10-Q
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, 2015
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
__________________________________________________  
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.)
429 Santa Monica Blvd.
Suite 230
Santa Monica, CA 90401
(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. o
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes. þ   No. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
 
 
 
As of November 9, 2015, the registrant had 6,973,549 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, 2015

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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A-MARK PRECIOUS METALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
 
September 30,
2015
 
June 30,
2015
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
5,044

 
$
20,927

Receivables, net
47,899

 
30,025

Derivative assets
10,626

 
11,364

Secured loans receivables
49,766

 
48,666

 
 
 
 
Inventories:
 
 
 
   Inventories
204,476

 
152,076

   Restricted inventories
50,030

 
39,425

 
254,506

 
191,501

 
 
 
 
Income taxes receivable
6,024

 
7,846

Income taxes receivable from Former Parent
1,095

 
1,095

Prepaid expenses and other assets
1,074

 
1,202

Total current assets
376,034

 
312,626

 
 
 
 
Property and equipment, net
2,832

 
2,850

Goodwill
4,884

 
4,884

Intangibles, net
2,273

 
2,369

Long-term secured loans receivables
650

 
650

Long-term investments
2,500

 
2,500

Deferred tax assets - non-current
23

 
23

Total assets
$
389,196

 
$
325,902

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Lines of credit
$
176,900

 
$
147,000

Liability on borrowed metals
4,009

 
9,500

Product financing arrangement
50,030

 
39,425

Accounts payable
78,499

 
50,639

Derivative liabilities
12,893

 
17,897

Accrued liabilities
4,242

 
5,330

Deferred tax liability - current
1,593

 
149

Total current liabilities
328,166

 
269,940

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, authorized 10,000,000 shares; issued and outstanding: none as of September 30, 2015 and June 30, 2015

 

Common Stock, par value $0.01; 40,000,000 authorized; 6,973,549 and 6,973,549
issued and outstanding as of September 30, 2015 and June 30, 2015, respectively
70

 
70

Additional paid-in capital
22,523

 
22,470

Retaining earnings
38,437

 
33,422

Total stockholders’ equity
61,030

 
55,962

Total liabilities and stockholders’ equity
$
389,196

 
$
325,902



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, 2015
 
September 30, 2014
 
Revenues
 
$
2,006,936

 
$
1,453,466

 
Cost of sales
 
1,992,512

 
1,447,736

 
Gross profit
 
14,424

 
5,730

 
 
 
 
 
 
 
Selling, general and administrative expenses
 
(6,408
)
 
(4,219
)
 
Interest income
 
1,933

 
1,477

 
Interest expense
 
(1,234
)
 
(1,063
)
 
Unrealized losses on foreign exchange
 
(39
)
 
(9
)
 
Net income before provision for income taxes
 
8,676

 
1,916

 
Provision for income taxes
 
(3,312
)
 
(778
)
 
Net income
 
$
5,364

 
$
1,138

 
 
 
 
 
 
 
Basic and diluted income per share:
 
 
 
 
 
Basic - net income
 
$
0.77

 
$
0.16

 
Diluted - net income
 
$
0.76

 
$
0.16

 
Weighted average shares outstanding:
 
 
 
 
 
Basic
 
6,973,500

 
6,962,742

 
Diluted
 
7,058,700

 
7,065,700

 

See accompanying Notes to Condensed Consolidated Financial Statements

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A-MARK PRECIOUS METALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share data)
(unaudited)
 
 
Common Stock
(Shares)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Total Stockholders’ Equity
 
Balance, June 30, 2015
 
6,973,549

 
$
70

 
$
22,470

 
$
33,422

 
$
55,962

 
Net income
 

 

 

 
5,364

 
5,364

 
Share-based compensation
 

 

 
53

 

 
53

 
Dividends declared
 

 

 

 
(349
)
 
(349
)
 
Balance, September 30, 2015
 
6,973,549

 
$
70

 
$
22,523

 
$
38,437

 
$
61,030

 
 
 
 
 
 
 
 
 
 
 
 
 


See accompanying Notes to Condensed Consolidated Financial Statements



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


Three Months Ended
 
September 30,
2015
 
September 30,
2014
 
Cash flows from operating activities:
 
 
 
 
 
Net Income
 
$
5,364

 
$
1,138

 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 

 
Depreciation and amortization
 
303

 
228

 
Deferred income taxes
 
1,444

 

 
Interest added to principal of secured loans
 
(26
)
 
(91
)
 
Share-based compensation
 
53

 
62

 
Changes in assets and liabilities:
 
 
 
 
 
Receivables
 
(17,223
)
 
(19,286
)
 
Secured loans
 
340

 
1,992

 
Secured loans to Former Parent
 
(710
)
 
2,562

 
Derivative assets
 
738

 
(24,026
)
 
Income tax receivable
 
1,822

 

 
Inventories
 
(63,005
)
 
16,314

 
Prepaid expenses and other current assets
 
128

 
(115
)
 
Accounts payable
 
27,860

 
5,816

 
Derivative liabilities
 
(5,004
)
 
21,680

 
Liabilities on borrowed metals
 
(5,491
)
 
3,289

 
Accrued liabilities
 
(1,088
)
 
(2,135
)
 
Income taxes payable
 

 
(1,794
)
 
Net cash (used in) provided by operating activities
 
(54,495
)
 
5,634

 
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures for property and equipment
 
(189
)
 
(53
)
 
Purchase of cost method investment
 

 
(1,111
)
 
Secured loans, net
 
(1,355
)
 
(1,809
)
 
Net cash used in investing activities
 
(1,544
)
 
(2,973
)
 
Cash flows from financing activities:
 
 
 
 
 
Product financing arrangement, net
 
10,605

 
(3,997
)
 
Dividends paid
 
(349
)
 

 
Borrowings under lines of credit, net
 
29,900

 
(7,200
)
 
Net cash provided by (used in) financing activities
 
40,156

 
(11,197
)
 
 
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(15,883
)
 
(8,536
)
 
Cash and cash equivalents, beginning of period
 
20,927

 
13,193

 
Cash and cash equivalents, end of period
 
$
5,044

 
$
4,657

 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest expense
 
$
1,134

 
$
1,003

 
Income taxes
 
$

 
$
2,572

 
   Non-cash investing and financing activities:
 
 
 
 
 
Interest added to principal of secured loans
 
$
26

 
$
91

 

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
A-Mark Precious Metals, Inc. and its subsidiaries (“A-Mark” or the “Company”) is 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 collateral 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, which began operations in July 2015. Logistics provides our customers an array of complementary services, including storage, shipping, handling, receiving, processing, and inventorying of precious metals and custom coins on a secure basis.
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
Basis of Presentation and 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”). The Company operated in one segment for all periods presented.
These condensed consolidated financial statements include the accounts of A-Mark, and its wholly owned subsidiaries, CFC, AMTAG, Logistics and TDS (collectively the “Company”). All significant 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 statements 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, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2016 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, 2015 (the “2015 Annual Report”), as filed with the SEC. Amounts related to disclosure of June 30, 2015 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in the 2015 Annual Report.

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Reclassifications
Certain previously reported amounts have been reclassified to conform to the current fiscal quarter's condensed consolidated financial statement presentation. In the previous reported periods, account receivables included secured loans and derivative assets; these components are shown as separate lines items on the condensed consolidated balance sheets and cash flow statements. Similarly, accounts payables included derivative liabilities; these components are shown as separate lines items on the condensed consolidated balance sheets and cash flow statements.
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, and allowances for doubtful accounts, impairment assessments of long-lived assets and intangible assets, valuation reserve determination on deferred tax assets, and revenue recognition judgments. Significant estimates also include the Company's fair value determination with respect to its financial instruments and precious metals materials. Actual results could materially differ from these estimates.
Concentration of Credit Risk
Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never 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; substantially all inventories loaned under consignment arrangements are collateralized for the benefit of the Company. 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.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents.
Inventories
Inventories principally 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 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.
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

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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.)
Property and Equipment and Depreciation
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 five years.
Goodwill and Purchased 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 life intangibles are evaluated for impairment annually in the fourth quarter of the fiscal year (or more frequently if indicators of potential impairment exist) in accordance with the Intangibles - Goodwill and Other Topic 350 of the Accounting Standards Codification ("ASC".) Other purchased intangible assets continue to be amortized over their useful lives and are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. The Company may first qualitatively assess whether relevant events and circumstances make it more likely than not that the fair value of the reporting unit's goodwill is less than its carrying value. If, based on this qualitative assessment, management determines that goodwill is more likely than not to be impaired, the two-step impairment test is performed. This 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. As of September 30, 2015 and June 30, 2015, the Company had no impairments.
If the Company determines it will quantitatively assess impairment, the Company utilizes the discounted cash flow method to determine the fair value of each of its reporting units. In calculating the implied fair value of the reporting unit's goodwill, the present value of the reporting unit's expected future cash flows is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the present value of the reporting unit's expected future cash flows over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. In calculating the implied value of the Company's trade names, the Company uses the present value of the relief from royalty method.
Amortizable intangible assets are being amortized on a straight-line basis which approximates economic use, over periods ranging from four years to fifteen years. The Company considers the useful life of the trademarks to be indefinite. The Company tests the value of the trademarks and trade name annually for impairment.
Long-Lived Assets
Long-lived assets, other than goodwill and purchased intangible assets with indefinite lives are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. In evaluating impairment, the carrying value of the asset is compared to the undiscounted estimated future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is recognized when estimated future cash flows are less than the carrying amount. Estimates of future cash flows may be internally developed or based on independent appraisals and significant judgment is applied to make the estimates. Changes in the Company's strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. As of September 30, 2015 and June 30, 2015, management concluded that an impairment was not required.
Investments
Investments into noncontrolled entities that do not have readily determinable fair values (i.e., non-marketable equity securities) under Cost Method Investments Topic 325-20 of the ASC are initially recorded at cost. Income is recorded for dividends received that are distributed from net accumulated earnings of the noncontrolled entity subsequent to the date of investment. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions in the cost of the investment. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred. The Company assesses all cost-method investments for impairment quarterly. Below is a summary of the Company's cost-method investments.
On February 18, 2014, the Company purchased 2.5% of issued and outstanding Class A common stock of a nonpublic company, who is a customer of A-Mark, for $0.5 million. On September 19, 2014, the Company entered into an agreement with a separate nonpublic company, also a customer of A-Mark, to purchase up to 9% of its issued and outstanding common stock, on a fully diluted basis, in two tranches, for an aggregate purchase price of $2.0 million. The closing of the first tranche of the second transaction, for 5% of the retailer's issued and outstanding common stock at a purchase price equal to $1.1 million, took place on

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September 19, 2014. The closing of the second tranche of the second transaction, for 4% of this company's issued and outstanding common stock took place on April 1, 2015, at a purchase price equal to $0.9 million.
In connection with both transactions, the Company entered into exclusive supplier agreements, pursuant to which the customers will purchase all bullion products required for their respective businesses exclusively from A-Mark for a period of 5.0 years and 3.0 years, respectively (subject to renewal and earlier termination under certain circumstances). In the case of the second transaction, A-Mark will continue to provide fulfillment services to this customer under the terms of a previously existing fulfillment agreement. The Company initially had the right to appoint, and did appoint, a board member to each customer's boards of directors. During the fourth quarter of fiscal 2015, the operative agreements were amended to provide that the Company has the right instead to designate a board observer, who is entitled to attend, in a nonvoting observer capacity, all meetings of each company's board of directors and all committees thereof. Also during the fourth quarter of fiscal 2015, the Company's former board designee resigned as a member of both boards of directors.
As of September 30, 2015, the aggregate carrying amount of the Company’s cost-method investments was $2.5 million. There were no identifiable events or changes in circumstances that may have had a significant adverse effect on the fair value. As a result, no impairment loss was recorded, nor were any dividends received during the three months ended September 30, 2015 and 2014.
On October 26, 2015, the Company entered into an amended and restated agreement with one of its customers, an online retailer of generic gold and silver coins and bullion, to increase the Company's ownership of the retailer's outstanding common stock from 9% to up to 20% on a fully diluted basis (see Note 18.)
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.)
Revenue Recognition
Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collection is probable. The Company records sales of precious metals, which occurs upon receipt by the customer. The Company records revenues from its metal assaying and melting services after the related services are completed and the effects of forward sales contracts are reflected in revenue at the date the related precious metals are delivered or the contracts expire. The Company records revenues from its storage and logistics services after the related services are completed.
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 trade and settlement date, the Company has essentially entered into a forward contract that meets the definition of a derivative in accordance with the Derivatives and Hedging Topic 815 of the ASC. The Company records the derivative at the trade date with a corresponding unrealized gain (loss), which is reflected in the cost of sales in the condensed consolidated statements of income. The Company adjusts the derivatives to fair value on a daily basis until the transaction is physically settled. Sales which are physically settled are recognized at the gross amount 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 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 receivable and then to any unrecognized interest income (see Note 5.)
Interest Expense
The Company incurs interest expense and related fees as a result of usage under its lines of credit, product financing arrangements and liability on borrowed metals.
The Company incurs interest expense based on usage under its Trading Credit Facility recording interest expense using the effective interest method.
The Company incurs financing fees (classified as interest expense) as a result of its product financing arrangements for the transfer and subsequent re-acquisition of gold and silver at a fixed price to a third party finance company. During the term of this type of financing agreement, a third party finance company holds the Company's inventory as collateral, with the intent to return the inventory to the Company at an agreed-upon price based on the spot price on the finance arrangement termination date, pursuant to the guidance in Product Financing Arrangements Topic 470-40 of the ASC. The third party charges a monthly fee as

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a percentage of the market value of the outstanding obligation. In addition, the Company incurs a financing fee related to custodial storage facility charges related to the transferred collateral inventory; this collateral is classified as restricted inventory on our condensed consolidated balance sheets.
Additionally, the Company incurs interest expense when we borrow precious metals from our suppliers under short-term arrangements, which bear interest at a designated rate. Amounts under these arrangements are due at maturity and require repayment either in the form of precious metals or cash. This liability is reflected in the condensed consolidated balance sheet as a liability on borrowed metals.
Derivative Instruments
The Company’s inventory, purchase and sale commitments transactions consist of precious metals bearing products. The value of our inventory and these commitments is intimately linked to the prevailing price of the underlying precious metal commodity. The Company seeks to minimize the effect of price changes of the underlying commodity and enters into inventory hedging transactions, principally utilizing metals commodity futures contracts traded on national futures exchanges or forward contracts with only major credit worthy financial institutions. All of 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 and forward contract transactions are recorded at fair value on the trade date. The difference between the original contract value and the market value of the open futures and forward contracts are reflected in derivative assets or derivative liabilities in the condensed consolidated balance sheet at fair value.
The Company records the change between market value and trade value of the underlying open commodity contracts as a derivative asset or liability, and the Company correspondingly records the related unrealized gains or losses. The change in unrealized gain (loss) on open commodity contracts from one period to the next is reflected in net gain (loss) on derivative instruments. These unrealized gains and losses are included as a component of cost of sales on the condensed consolidated statements of income. Gains or losses resulting from the termination of commodity contracts are reported as realized gains or losses on commodity contracts, which is recorded as a component of cost of sales on the condensed consolidated statements of income.
The Company enters into derivative transactions solely for the purpose of hedging our inventory holding risk, 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 10.)
Advertising
Advertising costs are expensed as incurred, and are included in selling, general and administrative expenses in the condensed consolidated statements of income. Advertising expense was $0.2 million and $0.1 million, respectively, for the three months ended September 30, 2015 and 2014.
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 $2.3 million and $1.5 million, respectively, for the three months ended September 30, 2015 and 2014.
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.
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

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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 sheet principally within accrued liabilities.
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.
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 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 11 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.
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 rather than 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.
Income taxes receivable from Former Parent reflects balances due from the Former Parent for the Company's share of the income tax assets of the group, net of amounts related to federal and state jurisdictions due to taxable income generated as if the Company were a separate taxpaying entity prior to the 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.

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A reconciliation of shares used in calculating basic and diluted earnings per common shares follows. There is no dilutive effect of stock appreciation rights ("SARs"), as such obligations are not settled and were out of the money for the three months ended September 30, 2015 and 2014.
in thousands
 
 
 
 
 
 
 
Three Months Ended
 

 
September 30, 2015
 
September 30, 2014
 
Basic weighted average shares outstanding (1)
 
6,974

 
6,963

 
Effect of common stock equivalents — stock issuable under outstanding equity awards
 
85

 
103

 
Diluted weighted average shares outstanding
 
7,059

 
7,066

 
 
 
_________________________________
 
(1)
 
Basic weighted average shares outstanding include the effect of vested but unissued restricted stock grants.
 
Recent Accounting Pronouncements
In February 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-2, Consolidation (Topic 820): Amendments to the Consolidation Analysis. ASU 2015-2 provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities. All legal entities will be subject to reevaluation under this revised consolidation model. The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships. ASU 2015-2 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2015, which will be our fiscal year 2017 (or July 1, 2016). We are still evaluating what impact, if any, this ASU will have on the Company’s consolidated financial position, results of operations or cash flows.
In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity. ASU No. 2014-16 clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. In addition, ASU No. 2014-16 clarifies that in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (that is, the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The effects of initially adopting ASU No. 2014-16 should be applied on a modified retrospective basis to existing hybrid financial instruments issued in a form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods. ASU No. 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, which will be our fiscal year 2017 (or July 1, 2016). Early adoption is permitted. We are still evaluating what impact, if any, this ASU will have on the Company’s consolidated financial position, results of operations or cash flows and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), 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 August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year. With the deferral, the new standard is effective for the Company, on July 1, 2018, with early adoption permitted one year prior. The standard permits the use of either the retrospective or cumulative effect transition method. We are still evaluating what impact this standard will have on the Company’s consolidated financial position, results of operations or cash flows and related disclosures.

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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, 2015 and June 30, 2015.
in thousands
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
 
Carrying Amount
 
Fair value
 
Carrying Amount
 
Fair value
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
Cash
 
$
5,044

 
$
5,044

 
$
20,927

 
$
20,927

Receivables, and advances, net
 
47,899

 
47,899

 
30,025

 
30,025

Secured loans
 
50,416

 
50,416

 
49,316

 
49,316

Derivative assets - open sale and purchase commitments, net
 
7,508

 
7,508

 
1,722

 
1,722

Derivative assets - futures contracts
 
2,842

 
2,842

 
5,363

 
5,363

Derivative assets - forward contracts
 
276

 
276

 
4,279

 
4,279

Income taxes receivable from Former Parent
 
1,095

 
1,095

 
1,095

 
1,095

Financial liabilities:
 
 
 
 
 
 
 
 
Lines of credit
 
$
176,900

 
$
176,900

 
$
147,000

 
$
147,000

Liability for borrowed metals
 
4,009

 
4,009

 
9,500

 
9,500

Product financing obligation
 
50,030

 
50,030

 
39,425

 
39,425

Derivative liabilities - liability on margin accounts
 
6,367

 
6,367

 
6,908

 
6,908

Derivative liabilities - open sale and purchase commitments, net
 
6,183

 
6,183

 
10,989

 
10,989

Derivative liabilities - forward contracts
 
343

 
343

 

 

Accounts payable, advances and other payables
 
78,499

 
78,499

 
50,639

 
50,639

Accrued liabilities
 
4,242

 
4,242

 
5,330

 
5,330

The fair values of the financial instruments shown in the above table as of September 30, 2015 and June 30, 2015 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, available observable and unobservable inputs.
The carrying amounts of cash and cash equivalents, secured loans, accounts receivable, consignor advances, accounts payable and accrued liabilities approximated fair value due to their short-term nature. The carrying amounts of derivative assets and derivative liabilities are marked-to-market on a daily basis to fair value. The carrying amounts of lines of credit approximate fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities.
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:

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Inventory. Inventories principally 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 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 and 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 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 Obligations. Product financing obligations consist of financing agreements for the transfer and subsequent re-acquisition of the sale of gold and silver at a fixed price to a third party. Such transactions allow the Company to repurchase this inventory at an agreed-upon price based on the spot price on the repurchase date. The third party charges monthly interest as a percentage of the market value of the outstanding obligation, 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 obligations are classified in Level 1 of the valuation hierarchy.
The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and June 30, 2015 aggregated by the level in the fair value hierarchy within which the measurements fall:
 
 
September 30, 2015
 
 
Quoted Price in
 
 
 
 
 
 
 
 
Active Markets
 
Significant Other
 
Significant
 
 
 
 
for Identical
 
Observable
 
Unobservable
 
 
 
 
Instruments
 
Inputs
 
Inputs
 
 
in thousands
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total Balance
Assets:
 
 
 
 
 
 
 
 
Inventory (1)
 
$
254,343

 
$

 
$

 
$
254,343

Derivative assets — open sale and purchase commitments, net
 
7,508

 

 

 
7,508

Derivative assets — futures contracts
 
2,842

 

 

 
2,842

Derivative assets — forward contracts
 
276

 

 

 
276

Total assets valued at fair value
 
$
264,969

 
$

 
$

 
$
264,969

Liabilities:
 
 
 
 
 
 
 
 
Liability on borrowed metals
 
$
4,009

 
$

 
$

 
$
4,009

Product financing arrangement
 
50,030

 

 

 
50,030

Derivative liabilities — Liability on margin accounts
 
6,367

 

 

 
6,367

Derivative liabilities — open sales and purchase commitments, net
 
6,183

 

 

 
6,183

Derivative liabilities — forward contracts
 
343

 

 

 
343

Total liabilities, valued at fair value
 
$
66,932

 
$

 
$

 
$
66,932

____________________
(1) Commemorative coin inventory totaling $0.2 million is held at lower of cost or market and is thus excluded from this table.

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June 30, 2015
 
 
Quoted Price in
 
 
 
 
 
 
 
 
Active Markets
 
Significant Other
 
Significant
 
 
 
 
for Identical
 
Observable
 
Unobservable
 
 
 
 
Instruments
 
Inputs
 
Inputs
 
 
in thousands
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total Balance
Assets:
 
 
 
 
 
 
 
 
Inventory (1)
 
$
189,983

 
$

 
$

 
$
189,983

Derivative assets — open sale and purchase commitments, net
 
1,722

 

 

 
1,722

Derivative assets — futures contracts
 
5,363

 

 

 
5,363

Derivative assets — forward contracts
 
4,279

 

 

 
4,279

Total assets, valued at fair value
 
$
201,347

 
$

 
$

 
$
201,347

Liabilities:
 
 
 
 
 
 
 
 
Liability on borrowed metals
 
$
9,500

 
$

 
$

 
$
9,500

Product financing arrangement
 
39,425

 

 

 
39,425

Derivative liabilities — Liability on margin accounts
 
6,908

 

 

 
6,908

Derivative liabilities — open sale and purchase commitments, net
 
10,989

 

 

 
10,989

Total liabilities valued at fair value
 
$
66,822

 
$

 
$

 
$
66,822

____________________
(1) Commemorative coin inventory totaling $1.5 million 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 during the three months ended September 30, 2015.
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 investments that are written down to fair value when their declines are determined to be other-than-temporary, and long-lived assets or goodwill that are written down to fair value when they are held for sale or determined to be impaired.
The Company uses level-three inputs to measure the fair value of its cost method investments on a non-recurring basis. The Company's investments in ownership interests in noncontrolled entities do not have readily determinable fair values and were recorded at cost, $2.5 million, in aggregate. Quoted prices of the investments are not available, and the cost of obtaining an independent valuation appears excessive considering the materiality of the instruments to the Company. There were no gains or losses recognized in earnings associated with the Company's ownership interests in these noncontrolled entities during the three months ended September 30, 2015.
The Company uses level-three 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, 2015, there were no indications present that the Company's goodwill or other purchased intangibles were impaired, and therefore were not measured at fair value. There were no gains or losses recognized in earnings associated with the above purchased intangibles during the three months ended September 30, 2015.


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4.
RECEIVABLES
Receivables consist of the following as of September 30, 2015 and June 30, 2015:
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
 
 
 
 
 
 
Customer trade receivables
 
$
11,194

 
$
11,835

 
Wholesale trade advances
 
26,810

 
12,164

 
Due from brokers
 
9,925

 
6,056

 
Subtotal
 
47,929

 
30,055

 
Less: allowance for doubtful accounts
 
(30
)
 
(30
)
 
Receivables, net
 
$
47,899

 
$
30,025

 
Customer trade receivables. Customer trade receivables represent short-term, non-interest bearing amounts due from precious metal sales and are secured by the related precious metals stored with the Company, a letter of credit issued on behalf of the customer, or other secured interests in assets of the customer.
Wholesale trade advances. Wholesale trade advances represent advances of various bullion products and cash advances to customers. Typically, these advances are: unsecured, short-term, and non-interest bearing, which 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 10).
Allowance for Doubtful Accounts
Allowances for doubtful accounts are 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
 
Quarter Ended September 30, 2015
 
$
30

 
$

 
$

 
$
30

 
Year Ended June 30, 2015
 
$
30

 
$

 
$

 
$
30

 
5.
SECURED LOANS RECEIVABLES
Below is a summary of the carrying-value of our secured loans as of September 30, 2015 and June 30, 2015:
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
 
 
 
 
 
 
Secured loans originated
 
$
35,564

 
$
36,778

 
Secured loans originated - with a related party
 
716

 

 
 
 
36,280

 
36,778

 
Secured loans acquired
 
14,136

(1) 
12,538

(2) 
Secured loans, total
 
$
50,416

 
$
49,316

 
_________________________________
(1)    Includes $99,000 of amortized loan premium as of September 30, 2015.
(2)    Includes $99,000 of amortized loan premium as of June 30, 2015.    
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 (i.e., originated secured loans). 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 12, for further information regarding our secured loans made to related parties.)


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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 customers. The Company acquires a portfolio of their loan receivables at price that approximates the aggregate carrying-value of the each loan in the portfolio, as determined on the effective transaction date. 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, our customer retains the responsibility for the servicing and administration of the loans.
    As of September 30, 2015 and June 30, 2015, our secured loans carried weighted-average effective interest rates of 8.4% and 8.5%, respectively, and mature in periods generally ranging from on-demand to two years.
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. In contrast, for the secured loans that are reflected as an investing activity and do not contain a revolving credit-line feature or have long-term maturities, the borrowed funds are shown at gross as other originated secured loans, segregated from the repayments of the principal, which are shown as principal collections on other originated secured loans 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 three classes of secured loan receivables: those loans secured by: 1) bullion 2) numismatic items and 3) customers' pledged assets, which may include bullion and numismatic items. The Company's secured loans by portfolio class, which align with management reporting, are as follows:
in thousands
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
Bullion
 
$
17,121

 
34.0
%
 
$
16,250

 
33.0
%
 
Numismatic and semi numismatic
 
32,445

 
64.3

 
32,216

 
65.3

 
Subtotal
 
49,566

 
98.3

 
48,466

 
98.3

 
Other pledged assets(1)
 
850

 
1.7

 
850

 
1.7

 
Total secured loans
 
$
50,416

 
100.0
%
 
$
49,316

 
100.0
%
 
_________________________________
(1
)
 
Includes secured loans that are collateralized by borrower's assets, which are not exclusively precious metal products.
 
Each of the three 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 loans 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

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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.
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, 2015
 
June 30, 2015
Loan-to-value of 75% or more (1)
 
$
27,418

 
55.3
%
 
$
17,153

 
35.4
%
Loan-to-value of less than 75% (1)
 
22,148

 
44.7

 
31,313

 
64.6

Secured loans collateralized by precious metal products (1)
 
$
49,566

 
100.0
%
 
$
48,466

 
100.0
%
_________________________________
(1
)
 
Excludes secured loans that are collateralized by borrower's assets, which are not exclusively precious metal products.
 
    The Company had three loans with a loan-to-value ratio in excess of 100% at September 30, 2015; the aggregate balance of these loans totaled $227,000 or 0.5% of the secured loan balance. At June 30, 2015, the Company had one loan with a loan-to-value ratio in excess of 100%, the aggregate balance of this loan totaled $175,600 or 0.4% of the secured loan balance. The primary reason for the increase in the loan-to-value ratio of 75% or more from June 30, 2015 to September 30, 2015 was the decline in the value of the underlying precious metal products.
For the Company's secured loans where the loan-to-value ratio is not a valid indicator (because the loans are collateralized by other assets of the borrower in addition to their precious metal inventory) the Company uses other indicators to measure the quality of this type of loan. For this type of loan, the Company uses the following credit quality indicators: accounts receivable-to-loan ratios and inventory-to-loan ratios and delinquency status of the loan.
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 rapidly liquidate the loan collateral in the event of a default. The material is highly liquid and easily sold to pay off the loan. Such circumstances would result in a short term impairment that would typically result in full repayment of the loan and fees due to the Company.
For the three months ended September 30, 2015 and 2014, the Company incurred no loan impairment costs.

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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 may or may not receive. Below, our inventory is summarized by classification at September 30, 2015 and June 30, 2015:
in thousands
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
Inventory held for sale
 
$
118,796

 
$
86,353

Repurchase arrangements with customers
 
75,910

 
49,117

Consignment arrangements with customers
 
5,598

 
5,588

Commemorative coins, held at lower of cost or market
 
163

 
1,518

Borrowed precious metals from suppliers
 
4,009

 
9,500

Product financing arrangements, restricted
 
50,030

 
39,425

 
 
$
254,506

 
$
191,501

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, 2015 and June 30, 2015, the inventory held for sale totaled $118.8 million and 86.4 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. 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, 2015 and June 30, 2015, included within inventory is $75.9 million and $49.1 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, charging interest fees based on the value of the metal loaned. Inventories loaned under consignment arrangements to customers as of September 30, 2015 and June 30, 2015 totaled $5.6 million and $5.6 million, respectively. Such inventories are removed at the time the customer elects to price and purchase the precious metals, and the Company records a corresponding sale and receivable. Substantially all inventories loaned under consignment arrangements are collateralized for the benefit of the Company.
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, are included in inventory at the lower of cost or market and totaled $0.2 million and $1.5 million as of September 30, 2015 and June 30, 2015, respectively.
Borrowed Precious Metals from Suppliers. Inventories include amounts borrowed from suppliers under arrangements to purchase precious metals on an unallocated basis that are held by the supplier. 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 $4.0 million and $9.5 million as of September 30, 2015 and June 30, 2015, respectively.

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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 a fixed price to 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 to return the inventory to the Company at an agreed-upon price based on the spot price on the finance arrangement termination date. The third party charges a monthly fee as percentage of the market value of the outstanding obligation; such monthly charge is classified in interest expense. Pursuant to the guidance in ASC 470-40 Product Financing Arrangements, these transactions do not qualify as sales and therefore have been accounted for as financing arrangements and reflected in the condensed consolidated balance sheet within product financing arrangement. 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 obligation totaled $50.0 million and $39.4 million as of September 30, 2015 and June 30, 2015, respectively.
The Company mitigates market risk of its physical inventories and open commitments through commodity hedge transactions (see Note 10.)
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, 2015 and June 30, 2015 totaled $3.5 million and $3.3 million, respectively. As of September 30, 2015 and June 30, 2015, the unrealized gains (losses) resulting from the difference between market value and cost of physical inventories were $(5.2) million and $(3.9) million, respectively.
7. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at September 30, 2015 and June 30, 2015:
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
Office furniture, fixtures and equipment
 
$
844

 
$
616

 
Computer equipment
 
368

 
368

 
Computer software
 
2,376

 
2,376

 
Leasehold improvements
 
1,661

 
1,700

 
Subtotal
 
5,249

 
5,060

 
Less: accumulated depreciation
 
(2,417
)
 
(2,210
)
 
Property and equipment, net
 
$
2,832

 
$
2,850

 
Depreciation expense for the three months ended September 30, 2015 and 2014 was $0.2 million and $0.1 million, respectively.
8. GOODWILL AND INTANGIBLE ASSETS
On July 1, 2005, all of the outstanding common stock of A-Mark was acquired by Spectrum PMI, Inc. Spectrum PMI was a holding company whose outstanding common stock was owned 80% by SGI, and 20% by Auctentia, S.L. In September 2012, SGI purchased from Auctentia its 20% interest in Spectrum PMI. On September 30, 2013, Spectrum PMI was merged with and into SGI, as a result of which all of the outstanding shares of A‑Mark were then owned directly by SGI.

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In connection with the acquisition of A-Mark by Spectrum PMI 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, which resulted in goodwill of $4.9 million and identifiable purchased intangible assets of $8.4 million. Goodwill represents the excess of the purchase price and related costs over the value assigned to intangible assets of businesses acquired and accounted for under the purchase method.
The carrying value of other purchased intangibles as of September 30, 2015 and June 30, 2015 is as described below:
dollar amounts in thousands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015

Estimated Useful Lives (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Book Value
Trade-name
Indefinite
 
$
454

 
$

 
$
454

 
$
454

 
$

 
$
454

Existing customer relationships
5 - 15
 
5,747

 
(3,928
)
 
1,819

 
5,747

 
(3,832
)
 
1,915

Non-compete and other
4
 
2,000

 
(2,000
)
 

 
2,000

 
(2,000
)
 

Employment agreement
3
 
195

 
(195
)
 

 
195

 
(195
)
 

Purchased intangibles subject to amortization
 
 
7,942

 
(6,123
)
 
1,819

 
7,942

 
(6,027
)
 
1,915

 
 
 
$
8,396

 
$
(6,123
)
 
$
2,273

 
$
8,396

 
$
(6,027
)
 
$
2,369

The Company's other purchased intangible assets are subject to amortization except for trademarks, 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 four to fifteen years. Amortization expense related to the Company's intangible assets for the three months ended September 30, 2015 and 2014 was $0.1 million and $0.1 million, respectively.
Estimated amortization expense on an annual basis for the succeeding five years is as follows (in thousands):
Fiscal year ending June 30,
 
Amount
Fiscal 2016 (9 months remaining)
 
$
289

2017
 
385

2018
 
385

2019
 
385

2020
 
375

Thereafter
 

Total
 
$
1,819


9.
ACCOUNTS PAYABLE
Accounts payable consist of the following:
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
Trade payable to customers payables
 
$
1,026

 
$
128

 
Advances from customers
 
59,877

 
38,039

 
Liability on deferred revenue
 
15,069

 
11,039

 
Other accounts payable
 
2,527

 
1,433

 
 
 
$
78,499

 
$
50,639

 

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10.
DERIVATIVE INSTRUMENTS AND HEDGING TRANSACTIONS
The Company is exposed to market risk, such as change 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 hedging substantially all of Company's market exposure to precious metals prices, and not for speculation reasons.
Commodity Price Management
The Company manages the value of certain specific 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's trading inventories and purchase and sale transactions consist primarily of precious metal bearing 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.
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 is subject to price risk. The Company regularly enters into precious metals commodity forward and futures contracts with major financial institutions to hedge price changes that would cause changes in the value of its physical metals positions and purchase commitments and sale commitments. The Company has access to all of the precious metals markets, allowing it to place hedges. However, the Company also maintains relationships with major market makers in every major precious metals dealing center.
The Company enters into these derivative transactions solely for the purpose of hedging our 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.
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, 2015 and June 30, 2015.

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Table of Contents            

 
 
September 30, 2015
 
June 30, 2015
 
 
 
 
 
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
 
$
10,624

 
$
(3,116
)
 
$

 
$
7,508

 
$
2,815

 
$
(1,093
)
 
$

 
$
1,722

Future contracts
 
9,917

 
(7,075
)
 

 
2,842

 
11,159

 
(5,796
)
 

 
5,363

Forward contracts
 
670

 
(394
)
 

 
276

 
4,279

 

 

 
4,279

 
 
$
21,211

 
$
(10,585
)
 
$

 
$
10,626

 
$
18,253

 
$
(6,889
)
 
$

 
$
11,364

Nettable derivative liabilities:
Open sale and purchase commitments
 
$
7,562

 
$
(1,379
)
 
$

 
$
6,183

 
$
11,723

 
$
(734
)
 
$

 
$
10,989

Margin commitments
 
11,436

 

 
(5,069
)
 
6,367

 
12,430

 

 
(5,522
)
 
6,908

Future contracts
 

 

 
 
 

 

 

 
 
 

Forward contracts
 
348

 
(5
)
 

 
343

 

 

 

 

 
 
$
19,346

 
$
(1,384
)
 
$
(5,069
)
 
$
12,893

 
$
24,153

 
$
(734
)
 
$
(5,522
)
 
$
17,897

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.
Gain or Loss on Derivative Instruments
The Company records the derivative at the trade date with a corresponding unrealized gain (loss), which is reflected in the cost of sales in the condensed consolidated statements of income. The Company adjusts the derivatives to fair value on a daily basis until the transaction is physically settled. Sales which are physically settled are recognized at the gross amount in the consolidated statements of income. Below, is a summary of the net losses on derivative instruments for the three months ended September 30, 2015 and 2014.
in thousands
 
 
 
 
 
 
 
Three Months Ended
 
 
 
September 30, 2015
 
September 30, 2014
 
Gain (loss) on derivative instruments:
 
Unrealized loss on open future commodity and forward contracts and open sale and purchase commitments, net
 
$
(3,816
)
 
$
1,278

 
Realized loss on future commodity contracts, net
 
(10,592
)
 
(7,634
)
 
Total
 
$
(14,408
)
 
$
(6,356
)
 
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 quarter-end typically settle within 30 days.

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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, 2015 and at June 30, 2015.
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
Inventory
 
$
254,506

 
$
191,501

 
Less unhedgable inventory:
 
 
 
 
 
Commemorative coin inventory, held at lower of cost or market
 
(163
)
 
(1,518
)
 
Premium on metals position
 
(3,529
)
 
(3,255
)
 
Inventory value not hedged
 
(3,692
)
 
(4,773
)
 
 
 
 
 
 
 
Subtotal
 
250,814

 
186,728

 
Commitments at market:
 
 

 
 

 
Open inventory purchase commitments
 
556,388

 
444,023

 
Open inventory sales commitments
 
(477,089
)
 
(249,081
)
 
Margin sale commitments
 
(11,436
)
 
(12,430
)
 
In-transit inventory no longer subject to market risk
 
(16,625
)
 
(13,807
)
 
Unhedgable premiums on open commitment positions
 
6,356

 
528

 
Inventory borrowed from suppliers
 
(4,009
)
 
(9,500
)
 
Product financing obligation
 
(50,030
)
 
(39,425
)
 
Advances on industrial metals
 
3,709

 
3,340

 
Inventory subject to price risk
 
258,078

 
310,376

 
 
 
 
 
 
 
Inventory subject to derivative financial instruments:
 
 
 
 
 
Precious metals forward contracts at market values
 
123,658

 
202,323

 
Precious metals futures contracts at market values
 
134,367

 
107,993

 
Total market value of derivative financial instruments
 
258,025

 
310,316

 
 
 
 
 
 
 
Net inventory subject to commodity price risk
 
$
53

 
$
60

 
Notional Balances of Derivatives
The 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. As of September 30, 2015 and June 30, 2015, the Company had the following outstanding commitments and open forward and future contracts:
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
Purchase commitments
 
$
556,388

 
$
444,023

 
Sales commitments
 
(477,089
)
 
(249,081
)
 
Margin sales commitments
 
(11,436
)
 
(12,430
)
 
Open forward contracts
 
123,658

 
202,323

 
Open futures contracts
 
134,367

 
107,993

 
The contract amounts (i.e., notional balances) of the Company's forward and futures contracts and the open sales and purchase orders are not reflected in the accompanying condensed consolidated balance sheet; as required, the Company records the difference between the market price of the underlying metal or contract and the trade amount at fair value.
    

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The Company is exposed to the risk of failure of the counterparties to its derivative contracts. Significant judgment is applied by the Company when evaluating the fair value implications. The Company regularly reviews the creditworthiness of its major counterparties and monitors its exposure to concentrations. At September 30, 2015, the Company believes its risk of counterparty default is mitigated as a result of such evaluation and the short-term duration of these arrangements.
Foreign Currency Exchange Rate Management
The Company utilizes foreign currency forward contracts to manage the effect of foreign currency exchange fluctuations of its sale and purchase transactions. These contracts generally have maturities of less than one week. The accounting treatment of our foreign currency exchange derivative instruments is similar to the accounting treatment of our commodity derivative instruments, that is, the change in the value in the financial instrument is immediately recognized as a component of cost of sales. Unrealized net gains (losses) on foreign exchange derivative instruments shown on the face of the condensed consolidated statements of income totaled $(39,000) and $(9,000) for the three months ended September 30, 2015 and 2014, respectively. The market values (fair values) of the Company’s foreign exchange forward contracts and the net open sale and purchase commitment transactions, denominated in foreign currencies, outstanding at September 30, 2015 was $1.2 million and $4.1 million, respectively. The market values (fair values) of the Company’s foreign exchange forward contracts and the net open sale and purchase commitment transactions, denominated in foreign currencies, outstanding at June 30, 2015 was $6.2 million and $9.9 million, respectively.
11.     INCOME TAXES
The Company files a consolidated federal income tax return based on a June 30th tax year end. The provision for income taxes for the three months ended September 30, 2015 and 2014 consists of the following:
in thousands
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
September 30, 2015
 
September 30, 2014
 
Federal
 
 
$
3,052

 
$
680

 
State and local
 
 
260

 
98

 
Provision for income taxes
 
 
$
3,312

 
$
778

 
 
 
 
 
 
 
 
The effective tax rate for the three months ended September 30, 2015 and 2014 is as follows:
in thousands
 
 
 
 
 
 
Three Months Ended
 
 
September 30, 2015
 
September 30, 2014
Effective tax rate
 
38.2
%
 
40.6
%
The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The effective tax rate varies significantly from the federal statutory rate due to permanent adjustments for nondeductible items and state taxes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the three months ended September 30, 2015, management concluded that with the exception of certain state net operating losses, it was more likely than not that the Company would be able to realize the benefit of the U.S. federal and state deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As of September 30, 2015 and 2014, the Company had $0.1 million and $0.3 million, respectively, of valuation allowance for its realizability of deferred tax assets. The Company will continue to assess the need for a valuation allowance in the future by evaluating both positive and negative evidence that may exist.
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 during the period prior to the Distribution rather than a member of the Former Parent's consolidated income tax return group. Current tax receivable from Former Parent reflects balances due from the Former Parent to A-Mark for its share of the income tax

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Table of Contents            

assets of the group. Income taxes receivable represents amounts paid to federal and state jurisdictions due to taxable income generated following the close of the transaction.
As of September 30, 2015, the Company has state and city net operating loss carryforwards of approximately $16.0 million, which expire beginning with the year ending June 30, 2030. The tax effect of the state and city net operating loss carryforwards included in the Company's deferred tax assets is $16.0 million. Due to limitations on the ability to use certain state and city net operating loss carryforwards, the Company has recorded a valuation allowance of $0.1 million against these assets as the Company believes that it is not more likely than not that they will realize the benefit of these carryforwards.
As of September 30, 2015, the Company had $243,000 of unrecognized tax benefits and $105,000 of liabilities for interest expense related to uncertain tax positions. Of the total unrecognized tax benefits, $243,000 would reduce the Company's effective tax rate, if recognized. For the three months ended September 30, 2015 and 2014, the Company recognized approximately $5,000 of interest expense and $0 of interest expense related to uncertain tax positions, respectively. For the three months ended September 30, 2015 and 2014, the Company had no additional accruals for tax penalties.
The Company files income tax returns in the U.S. and various states. Prior to the Distribution, the Company was included in the consolidated federal and state tax filing of the Former Parent. The Former Parent has been under examination by the IRS for the years ended June 30, 2004 through 2013; however, during the year ended June 30, 2015, the Former Parent was notified that it had successfully resolved the June 30, 2004 through June 30, 2007 tax years. As a result of the IRS exam, the Former Parent amended the state tax filings for the applicable periods. The amended state tax filings resulted in a tax benefit of approximately $0.6 million related to state net operating loss apportioned to the Company under intrastate apportionment rules. The Former Parent remains in appeals with the IRS for the years ended June 30, 2008 through 2013 and in examination with other taxing jurisdictions on certain tax matters, including challenges to certain positions the Former Parent has taken. The Former Parent is unable to determine the outcome of these audits at this time. With few exceptions, either prior federal, state or local examinations have been completed by the tax authorities or the statute of limitations have expired for U.S. federal, state and local income tax returns filed by the Former Parent for the years through 2003.
In connection with the spinoff, the Company entered into a tax separation agreement with SGI (the "Tax Separation Agreement").  The Tax Separation Agreement governs the respective rights, responsibilities and obligations of SGI and us with respect to, among other things, liabilities for U.S. federal, state, local and other taxes. In addition to the allocation of tax liabilities, the Tax Separation Agreement addresses the preparation and filing of tax returns for such taxes and disputes with taxing authorities regarding such taxes. Pursuant to the Tax Separation Agreement, A-Mark may be responsible for any tax amount related to A-Mark that is incurred as the result of adjustments made during the Internal Revenue Service examination or other tax jurisdictions' examinations of the Former Parent. Under the terms of the Tax Separation Agreement, SGI will have the responsibility to prepare and file tax returns for tax periods ending prior to the Distribution date and for tax periods which include the Distribution date but end after the Distribution date, which will include A-Mark and its subsidiaries.
These tax returns will be prepared on a basis consistent with past practices. The Company will cooperate in the preparation of these tax returns and have an opportunity to review and comment on these returns prior to filing. A-Mark will pay all taxes attributable to A-Mark and its subsidiaries, and will be entitled to any refund with respect to taxes it has paid.
The amounts receivable under the Company's income tax sharing obligation due from SGI totaled $1.1 million, and $1.1 million as of September 30, 2015 and June 30, 2015, respectively, and is shown on the face of the condensed consolidated balance sheets as income taxes receivable from Former Parent. Based on the terms to the Tax Separation Agreement, payment is due to the Company after SGI files its tax return and is in receipt of its tax refund from the IRS. Furthermore, pursuant to the terms of the Tax Separation Agreement, the Company has been allocated approximately $15.7 million of state net operating losses. These net operating losses resulted in a deferred tax asset of $0.5 million.

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12. RELATED PARTY TRANSACTIONS
Sales and Purchases Made to Affiliated Companies
During the three months ended September 30, 2015 and 2014, the Company made sales and purchases to various companies that had been under common control with A-Mark through the date of Distribution, and which have been deemed to be related parties.
in thousands
 
 
 
 
 
 
 
Three Months Ended
 
 
 
September 30, 2015
 
September 30, 2014
 
 
Sales
 
Purchases
 
Sales
 
Purchases
 
Related Party Company
 
 
 
 
 
 
 
 
 
Calzona Ventures, LLC
 
$

 
$

 
$
157

 
$

 
Stack's Bowers Numismatics, LLC
 
10,482

(1) 
27,004

 
1,395

 
2,921

 
Related party, total
 
$
10,482

 
$
27,004

 
$
1,552

 
$
2,921

 
_______________________________
(1)    Excludes $156,000 of fees related to finance charges earned in connection with purchase-sale transactions, which was recorded as interest income.
As of September 30, 2015 and June 30, 2015, the Company's had related party receivables and payables balance as set forth below:
 in thousands
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
 
 
Receivables
 
Payable
 
Receivables
 
Payable
 
Related Party Company
 
 
 
 
 
 
 
 
 
Stack's Bowers Numismatics, LLC
 
$
854

 
$
28

 
$
2

 
$
10

 
SGI (Former Parent)
 
1,095

 

 
1,095

 

 
Related party, total
 
$
1,949

 
$
28

 
$
1,097

 
$
10

 
 
 
 
 
 
 
 
 
 
 
Secured Loans to Related Parties
On June 18, 2014, CFC assumed the rights to a secured portfolio of short-term loan receivables totaling $2.6 million from Stack's Bowers Numismatics, LLC (Stack's Bowers), a related party. The Company reflects this transaction as a financing arrangement with the related party, secured by the portfolio of short-term loan receivables collateralized by numismatic and semi numismatic products, and bearing interest at 5.5% per annum. This secured loan was paid off in full, plus accrued interest, on August 19, 2014. As of September 30, 2015, the aggregate carrying value of this loan was $0.0 million.

On October 9, 2014, CFC entered into a loan agreement with Stack’s Bowers providing for a secured line of credit in the maximum principal amount of up to $16.0 million, bearing interest at a competitive rate per annum. Advances under the line of credit were secured by numismatic and semi-numismatic products. This secured loan was paid off in full, plus accrued interest, on April 15, 2015. As of September 30, 2015, the aggregate carrying value of this loan was $0.0 million.
On July 23, 2015, CFC entered into a loan agreement with Stack's Bowers providing a secured line of credit in the maximum principal amount of up to $2.5 million, bearing interest at a competitive rate per annum. The loan is secured by numismatic and semi-numismatic products. As of September 30, 2015, the aggregate carrying value of this loan was $0.7 million.
During the three months ended September 30, 2015 and 2014, the Company earned approximately $21,000 and $23,000 in interest income related to loans that we made to Stack's Bowers.
Secondment Agreement Fees and Reimbursements
In connection with the Distribution, SGI and the Company entered into a secondment agreement (the "Secondment Agreement"). Under the terms of the Secondment Agreement, A-Mark has agreed to make Gregory N. Roberts, our Chief Executive Officer, and Carol Meltzer, our Executive Vice President, General Counsel and Secretary, available to SGI for the performance of specified management and professional services following the spinoff in exchange for an annual secondment fee of $150,000 (payable monthly) and reimbursement of certain bonus payments.
Neither Mr. Roberts nor Ms. Meltzer will devote more than 20% of their professional working time on a monthly basis to SGI and in no event will the performance of services for SGI interfere with the performance of the duties and responsibilities of Mr. Roberts and Ms. Meltzer to A-Mark. In addition, to the services to be provided under the Secondment Agreement, both Mr. Roberts and Ms. Meltzer continue to serve as officers and directors of SGI. The Secondment Agreement will terminate on June 30, 2016 and is subject to earlier termination under certain circumstances. Under the Secondment Agreement, SGI will be obligated

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to reimburse A-Mark for the portion of the performance bonus payable under Mr. Roberts’ employment agreement with A-Mark attributable to pre-tax profits of SGI.
The Company records the accrual of secondment fees as a reduction to selling, general and administration expense. During the three months ended September 30, 2015 and 2014 the Company did not accrue any secondment fees. As of September 30, 2015 and June 30, 2015 the outstanding balance of secondment fees due from SGI was $0 and $150,000, respectively.
Income Tax Sharing Obligations
The amounts receivable under the Company's income tax sharing obligation due from SGI, totaled $1.1 million, and $1.1 million as of September 30, 2015 and June 30, 2015, respectively, and is shown on the face of the condensed consolidated balance sheets as income taxes receivable from Former Parent (see Note 11.)
Transaction with Affiliate of Board Member
In February 2015, A-M Global Logistics, LLC ("Logistics"), a wholly owned subsidiary of the Company that was formed to operate the Company's logistics fulfillment center in Las Vegas, Nevada, entered into various agreements with W. A. Richardson Builders, LLC ("WAR"), for the buildout of and improvements to the Las Vegas premises. The amount involved under the WAR contract was approximately $1.2 million, and Logistics paid WAR a fee equal to 5.0% of the contract work. The spouse of the Chairman of the Company's Audit Committee, Ellis Landau, is an owner and a managing member of WAR.
Royalties to Former Owner
As part of the sales agreement dated July 1, 2005, a former owner of the Company receives a portion of the finance income earned with a specific customer through July 2015. The Company incurred $20,000 and $73,000 in selling, general and administrative expenses (royalty expense) during the three months ended September 30, 2015 and 2014, respectively. The total amount due to the former owner of $274,000 and $254,000 are included in accrued liabilities as of September 30, 2015 and June 30, 2015, respectively.
13.
FINANCING AGREEMENTS

Lines of Credit
The Company has a borrowing facility (“Trading Credit Facility”) with a group of financial institutions under an inter-creditor agreement, which provides for lines of credit up to the maximum of the credit facility. All lenders have a perfected, first security interest in all assets of the Company presented as collateral. Loan advances will be available against a borrowing base report of eligible assets in accordance with the inter-creditor agreement currently in place. Pledged collateral comprises assigned and confirmed inventory, trade receivables, trade advances, derivatives, equity and pledged non bullion and bullion loans.
As of September 30, 2015, the maximum of the Trading Credit Facility was $205.0 million. The Company routinely uses the Trading Credit Facility to purchase precious metals from suppliers and for operating cash flow purposes. Amounts under the Trading Credit Facility bear interest based on London Interbank Offered Rate (“LIBOR”) plus a margin. The one-month LIBOR rate was approximately 0.19% and 0.19% as of September 30, 2015 and June 30, 2015, respectively. Borrowings are due on demand and totaled $176.9 million and $147.0 million at September 30, 2015 and at June 30, 2015, respectively. The amounts available under the Trading Credit Facility are determined at the end of each week following a specified borrowing base formula.  The Company is able to access additional credit as needed to finance operations, subject to the overall limits of the Trading Credit Facility and lender approval of the revised borrowing base calculation.   The amounts available under the Trading Credit Facility after taking into consideration current borrowings, based upon the latest approved borrowing bases in effect, totaled $34.3 million and $20.9 million at September 30, 2015 and June 30, 2015, respectively.
The Trading Credit Facility has certain restrictive financial covenants, which require the Company to maintain a minimum tangible net worth. As of September 30, 2015 the minimum tangible net worth financial covenant under the Trading Credit Facility was $35.0 million. The Company is in compliance with all restrictive financial covenants as of September 30, 2015. The Company's ability to pay dividends, if it were to elect to do so, could be limited as a result of these restrictions. Each lender has the right to cancel its credit line upon written notice.
Interest expense related to the Company’s borrowing arrangements totaled $1.1 million and $0.9 million, which represents 92.1% and 87.8% of the total interest expense recognized, for the three months ended September 30, 2015 and 2014, respectively. Our borrowing arrangements carried a daily weighted average effective interest rate of 2.83% and 3.06%, respectively, for the three months ended September 30, 2015 and 2014.

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Liability on Borrowed Metals
The Company borrows precious metals from its suppliers under short-term agreements, which bear interest at a designated rate. Amounts under these agreements are due at maturity and require repayment either in the form of precious metals or cash. The Company's inventories included borrowed metals with market values totaling $4.0 million and $9.5 million as of September 30, 2015 and June 30, 2015, respectively.
Product Financing Arrangement
The Company has an agreement with a financial institution (a third party) that allows the Company to transfer its gold and silver inventory at a fixed price to this third party. Such agreement allows the Company to repurchase this inventory at an agreed-upon price based on the spot price on the repurchase date. The third party charges a monthly fee as percentage of the market value of the outstanding obligation; such monthly charges are classified in interest expense. These transactions do not qualify as sales, and therefore have been accounted for as financing arrangements and reflected in the condensed consolidated balance sheet within product financing obligation. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the product financing obligation and the underlying inventory (which is entirely restricted) are carried at fair value, with changes in fair value recorded as a component of cost of sales in the condensed consolidated statements of income. Such obligation totaled $50.0 million and $39.4 million as of September 30, 2015 and June 30, 2015, respectively.
14. COMMITMENTS AND CONTINGENCIES
Refer to Note 13 of the Notes to Consolidated Financial Statements in the 2015 Annual Report for information relating to minimum rental payments under operating and capital leases, consulting and employment contracts, and other commitments. Other than the following item, there has been no material changes to those scheduled commitments as of the filing of that report.
On October 25, 2015, the Company received notification from the City of Santa Monica that the City was challenging the Company's classification as an "agent/broker" for purposes of computing the business license fee due to the City. Historically, A-Mark has paid its business license fee on net receipts, consistent with the "agent/broker" classification. The City of Santa Monica has asserted that the Company should have instead paid the fee based on gross receipts and has made a preliminary assessment against the Company seeking a material amount of what it believes to be underreported fees, together with a material amount of penalties and interest. The Company intends to meet with the City of Santa Monica shortly to discuss the preliminary assessment and the position taken by the Company with respect to the calculation of the fee. Neither the outcome of this administrative matter nor the amount or range of a potential impact to the Company in the event of an unfavorable outcome can be determined at this time.
15.
STOCKHOLDERS’ EQUITY
Payment of Dividends
    Fiscal 2015. In fiscal 2015, the Board of Directors of the Company initiated a cash dividend policy that calls for the payment of a quarterly cash dividend of $0.05 per common share. On February 6, 2015, the Board of Directors declared a quarterly cash dividend of $0.05 per common share that was paid on March 20, 2015 to stockholders of record at the close of business on March 12, 2015. On May 1, 2015, the Board of Directors declared a quarterly cash dividend of $0.05 per common share that was paid on May 25, 2015 to stockholders of record at the close of business on May 14, 2015.
Fiscal 2016. On September 11, 2015, the Board of Directors of the Company declared a quarterly cash dividend of $0.05 per common share to stockholders of record at the close of business on September 24, 2015 that was paid on October 5, 2015. On October 30, 2015, the Board of Directors of the Company declared a quarterly cash dividend of $0.05 per common share to stockholders of record at the close of business on November 13, 2015, which is scheduled to be paid on November 25, 2015.
2014 Stock Award and Incentive Plan
Prior to the Distribution, the Company’s Board of Directors ("Board") adopted and the Company's then sole stockholder approved the 2014 Stock Award and Incentive Plan ("2014 Plan"). Under the 2014 Plan, the Company may grant options and other equity awards as a means of attracting and retaining officers, employees, non-employee directors and consultants, to provide incentives to such persons, and to align the interests of such persons with the interests of stockholders by providing compensation based on the value of the Company's stock. Awards under the 2014 Plan may be granted in the form of incentive or non-qualified stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards (which may include outright grants of shares). The 2014 Plan also authorizes grants of performance-based cash incentive awards. The 2014 Plan is administered by the Compensation Committee of the Board of Directors, which, in its discretion, may select officers and other employees, directors (including non-employee directors) and consultants to the Company and its subsidiaries to receive grants of awards. The Board of Directors itself may perform any of the functions of the Compensation Committee under the 2014 Plan.
Under the 2014 Plan, the exercise price of options and base price of SARs may be set at the discretion of the Committee, but generally may not be less than the fair market value of the shares on the date of grant, and the maximum term of stock options

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and SARs is 10 years. The 2014 Plan limits the number of share-denominated awards that may be granted to any one eligible person to 250,000 shares in any fiscal year. Also, in the case of non-employee directors, the 2014 Plan limits the maximum grant-date fair value at $300,000 of stock-denominated awards granted to a director in a given fiscal year, except for a non-employee Chairman of the Board whose grant-date fair value maximum is $600,000 per fiscal year. The 2014 Plan will terminate when no shares remain available for issuance and no awards remain outstanding; however, the authority to grant new awards will terminate on December 13, 2022.
As of September 30, 2015, 622,000 shares were available for grant under the 2014 Plan.
Valuation and Significant Assumptions of Equity Awards Issued
The Company uses the Black-Scholes option pricing model, which has various inputs such as the estimated common share price, the risk-free interest rate, volatility, expected life and dividend yield, all of which are estimates. The Company also records share-based compensation expense net of expected forfeitures. Valuation models and significant assumptions for share-based compensation are as follows: 

Determining Fair Values. For all equity grants granted, the primary factor in the valuation of equity awards was the fair value of the underlying common stock at the time of grant.
Expected Volatility. The Company has limited data regarding company-specific historical or implied volatility of its share price. Consequently, the Company estimates its volatility based on the average of the historical volatilities of peer group companies from publicly available data for sequential periods approximately equal to the expected terms of its option grants. Management considers factors such as stage of life cycle, competitors, size, market capitalization and financial leverage in the selection of similar entities.
Expected Term. The expected term represents the period of time in which the options granted are expected to be outstanding. The Company estimates the expected term of options granted based on the midpoint between the vesting date and the end of the contractual term under the “short-cut” or simplified method permitted by the SEC implementation guidance for “plain vanilla” options. The Company will continue to use the short-cut method, as permitted, until we have developed sufficient historical data for employee exercise and post-vesting employment termination behavior after our common stock has been publicly traded for a reasonable period of time.
Forfeitures.  The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual experience differs from those estimates. For the current fiscal year, the Company estimated an average overall forfeiture rate of 0%, based on the historical forfeitures rates of executives of our Former Parent prio