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

9 Months Ended

Mar. 31, 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 March 31, 2018 and June 30, 2017.



in thousands
	March 31, 2018				June 30, 2017
	Carrying Amount		Fair value		Carrying Amount		Fair value

Financial assets:
Cash	$	4,941	$	4,941	$	13,059	$	13,059
Receivables, net	41,260		41,260		39,295		39,295
Secured loans receivable	109,493		109,493		91,238		91,238
Derivative asset on open sale and purchase commitments, net	1,233		1,233		931		931
Derivative asset on option contracts	144		144		—		—
Derivative asset on futures contracts	1,059		1,059		1,273		1,273
Derivative asset on forward contracts	5,199		5,199		15,383		15,383
Income taxes receivable	1,521		1,521		—		—
Financial liabilities:
Lines of credit	$	210,000	$	210,000	$	180,000	$	180,000
Debt obligation (related party)	6,993		6,993		—		—
Liability on borrowed metals	243,295		243,295		5,625		5,625
Product financing arrangements	97,370		97,370		135,343		135,343
Derivative liability on margin accounts	3,841		3,841		4,797		4,797
Derivative liability on price protection programs	57		57		—		—
Derivative liability on open sale and purchase commitments, net	14,273		14,273		29,785		29,785
Accounts payable	51,833		51,833		41,947		41,947
Accrued liabilities	6,042		6,042		4,945		4,945
Other long-term liabilities (related party) ⁽¹⁾	1,049		1,049		1,117		1,117
Income taxes payable	—		—		1,418		1,418
Note payable - related party	—		—		500		500

(1) Includes estimated contingent amounts due to SilverTowne and to Goldline Lenders.

The fair values of the financial instruments shown in the above table as of March 31, 2018 and June 30, 2017 represent the amounts that would be received upon the sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk adjusted discount rates, and available observable and unobservable inputs.

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

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

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

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

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

Liability on Price Protection Programs. The Company records an estimate of the fair value of the liability on price protection programs based on the difference between the contractual price at trade date and the retail price at the remeasurement date (i.e., quarter-end) based on the expected redemption rate of each program. As of March 31, 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 income. Changes to the contingent consideration liability can result from adjustments to the discount rate, or from changes to the estimates of future throughput activity of AMST. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. The key inputs in determining fair value of our contingent consideration obligations include the changes in the assumed timing and amounts of future throughputs (i.e., operating income, operating cost per unit, and production volume) which affects the timing and amount of future earn-out payments. Contingent earn-out liability is classified in Level 3 of the valuation hierarchy.

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

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and June 30, 2017, aggregated by the level in the fair value hierarchy within which the measurements fall:



	March 31, 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⁾	$	499,255	$	—	$	—	$	499,255
Derivative assets — open sale and purchase commitments, net	1,233		—		—		1,233
Derivative assets — option contracts	144		—		—		144
Derivative assets — futures contracts	1,059		—		—		1,059
Derivative assets — forward contracts	5,199		—		—		5,199
Total assets, valued at fair value	$	506,890	$	—	$	—	$	506,890
Liabilities:
Liability on borrowed metals	$	243,295	$	—	$	—	$	243,295
Product financing arrangements	97,370		—		—		97,370
Derivative liabilities — price protection programs	—		—		57		57
Derivative liabilities — liability on margin accounts	3,841		—		—		3,841
Derivative liabilities — open sale and purchase commitments, net	14,273		—		—		14,273
Derivative liabilities — future contracts	—		—		—		—
Derivative liabilities — forward contracts	—		—		—		—
Contingent earn-out liability	$	—	$	—	$	588	$	588
Total liabilities, valued at fair value	$	358,779	$	—	$	645	$	359,424

____________________

⁽¹⁾ Commemorative coin inventory totaling $162,000 is held at lower of cost or market and is thus excluded from this table.



	June 30, 2017
	Quoted Price in
	Active Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
in thousands	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Inventory ⁽¹⁾	$	284,619	$	—	$	—	$	284,619
Derivative assets — open sale and purchase commitments, net	931		—		—		931
Derivative assets — futures contracts	1,273		—		—		1,273
Derivative assets — forward contracts	15,383		—		—		15,383
Total assets, valued at fair value	$	302,206	$	—	$	—	$	302,206
Liabilities:
Liability on borrowed metals	$	5,625	$	—	$	—	$	5,625
Product financing arrangements	135,343		—		—		135,343
Derivative liabilities — liability on margin accounts	4,797		—		—		4,797
Derivative liabilities — open sale and purchase commitments, net	29,785		—		—		29,785
Contingent earn-out liability	—		—		1,325		1,325
Total liabilities, valued at fair value	$	175,550	$	—	$	1,325	$	176,875

____________________

⁽¹⁾ Commemorative coin inventory totaling $40,000 is held at lower of cost or market and is thus excluded from this table.

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

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only under certain circumstances. These include cost method and equity method investments that are written down to fair value when a decline in the fair value is determined to be other-than-temporary, and plant, property and equipment or goodwill that are written down to fair value when they are held for sale or determined to be impaired.

The Company uses Level 3 inputs to measure the fair value of its investments on a non-recurring basis. The Company's two investments in noncontrolled entities do not have readily determinable fair values. Quoted prices of the investments are not available, and the cost of obtaining an independent valuation appears excessive considering the carrying value of the instruments to the Company. As of March 31, 2018 and June 30, 2017, the carrying value of the Company's investments totaled $8.2 million and $8.0 million, respectively. During the three and nine months ended March 31, 2018 and 2017, the Company did not record any impairments related to these investments.

The Company also uses Level 3 inputs to measure the fair value of goodwill and other intangibles on a non-recurring basis. These assets are measured at cost and are written down to fair value on the annual measurement dates or on the date of a triggering event, if impaired. As of March 31, 2018, there were no indications present that the Company's goodwill or other purchased intangibles were impaired, and therefore were not remeasured.

- 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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