company adjusts the derivatives to fair value on a daily basis until the transactions are settled. When these contracts are settled, the unrealized gains and losses are reversed, and revenue is recognized for contracts that are physically settled. For contracts that are net settled, the realized gains and losses are recorded in cost of sales, with the exception of forward contracts, where their associated realized gains and losses are recorded in revenue and cost of sales, respectively. 64 Also, the Company recognizes its storage, logistics, licensing, and other services revenues in accordance with the FASB's release ASU 2014-09 Revenue From Contracts With Customers Topic 606 and subsequent related amendments ("ASC 606"), which follows five basic steps to determine whether revenue can be recognized: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the perfor mance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Inventories The Company's inventory primarily includes bullion and bullion coins, which is acquired and initially recorded at cost and then marked to fair market value. The fair market value of the bullion and bullion coins is comprised of two components: (i) published market values attributable to the cost of the raw precious metal, and (ii) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form and the market value attributable solely to the premium may be readily determined, as it is published by multiple reputable sources. The premium is included in the cost of the inventory, paid at acquisition, and is a component of the total fair market value of the inventory. The precious metal component of the inventory may be hedged through the use of precious metal commodity positions, while the premium component of our inventory is not a commodity that may be hedged. The Company’s inventory, except for certain lower of cost or net realizable value basis products (as described below), is subsequently recorded at their fair market values. The daily changes in the fair market value of our inventory are offset by daily changes in the fair market value of hedging derivatives that are taken with respect to our inventory positions; both the change in the fair market value of the inventory and the change in the fair market value of these derivative instruments are recorded in cost of sales in the condensed consolidated statements of income. While the premium component included in inventory is marked-to-market, our commemorative coin inventory, including its premium component, is held at the lower of cost or net realizable value, because the value of commemorative coins is influenced more by supply and demand determinants than on the underlying spot price of the precious metal content of the commemorative coins. Unlike our bullion coins, the value of commemorative coins is not subject to the same level of volatility as bullion coins because our commemorative coins typically carry a substantially higher premium over the spot metal price than bullion coins. Additionally, neither the commemorative coin inventory nor the premium component of our inventory is hedged. Inventory includes amounts borrowed from suppliers and customers arising from various arrangements including unallocated metal positions held by customers in the Company’s inventory, amounts due to suppliers for the use of consigned inventory, metals held by suppliers as collateral on advanced pool metals, as well as shortages in unallocated metal positions held by the Company in the supplier’s inventory. Unallocated or pool metal represents an unsegregated inventory position that is due on demand, in a specified physical form, based on the total ounces of metal held in the position. Amounts under these arrangements require delivery either in the form of precious metals or cash. The Company mitigates market risk of its physical inventory and open commitments through commodity hedge transactions. (See Note 11 of the notes to condensed consolidated financial statements.) The Company enters into product financing agreements for the transfer and subsequent option to reacquire its gold and silver inventory at an agreed-upon price based on the spot price with a third-party finance company. This inventory is restricted and is held at a custodial storage facility in exchange for a financing fee, charged by the third-party finance company. During the term of the financing agreement, the third-party company holds the inventory as collateral, and both parties intend for the inventory to be returned to the Company at an agreed-upon price based on the spot price on the termination (repurchase) date. The third party charges a monthly fee as percentage of the market value of the outstanding obligation; such monthly charge is classified as interest expense. These transactions do not qualify as sales and have been accounted for as financing arrangements in accordance with ASC 470-40 Product Financing Arrangements, and are reflected in the condensed consolidated balance sheets as product financing arrangements. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the product financing and the underlying inventory (which is restricted) are carried at fair value, with changes in fair value included in cost of sales in the condensed consolidated statements of income. The Company periodically loans metals to customers on a short-term consignment basis. 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. The Company enters into financing arrangements with certain customers under which A-Mark purchases precious metals products that are subject to repurchase by the customer at the fair value of the product on the repurchase date. The Company or the counterparty may typically terminate any such arrangement with 14 days' notice. Upon termination the customer’s rights to repurchase any remaining inventory is forfeited. 65 Goodwill and Other P urchased Intangible Assets We evaluate goodwill and other indefinite-lived 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-lived 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. We 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, a quantitative impairment test is performed. This step requires us to determine the fair value of the business and compare the calculated fair value of a reporting unit with its carrying amount, including goodwill. If through this quantitative analysis the Company determines the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is considered not to be impaired. If the Company concludes that the fair value of the reporting unit is less than its carrying value, a goodwill impairment will be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company also performs impairment reviews on its indefinite-lived intangible assets (i.e., trade names and trademarks). In assessing its indefinite-lived intangible assets for impairment, the Company has the option to first perform a qualitative assessment to determine whether events or circumstances exist that lead to a determination that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the Company is not required to perform any additional tests in assessing the asset for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform a quantitative analysis to determine if the fair value of an indefinite-lived intangible asset is less than its carrying value. If through a quantitative analysis the Company determines the fair value of an indefinite-lived intangible asset exceeds its carrying amount, the indefinite-lived intangible asset is considered not to be impaired. If the Company concludes that the fair value of an indefinite-lived intangible asset is less than its carrying value, an impairment will be recognized for the amount by which the carrying amount exceeds the indefinite-lived intangible asset’s fair value. Income Taxes As part of the process of preparing its condensed consolidated financial statements, the Company is required to estimate its provision for income taxes in each of the tax jurisdictions in which it conducts business, in accordance with the Income Taxes Topic 740 of the ASC ("ASC 740"). The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Significant judgment is required in determining the Company's annual tax rate and in evaluating uncertainty in its tax positions. The Company has adopted the provisions of ASC 740-10, which clarifies the accounting for uncertain tax positions. ASC 740-10 requires that the Company recognizes the impact of a tax position in the financial statements if the position is not more likely than not to be sustained upon examination based on the technical merits of the position. The Company recognizes interest and penalties related to certain uncertain tax positions as a component of income tax expense and the accrued interest and penalties are included in deferred and income taxes payable in the Company’s condensed consolidated balance sheets. See Note 12 for more information on the Company’s accounting for income taxes. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The factors used to assess the likelihood of realization include the Company's forecast of the reversal of temporary differences, future taxable income, and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company's effective tax rate on future earnings. Based on our assessment, it appears more likely than not that all of the net deferred tax assets will be realized through future taxable income. RECENT ACCOUNTING PRONOUNCEMENTS For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our financial position or results of operations, see Note 2 of the notes to condensed consolidated financial statements. 66 ITEM 3. QUANTITATIVE AND QUALITATI VE DI SCLOSURES ABOUT MARKET RISK Not applicable to smaller reporting companies.