Quarterly report pursuant to Section 13 or 15(d)

Assets and Liabilities, at Fair Value

v3.10.0.1
Assets and Liabilities, at Fair Value
3 Months Ended
Sep. 30, 2018
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 September 30, 2018 and June 30, 2018.
in thousands
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
June 30, 2018
 
 
Carrying Amount
 
Fair value
 
Carrying Amount
 
Fair value
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
Cash
 
$
22,714

 
$
22,714

 
$
6,291

 
$
6,291

Receivables, net
 
57,332

 
57,332

 
35,856

 
35,856

Secured loans receivable
 
81,891

 
81,891

 
110,424

 
110,424

Derivative asset on open sale and purchase commitments, net
 
1,981

 
1,981

 
2,274

 
2,274

Derivative asset on option contracts
 
392

 
392

 
390

 
390

Derivative asset on futures contracts
 
140

 
140

 
238

 
238

Derivative asset on forward contracts
 
193

 
193

 
4,493

 
4,493

Income taxes receivable
 
1,561

 
1,561

 
1,553

 
1,553

Financial liabilities:
 
 
 
 
 
 
 
 
Lines of credit
 
$
179,000

 
$
179,000

 
$
200,000

 
$
200,000

Debt obligation (related party)
 
7,257

 
7,257

 
7,226

 
7,226

Liability on borrowed metals
 
227,198

 
227,198

 
280,346

 
280,346

Product financing arrangements
 
53,126

 
53,126

 
113,940

 
113,940

Derivative liability on margin accounts
 
3,728

 
3,728

 
3,804

 
3,804

Derivative liability on price protection programs
 
116

 
116

 
168

 
168

Derivative liability on open sale and purchase commitments, net
 
25,488

 
25,488

 
16,485

 
16,485

Derivative liability on futures contracts
 
2,163

 
2,163

 

 

Derivative liability on forward contracts
 
4,479

 
4,479

 

 

Accounts payable
 
60,993

 
60,993

 
45,997

 
45,997

Accrued liabilities
 
4,838

 
4,838

 
5,129

 
5,129

Other long-term liabilities (related party) (1)
 
296

 
296

 
798

 
798

Notes payable
 
87,056

 
87,056

 

 

 
 
 
 
 
 
 
 
 
(1) Includes estimated contingent amounts due to SilverTowne.
 
 
 
 
 
 
 
 
 

The fair values of the financial instruments shown in the above table as of September 30, 2018 and June 30, 2018 represent the amounts that would be received upon the sale of 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 contingent earn-out liabilities that are 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 assets and liabilities measured at fair value on a recurring basis 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.
Precious Metals held under Financing Arrangements. The Company enters into arrangements with certain customers under which A-Mark purchases precious metals from the customers which are subject to repurchase by the customer at the spot value of the product on the repurchase date. The substance of these transactions are precious metals owned by the Company that generate financing income from customers and are not metals held as inventory for sale. As such, the Company has classified this material as "precious metals held under financing arrangements", rather than as "inventory - repurchase arrangements with customers". In these repurchase arrangements, the Company holds legal title to the metals and earns financing income for the duration of the agreement. The fair value for precious metals held under financing arrangements, (a commodity, like inventory above) 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 September 30, 2018, 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 operations. 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, and as of September 30, 2018, the remaining two annual contingent payout obligations, if achieved, would become due on August 31, 2019 and on October 30, 2019. 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 September 30, 2018 and June 30, 2018, aggregated by the level in the fair value hierarchy within which the measurements fall:
 
 
September 30, 2018
 
 
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)
 
$
289,719

 
$

 
$

 
$
289,719

Precious metals held under financing arrangements
 
232,476

 
 
 
 
 
232,476

Derivative assets — open sale and purchase commitments, net
 
1,981

 

 

 
1,981

Derivative assets — option contracts
 
392

 

 

 
392

Derivative assets — futures contracts
 
140

 

 

 
140

Derivative assets — forward contracts
 
193

 

 

 
193

Total assets, valued at fair value
 
$
524,901

 
$

 
$

 
$
524,901

Liabilities:
 
 
 
 
 
 
 
 
Liability on borrowed metals
 
$
227,198

 
$

 
$

 
$
227,198

Product financing arrangements
 
53,126

 

 

 
53,126

Derivative liabilities — price protection programs
 

 

 
116

 
116

Derivative liabilities — liability on margin accounts
 
3,728

 

 

 
3,728

Derivative liabilities — open sale and purchase commitments, net
 
25,488

 

 

 
25,488

Derivative liabilities — future contracts
 
2,163

 

 

 
2,163

Derivative liabilities — forward contracts
 
4,479

 

 

 
4,479

Contingent earn-out liability
 
$

 
$

 
$
588

 
$
588

Total liabilities, valued at fair value
 
$
316,182

 
$

 
$
704

 
$
316,886

____________________
(1) Commemorative coin inventory totaling $86,000 is held at lower of cost or market and is thus excluded from this table.
 
 
June 30, 2018
 
 
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)
 
$
280,017

 
$

 
$

 
$
280,017

Precious metals held under financing arrangements
 
262,566

 

 

 
262,566

Derivative assets — open sale and purchase commitments, net
 
2,274

 

 

 
2,274

Derivative assets — option contracts
 
390

 

 

 
390

Derivative assets — futures contracts
 
238

 

 

 
238

Derivative assets — forward contracts
 
4,493

 

 

 
4,493

Total assets, valued at fair value
 
$
549,978

 
$

 
$

 
$
549,978

Liabilities:
 
 
 
 
 
 
 
 
Liability on borrowed metals
 
$
280,346

 
$

 
$

 
$
280,346

Product financing arrangements
 
113,940

 

 

 
113,940

Derivative liabilities — price protection programs
 

 

 
168

 
168

Derivative liabilities — liability on margin accounts
 
3,804

 

 

 
3,804

Derivative liabilities — open sale and purchase commitments, net
 
16,485

 

 

 
16,485

Contingent earn-out liability
 

 

 
588

 
588

Total liabilities, valued at fair value
 
$
414,575

 
$

 
$
756

 
$
415,331


____________________
(1) Commemorative coin inventory totaling $99,000 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, intangibles or goodwill, which are written down to fair value when they are held for sale or determined to be impaired. The resulting fair value measurements of the assets are considered to be Level 3 measurements. Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, long-term growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows. The cash flows employed in the analyses are based on the Company’s estimated outlook and various growth rates. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. In assessing the reasonableness of its determined fair values, the Company evaluates its results against other value indicators, such as comparable transactions and comparable public company trading values.
The Company evaluates its goodwill and other indefinite-lived intangibles for impairment on non-recurring basis in the fourth quarter of the fiscal year, or more frequently if indicators of potential impairment exist. As of June 30, 2018, the carrying value of the Company's indefinite-lived intangible and goodwill assets totaled $3.2 million and $8.9 million, respectively. In the fourth quarter of fiscal 2018, the Company recorded an impairment loss of $1.3 million and $1.4 million to indefinite-lived intangible and goodwill assets, respectively, based on our quantitative assessment of the fair value of the Direct Sales segment (i.e., Goldline). As of September 30, 2018 , the carrying value of the Company's indefinite-lived intangible and goodwill assets totaled $3.2 million and $8.9 million, respectively (see Note 8).
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 Company identified no impairment indicators that may affect the carrying value of these investments. Based on the Company's assessment of the carrying value of these assets, during the three months ended September 30, 2018 and 2017 the Company did not record any impairments related to these investments. As of September 30, 2018 and June 30, 2018, the carrying value of the Company's investments totaled $8.6 million and $8.4 million, respectively.