Quarterly report pursuant to Section 13 or 15(d)

Assets and Liabilities, at Fair Value

v3.8.0.1
Assets and Liabilities, at Fair Value
6 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Assets and Liabilities, at Fair Value
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 December 31, 2017 and June 30, 2017.
in thousands
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
June 30, 2017
 
 
Carrying Amount
 
Fair value
 
Carrying Amount
 
Fair value
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
Cash
 
$
12,011

 
$
12,011

 
$
13,059

 
$
13,059

Receivables, net
 
39,418

 
39,418

 
39,295

 
39,295

Secured loans receivable
 
96,971

 
96,971

 
91,238

 
91,238

Derivative asset on open sale and purchase commitments, net
 
1,009

 
1,009

 
931

 
931

Derivative asset on option contracts
 
158

 
158

 

 

Derivative asset on futures contracts
 
179

 
179

 
1,273

 
1,273

Derivative asset on forward contracts
 
53

 
53

 
15,383

 
15,383

Income taxes receivable
 
663

 
663

 

 

Financial liabilities:
 
 
 
 
 
 
 
 
Lines of credit
 
$
214,000

 
$
214,000

 
$
180,000

 
$
180,000

Debt obligation (related party)
 
6,873

 
6,873

 

 

Liability on borrowed metals
 
19,526

 
19,526

 
5,625

 
5,625

Product financing arrangements
 
120,161

 
120,161

 
135,343

 
135,343

Derivative liability on margin accounts
 
4,252

 
4,252

 
4,797

 
4,797

Derivative liability on price protection programs
 
84

 
84

 

 

Derivative liability on open sale and purchase commitments, net
 
2,561

 
2,561

 
29,785

 
29,785

Derivative liability on futures contracts
 
4,167

 
4,167

 

 

Derivative liability on forward contracts
 
16,356

 
16,356

 

 

Accounts payable
 
59,754

 
59,754

 
41,947

 
41,947

Accrued liabilities
 
5,263

 
5,263

 
4,945

 
4,945

Other long-term liabilities (related party) (1)
 
1,103

 
1,103

 
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 December 31, 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, receivables, 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.
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 retail price at the remeasurement date (i.e., quarter-end) based on the expected redemption rate of each program. As of December 31, 2017, the Company used the quoted market price based on the current spot rate and used an expected redemption rate of 100% for the price shield program, the most significant of the price protection programs. 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 are 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.
The Company values the contingent obligation by determining the likelihood that the company has achieved the following targeted amount of performance thresholds for each annual earn-out period. Such thresholds include (1) Producing a targeted amount of silver ounces, (2) Earning a targeted amount of operating income, and (3) Generating an operating cost per ounce that is less than a targeted level. Each category triggers a different annual payout obligation if achieved over a 3 year period. The company re-assesses this contingent obligation each quarter based on the most current facts and market conditions. The obligation continues to remain as a liability at its original recorded value unless, based on each quarterly evaluation, it becomes evident the Company will not achieve all or part of the threshold performance targets. In such case, the obligation is adjusted to its more current estimated value.
The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and June 30, 2017, aggregated by the level in the fair value hierarchy within which the measurements fall:
 
 
December 31, 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)
 
$
335,106

 
$

 
$

 
$
335,106

Derivative assets — open sale and purchase commitments, net
 
1,009

 

 

 
1,009

Derivative assets — option contracts
 
158

 

 

 
158

Derivative assets — futures contracts
 
179

 

 

 
179

Derivative assets — forward contracts
 
53

 

 

 
53

Total assets, valued at fair value
 
$
336,505

 
$

 
$

 
$
336,505

Liabilities:
 
 
 
 
 
 
 
 
Liability on borrowed metals
 
$
19,526

 
$

 
$

 
$
19,526

Product financing arrangements
 
120,161

 

 

 
120,161

Derivative liabilities — price protection programs
 

 

 
84

 
84

Derivative liabilities — liability on margin accounts
 
4,252

 

 

 
4,252

Derivative liabilities — open sale and purchase commitments, net
 
2,561

 

 

 
2,561

Derivative liabilities — future contracts
 
4,167

 

 

 
4,167

Derivative liabilities — forward contracts
 
16,356

 

 

 
16,356

Contingent earn-out liability
 
$

 
$

 
$
588

 
$
588

Total liabilities, valued at fair value
 
$
167,023

 
$

 
$
672

 
$
167,695

____________________
(1) Commemorative coin inventory totaling $129,000 is held at lower of cost or market and is thus excluded from this table.
 
 
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

Contingent earn-out liability
 

 

 
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 December 31, 2017 and June 30, 2017, the carrying value of the Company's investments totaled $8.1 million and $8.0 million, respectively. During the three and six months ended December 31, 2017 and 2016, 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 December 31, 2017, there were no indications present that the Company's goodwill or other purchased intangibles were impaired, and therefore were not remeasured.