1. DESCRIPTION OF BUSINESS

Basis of Presentation

The consolidated financial statements comprise those of A-Mark Precious Metals, Inc. ("A-Mark" or the "Company"), its wholly-owned consolidated subsidiaries, and its joint ventures in which the Company has a controlling interest.

Business Segments

The Company conducts its operations in three reportable segments: (i) Wholesale Sales & Ancillary Services (formerly known as Wholesale Trading & Ancillary Services), (ii) Direct-to-Consumer (formerly known as Direct Sales), and (iii) Secured Lending.  Each of these reportable segments represents an aggregation of operating segments that meets the aggregation criteria set forth in the Segment Reporting Topic 280 of the Financial Accounting Standards Board’s ("FASB") Accounting Standards Codification (“ASC”). (See Note 18.)

The Wholesale Sales & Ancillary Services and Direct-to-Consumer segment name changes had no impact on the Company's historical financial position, results of operations, cash flow, or segment level results previously reported.

Wholesale Sales & Ancillary Services

The Company operates its Wholesale Sales & Ancillary Services segment through A-Mark Precious Metals, Inc., and its wholly-owned subsidiaries, A-Mark Trading AG (“AMTAG”), Transcontinental Depository Services, LLC ("TDS" or “Storage”), A-M Global Logistics, LLC (“AMGL” or "Logistics"), and AM&ST Associates, LLC ("AMST" or "SilverTowne" or the "Mint").

The Wholesale Sales & Ancillary Services segment operates as a full-service precious metals company. We offer gold, silver, platinum, and palladium in the form of bars, plates, powder, wafers, grain, ingots, and coins. Our Industrial unit services manufacturers and fabricators of products utilizing or incorporating precious metals. Our Coin and Bar unit deals in over 1,000 coin and bar products in a variety of weights, shapes, and sizes for distribution to dealers and other qualified purchasers. We have a marketing support office in Vienna, Austria, and a trading center in El Segundo, California.  The trading center, for buying and selling precious metals, is available to receive orders 24 hours every day, even when many major world commodity markets are closed. In addition to Wholesale Sales activity, A-Mark offers its customers a variety of ancillary services, including financing, storage, consignment, logistics, and various customized financial programs.  As a U.S. Mint-authorized purchaser of gold, silver, platinum, and palladium coins, A-Mark purchases product directly from the U.S. Mint and other sovereign mints for sale to its customers.

Through its wholly-owned subsidiary, AMTAG, the Company promotes A-Mark's products and services to the international market. Through our wholly-owned subsidiary TDS, we offer a variety of managed storage options for precious metals products to financial institutions, dealers, investors, and collectors around the world.

The Company's wholly-owned subsidiary AMGL is based in Las Vegas, Nevada, and provides our customers an array of complementary services, including receiving, handling, inventorying, processing, packing, and shipping of precious metals and custom coins on a secure basis.

Through its wholly-owned subsidiary, AMST, the Company designs and produces minted silver products. Our mint operations allow us to provide greater product selection to our customers and greater pricing stability within the supply chain, as well as to gain increased access to silver during volatile market environments, which have historically created higher demand for precious metals products. The Company initially operated the Mint pursuant to a joint venture agreement with Silver Towne, L.P.  As of March 31, 2021, the Company and Silver Towne L.P. owned 69% and 31%, respectively, of AMST.  On April 1, 2021, the Company acquired the remaining 31% interest in AMST, which increased the Company's ownership to 100%.

Direct-to-Consumer

The Company operates its Direct-to-Consumer segment through its wholly-owned subsidiaries JM Bullion, Inc., including its four wholly-owned subsidiaries Gold Price Group, Inc. (“GPG”), Silver.com, Inc. (“SILVER.COM”), Goldline Metal Buying Corp. (“GMBC”), and Provident Metals Corp. (“PMC”), (collectively “JMB”), and Goldline, Inc., including its two subsidiaries AMIP, LLC ("AMIP") and its 50%-owned subsidiary Precious Metals Purchasing Partners, LLC ("PMPP"), (collectedly “Goldline”).

JMB is a leading e-commerce retailer providing access to a broad array of gold, silver, copper, platinum, and palladium products through its websites and marketplaces. Currently, JMB operates five separately branded, company-owned websites

targeting specific niches within the precious metals retail market.  The Company acquired the 79.5% interest in JMB that it did not previously own in March 2021.  

The Company acquired Goldline in August 2017 through an asset purchase transaction with Goldline, LLC, which had been in operation since 1960. Goldline is a direct retailer of precious metals to the investor community, and markets its precious metal products on television, radio, and the internet, as well as through customer service outreach.

AMIP, a wholly-owned subsidiary of Goldline, manages its intellectual property.

The Company formed and capitalized PMPP in fiscal 2019, a 50%-owned subsidiary of Goldline, pursuant to terms of a joint venture agreement, for the purpose of purchasing precious metals from the partners' retail customers, and then reselling the acquired products back to affiliates of the partners.  PMPP commenced its operations in fiscal 2020.

Direct-to-Consumer – Incremental Acquisition of a Pre-existing Equity Method Investment

Effective March 19, 2021, JMB  became a wholly-owned subsidiary of the Company.  Management’s reasons for acquiring JMB were to: (i) expand our e-commerce channel for precious coin and metals sales; (ii) assist in leveraging proven and internally developed online marketing strategies; (iii) allow us to more effectively tailor our merchandising and pricing strategies to target multiple customer demographics across our combined six unique consumer-facing brands; (iv) enhance our ability to repurchase product from new and existing customers; (v) expand our logistics footprint by adding a centrally located distribution hub in Dallas, Texas; (vi) further diversify our business between wholesale and retail distribution; (vii) allow us to offer JMB’s customers proprietary precious metal products as well as additional services, such as distribution, storage, and logistics; (viii) enable us to leverage the increased size of our combined business to achieve more favorable pricing and financing terms; (ix) provide JMB with opportunities for geographic expansion through our international presence; and (x) and facilitate JMB’s introduction of new bullion offerings to the retail market.

Transaction Summary

On March 19, 2021 (the “Acquisition Date”), pursuant to a stock purchase agreement with the selling stockholders of JMB, the Company acquired the remaining 79.5% interest in JMB that we did not previously own for total consideration of $141.1 million.  The consideration paid consisted of $99.5 million in cash and the remainder in the form of 1,047,007 shares of the Company’s common stock with a fair value of $41.6 million.  The Company incurred transaction costs of $2.6 million related to this acquisition, which is shown as a component of selling, general, and administrative expenses in the Company’s consolidated statements of income.

Business Combination

The acquisition of JMB was accounted for as a business combination that was achieved in stages.  As a result of the change of control, the Company was required to remeasure its pre-existing equity investment in JMB at fair value prior to consolidation.  The Company estimated the fair value of its 20.5% pre-existing investment in JMB to be approximately $33.9 million. The remeasurement resulted in the recognition of a pretax gain of $26.3 million, which is presented on the face of the Company’s consolidated statements of income.

Purchase Price Allocation

The total purchase consideration was $207.4 million, consisting of $99.5 million in cash, $41.6 million of A-Mark’s common stock, $33.9 million in pre-existing equity method investment, and $32.4 million in the settlement of pre-existing net payables. This amount was allocated to the fair value of assets acquired and liabilities assumed as of the Acquisition Date, with the excess purchase price recorded as goodwill.

A third-party valuation specialist assisted the Company with our fair value estimates for the net tangible and identifiable intangible assets. Management estimated that the tangible assets acquired, and liabilities assumed were recorded at fair value as of the Acquisition Date. The trade name intangible was valued using the relief-from-royalty methodology which considers estimated future discounted cash flows derived from JMB’s website domain names that existed at the Acquisition Date.  The developed technology intangible was valued using developer's profit methodology, which estimates the costs and risks associated with developing technology applications (identified as JMB’s front end platform, customer relationship management, and back-office platform software used to fulfill orders) that was discounted to the Acquisition Date.  The customer relationships intangible was valued using attrition methodology which considers estimated future discounted cash flows to be derived from the existing number of customers that existed at the Acquisition Date.

The Company has allocated the purchase price as of the Acquisition Date as follows:

The purchase price allocation is based on the Company's analysis of the fair value of the assets acquired. The valuation has been completed and amounts above are considered finalized. The allocation of the tangible and identifiable intangible assets requires extensive use of accounting estimates and management judgment. Certain of these estimates are material. The fair values assigned to the assets acquired and liabilities assumed are based on estimates and assumptions from data currently available. Of the goodwill, $3.9 million is expected to be deductible for tax purposes. Refer to Note 8 to the Company’s consolidated financial statements for additional information regarding goodwill and intangible assets.

Related Agreements

At the closing of the acquisition, the Company entered into the following agreements, among others: (i) a new employment agreement with Mr. Michael Wittmeyer, pursuant to which he will continue to serve as the Chief Executive Officer of JMB through June 30, 2024; (ii) a lock-up agreement between us and each JMB selling stockholder that restricts the sale or transfer of shares for 270 days after the Acquisition Date; and (iii) a registration rights agreement with certain JMB selling stockholders.

Selected Financial Information

The Company’s consolidated financial statements include the financial results of JMB for the post-acquisition period from March 20, 2021 through June 30, 2021.  For the year ended June 30, 2021, the Company’s consolidated statements of income include $673.3 million of revenue and $30.8 million of pre-tax income that is attributable to JMB.

Pro Forma Information

The following pro forma consolidated results of operations for the years ended June 30, 2021 and 2020, assumes that the acquisition of JMB occurred as of July 1, 2019.

The above pro forma supplemental information does not purport to be indicative of what the Company's operations would have been had these transactions occurred on July 1, 2019 and should not be considered indicative of future operating results.

The Company believes the assumptions used provide a reasonable basis for reflecting the significant pro forma effects directly attributable to the acquisition of JMB.  

The unaudited pro forma information accounts for: (i) eliminations of equity investment income recognized prior to the acquisition and transactions between JMB and A-Mark; and (ii) adjustments to the income tax provision, revenue for JMB sales orders that were shipped but not delivered as of period end; stock compensation expense, acquisition costs, the estimated remeasurement gain, and the amortization expense resulting from the estimated fair value of the acquired finite-lived intangible assets.

Secured Lending

The Company operates its Secured Lending segment through its wholly-owned subsidiary, Collateral Finance Corporation, LLC. including its two wholly-owned subsidiaries AM Capital Funding, LLC (“AMCF”), and CFC Alternative Investments (“CAI”), (collectively “CFC”).

Collateral Finance Corporation, LLC. is a California licensed finance lender that originates and acquires commercial loans secured by bullion and numismatic coins. CFC's customers include coin and precious metal dealers, investors, and collectors.

AM Capital Funding, LLC (“AMCF”), a wholly-owned subsidiary of CFC, was formed for the purpose of securitizing eligible secured loans of CFC.  AMCF issued and administers the Notes. (See Note 14.)

CAI is a holding company that has a 50%-ownership stake in CCP. The purpose of CCP is to provide capital to fund commercial loans secured by graded sport cards and sports memorabilia.  Formed in April 2021, CCP had no operations in fiscal 2021.