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, 2019

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, 2019 and June 30, 2019.



in thousands
	September 30, 2019				June 30, 2019
	Carrying Amount		Fair value		Carrying Amount		Fair value

Financial assets:
Cash	$	12,461	$	12,461	$	8,320	$	8,320
Receivables, net	23,643		23,643		26,895		26,895
Secured loans receivable	150,473		150,473		125,298		125,298
Derivative assets on open sale and purchase commitments, net	4,960		4,960		2,322		2,322
Derivative assets on option contracts	11		11		61		61
Derivative assets on futures contracts	3,871		3,871		2		2
Derivative assets on forward contracts	10,704		10,704		43		43
Income taxes receivable	1,500		1,500		1,473		1,473
Other long-term assets	3,000		3,000		—		—
Financial liabilities:
Lines of credit	$	204,000	$	204,000	$	167,000	$	167,000
Liabilities on borrowed metals	196,738		196,738		201,144		201,144
Product financing arrangements	159,130		159,130		94,505		94,505
Derivative liabilities on margin accounts	3,455		3,455		2,981		2,981
Derivative liabilities on price protection programs	13		13		22		22
Derivative liabilities on open sale and purchase commitments, net	3,115		3,115		3,822		3,822
Derivative liabilities on futures contracts	—		—		1,241		1,241
Derivative liabilities on forward contracts	107		107		1,905		1,905
Accounts payable	85,405		85,405		62,180		62,180
Accrued liabilities	5,391		5,391		6,137		6,137
Notes payable	92,017		99,172		91,859		98,609

The fair values of the financial instruments shown in the above table as of September 30, 2019 and June 30, 2019 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, and accrued liabilities approximate fair value due to their short-term nature. The carrying amounts of derivative assets and derivative liabilities, liabilities 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 approximate fair value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The Company’s notes payable are reported at their aggregate principal amount less unamortized original issue discount and deferred financing costs on the accompanying consolidated balance sheets. The fair value of the notes payable is based on the present value of the expected coupon and principal payments using an estimated discount rate based on current market rates for debt with similar credit risk.

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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, which 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 net realizable value, 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 precious metals purchased under these arrangements consist of rare and unique items, and therefore the Company accounts for these transactions as precious metals held under financing arrangements, which generate financing income rather than revenue earned from precious metals inventory sales. 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 the 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. As of September 30, 2019, the Company used the quoted market price based on the current spot rate and used an expected redemption rate of 100%. The use of a throughput rate ignores the future price volatility that would affect the timing and rate of redemption under the program, and, as a result, the liability on the price protection programs is classified in Level 3 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, 2019 and June 30, 2019, aggregated by the level in the fair value hierarchy within which the measurements fall:



	September 30, 2019
	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⁾	$	369,862	$	—	$	—	$	369,862
Precious metals held under financing arrangements	200,809		—		—		200,809
Derivative assets — open sale and purchase commitments, net	4,960		—		—		4,960
Derivative assets — option contracts	11		—		—		11
Derivative assets — futures contracts	3,871		—		—		3,871
Derivative assets — forward contracts	10,704		—		—		10,704
Total assets, valued at fair value	$	590,217	$	—	$	—	$	590,217

Liabilities:
Liabilities on borrowed metals	$	196,738	$	—	$	—	$	196,738
Product financing arrangements	159,130		—		—		159,130
Derivative liabilities — price protection programs	—		—		13		13
Derivative liabilities — margin accounts	3,455		—		—		3,455
Derivative liabilities — open sale and purchase commitments, net	3,115		—		—		3,115
Derivative liabilities — forward contracts	107		—		—		107
Total liabilities, valued at fair value	$	362,545	$	—	$	13	$	362,558

____________________

⁽¹⁾ Commemorative coin inventory totaling $2.3 million is held at lower of cost or net realizable value and is thus excluded from this table.



	June 30, 2019
	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⁾	$	292,844	$	—	$	—	$	292,844
Precious metals held under financing arrangements	208,792		—		—		208,792
Derivative assets — open sale and purchase commitments, net	2,322		—		—		2,322
Derivative assets — option contracts	61		—		—		61
Derivative assets — futures contracts	2		—		—		2
Derivative assets — forward contracts	43		—		—		43
Total assets, valued at fair value	$	504,064	$	—	$	—	$	504,064
Liabilities:
Liabilities on borrowed metals	$	201,144	$	—	$	—	$	201,144
Product financing arrangements	94,505		—		—		94,505
Derivative liabilities — price protection programs	—		—		22		22
Derivative liabilities — margin accounts	2,981		—		—		2,981
Derivative liabilities — open sale and purchase commitments, net	3,822		—		—		3,822
Derivative liabilities — futures contracts	1,241		—		—		1,241
Derivative liabilities — forward contracts	1,905		—		—		1,905
Total liabilities, valued at fair value	$	305,598	$	—	$	22	$	305,620

____________________

⁽¹⁾ Commemorative coin inventory totaling $17 thousand is held at lower of cost or net realizable value 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: i) equity method investments that are written down to fair value when a decline in the fair value is determined to be other-than-temporary, ii) plant, property and equipment and definite-lived intangibles, or iii) goodwill and indefinite-lived intangibles, all of 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 equity method investment, asset group, or reporting unit. 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.

- 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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