A-Mark Precious Metals, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Assets and Liabilities, at Fair Value

Assets and Liabilities, at Fair Value

3 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Assets and Liabilities, at Fair Value

ASSETS AND LIABILITIES, AT FAIR VALUE

Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2018 and June 30, 2018.



in thousands
	September 30, 2018				June 30, 2018
	Carrying Amount		Fair value		Carrying Amount		Fair value

Financial assets:
Cash	$	22,714	$	22,714	$	6,291	$	6,291
Receivables, net	57,332		57,332		35,856		35,856
Secured loans receivable	81,891		81,891		110,424		110,424
Derivative asset on open sale and purchase commitments, net	1,981		1,981		2,274		2,274
Derivative asset on option contracts	392		392		390		390
Derivative asset on futures contracts	140		140		238		238
Derivative asset on forward contracts	193		193		4,493		4,493
Income taxes receivable	1,561		1,561		1,553		1,553
Financial liabilities:
Lines of credit	$	179,000	$	179,000	$	200,000	$	200,000
Debt obligation (related party)	7,257		7,257		7,226		7,226
Liability on borrowed metals	227,198		227,198		280,346		280,346
Product financing arrangements	53,126		53,126		113,940		113,940
Derivative liability on margin accounts	3,728		3,728		3,804		3,804
Derivative liability on price protection programs	116		116		168		168
Derivative liability on open sale and purchase commitments, net	25,488		25,488		16,485		16,485
Derivative liability on futures contracts	2,163		2,163		—		—
Derivative liability on forward contracts	4,479		4,479		—		—
Accounts payable	60,993		60,993		45,997		45,997
Accrued liabilities	4,838		4,838		5,129		5,129
Other long-term liabilities (related party) ⁽¹⁾	296		296		798		798
Notes payable	87,056		87,056		—		—

(1) Includes estimated contingent amounts due to SilverTowne.

The fair values of the financial instruments shown in the above table as of September 30, 2018 and June 30, 2018 represent the amounts that would be received upon the sale of those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk adjusted discount rates, and available observable and unobservable inputs.

The carrying amounts of cash, secured loans receivable, receivables, income taxes receivable, accounts payable, income taxes payable, note payable, and accrued liabilities approximate fair value due to their short-term nature. The carrying amounts of derivative assets and derivative liabilities, liability on borrowed metals and product financing arrangements are marked-to-market on a daily basis to fair value. The carrying amounts of lines of credit and debt obligation approximate fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The carrying value of other long-term liabilities represents the long-term portion of contingent earn-out liabilities that are remeasured on a quarterly basis.

Valuation Hierarchy

Topic 820 of the ASC established a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:


•	Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.


•	Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.


•	Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The significant assumptions used to determine the carrying value and the related fair value of the assets and liabilities measured at fair value on a recurring basis are described below:

Inventory. Inventories, principally include bullion and bullion coins, are acquired and initially recorded at fair market value. The fair market value of the bullion and bullion coins are comprised of two components: 1) published market values attributable to the costs of the raw precious metal, and 2) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form and the market value attributable solely to the premium is readily determined, as it is published by multiple reputable sources. Except for commemorative coin inventory, which are included in inventory at the lower of cost or market, the Company’s inventories are subsequently recorded at their fair market values on a daily basis. The fair value for commodities inventory (i.e., inventory excluding commemorative coins) is determined using pricing data derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory are classified in Level 1 of the valuation hierarchy.

Precious Metals held under Financing Arrangements. The Company enters into arrangements with certain customers under which A-Mark purchases precious metals from the customers which are subject to repurchase by the customer at the spot value of the product on the repurchase date. The substance of these transactions are precious metals owned by the Company that generate financing income from customers and are not metals held as inventory for sale. As such, the Company has classified this material as "precious metals held under financing arrangements", rather than as "inventory - repurchase arrangements with customers". In these repurchase arrangements, the Company holds legal title to the metals and earns financing income for the duration of the agreement. The fair value for precious metals held under financing arrangements, (a commodity, like inventory above) is determined using pricing data derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory are classified in Level 1 of the valuation hierarchy.

Derivatives. Futures contracts, forward contracts, option contracts and open sale and purchase commitments are valued at their fair values, based on the difference between the quoted market price and the contractual price (i.e., intrinsic value,) and are included within Level 1 of the valuation hierarchy.

Margin and Borrowed Metals Liabilities. Margin and borrowed metals liabilities consist of the Company's commodity obligations to margin customers and suppliers, respectively. Margin liabilities and borrowed metals liabilities are carried at fair value, which is determined using quoted market pricing and data derived from the markets on which the underlying commodities are traded. Margin and borrowed metals liabilities are classified in Level 1 of the valuation hierarchy.

Product Financing Arrangements. Product financing arrangements consist of financing agreements for the transfer and subsequent re-acquisition of the sale of gold and silver at an agreed-upon price based on the spot price with a third party. Such transactions allow the Company to repurchase this inventory on the termination (repurchase) date. The third party charges monthly interest as a percentage of the market value of the outstanding obligation, which is carried at fair value. The obligation is stated at the amount required to repurchase the outstanding inventory. Fair value is determined using quoted market pricing and data derived from the markets on which the underlying commodities are traded. Product financing arrangements are classified in Level 1 of the valuation hierarchy.

Liability on Price Protection Programs. The Company records an estimate of the fair value of the liability on price protection programs based on the difference between the contractual price at trade date and the retail price at the remeasurement date (i.e., quarter-end) based on the expected redemption rate of each program. As of September 30, 2018, the Company used the quoted market price based on the current spot rate and used an expected redemption rate of 100% for the price shield program, the most significant of the price protection programs. The use of a throughput rate of each program ignores the future price volatility that would affect the timing and rate of redemption under these programs, and, as a result, the liability on price protection programs is classified in Level 3 of the valuation hierarchy.

Contingent Earn-out Liability. The Company records an estimate of the fair value of contingent consideration related to the earn-out obligation to SilverTowne LP related to the SilverTowne Mint transaction. On a quarterly basis, the liability is remeasured and increases or decreases in the fair value are recorded as an adjustment to other income on the condensed consolidated statements of operations. Changes to the contingent consideration liability can result from adjustments to the discount rate, or from changes to the estimates of future throughput activity of AMST. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. The key inputs in determining fair value of our contingent consideration obligations include the changes in the assumed timing and amounts of future throughputs (i.e., operating income, operating cost per unit, and production volume) which affects the timing and amount of future earn-out payments. Contingent earn-out liability is classified in Level 3 of the valuation hierarchy.

The Company values the contingent obligation by determining the likelihood that the company has achieved the following targeted amount of performance thresholds for each annual earn-out period. Such thresholds include (1) Producing a targeted amount of silver ounces, (2) Earning a targeted amount of operating income, and (3) Generating an operating cost per ounce that is less than a targeted level. Each category triggers a different annual payout obligation if achieved over a 3 year period, and as of September 30, 2018, the remaining two annual contingent payout obligations, if achieved, would become due on August 31, 2019 and on October 30, 2019. The company re-assesses this contingent obligation each quarter based on the most current facts and market conditions. The obligation continues to remain as a liability at its original recorded value unless, based on each quarterly evaluation, it becomes evident the Company will not achieve all or part of the threshold performance targets. In such case, the obligation is adjusted to its more current estimated value.

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and June 30, 2018, aggregated by the level in the fair value hierarchy within which the measurements fall:



	September 30, 2018
	Quoted Price in
	Active Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
in thousands	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Inventory ⁽¹⁾	$	289,719	$	—	$	—	$	289,719
Precious metals held under financing arrangements	232,476						232,476
Derivative assets — open sale and purchase commitments, net	1,981		—		—		1,981
Derivative assets — option contracts	392		—		—		392
Derivative assets — futures contracts	140		—		—		140
Derivative assets — forward contracts	193		—		—		193
Total assets, valued at fair value	$	524,901	$	—	$	—	$	524,901
Liabilities:
Liability on borrowed metals	$	227,198	$	—	$	—	$	227,198
Product financing arrangements	53,126		—		—		53,126
Derivative liabilities — price protection programs	—		—		116		116
Derivative liabilities — liability on margin accounts	3,728		—		—		3,728
Derivative liabilities — open sale and purchase commitments, net	25,488		—		—		25,488
Derivative liabilities — future contracts	2,163		—		—		2,163
Derivative liabilities — forward contracts	4,479		—		—		4,479
Contingent earn-out liability	$	—	$	—	$	588	$	588
Total liabilities, valued at fair value	$	316,182	$	—	$	704	$	316,886

____________________

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



	June 30, 2018
	Quoted Price in
	Active Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
in thousands	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Inventory ⁽¹⁾	$	280,017	$	—	$	—	$	280,017
Precious metals held under financing arrangements	262,566		—		—		262,566
Derivative assets — open sale and purchase commitments, net	2,274		—		—		2,274
Derivative assets — option contracts	390		—		—		390
Derivative assets — futures contracts	238		—		—		238
Derivative assets — forward contracts	4,493		—		—		4,493
Total assets, valued at fair value	$	549,978	$	—	$	—	$	549,978
Liabilities:
Liability on borrowed metals	$	280,346	$	—	$	—	$	280,346
Product financing arrangements	113,940		—		—		113,940
Derivative liabilities — price protection programs	—		—		168		168
Derivative liabilities — liability on margin accounts	3,804		—		—		3,804
Derivative liabilities — open sale and purchase commitments, net	16,485		—		—		16,485
Contingent earn-out liability	—		—		588		588
Total liabilities, valued at fair value	$	414,575	$	—	$	756	$	415,331

____________________

⁽¹⁾ Commemorative coin inventory totaling $99,000 is held at lower of cost or market and is thus excluded from this table.

There were no transfers in or out of Level 2 or 3 from other levels within the fair value hierarchy during the reported periods.

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only under certain circumstances. These include: cost method and equity method investments that are written down to fair value when a decline in the fair value is determined to be other-than-temporary, and plant, property and equipment, intangibles or goodwill, which are written down to fair value when they are held for sale or determined to be impaired. The resulting fair value measurements of the assets are considered to be Level 3 measurements. Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, long-term growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows. The cash flows employed in the analyses are based on the Company’s estimated outlook and various growth rates. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. In assessing the reasonableness of its determined fair values, the Company evaluates its results against other value indicators, such as comparable transactions and comparable public company trading values.

The Company evaluates its goodwill and other indefinite-lived intangibles for impairment on non-recurring basis in the fourth quarter of the fiscal year, or more frequently if indicators of potential impairment exist. As of June 30, 2018, the carrying value of the Company's indefinite-lived intangible and goodwill assets totaled $3.2 million and $8.9 million, respectively. In the fourth quarter of fiscal 2018, the Company recorded an impairment loss of $1.3 million and $1.4 million to indefinite-lived intangible and goodwill assets, respectively, based on our quantitative assessment of the fair value of the Direct Sales segment (i.e., Goldline). As of September 30, 2018 , the carrying value of the Company's indefinite-lived intangible and goodwill assets totaled $3.2 million and $8.9 million, respectively (see Note 8).

The Company's two investments in noncontrolled entities do not have readily determinable fair values. Quoted prices of the investments are not available, and the Company identified no impairment indicators that may affect the carrying value of these investments. Based on the Company's assessment of the carrying value of these assets, during the three months ended September 30, 2018 and 2017 the Company did not record any impairments related to these investments. As of September 30, 2018 and June 30, 2018, the carrying value of the Company's investments totaled $8.6 million and $8.4 million, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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