Table of Contents            

 
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
For the quarterly period ended September 30, 2017
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: 001-36347
  
image0a01a25.jpg
A-MARK PRECIOUS METALS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________
Delaware
(State of Incorporation)
 
11-2464169
(IRS Employer I.D. No.)
2121 Rosecrans Ave. Suite 6300
El Segundo, CA 90245
(Address of principal executive offices)(Zip Code)
(310) 587-1477
(Registrant’s Telephone Number, Including Area Code)
__________________________________________________            
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Common Stock, $0.01 par value
 
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered under Section 12 (g) of the Exchange Act: None
__________________________________________    
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. ¨
 
 
 
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. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company þ
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
  ¨
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes. ¨   No. þ
 
 
 
As of November 9, 2017, the registrant had 7,031,450 shares of common stock outstanding, par value $0.01 per share.
 
 
 



A-MARK PRECIOUS METALS, INC.

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2017

TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
 
 
Item 1.
Condensed Consolidated Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
PART II
 
 
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
Signatures
 
 


2

Table of Contents            

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to the Condensed Consolidated Financial Statements
 
 
Page
 
 

3

Table of Contents            

A-MARK PRECIOUS METALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except for share data) (unaudited)
 
September 30,
2017
 
June 30,
2017
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
8,357

 
$
13,059

Receivables, net
42,133

 
39,295

Derivative assets
20,326

 
17,587

Secured loans receivable
88,871

 
91,238

 
 
 
 
Inventories:
 
 
 
   Inventories
186,720

 
149,316

   Restricted inventories
124,864

 
135,343

 
311,584

 
284,659

 
 
 
 
Income taxes receivable
5,881

 

Prepaid expenses and other assets
2,627

 
1,183

Total current assets
479,779

 
447,021

 
 
 
 
Plant, property and equipment, net
8,320

 
6,607

Goodwill
10,331

 
8,881

Intangibles, net
8,910

 
4,065

Long-term investments
8,024

 
7,967

Deferred tax assets - non-current
1,176

 
3,959

Total assets
$
516,540

 
$
478,500

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Lines of credit
$
219,000

 
$
180,000

Liability on borrowed metals
15,010

 
5,625

Product financing arrangements
124,864

 
135,343

Accounts payable
45,660

 
41,947

Derivative liabilities
23,989

 
34,582

Note payable - related party

 
500

Accrued liabilities
4,831

 
4,945

Income taxes payable

 
1,418

Total current liabilities
433,354

 
404,360

Deferred tax liabilities - non-current
1,904

 

Debt obligation (related party)
6,818

 

Other long-term liabilities (related party)
1,123

 
1,117

Total liabilities
443,199

 
405,477

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, authorized 10,000,000 shares; issued and outstanding: none as of September 30, 2017 and June 30, 2017

 

Common Stock, par value $0.01; 40,000,000 shares authorized; 7,031,450 shares issued and outstanding as of September 30, 2017 and June 30, 2017
71

 
71

Additional paid-in capital
23,962

 
23,526

Retained earnings
45,910

 
45,994

Total A-Mark Precious Metals, Inc. stockholders’ equity
69,943

 
69,591

Non-controlling interest
3,398

 
3,432

Total stockholders’ equity
73,341

 
73,023

Total liabilities, non-controlling interest and stockholders’ equity
$
516,540

 
$
478,500

See accompanying Notes to Condensed Consolidated Financial Statements

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A-MARK PRECIOUS METALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share and per share data)
(unaudited)


Three Months Ended September 30,
 
2017
 
2016
 
Revenues
 
$
2,163,790

 
$
1,805,653

 
Cost of sales
 
2,156,484

 
1,797,589

 
Gross profit
 
7,306

 
8,064

 
 
 
 
 
 
 
Selling, general and administrative expenses
 
(6,976
)
 
(5,664
)
 
Interest income
 
3,161

 
2,884

 
Interest expense
 
(2,733
)
 
(2,241
)
 
Other income (expense)
 
61

 
(39
)
 
Unrealized loss on foreign exchange
 
(101
)
 
(6
)
 
Net income before provision for income taxes
 
718

 
2,998

 
Provision for income taxes
 
(274
)
 
(1,059
)
 
Net income
 
444

 
1,939

 
Add: Net loss attributable to non-controlling interest
 
(34
)
 
(11
)
 
Net income attributable to the Company
 
$
478

 
$
1,950

 
 
 
 
 
 
 
Basic and diluted income per share attributable to A-Mark Precious Metals, Inc.:
 
Basic
 
$
0.07

 
$
0.28

 
Diluted
 
$
0.07

 
$
0.27

 
Weighted average shares outstanding:
 
 
 
 
 
Basic
 
7,031,400

 
7,023,300

 
Diluted
 
7,122,400

 
7,108,500

 

See accompanying Notes to Condensed Consolidated Financial Statements

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A-MARK PRECIOUS METALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except for share data)

(unaudited)

 
 
Common Stock
(Shares)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Total A-Mark Precious Metals, Inc.
Stockholders' Equity
 
Non-Controlling Interest
 
Total Stockholders’ Equity
 
Balance, June 30, 2017
 
7,031,450

 
$
71

 
$
23,526

 
$
45,994

 
$
69,591

 
$
3,432

 
$
73,023

 
Net income (loss)
 

 

 

 
478

 
478

 
(34
)
 
444

 
Share-based compensation
 

 

 
436

 

 
436

 

 
436

 
Dividends declared
 

 

 

 
(562
)
 
(562
)
 

 
(562
)
 
Balance, September 30, 2017
 
7,031,450

 
$
71

 
$
23,962

 
$
45,910

 
$
69,943

 
$
3,398

 
$
73,341

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


See accompanying Notes to Condensed Consolidated Financial Statements



6

Table of Contents A-MARK PRECIOUS METALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)




Three Months Ended
 
September 30, 2017
 
September 30, 2016
 
Cash flows from operating activities:
 
 
 
 
 
Net income
 
$
444

 
$
1,939

 
Adjustments to reconcile net income to net cash used in operating activities:
 

 

 
Depreciation and amortization
 
529

 
321

 
Amortization of loan cost
 
233

 
204

 
Deferred income taxes
 
4,687

 
1,868

 
Interest added to principal of secured loans
 
(15
)
 
(17
)
 
Share-based compensation
 
436

 
191

 
Earnings from equity method investment
 
(57
)
 
14

 
Receivables
 
(1,792
)
 
22,556

 
Secured loans
 
(77
)
 
(3,262
)
 
Secured loans to Former Parent
 
(2,215
)
 
1,369

 
Derivative assets
 
(1,914
)
 
4,957

 
Income tax receivable
 
(5,881
)
 
(1,023
)
 
Inventories
 
(14,384
)
 
(52,558
)
 
Prepaid expenses and other assets
 
(802
)
 
(357
)
 
Accounts payable
 
1,417

 
14,606

 
Derivative liabilities
 
(10,593
)
 
(22,935
)
 
Liabilities on borrowed metals
 
436

 
(156
)
 
Accrued liabilities
 
(3,147
)
 
(3,787
)
 
Earn-out payments for related party contingent consideration in excess of acquisition-date fair value
 
(208
)
 

 
Receivable from/payables to Former Parent
 

 
203

 
Income taxes payable
 
(1,418
)
 

 
Net cash used in operating activities
 
(34,321
)
 
(35,867
)
 
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures for property and equipment
 
(318
)
 
(336
)
 
Secured loans, net
 
4,674

 
(10,368
)
 
Acquisition of subsidiary, net of cash
 
(9,548
)
 
(3,421
)
 
Net cash used in investing activities
 
(5,192
)
 
(14,125
)
 
Cash flows from financing activities:
 
 
 
 
 
Product financing arrangements, net
 
(10,478
)
 
58,431

 
Dividends
 
(562
)
 

 
Borrowings (repayments) under lines of credit, net
 
39,000

 
(9,000
)
 
Proceeds from issuance of debt obligation payable to related party
 
7,500

 

 
Repayments on notes payable to related party
 
(500
)
 

 
Stock award grant
 

 
172

 
Debt funding fees
 
(149
)
 

 
Net cash provided by financing activities
 
34,811

 
49,603

 
 
 
 
 
 
 
Net decrease in cash, cash equivalents, and restricted cash
 
(4,702
)
 
(389
)
 
Cash, cash equivalents, and restricted cash, beginning of period
 
13,059

 
17,142

 
Cash, cash equivalents, and restricted cash, end of period
 
$
8,357

 
$
16,753

 

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Table of Contents A-MARK PRECIOUS METALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)




Three Months Ended
 
September 30, 2017
 
September 30, 2016
 
   ( - Continued from preceding page - )
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest expense
 
$
1,856

 
$
1,456

 
Income taxes
 
$
2,869

 
$
307

 
 
 
 
 
 
 
   Non-cash investing and financing activities:
 
 
 
 
 
Interest added to principal of secured loans
 
$
15

 
$
17

 
Debt funding fee
 
$
534

 
$

 
Contribution of assets from minority interest
 
$

 
$
3,454

 
Payable to minority interest partner for acquired business
 
$

 
$
500

 
Earn out obligation payable to minority interest partner
 
$

 
$
1,523

 
See accompanying Notes to Condensed Consolidated Financial Statements

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A-MARK PRECIOUS METALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS
Basis of Presentation
The condensed consolidated financial statements include the accounts of A-Mark Precious Metals, Inc. and its wholly- and majority-owned subsidiaries ("A-Mark" or the "Company"). Intercompany accounts and transactions have been eliminated.
Business Segments
The Company conducts its operations in two reportable segments: (1) Wholesale Trading & Ancillary Services, and (2) Direct Sales. Each of these reportable segments represents 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”) (See Note 18).
Wholesale Trading & Ancillary Services
The Wholesale Trading & Ancillary Services segment operates as a full-service precious metals trading company. Its products include gold, silver, platinum and palladium for storage and delivery primarily in the form of coins, bars, wafers and grain. The Company's trading-related services include financing, consignment, logistics, hedging and various customized financial programs.
Through its wholly owned subsidiary, Collateral Finance Corporation (“CFC”), a licensed California Finance Lender, the Company offers loans on precious metals, rare coins and other collectibles to coin dealers, collectors and investors. Through its wholly owned subsidiary, A-Mark Trading AG (“AMTAG”), the Company promotes A-Mark bullion products throughout the European continent. Transcontinental Depository Services (“TDS”), also a wholly owned subsidiary of the Company, offers worldwide storage solutions to institutions, dealers and consumers.
The Company's wholly-owned subsidiary, A-M Global Logistics, LLC ("Logistics"), operates the Company's logistics fulfillment center based in Las Vegas, Nevada. Logistics provides customers an array of complementary services, including packaging, shipping, handling, receiving, processing, and inventorying of precious metals and custom coins on a secure basis.
In August 2016, the Company formed AM&ST Associates, LLC ("AMST"), a joint venture with SilverTowne, L.P., referred to as SilverTowne, an Indiana-based producer of minted silver. The Company and SilverTowne, L.P. own 55% and 45%, 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.
Direct Sales (Recent Acquisition)
The Company's wholly-owned subsidiary, Goldline, Inc. ("Goldline"), is a direct retailer of precious metals to the investor community. Goldline markets its precious metal products primarily on radio, the internet and television. Goldline sells gold and silver bullion in the form of coins, and bars, as well as numismatic coins.
The Company entered into the direct sales segment through its acquisition of substantially all of the assets of Goldline, LLC ("Goldline, LLC" or the "Seller"), pursuant to the terms of an Asset Purchase Agreement (the “Purchase Agreement”), dated August 14, 2017, between Goldline (then known as Goldline Acquisition Corp.) and the Seller. The transaction closed on August 28, 2017 (the "Closing Date"). On the Closing Date, the estimated purchase price for the net assets was approximately $10.0 million (the “Initial Provisional Purchase Price”), which was based on the Seller’s preliminary balance sheet dated as of July 31, 2017. The net assets acquired consisted of both intangible assets, which the parties agreed had an aggregate fair value of $6.4 million, and specified net tangible assets of the Seller, which the parties initially agreed had an estimated aggregate fair value of $3.6 million, subject to post-closing adjustment as described below. In connection with the closing, Goldline paid to the Seller an amount equal to the Initial Provisional Purchase Price less $1.5 million (the "Holdback Amount"), which amount was held back and deposited into escrow to serve as security for the Seller’s indemnification obligations under the Purchase Agreement. As of September 30, 2017, none of the Holdback Amount had been released.
Based on the post-Closing Date net tangible asset value adjustment procedures conducted to date pursuant to the terms of the Purchase Agreement, the Company has adjusted the estimated total purchase price for the net assets from $10.0 million to $9.5 million (the “Revised Provisional Purchase Price”). The fair value of the acquired net tangible assets as of the Closing Date is still being reviewed by the Company and the Seller and therefore the total purchase price is subject to further adjustment. Under the terms of the Purchase Agreement, any amounts due back to the Company from the Seller as a result of the final determination of the fair value of the acquired net tangible assets is to be paid within three business days following such determination.

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The difference between the Initial Provisional Purchase Price and the Revised Provisional Purchase Price of $0.5 million ($10.0 million less $9.5 million) has been recorded in receivables in the condensed consolidated balance sheet as of September 30, 2017.
Acquisition costs of $0.7 million were expensed as incurred as selling, general and administrative expenses, of which $0.5 million was recorded by the Company during the three months ended September 30, 2017 .
Purchase Price Allocation
The Revised Provisional Purchase Price of $9.5 million has been allocated to the acquired net assets purchased based on their fair values as follows (shown in thousands, and liability balances shown as negative amounts):
Working capital net assets:
 
 
 
 
Receivables, net
 
$
1,046

 
 
Derivative assets
 
825

 
 
Inventory
 
12,541

 
 
Prepaid expenses and other assets
 
856

 
 
Accounts payable and accrued liabilities
 
(2,616
)
 
 
Liability on borrowed metals
 
(8,949
)
 
 
Deferred income
 
(2,374
)
 
 
Subtotal
 
 
 
$
1,329

Property and equipment
 
 
 
1,769

Intangible assets (identifiable):
 
 
 
 
     Trade names
 
2,200

 
 
     Existing customer relationships
 
1,300

 
 
     Customer lead list
 
1,100

 
 
     Other
 
400

 
 
Subtotal
 
 
 
5,000

Goodwill:
 
 
 
 
Excess of cost over fair value of assets acquired
 
 
 
1,450

 
 
 
 
$
9,548

The purchase price allocation is subject to completion of the Company's analysis of the fair value of the assets acquired. The final valuation is expected to be completed as soon as practicable, but no later than one year from the closing date of the transaction. The estimates of the fair value of the contingent consideration, and the allocation of the tangible and identifiable intangible assets requires extensive use of accounting estimates and management judgment. These estimates could be material. The fair values assigned to the assets acquired are based on estimates and assumption from data currently available.
Pro Forma Information
The following unaudited pro forma information for the three months ended September 30, 2017 and 2016 assumes the acquisition of the net assets of Goldline, LLC occurred on July 1, 2016, that is, the first day of fiscal year 2016:
in thousands, except for EPS
 
Unaudited
 
Three Months Ended September 30,
 
2017
 
2016
 
Pro forma revenue
 
$
2,166,054

 
$
1,842,528

 
Pro forma net income
 
$
216

 
$
2,290

 
Pro from basic earnings per share
 
$
0.03

 
$
0.33

 
Pro from dilutive earnings per share
 
$
0.03

 
$
0.32

 
 
 
 
 
 
 
The above pro forma supplemental information does not purport to be indicative of what the Company's operations would have been had these transactions occurred on July 1, 2016 and should not be considered indicative of future operating results. The Company believes the assumptions used provide a reasonable basis for reflecting the significant pro forma effects directly attributable to the acquisition of Goldline. The unaudited pro forma information accounts for amortization of acquired intangible assets (based on the preliminary purchase price allocation and an estimate of their useful lives), incremental financing costs resulting from the acquisition, elimination of prior sales and purchases between the entities, elimination of acquisition costs and an application of the Company's tax rate. The unaudited pro forma results do not include any anticipated cost savings or other effects of the planned integration of Goldline.

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Related Agreements
In connection with the closing of the acquisition, Goldline entered into a privately placed credit facility in the amount of $7.5 million (the “Goldline Credit Facility”) with various lenders (the "Goldline Lenders"), which include some directors from the Company's Board, effective August 28, 2017 (see Note 14). Borrowings under the Goldline Credit Facility were used to finance a portion of the consideration payable under the Purchase Agreement.
On the Closing Date, the Seller and Goldline entered into a transition services agreement, pursuant to which Goldline will provide reasonable assistance to the Seller (including access to records and services of transferring employees) for a period of two years following the closing date in connection with assisting the Seller with its continuing obligations for its retained liabilities that were not assumed by Goldline.
Also on the Closing Date, the Seller and the former CEO of the Seller also agreed that, for the period commencing on the closing date until the third anniversary thereof, neither they nor any of their affiliates will, directly or indirectly own, manage, operate, join, control, participate in, invest in or otherwise provide assistance to, in any manner, any “competing business” (as defined in the Purchase Agreement).
Spinoff from Spectrum Group International, Inc.
On March 14, 2014, the Company's former parent, Spectrum Group International, Inc. ("SGI" or the "Former Parent"), effected a spinoff (the "spinoff" or the "Distribution") of the Company from SGI. As a result of the Distribution, the Company became a publicly traded company independent from SGI. On March 17, 2014, A-Mark’s shares of common stock commenced trading on the NASDAQ Global Select Market under the symbol "AMRK."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements reflect the financial condition, results of operations, and cash flows of the Company, and were prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). These condensed consolidated financial statements include the accounts of A-Mark, and its wholly owned subsidiaries, CFC, AMTAG, TDS, Logistics, Goldline and its majority owned affiliate AMST (collectively the “Company”). All inter-company accounts and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the condensed consolidated balance sheets, condensed consolidated statements of income, condensed consolidated statement of stockholders’ equity, and condensed consolidated statements of cash flows for the periods presented in accordance with U.S. GAAP. Operating results for the three months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018 or for any other interim period during such fiscal year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the “2017 Annual Report”), as filed with the SEC. Amounts related to disclosure of June 30, 2017 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in the 2017 Annual Report.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates include, among others, determination of fair value, allowances for doubtful accounts, impairment assessments of plant, property and equipment and intangible assets, valuation allowance determination on deferred tax assets, contingent earn-out liabilities, and revenue recognition judgments. Significant estimates also include the Company's fair value determination with respect to its financial instruments and precious metals inventory. Actual results could materially differ from these estimates.

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Concentration of Credit Risk
Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances.
Assets that potentially subject the Company to concentrations of credit risk consist principally of receivables, loans of inventory to customers, and inventory hedging transactions. Concentration of credit risk with respect to receivables is limited due to the large number of customers composing the Company's customer base, the geographic dispersion of the customers, and the collateralization of substantially all receivable balances. Based on an assessment of credit risk, the Company typically grants collateralized credit to its customers. The Company enters into inventory hedging transactions, principally utilizing metals commodity futures contracts traded on national futures exchanges or forward contracts with credit worthy financial institutions. Credit risk with respect to loans of inventory to customers is minimal. All of our commodity derivative contracts are under master netting arrangements and include both asset and liability positions. Substantially all of these transactions are secured by the underlying metals positions.
Foreign Currency
The functional currency of the Company is the United States dollar ("USD"). Also, the functional currency of the Company's wholly-owned foreign subsidiary, AMTAG, is USD, but it maintains its books of record in Euros. The Company remeasures the financial statements of AMTAG into USD. The remeasurement of local currency amounts into USD creates remeasurement gains and losses, which are included in the condensed consolidated statements of income.
To manage the effect of foreign currency exchange fluctuations, the Company utilizes foreign currency forward contracts. These derivatives generate gains and losses when they are settled and/or when they are marked to market. The change in the value in the derivative instruments is shown on the face of the condensed consolidated statements of income as unrealized net gains (losses) on foreign exchange.
Business Combinations
The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. The Company accounts for business combinations by applying the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. Transaction costs related to the acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and liabilities.
Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business is measured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value included in net income.
Net cash paid to acquire a business is classified as investing activities on the accompanying condensed consolidated statements of cash flow.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. The Company does not have any cash equivalents as of September 30, 2017 and June 30, 2017.
As of September 30, 2017, the Company has $0.5 million in a bank account that is restricted and serves as collateral against a standby letter of credit issued by the bank in favor of the landlord for our office space in Los Angeles, California (see Note 15).
Inventories
Inventories principally include bullion and bullion coins that are acquired and initially recorded at fair market value. The fair market value of the bullion and bullion coins is comprised of two components: (1) published market values attributable to the costs of the raw precious metal, and (2) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form and the market value attributable solely to the premium may be readily determined, as it is published by multiple reputable sources.
The Company’s inventories, except for certain lower of cost or market basis products (as discussed below), are subsequently recorded at their fair market values, that is, "marked-to-market". The daily changes in the fair market value of our inventory are offset by daily changes in the fair market value of hedging derivatives that are taken with respect to our inventory positions; both the change in the fair market value of the inventory and the change in the fair market value of these derivative instruments are recorded in cost of sales in the condensed consolidated statements of income.

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While the premium component included in inventories is marked-to-market, our commemorative coin inventory, including its premium component, is held at the lower of cost or market, because the value of commemorative coins is influenced more by supply and demand determinants than on the underlying spot price of the precious metal content of the commemorative coins. Unlike our bullion coins, the value of commemorative coins is not subject to the same level of volatility as bullion coins because our commemorative coins typically carry a substantially higher premium over the spot metal price than bullion coins. Neither the commemorative coin inventory nor the premium component of our inventory is hedged (see Note 6.)
Plant, Property and Equipment
Plant, property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using a straight line method based on the estimated useful lives of the related assets, ranging from three years to twenty-five years. Depreciation commences when the related assets are placed into service. Internal-use software development costs are capitalized during the application development stage. Internal-use software costs incurred during the preliminary project stage are expensed as incurred. Land is recorded at historical cost, and is not depreciated. Repair and maintenance costs are recognized as incurred. We have no major planned maintenance activities related to our plant assets associated with our minting operations.
The Company reviews the carrying value of these assets for impairment whenever events and circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating for impairment, the carrying value of each asset is compared to the undiscounted estimated future cash flows expected to result from its use and eventual disposition. An impairment loss is recognized for the difference when the carrying value exceeds the undiscounted estimated future cash flows. The factors considered by the Company in performing this assessment include current and projected operating results, trends and prospects, the manner in which the these assets are used, and the effects of obsolescence, demand and competition, as well as other economic factors.
Definite-lived Intangible Assets
Definite-lived intangible assets consists primarily of customer relationships, non-compete agreements and employment contracts which are amortized on a straight-line basis over their economic useful lives ranging from three years to fifteen years. We review our definite-lived intangible assets for impairment under the same policy described above for plant, property, and equipment; that is, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Goodwill and Indefinite-lived Intangible Assets
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill and other indefinite-lived intangibles (such as trade names) are not subject to amortization, but are evaluated for impairment at least annually. However, for tax purposes, goodwill acquired in connection with a taxable asset acquisition is generally deductible.
The Company evaluates its goodwill and other indefinite-lived intangibles for impairment in the fourth quarter of the fiscal year (or more frequently if indicators of potential impairment exist) in accordance with the Intangibles - Goodwill and Other Topic 350 of the ASC. 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. A qualitative assessment includes analyzing current economic indicators associated with a particular reporting unit such as changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required.
If, based on this qualitative assessment, management determines that goodwill is more likely than not to be impaired, a two-step impairment test is performed. The first step in this test includes 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.
Long-Term Investments
Investments in privately-held entities that are at least 20% but less than 50% owned by the Company are accounted for using the equity method. Under the equity method, the carrying value of the investment is adjusted for the Company’s proportionate share of the investee’s earnings or losses, with the corresponding share of earnings or losses reported in other income (expense). The carrying value of the investment is reduced by the amount of the dividends received from the equity-method investee, as they are considered a return of capital.
Investments in privately-held entities that are less than 20% owned by the Company are accounted for using the cost method, unless the Company can exercise significant influence or the investee is economically dependent upon the Company, in which case the equity method is used. Under the cost method, investments are carried at cost and other income is recorded when dividends are received from the cost-method investee.

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We evaluate our long-term investments for impairment quarterly or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. As of September 30, 2017 and June 30, 2017, the Company did not identify any impairments.
Fair Value Measurement
The Fair Value Measurements and Disclosures Topic 820 of the ASC ("ASC 820"), creates a single definition of fair value for financial reporting. The rules associated with ASC 820 state that valuation techniques consistent with the market approach, income approach and/or cost approach should be used to estimate fair value. Selection of a valuation technique, or multiple valuation techniques, depends on the nature of the asset or liability being valued, as well as the availability of data (see Note 3.)
Contingent Earn-out Liability
We record an estimate of the fair value of contingent consideration related to the earn-out obligation to SilverTowne LP related to the SilverTowne Mint acquisition. On a quarterly basis, we revalue the liability and record increases or decreases in the fair value as an adjustment to earnings. Changes to the contingent consideration liability can result from adjustments to the discount rate, or from changes to the estimates of future throughput activity of AMST, which are considered Level 3 inputs (see Note 3). Consequentially, the assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. As of September 30, 2017 and June 30, 2017 the balance of contingent liability was $1.1 million and $1.3 million respectively, and current portion of this liability is shown as a component of accrued liabilities and the non-current portion is shown in other long-term liabilities. Below is a reconciliation of the contingent earn out liability for the three months ended September 30, 2017.
in thousands
 
 
 
 
 
Contingent
 
Liabilities at fair value, based on Level 3 inputs:
 
Consideration
 
Balance at June 30, 2017
 
$
1,325

 
Amount paid to SilverTowne
 
(208
)
 
Balance at September 30, 2017
 
$
1,117

 
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 ("ASC 815"). 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. Upon settlement, the sales which are physically settled are recognized at the gross amount in the condensed consolidated statements of income. Realized gains and losses on derivative contracts, which are not physically settled are recognized at the net amount as a component of cost of sales in the condensed consolidated statements of income.
Interest Income
The Company uses the effective interest method to recognize interest income on its secured loans transactions.  For these arrangements, the Company maintains a security interest in the precious metals and records interest income over the terms of the secured loan receivable. Recognition of interest income is suspended and the loan is placed on non-accrual status when management determines that collection of future interest income is not probable. The interest income accrual is resumed, and previously suspended interest income is recognized, when the loan becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans are recorded first against the principal and then to any unrecognized interest income (see Note 5).
The Company also enters into financing arrangements whereby the Company purchases precious metals from a customer, and the customer is granted the option to reacquire the metal at a later date.  The Company earns a fee (classified as interest income) over the open reacquisition period. Other sources of interest income include fees earned under other financing arrangements over the period in which customers have opted to defer the payments, deliveries and/or the pricing out of the metals being purchased.
Interest Expense
The Company incurs interest expense based on usage under its lines of credit and its debt obligations (related party), recording interest expense using the effective interest method.
The Company also incurs financing fees (classified as interest expense) as a result of its product financing arrangements with third party finance companies for the transfer and subsequent option to reacquire its precious metal inventory at a later date. During the term of this type of agreement, the third party charges a monthly fee as a percentage of the market value of the designated inventory, which the Company intends to reacquire in the future.  Other sources of interest expense can include fees incurred over the period in which the Company has opted to defer the receipt of metals being purchased.

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Other Income
The Company's other income is derived from the Company's proportional interest in the investee's reported net income or net loss for its equity method investment, and the gains or losses associated with revaluation adjustments to the contingent earn-out liability.    
Derivative Instruments
The value of our inventory and our purchase and sale commitments are linked to the prevailing price of the underlying precious metal commodity. The Company seeks to minimize the effect of price changes of the underlying commodity and enters into inventory hedging transactions, principally utilizing metals commodity futures contracts traded on national futures exchanges or forward contracts with only credit worthy financial institutions. All of our commodity derivative contracts are under master netting arrangements and include both asset and liability positions. Substantially all of these transactions are secured by the underlying metals positions. Notional balances of the Company's derivative instruments, consisting of contractual metal quantities, are expressed at current spot prices of the underlying precious metal commodity.
Commodity futures, forward and option contracts are recorded at fair value on the trade date. The difference between the original contract value and the market value of the open futures, forward and option contracts are reflected in derivative assets or derivative liabilities in the condensed consolidated balance sheets at fair value, with the corresponding unrealized gain or losses included as a component of cost of sales on the condensed consolidated statements of income. Realized gains or losses resulting from the termination of commodity contracts are also reported as a component of cost of sales on the condensed consolidated statements of income.
The Company enters into futures, forward and option contracts solely for the purpose of hedging our inventory holding risk and our liability on price protection programs, and not for speculative market purposes. The Company’s gains (losses) on derivative instruments are substantially offset by the changes in the fair market value of the underlying precious metals inventory, which is also recorded in cost of sales in the condensed consolidated statements of income (see Note 11.)
Advertising
Advertising expense was $517,000 and $167,000, respectively, for the three months ended September 30, 2017 and 2016.
Shipping and Handling Costs
Shipping and handling costs represent costs associated with shipping product to customers, and receiving product from vendors and are included in cost of sales in the condensed consolidated statements of income. Shipping and handling costs incurred totaled $1,100,000 and $1,120,000, respectively, for the three months ended September 30, 2017 and 2016.
Share-Based Compensation
The Company accounts for equity awards under the provisions of the Compensation - Stock Compensation Topic 718 of the ASC ("ASC 718"), which establishes fair value-based accounting requirements for share-based compensation to employees. ASC 718 requires the Company to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees as expense over the service period in the Company's condensed consolidated financial statements. The expense is adjusted for actual forfeitures of unvested awards as they occur.
Income Taxes
As part of the process of preparing its condensed consolidated financial statements, the Company is required to estimate its provision for income taxes in each of the tax jurisdictions in which it conducts business, in accordance with the Income Taxes Topic 740 of the ASC ("ASC 740"). The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Significant judgment is required in determining the Company's annual tax rate and in evaluating uncertainty in its tax positions. The Company recognizes a benefit for tax positions that it believes will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that the Company believes has more than a 50% probability of being realized upon settlement. The Company regularly monitors its tax positions and adjusts the amount of recognized tax benefit based on its evaluation of information that has become available since the end of its last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits, the Company does not consider information that has become available after the balance sheet date, but does disclose the effects of new information whenever those effects would be material to the Company's condensed consolidated financial statements. The difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting represents unrecognized tax benefits. These unrecognized tax benefits are presented in the condensed consolidated balance sheets principally within accrued liabilities.
The Company accounts for uncertainty in income taxes under the provisions of ASC 740. These provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise's financial statements, and prescribe a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions also provide guidance on de-recognition, classification, interest, and penalties, accounting in interim

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periods, disclosure, and transition. The potential interest and/or penalties associated with an uncertain tax position are recorded in provision for income taxes on the condensed consolidated statements of income. Please refer to Note 12 for further discussion regarding these provisions.
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The factors used to assess the likelihood of realization include the Company's forecast of the reversal of temporary differences, future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company's effective tax rate on future earnings.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. Significant judgment is applied when assessing the need for valuation allowances. Areas of estimation include the Company's consideration of future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the utilization 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 condensed consolidated financial position.
Based on our assessment it appears more likely than not that most of the net deferred tax assets will be realized through future taxable income. Management has established a valuation allowance against the deferred taxes related to certain state net operating loss carryovers. Management believes the utilization of these losses may be limited. We will continue to assess the need for a valuation allowance for our remaining deferred tax assets in the future.
The Company's condensed consolidated financial statements recognized the current and deferred income tax consequences that result from the Company's activities during the current and preceding periods, as if the Company were a separate taxpayer prior to the date of the Distribution of the company when it was a member of the consolidated income tax return group of its Former Parent, Spectrum Group International, Inc. Following its spin-off, the Company files federal and state income tax filings that are separate from the Former Parent's tax filings. The Company recognizes current and deferred income taxes as a separate taxpayer for periods ending after the date of Distribution.
Earnings per Share ("EPS")
The Company computes and reports both basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity awards, including unexercised stock options, utilizing the treasury stock method.
A reconciliation of shares used in calculating basic and diluted earnings per common shares for the three months ended September 30, 2017 and 2016, is presented below.
in thousands
 
 
 
 
Three Months Ended September 30,
2017
 
2016
 
Basic weighted average shares outstanding
7,031

 
7,023

 
Effect of common stock equivalents — stock issuable under outstanding equity awards
91

 
86

 
Diluted weighted average shares outstanding
7,122

 
7,109

 
 
 
Recent Accounting Pronouncements Not Yet Adopted
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (“ASU 2017-04”). The amendments of this ASU eliminate step 2 from the goodwill impairment test. The annual, or interim test is performed by comparing the fair value of a reporting unit with its carrying amount. The amendments of this ASU also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill impairment test. This update is effective for the

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Company, on July 1, 2020 (for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years). Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. We continue to evaluate the impact of our upcoming adoption of  ASU 2017-04 and do not believe that its adoption will have a material impact on our consolidated financial position, results of operations or cash flows and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, (“ASU 2017-01”). The objective of ASU 2017-01 is to clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for the Company for annual and interim reporting periods beginning July 1, 2018. We continue to evaluate the impact of our upcoming adoption of ASU 2017-01 and do not believe that its adoption will have a material impact on our consolidated financial position, results of operations or cash flows and related disclosures.
In August 2016 the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). This new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This update is effective for the Company on July 1, 2018 (for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years). The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the impact of our upcoming adoption of ASU 2016-15 on our consolidated financial position, results of operations or cash flows and related disclosures.
In February 2016, FASB issued ASU No. 2016-02, (“ASU 2016-02”), Leases (Topic 842). The amendments in this update require lessees to recognize a lease liability measured on a discounted basis and a right-of-use asset for all leases at the commencement date. This update is effective for the Company, on July 1, 2019 (for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years), and is to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are evaluating the new guidelines, but believe that adoption will not have a material impact on our consolidated financial position, results of operations or cash flows and related disclosures, as the Company has minimal lease commitments.
    In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify aspects relating to the identification of performance obligations and improve the operability and understandability of the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12("ASU 2016-12"), Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in ASU 2016-12 address certain issues identified on assessing collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition. For all of the ASUs noted above ("ASC 606"), the effective date for the Company is July 1, 2018 (for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years). Either the retrospective or cumulative effect transition method is permitted.  The Company has been evaluating the impact of this new pronouncement and does not believe the implementation of ASC 606 will have a significant effect on the financial results of the Company for fiscal years beginning on and after July 1, 2018. This is because the major portion of the Company's revenues fall under the authoritative guidance of ASC 815, which are outside the scope of ASC 606.
3. ASSETS AND LIABILITIES, AT FAIR VALUE
Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2017 and June 30, 2017.

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in thousands
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
 
Carrying Amount
 
Fair value
 
Carrying Amount
 
Fair value
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
Cash
 
$
8,357

 
$
8,357

 
$
13,059

 
$
13,059

Receivables, net
 
42,133

 
42,133

 
39,295

 
39,295

Secured loans receivable
 
88,871

 
88,871

 
91,238

 
91,238

Derivative asset on open sale and purchase commitments, net
 
2,745

 
2,745

 
931

 
931

Derivative asset on option contracts
 
214

 
214

 

 

Derivative asset on futures contracts
 
7,263

 
7,263

 
1,273

 
1,273

Derivative asset on forward contracts
 
10,104

 
10,104

 
15,383

 
15,383

Income taxes receivable
 
5,881

 
5,881

 

 

Financial liabilities:
 
 
 
 
 
 
 
 
Lines of credit
 
$
219,000

 
$
219,000

 
$
180,000

 
$
180,000

Debt obligation (related party)
 
6,818

 
6,818

 

 

Liability on borrowed metals
 
15,010

 
15,010

 
5,625

 
5,625

Product financing arrangements
 
124,864

 
124,864

 
135,343

 
135,343

Derivative liability on margin accounts
 
3,577

 
3,577

 
4,797

 
4,797

Derivative liability on price protection programs
 
198

 
198

 

 

Derivative liability on open sale and purchase commitments, net
 
20,214

 
20,214

 
29,785

 
29,785

Accounts payable
 
45,660

 
45,660

 
41,947

 
41,947

Accrued liabilities
 
4,831

 
4,831

 
4,945

 
4,945

Other long-term liabilities (related party) (1)
 
1,123

 
1,123

 
1,117

 
1,117

Income taxes payable
 

 

 
1,418

 
1,418

Note payable - related party
 

 

 
500

 
500

 
 
 
 
 
 
 
 
 
(1) Includes estimated contingent amounts due to SilverTowne and Goldline Lenders.
 
 
 
 
 
 
 
 
 
The fair values of the financial instruments shown in the above table as of September 30, 2017 and June 30, 2017 represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk adjusted discount rates, and available observable and unobservable inputs.
The carrying amounts of cash, secured loans receivable, accounts receivable, income taxes receivable, accounts payable, income taxes payable, note payable, and accrued liabilities approximate fair value due to their short-term nature. The carrying amounts of derivative assets and derivative liabilities, liability on borrowed metals and product financing arrangements are marked-to-market on a daily basis to fair value. The carrying amounts of lines of credit and debt obligation approximate fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The carrying value of other long-term liabilities represents the long-term portion of a contingent earn-out liability that is remeasured on a quarterly basis.
Valuation Hierarchy
Topic 820 of the ASC established a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

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Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The significant assumptions used to determine the carrying value and the related fair value of the financial instruments are described below:
Inventory. Inventories, principally include bullion and bullion coins, are acquired and initially recorded at fair market value. The fair market value of the bullion and bullion coins are comprised of two components: 1) published market values attributable to the costs of the raw precious metal, and 2) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form and the market value attributable solely to the premium is readily determined, as it is published by multiple reputable sources. Except for commemorative coin inventory, which are included in inventory at the lower of cost or market, the Company’s inventories are subsequently recorded at their fair market values on a daily basis. The fair value for commodities inventory (i.e., inventory excluding commemorative coins) is determined using pricing data derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory are classified in Level 1 of the valuation hierarchy.
Derivatives. Futures contracts, forward contracts, option contracts and open sale and purchase commitments are valued at their fair values, based on the difference between the quoted market price and the contractual price (i.e., intrinsic value,) and are included within Level 1 of the valuation hierarchy.
Margin and Borrowed Metals Liabilities. Margin and borrowed metals liabilities consist of the Company's commodity obligations to margin customers and suppliers, respectively. Margin liabilities and borrowed metals liabilities are carried at fair value, which is determined using quoted market pricing and data derived from the markets on which the underlying commodities are traded. Margin and borrowed metals liabilities are classified in Level 1 of the valuation hierarchy.
Product Financing Arrangements. Product financing arrangements consist of financing agreements for the transfer and subsequent re-acquisition of the sale of gold and silver at an agreed-upon price based on the spot price with a third party. Such transactions allow the Company to repurchase this inventory on the termination (repurchase) date. The third party charges monthly interest as a percentage of the market value of the outstanding obligation, which is carried at fair value. The obligation is stated at the amount required to repurchase the outstanding inventory. Fair value is determined using quoted market pricing and data derived from the markets on which the underlying commodities are traded. Product financing arrangements are classified in Level 1 of the valuation hierarchy.
Liability on Price Protection Programs. The Company records an estimate of the fair value of the liability on price protection programs based on the difference between the contractual price at trade date and the quoted market price at the remeasurement date (i.e., quarter-end) based on the expected redemption rate of each program. The use of a throughput rate of each program ignores the future price volatility that would affect the timing and rate of redemption under these programs, and, as a result, the liability on price protection programs is classified in Level 3 of the valuation hierarchy.
Contingent Earn-out Liability. The Company records an estimate of the fair value of contingent consideration related to the earn-out obligation to SilverTowne LP related to the SilverTowne Mint transaction. On a quarterly basis, the liability is remeasured and increases or decreases in the fair value is recorded as an adjustment to other income on the condensed consolidated statements of income. Changes to the contingent consideration liability can result from adjustments to the discount rate, or from changes to the estimates of future throughput activity of AMST. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. The key inputs in determining fair value of our contingent consideration obligations include the changes in the assumed timing and amounts of future throughputs (i.e., operating income, operating cost per unit, and production volume) which affects the timing and amount of future earn-out payments. Contingent earn-out liability is classified in Level 3 of the valuation hierarchy.
    

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The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and June 30, 2017, aggregated by the level in the fair value hierarchy within which the measurements fall:
 
 
September 30, 2017
 
 
Quoted Price in
 
 
 
 
 
 
 
 
Active Markets
 
Significant Other
 
Significant
 
 
 
 
for Identical
 
Observable
 
Unobservable
 
 
 
 
Instruments
 
Inputs
 
Inputs
 
 
in thousands
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Inventory (1)
 
$
311,369

 
$

 
$

 
$
311,369

Derivative assets — open sale and purchase commitments, net
 
2,745

 

 

 
2,745

Derivative assets — option contracts
 
214

 

 

 
214

Derivative assets — futures contracts
 
7,263

 

 

 
7,263

Derivative assets — forward contracts
 
10,104

 

 

 
10,104

Total assets, valued at fair value
 
$
331,695

 
$

 
$

 
$
331,695

Liabilities:
 
 
 
 
 
 
 
 
Liability on borrowed metals
 
$
15,010

 
$

 
$

 
$
15,010

Product financing arrangements
 
124,864

 

 

 
124,864

Liability on price protection programs
 

 

 
198

 
198

Derivative liabilities — liability on margin accounts
 
3,577

 

 

 
3,577

Derivative liabilities — open sale and purchase commitments, net
 
20,214

 

 

 
20,214

Derivative liabilities — future contracts
 

 

 

 

Derivative liabilities — forward contracts
 

 

 

 

Contingent earn-out liability
 
$

 
$

 
$
1,117

 
$
1,117

Total liabilities, valued at fair value
 
$
163,665

 
$

 
$
1,315

 
$
164,980

____________________
(1) Commemorative coin inventory totaling $215,000 is held at lower of cost or market and is thus excluded from this table.

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June 30, 2017
 
 
Quoted Price in
 
 
 
 
 
 
 
 
Active Markets
 
Significant Other
 
Significant
 
 
 
 
for Identical
 
Observable
 
Unobservable
 
 
 
 
Instruments
 
Inputs
 
Inputs
 
 
in thousands
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Inventory (1)
 
$
284,619

 
$

 
$

 
$
284,619

Derivative assets — open sale and purchase commitments, net
 
931

 

 

 
931

Derivative assets — futures contracts
 
1,273

 

 

 
1,273

Derivative assets — forward contracts
 
15,383

 

 

 
15,383

Total assets, valued at fair value
 
$
302,206

 
$

 
$

 
$
302,206

Liabilities:
 
 
 
 
 
 
 
 
Liability on borrowed metals
 
$
5,625

 
$

 
$

 
$
5,625

Product financing arrangements
 
135,343

 

 

 
135,343

Derivative liabilities — liability on margin accounts
 
4,797

 

 

 
4,797

Derivative liabilities — open sale and purchase commitments, net
 
29,785

 

 

 
29,785

Derivative liabilities — forward contracts
 

 

 
1,325

 
1,325

Total liabilities, valued at fair value
 
$
175,550

 
$

 
$
1,325

 
$
176,875

____________________
(1) Commemorative coin inventory totaling $40,000 is held at lower of cost or market and is thus excluded from this table.
There were no transfers in or out of Level 2 or 3 from other levels within the fair value hierarchy during the reported periods.
Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only under certain circumstances. These include cost method and equity method investments that are written down to fair value when a decline in the fair value is determined to be other-than-temporary, and plant, property and equipment or goodwill that are written down to fair value when they are held for sale or determined to be impaired.
The Company uses Level 3 inputs to measure the fair value of its investments on a non-recurring basis. The Company's two investments in noncontrolled entities do not have readily determinable fair values. Quoted prices of the investments are not available, and the cost of obtaining an independent valuation appears excessive considering the carrying value of the instruments to the Company. As of September 30, 2017 and June 30, 2017, the carrying value of the Company's investments totaled $8.0 million and $8.0 million, respectively. During the three months ended September 30, 2017, the Company did not record any impairments related to these investments.
The Company also uses Level 3 inputs to measure the fair value of goodwill and other intangibles on a non-recurring basis. These assets are measured at cost and are written down to fair value on the annual measurement dates or on the date of a triggering event, if impaired. As of September 30, 2017, there were no indications present that the Company's goodwill or other purchased intangibles were impaired, and therefore were not measured at fair value.

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4.
RECEIVABLES
Receivables consist of the following as of September 30, 2017 and June 30, 2017:
in thousands
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
 
 
 
 
 
 
Customer trade receivables
 
$
25,044

 
$
31,949

 
Wholesale trade advances
 
12,697

 
2,457

 
Due from brokers
 
4,422

 
4,919

 
Subtotal
 
42,163

 
39,325

 
Less: allowance for doubtful accounts
 
(30
)
 
(30
)
 
Receivables, net
 
$
42,133

 
$
39,295

 
Customer Trade Receivables. Customer trade receivables represent short-term, non-interest bearing amounts due from precious metal sales, advances related to financing products, and other secured interests in assets of the customer.
Wholesale Trade Advances. Wholesale trade advances represent advances of various bullion products and cash advances for purchase commitments of precious metal inventory. Typically, these advances are unsecured, short-term, and non-interest bearing, and are made to wholesale metals dealers and government mints.
Due from Brokers. Due from brokers principally consists of the margin requirements held at brokers related to open futures contracts (see Note 11).
Allowance for Doubtful Accounts
An allowance for doubtful accounts is recorded based on specifically identified receivables, which the Company has identified as potentially uncollectible. A summary of the activity in the allowance for doubtful accounts is as follows:
in thousands
 
 
 
 
 
 
 
 
 
Period ended:
 
Beginning Balance
 
Provision
 
Charge-off
 
Ending Balance
 
Three Months Ended September 30, 2017
 
$
30

 
$

 
$

 
$
30

 
Year Ended June 30, 2017
 
$
30

 
$

 
$

 
$
30

 
5.
SECURED LOANS RECEIVABLE
Below is a summary of the carrying value of our secured loans as of September 30, 2017 and June 30, 2017:
in thousands
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
 
 
 
 
 
 
Secured loans originated
 
$
30,072

 
$
30,864

 
Secured loans originated - with a related party
 
2,215

 

 
 
 
32,287

 
30,864

 
Secured loans acquired
 
56,584

(1) 
60,374

(2) 
Secured loans (current and long-term)
 
$
88,871

 
$
91,238

 
_________________________________
(1)    Includes $65,000 of loan premium as of September 30, 2017.
(2)    Includes $72,000 of loan premium as of June 30, 2017.    
Secured Loans - Originated: Secured loans include short-term loans, which include a combination of on-demand lines and short term facilities, and long-term loans that are made to our customers. These loans are fully secured by the customers' assets that include bullion, numismatic and semi-numismatic material, which are typically held in safekeeping by the Company. (See Note 13, for further information regarding our secured loans made to related parties.)
Secured Loans - Acquired: Secured loans also include short-term loans, which include a combination of on-demand lines and short term facilities that are purchased from our customer. The Company acquires a portfolio of their loan receivables at a price that approximates the aggregate carrying value of each loan in the portfolio, as determined on the effective transaction date.

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Each loan in the portfolio is fully secured by the borrowers' assets, which include bullion, numismatic and semi-numismatic material that are held in safekeeping by the Company. Typically, the seller of the loan portfolio retains the responsibility for the servicing and administration of the loans.
    As of September 30, 2017 and June 30, 2017, our secured loans carried weighted-average effective interest rates of 9.3% and 9.2%, respectively, and mature in periods generally ranging typically from on-demand to one year.
The secured loans that the Company generates with active customers of A-Mark are reflected as an operating activity on the condensed consolidated statements of cash flows. The secured loans that the Company generates with borrowers who are not active customers of A-Mark are reflected as an investing activity on the condensed consolidated statements of cash flows as secured loans, net. For the secured loans that are reflected as an investing activity and have terms that allow the borrower to increase their loan balance (at the discretion of the Company) based on the excess value of their collateral compared to their aggregate principal balance of loan and are repayable on demand or in the short-term, the borrowings and repayments are netted on the condensed consolidated statements of cash flows.
Credit Quality of Secured Loans Receivables and Allowance for Credit Losses
The Company applies a systematic methodology to determine the allowance for credit losses for secured loan receivables. The secured loan receivables portfolio is comprised solely of secured loans with similar risk profiles. This similarity allows the Company to apply a standard methodology to determine the credit quality for each loan. The credit quality of each loan is generally determined by the secured material, the initial and ongoing collateral value determination and the assessment of loan to value determination. Typically, the Company's secured loan receivables within its portfolio have similar credit risk profiles and methods for assessing and monitoring credit risk.
The Company evaluates its loan portfolio in one of two classes of secured loan receivables: those loans secured by: 1) bullion and 2) numismatic and semi-numismatic items. The Company's secured loans by portfolio class, which align with management reporting, are as follows:
in thousands
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
Bullion
 
$
57,964

 
65.2
%
 
$
61,767

 
67.7
%
 
Numismatic and semi-numismatic
 
30,907

 
34.8

 
29,471

 
32.3

 
 
 
$
88,871

 
100.0
%
 
$
91,238

 
100.0
%
 
Each of the two classes of receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. The methodology of assessing the credit quality of the secured loans acquired by the Company is similar to the secured loans originated by the Company; they are administered using the same internal reporting system, collateralized by precious metals or other pledged assets, for which a loan to value determination procedures are applied.
Credit Quality of Loans and Non Performing Status
Generally, interest is due and payable within 30 days. A loan is considered past due if interest is not paid in 30 days or collateral calls are not met timely. Typically, loans do not achieve the threshold of non performing status due to the fact that customers are generally put into default for any interest past due over 30 days and for unsatisfied collateral calls. When this occurs the loan collateral is typically liquidated within 90 days.
For certain secured loans, interest is billed monthly and, if not paid, is added to the outstanding loan balance. These secured loans are considered past due if their current loan-to-value ratio fails to meet established minimum equity levels, and the borrower fails to meet the collateral call required to reestablish the appropriate loan to value ratio.    
Non-performing loans have the highest probability for credit loss. The allowance for credit losses attributable to non-performing loans is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, the Company estimates the current market value of the collateral and considers credit enhancements such as additional collateral and third-party guarantees. Due to the accelerated liquidation terms of the Company's loan portfolio, all past due loans are generally liquidated within 90 days of default.

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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 that are collateralized by precious metal products, as follows:
in thousands
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
Loan-to-value of 75% or more
 
$
65,909

 
74.2
%
 
$
60,432

 
66.2
%
Loan-to-value of less than 75%
 
22,962

 
25.8

 
30,806

 
33.8

Secured loans collateralized by precious metal products
 
$
88,871

 
100.0
%
 
$
91,238

 
100.0
%
    The Company had no loans with a loan-to-value ratio in excess of 100% at September 30, 2017. At June 30, 2017, the Company had no loans with a loan-to-value ratio in excess of 100%.
Impaired loans
A loan is considered impaired if it is probable, based on current information and events, that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Customer loans are reviewed for impairment and include loans that are past due, non-performing or in bankruptcy. Recognition of interest income is suspended and the loan is placed on non-accrual status when management determines that collection of future interest income is not probable. Accrual is resumed, and previously suspended interest income is recognized, when the loan becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans are recorded first against the receivable and then to any unrecognized interest income.
All loans are contractually subject to margin 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 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.
For the three months ended September 30, 2017 and 2016, the Company incurred no loan impairment costs.
6.
INVENTORIES
Our inventory consists of the precious metals that the Company has physically received, and inventory held by third-parties, which, at the Company's option, it may or may not receive. Below, our inventory is summarized by classification at September 30, 2017 and June 30, 2017:
in thousands
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
Inventory held for sale
 
$
58,746

 
$
43,787

Repurchase arrangements with customers
 
104,986

 
92,496

Consignment arrangements with customers
 
7,763

 
7,368

Commemorative coins, held at lower of cost or market
 
215

 
40

Borrowed precious metals from suppliers
 
15,010

 
5,625

Product financing arrangement, restricted
 
124,864

 
135,343

 
 
$
311,584

 
$
284,659

Inventory Held for Sale. Inventory held for sale represents precious metals, excluding commemorative coin inventory, that have been received by the Company that is not subject to repurchase or consignment arrangements with third parties. As of September 30, 2017 and June 30, 2017, the inventory held for sale totaled $58.7 million and $43.8 million, respectively.
Repurchase Arrangements with Customers. The Company enters into 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, whereby the Company retains legal title to the metals. 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. As of September 30, 2017 and June 30, 2017, included within inventory is $105.0 million and $92.5 million, respectively, of precious metals products subject to repurchase.
Consignment Arrangements with Customers. The Company periodically loans metals to customers on a short-term consignment basis. Inventories loaned under consignment arrangements to customers as of September 30, 2017 and June 30, 2017 totaled $7.8 million and $7.4 million, respectively. Such transactions are recorded as sales and are removed from the Company's inventory at the time the customer elects to price and purchase the precious metals.

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Table of Contents            

Commemorative Coins. Our commemorative coin inventory, including its premium component, is held at the lower of cost or market, because the value of commemorative coins is influenced more by supply and demand determinants than on the underlying spot price of the precious metal content of the commemorative coins. Unlike our bullion coins, the value of commemorative coins is not subject to the same level of volatility as bullion coins because our commemorative coins typically carry a substantially higher premium over the spot metal price than bullion coins. Our commemorative coins are not hedged, and are included in inventory at the lower of cost or market and totaled $215,000 and $40,000 as of September 30, 2017 and June 30, 2017, respectively.
Borrowed Precious Metals from Suppliers. Inventories include amounts borrowed from suppliers that arise from various arrangements including unallocated metal positions held by customers in the Company’s inventory, as well as amounts due to suppliers for the use of consigned inventory, and 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. Corresponding obligations related to liabilities on borrowed metals are reflected on the condensed consolidated balance sheets and totaled $15.0 million and $5.6 million as of September 30, 2017 and June 30, 2017, respectively.
Product Financing Arrangements. Inventories include amounts for obligations under product financing arrangements. The Company enters into a product financing agreement for the transfer and subsequent re-acquisition of gold and silver at an agreed-upon price based on the spot price with a third party finance company. This inventory is restricted and is held at a custodial storage facility in exchange for a financing fee, by the third party finance company. During the term of the financing, the third party finance company holds the inventory as collateral, and both parties intend for the inventory to be returned to the Company at an agreed-upon price based on the spot price on the finance arrangement termination date. These transactions do not qualify as sales and have been accounted for as financing arrangements in accordance with ASC 470-40 Product Financing Arrangements. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the product financing and the underlying inventory are carried at fair value, with changes in fair value included in cost of sales in the condensed consolidated statements of income. Such obligations totaled $124.9 million and $135.3 million as of September 30, 2017 and June 30, 2017, respectively.
The Company mitigates market risk of its physical inventories and open commitments through commodity hedge transactions (see Note 11.) As of September 30, 2017 and June 30, 2017, the unrealized gains (losses) resulting from the difference between market value and cost of physical inventories were $(3.0) million and $(4.5) million, respectively.
Premium component of inventory
The Company's inventories primarily include bullion and bullion coins and are acquired and initially recorded at fair market value. The fair market value of the bullion and bullion coins is comprised of two components: (1) published market values attributable to the cost of the raw precious metal, and (2) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form and the market value attributable solely to the premium is readily determined, as it is published by multiple reputable sources. The premium is included in the cost of the inventory, paid at acquisition, and is a component of the total fair market value of the inventory. The precious metal component of the inventory may be hedged through the use of precious metal commodity positions, while the premium component of our inventory is not a commodity that may be hedged.
The Company’s inventories are subsequently recorded at their fair market values, that is, "marked-to-market", except for our commemorative coin inventory. The daily changes in the fair market value of our inventory are offset by daily changes in fair market value of hedging derivatives that are taken with respects to our inventory positions; both the change in the fair market value of the inventory and the change in the fair market value of these derivative instruments are recorded in cost of sales in the condensed consolidated statements of income.
The premium component, at market value, included in the inventories as of September 30, 2017 and June 30, 2017 totaled $4.1 million and $4.1 million, respectively.

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7. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consists of the following at September 30, 2017 and June 30, 2017:
in thousands
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
Office furniture, and fixtures
 
$
1,984

 
$
1,638

 
Computer equipment
 
712

 
462

 
Computer software
 
3,521

 
2,386

 
Plant equipment
 
2,034

 
1,979

 
Building
 
315

 
315

 
Leasehold improvements
 
2,789

 
2,571

 
Total depreciable assets
 
11,355

 
9,351

 
Less: accumulated depreciation
 
(4,258
)
 
(3,885
)
 
Property and equipment not placed in service
 
1,187

 
1,105

 
Land
 
36

 
36

 
Plant, property and equipment, net
 
$
8,320

 
$
6,607

 
Depreciation expense for the three months ended September 30, 2017 and 2016 was $374,000 and $225,000, respectively.
Pursuant to the Company's acquisition of Goldline (see Note 1) the Company recorded approximately $1.8 million of additional property and equipment, which represents the approximate fair value of these assets.
8. GOODWILL AND INTANGIBLE ASSETS
In connection with the acquisition of A-Mark by Former Parent on July 1, 2005, the accounts of the Company were adjusted using the push down basis of accounting to recognize the allocation of the consideration paid to the respective net assets acquired. In accordance with the push down basis of accounting, the Company's net assets were adjusted to their fair values as of the date of the acquisition based upon an independent appraisal.
Due to the Company's business combination with AMST that closed on August 31, 2016 the Company recorded an additional $2.5 million and $4.3 million of identifiable intangible assets and goodwill, respectively; these values were based upon an independent appraisal. The Company’s investment in AMST has resulted in synergies between the acquired minting operation and the Company’s established distribution network by providing a more steady and reliable fabricated source of silver during times of market volatility. The Company considers that much of the acquired goodwill relates to the “ ready state” of AMST's established minting operation with existing quality processes, procedures and ability to scale production to meet market needs. 
Due to the Company's acquisition of Goldline (see Note 1), the Company recorded $5.0 million and $1.5 million of additional identifiable intangible assets and goodwill, respectively; these values were based upon an independent appraisal and represents their fair values at the acquisition date. The Company’s investment in Goldline is expected to create synergies between Goldline's direct marketing operation and the Company’s established distribution network, secured storage and lending operations that is expected to lead to increased product margin spreads, lower distribution and storage costs for Goldline, and a larger customer base for the Company's secured lending operations.

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The carrying value of goodwill and other purchased intangibles as of September 30, 2017 and June 30, 2017 is as described below:
dollar amounts in thousands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017

Estimated Useful Lives (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Identifiable intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Existing customer relationships
5 - 15
 
8,849

 
(4,784
)
 
4,065

 
6,447

 
(4,636
)
 
1,811

Non-compete and other
3 - 5
 
2,300

 
(2,006
)
 
294

 
2,000

 
(2,000
)
 

Employment agreement
3
 
295

 
(198
)
 
97

 
195

 
(195
)
 

Intangibles subject to amortization
 
 
11,444

 
(6,988
)
 
4,456

 
8,642

 
(6,831
)
 
1,811

Trade Name
Indefinite
 
$
4,454

 
$

 
$
4,454

 
$
2,254

 
$

 
$
2,254

 
 
 
$
15,898

 
$
(6,988
)
 
$
8,910

 
$
10,896

 
$
(6,831
)
 
$
4,065

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
Indefinite
 
$
10,331

 
$

 
$
10,331

 
$
8,881

 
$

 
$
8,881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company's intangible assets are subject to amortization except for trade-names, which have an indefinite life. Intangible assets subject to amortization are amortized using the straight-line method over their useful lives, which are estimated to be three to fifteen years. Amortization expense related to the Company's intangible assets for the three months ended September 30, 2017 and 2016 was $157,000 and $96,000, respectively. For the three months ended September 30, 2017 and 2016, the Company did not identify any impairments related to the Company's goodwill or intangible assets.
Estimated amortization expense on an annual basis for the succeeding five years is as follows (in thousands):
Fiscal Year Ending June 30,
 
Amount
2018 (9 months remaining)
 
$
759

2019
 
1,012

2020
 
1,012

2021
 
621

2022
 
571

Thereafter
 
481

Total
 
$
4,456


9.
LONG-TERM INVESTMENTS
The Company has two investments in privately-held entities, both of which are online precious metals retailers and customers of the Company. The Company has exclusive supplier agreements with each entity, for which theses customers have agreed to purchase all bullion products required for their businesses exclusively from A-Mark, subject to certain limitations. The Company also provides fulfillment services to both of these customers. The following table shows the carrying value of the Company's investments in the privately held companies, categorized by type of investment:
in thousands
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
Equity method investment
 
$
7,524

 
$
7,467

 
Cost method investment
 
500

 
500

 
 
 
$
8,024

 
$
7,967

 
Equity Method Investment
The Company applies the equity method of accounting for its investment in which it has aggregate ownership interest of 20.2%. Under the equity method of accounting, the carrying value of the investment is adjusted for the Company's proportional share of the investee's reported earnings or losses with the corresponding share of earnings or losses reported in other income (expense) on the condensed consolidated statements of income. The Company's proportionate share of the investee’s net income totaled $57,000 and $(14,000) for the three months ended September 30, 2017 and 2016, respectively.

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Table of Contents            

Cost Method Investment
The Company applies the cost method to its investment in which its ownership percentage, based on the number of fully dilutive common shares outstanding, was 2.5% as of September 30, 2017 and June 30, 2017. As of September 30, 2017 and June 30, 2017, the aggregate carrying balance of this investment was $0.5 million.

10.
ACCOUNTS PAYABLE
Accounts payable consists of the following:
in thousands
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
Trade payables to customers
 
$
7,711

 
$
277

 
Advances from customers
 
31,441

 
36,382

 
Liability on deferred revenue
 
4,805

 
3,777

 
Other accounts payable
 
1,703

 
1,511

 
 
 
$
45,660

 
$
41,947

 
11.
DERIVATIVE INSTRUMENTS AND HEDGING TRANSACTIONS
The Company is exposed to market risk, such as changes in commodity prices, and foreign exchange rates. To manage the volatility relating to these exposures, the Company enters into various derivative products, such as forwards and futures contracts. By policy, the Company historically has entered into derivative financial instruments for the purpose of hedging substantially all of Company's market exposure to precious metals prices, and not for speculative purposes.
Commodity Price Management
The Company manages the value of certain assets and liabilities of its trading business, including trading inventories, by employing a variety of hedging strategies. These strategies include the management of exposure to changes in the market values of the Company's trading inventories through the purchase and sale of a variety of derivative instruments, such as, forwards and futures contracts.
The Company enters into derivative transactions solely for the purpose of hedging its inventory subject to price risk, and not for speculative market purposes. Due to the nature of the Company's global hedging strategy, the Company is not using hedge accounting as defined under Topic 815 of the ASC, whereby the gains or losses would be deferred and included as a component of other comprehensive income. Instead, gains or losses resulting from the Company's futures and forward contracts and open sale and purchase commitments are reported as unrealized gains or losses on commodity contracts (a component of cost of sales) with the related unrealized amounts due from or to counterparties reflected as a derivative asset or liability on the condensed consolidated balance sheets.
The Company's trading inventories and purchase and sale transactions consist primarily of precious metal products. The value of these assets and liabilities are marked-to-market daily to the prevailing closing price of the underlying precious metals. The Company's precious metals inventories are subject to market value changes, created by changes in the underlying commodity market prices. Inventories purchased or borrowed by the Company are subject to price changes. Inventories borrowed are considered natural hedges, since changes in value of the metal held are offset by the obligation to return the metal to the supplier.
    The Company’s open sale and purchase commitments typically settle within 2 business days, and for those commitments that do not have stated settlement dates, the Company has the right to settle the positions upon demand. Futures and forwards contracts open at end of any period typically settle within 30 days. Open sale and purchase commitments are subject to changes in value between the date the purchase or sale price is fixed (the trade date) and the date the metal is received or delivered (the settlement date). The Company seeks to minimize the effect of price changes of the underlying commodity through the use of forward and futures contracts.
The Company's policy is to substantially hedge its inventory position, net of open sale and purchase commitments that are subject to price risk. The Company regularly enters into precious metals commodity forward and futures contracts with financial institutions to hedge price changes that would cause changes in the value of its physical metals positions and purchase commitments and sale commitments. The Company has access to all of the precious metals markets, allowing it to place hedges. The Company also maintains relationships with major market makers in every major precious metals dealing center.

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Table of Contents            

The Company’s management sets credit and position risk limits. These limits include gross position limits for counterparties engaged in sales and purchase transactions with the Company. They also include collateral limits for different types of sale and purchase transactions that counterparties may engage in from time to time.
Derivative Assets and Liabilities
The Company's derivative assets and liabilities represent the net fair value of the difference (or intrinsic value) between market values and trade values at the trade date for open precious metals sale and purchase contracts, as adjusted on a daily basis for changes in market values of the underlying metals, until settled. The Company's derivative assets and liabilities represent the net fair value of open precious metals forwards and futures contracts. The precious metals forwards and futures contracts are settled at the contract settlement date.
All of our commodity derivative contracts are under master netting arrangements and include both asset and liability positions (i.e., offsetting derivative instruments). Substantially all of these transactions are secured by the underlying metals positions. As such, the Company's derivative contracts with the same counterparty, the receivables and payables have been netted on the condensed consolidated balance sheets. Such derivative contracts include open sale and purchase commitments, futures, forwards and margin accounts. In the table below, the aggregate gross and net derivative receivables and payables balances are presented by contract type and type of hedge, as of September 30, 2017 and June 30, 2017.
 
 
September 30, 2017
 
June 30, 2017
 
 
 
 
 
in thousands
 
Gross Derivative
 
Amounts Netted
 
Cash Collateral Pledge
 
Net Derivative
 
Gross Derivative
 
Amounts Netted
 
Cash Collateral Pledge
 
Net Derivative
Nettable derivative assets:
Open sale and purchase commitments
 
$
3,259

 
$
(514
)
 
$

 
$
2,745

 
$
1,625

 
$
(694
)
 
$

 
$
931

Option contracts
 
214

 

 

 
214

 

 

 

 

Future contracts
 
7,263

 

 

 
7,263

 
1,273

 

 

 
1,273

Forward contracts
 
10,104

 

 

 
10,104

 
15,754

 
(371
)
 

 
15,383

 
 
$
20,840

 
$
(514
)
 
$

 
$
20,326

 
$
18,652

 
$
(1,065
)
 
$

 
$
17,587

Nettable derivative liabilities:
Open sale and purchase commitments
 
$
23,213

 
$
(2,999
)
 
$

 
$
20,214

 
$
31,568

 
$
(1,783
)
 
$

 
$
29,785

Margin accounts
 
7,206

 

 
(3,629
)
 
3,577

 
7,936

 

 
(3,139
)
 
4,797

Liability of price protection programs
 
198

 

 

 
198

 

 


 


 

 
 
$
30,617

 
$
(2,999
)
 
$
(3,629
)
 
$
23,989

 
$
39,504

 
$
(1,783
)
 
$
(3,139
)
 
$
34,582

Gains or Losses on Derivative Instruments
The Company records the derivative at the trade date with a corresponding unrealized gain (loss), shown as a component of cost of sales in the condensed consolidated statements of income. The Company adjusts the derivatives to fair value on a daily basis until the transactions are settled. Upon settlement, the sales which are physically settled, are recognized at the gross amount in the consolidated statements of income. Realized gains and losses on contracts which are not physically settled are recognized at the net amount as component of cost of sales in the condensed consolidated statements of income.
Below is a summary of the net gains (losses) on derivative instruments for the three months ended September 30, 2017 and 2016.
in thousands
 
 
 
 
 
Three Months Ended September 30,
 
2017
 
2016
 
Gains (losses) on derivative instruments:
 
Unrealized losses on open future commodity and forward contracts and open sale and purchase commitments, net
 
$
(12,257
)
 
$
(18,150
)
 
Realized (losses) gains on future commodity contracts, net
 
(2,387
)
 
14,259

 
 
 
$
(14,644
)
 
$
(3,891
)
 

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Table of Contents            

Summary of Hedging Activity
In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. The following table summarizes the results of our hedging activities, which shows the precious metal commodity inventory position, net of open sale and purchase commitments, that is subject to price risk as of September 30, 2017 and at June 30, 2017.
in thousands
 
 
 
 
 
 
 
September 30, 2017
 
June 30, 2017
 
Inventory
 
$
311,584

 
$
284,659

 
Less unhedgable inventory:
 
 
 
 
 
Commemorative coin inventory, held at lower of cost or market