1. DESCRIPTION OF BUSINESS

Basis of Presentation

The condensed 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) Secured Lending, and (iii) Direct-to-Consumer (formerly known as Direct Sales). 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 Wholesale Sales & Ancillary Services segment operates as a full-service precious metals company. The products sold within this segment include: gold, silver, platinum, and palladium primarily in the form of coins, rounds, bars, wafers, and grain. This segment's services include: consignment, storage, logistics, hedging, and various customized financial programs.

Through its wholly-owned subsidiary, A-Mark Trading AG (“AMTAG”), the Company promotes A-Mark's goods and services to the international market. Transcontinental Depository Services, LLC (“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" or “AMGL”), operates the Company's logistics fulfillment center. Logistics provides customers an array of complementary services, including packaging, shipping, handling, receiving, processing, and inventorying of precious metals and custom coins on a secure basis.

Through AM&ST Associates, LLC ("AMST", "Silver Towne" or the "Mint"), the Company designs and produces minted silver 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%. (See Note 19.)

Secured Lending

The Company operates its Secured Lending segment through its wholly-owned subsidiary, Collateral Finance Corporation ("CFC".) CFC 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.)

Direct-to-Consumer

The Company's wholly-owned subsidiary Goldline, Inc. ("Goldline"), is a direct retailer of precious metals to the investor community.  Goldline markets its precious metal products primarily on radio, television, and the internet.  Goldline sells gold and silver bullion in the form of coins, rounds, and bars.

AM IP, LLC ("AMIP"), a wholly-owned subsidiary of Goldline, manages its intellectual property.

Precious Metals Purchasing Partners, LLC ("PMPP"), is a 50% owned subsidiary of Goldline.  PPMP acquires precious metals from retail customers and resells the metals to partners or affiliates of the joint venture.

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

Effective March 19, 2021, JM Bullion, Inc. (“JMB”) became a wholly-owned subsidiary of the Company.  JMB is an e-commerce retailer providing access to an array of gold, silver, platinum, palladium, and copper products through its websites and marketplaces. Currently, JMB operates five separately branded, company-owned websites targeting specific niches within the precious metals retail market.

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 $141.7 million.  The consideration paid consisted of $100.1 million in cash and the remainder in the form of 1,047,004 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 condensed 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 $34.1 million. The remeasurement resulted in the recognition of a pretax gain of $26.3 million, which is presented on the face of the condensed consolidated statements of income.

Purchase Price Allocation

The total purchase consideration was $175.8 million, consisting of $100.1 million in cash, $41.6 million of A-Mark’s common stock, and $34.1 million in pre-existing equity method investment. 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 preliminarily allocated the purchase price as of the Acquisition Date as follows:

The purchase price allocation is subject to completion of the Company's analysis of the fair value of the assets acquired. The final valuation is expected to be completed as soon as practicable, but no later than one year from the closing date of the transaction. 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 condensed 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 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

Our condensed consolidated financial statements include the financial results of JMB’s operations for the post-acquisition period from March 20, 2021 through March 31, 2021. For the three and nine months ended March 31, 2021, our condensed consolidated statements of income include $68.4 million of revenue and $6.8 million of pre-tax income that is attributable to JMB’s operations.

Pro Forma Information

The following pro forma consolidated results of operations for the three and nine months ended March 31, 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, the amortization expense resulting from the estimated fair value of the acquired finite-lived intangible assets, and to interest expense related to the borrowings against A-Mark's Trading Credit Facility.