ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking
Statements
The
discussion in this Item 2 of this Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “1934 Act”). Those Sections of the 1933 Act and 1934 Act provide
a “safe harbor” from liability for forward-looking statements in order to encourage companies to provide prospective
information about their expected future financial performance so long as they provide cautionary statements identifying important
factors that could cause their actual results to differ from projected or anticipated results. Other than statements of historical
fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning
our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking
statements. Forward-looking statements often include the words “believe,” “expect,” “anticipate,”
“intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future
or conditional verbs such as “will,” “would,” “should,” “could,” or “may.”
Our actual financial performance in future periods may differ significantly from the currently expected financial performance
set forth in the forward-looking statements contained in this Report due to the risks to which our business is subject and other
circumstances or occurrences which are not presently predictable and over which we do not have control, including the continuing
impact that the Coronavirus (“COVID-19”) may have on our business, financial condition and results of operations.
Consequently, the forward-looking statements and information contained in this Report are qualified in their entirety by, and
readers of this Report are urged to read the risk factors that are described in Item 1A of Part I of our Annual Report on Form
10-K for the fiscal year ended June 30, 2020 (the “Fiscal 2020 10-K”), which we filed with the Securities and Exchange
Commission (the “SEC”) on August 26, 2020, and the section, entitled “Factors that Can affect our Results of
Operations or Financial Position,” below in this Item 2.
Due
to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking
statements that are contained or recent trends that we describe in this Report, which speak only as of the date of this Report,
or to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim
any obligation to update or revise any forward-looking statements contained in this Report or in our Fiscal 2020 10-K or any of
our other prior filings with the SEC, except as may be required by applicable law or applicable NASDAQ rules.
Our
Business
Collectors
Universe, Inc. (“we”, “us”, “our”, or the “Company”) provides authentication and
grading services to dealers and collectors of coins, trading cards, event tickets, autographs, sports and historical memorabilia.
We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with
a high level of assurance as to the authenticity and quality of the collectibles they seek to buy or sell; thereby enhancing their
marketability and providing increased liquidity to the dealers, collectors and consumers that own, buy and sell such collectibles.
We
principally generate revenues from the fees paid for our authentication and grading services. To a lesser extent, we generate
revenues from other related services which consist of: (i) revenues from sales of advertising placed and commissions earned on
our websites; (ii) sales of printed publications and collectibles price guides and sales of advertising in our publications; (iii)
sales of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles
among new collectors; (iv) sales of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for coins that have been
authenticated and graded (or “certified”) and (v) the management and operation of collectibles trade shows and conventions.
We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we
have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part
of our on-going revenue generating activities.
Recent
Developments: Coronavirus (COVID-19)
Despite
the continuing COVID-19 pandemic, we achieved record quarterly revenues of $30.8 million and operating income of $7.8 million,
in the first quarter of fiscal 2021, as compared to revenues of $20.2 million and operating income of $4.6 million in the first
quarter of fiscal 2020 and revenues of $20.5 million and operating income of $3.5 million in the fourth quarter of fiscal 2020
(when, as previously reported, our operations were shut down for part of the quarter).
Set
forth below is a summary of the impact of COVID -19 in the first quarter of fiscal 2021 and the possible impact on future periods.
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We
continue to apply enhanced measures to protect the health and safety of our returning employees and the community. Those health
and safety measures included a reconfiguration of our authentication and grading facility to permit social distancing and
continuing to have certain administrative and clerical personnel work remotely from their homes. As a result, there are inefficiencies
in our business that did not exist prior to the COVID-19 outbreak, although we mitigated the effect of those inefficiencies
by operating with multiple shifts and making extra space available to operations personnel that was previously used by the
administrative and clerical personnel, who began working remotely. As previously reported, our cards and autographs business
had a record backlog of submissions for authentication and grading at June 30, 2020. Through increasing capacity, primarily
by adding operations personnel, we authenticated and graded more units which contributed to us generating the record revenues
and operating results for the first quarter of fiscal 2021. In addition, we increased our cash and cash equivalents to $36.7
million at September 30, 2020 from $28.6 million at June 30, 2020. See Overview of First Quarter Fiscal 2021 Operating
Results below which highlights certain additional costs in this year’s first quarter.
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Our
Expos Long Beach trade show scheduled to take place the first quarter of fiscal 2021 was cancelled due to COVID-19 and there
continues to be uncertainty as to the viability of the Expos trade show business, due to social distancing and other safety
concerns, that will limit the numbers of dealers and attendees at future shows. As a result, we generated no revenues in this
year’s first quarter for Expos as compared to $462,000 in the first quarter of fiscal 2020.
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We
earn higher average service fees from onsite authentication and grading activities at many coin trade shows and to a lesser
extent, trading card shows. All scheduled trade shows in the first fiscal quarter of 2021, including The National Sports Collectors
Convention, and the PNG/ANA Numismatic Trade Show which are the largest annual trade shows for our cards / autographs and
coin businesses, respectively, were cancelled, by the operators of those shows. However, in the first quarter, we replaced
some of the cancelled U.S. coins shows with smaller coin authentication and grading events that we conducted ourselves, and
were successful in generating show revenues of approximately $1.5 million in this year’s first quarter as compared to
approximately $1.7 million in last year’s first quarter and $0.2 million in the fourth quarter of fiscal 2020. In addition,
whenever possible, we encouraged customers to redirect trade show submissions to our California operations facility, for authentication
and grading. At this time all coin shows originally scheduled for the second quarter of fiscal 2021 have been cancelled so
we will continue to conduct replacement shows during the second quarter ourselves. Although our efforts to replace coin trade
shows were successful in the first quarter of fiscal 2021, it is uncertain as to the level of on-going revenues we will be
able to generate at these smaller coin authentication and grading events, going forward. At this time, the trade shows customarily
scheduled for the third fiscal quarter of fiscal 2021 have been tentatively scheduled.
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There
continues to be uncertainty as to the U.S. Mint’s production and release schedule for modern coin programs through the
remainder of calendar year 2020, although in the first quarter of fiscal 2021 our domestic modern coin revenues were slightly
higher than during the same period of last year’s first quarter. In addition, so far in the second quarter, we are continuing
to see modern coin revenues at about the same levels as the second quarter of fiscal 2020. Currently, we are expecting a normal
production and release schedule from the U.S. Mint in this year’s third fiscal quarter, which traditionally has been
the seasonally strongest quarter of the year for modern coins.
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Our
China operation, generated revenues of approximately $1.6 million in the first quarter of fiscal 2021 as compared to approximately
$1.3 million in both the first quarter of fiscal 2020 and the fourth quarter of fiscal 2020. Although we continue to have
a sizeable backlog of submissions for authentication and grading in China at September 30, 2020, it continues to be difficult
to fully ramp up our operations in China to pre-COVID-19 levels, due to the travel restrictions, that prevent our U.S. coins
experts from travelling there. However, we expect to be able to progressively increase revenues on a quarterly basis as we
add more local capacity at our Shanghai operation.
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Despite
the uncertainties arising from COVID-19 discussed above, our cards and autographs business had a record backlog as of September
30, 2020 and continues to experience record customer submissions. We increased capacity through adding operations personnel
in the first quarter of fiscal 2021, and we plan to continue increasing capacity in the second quarter of fiscal 2021. In
addition, on October 5, 2020 we announced a doubling of our headquarters and operations facility, which will accommodate the
growth of our cards and autographs business in future quarters.
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As
discussed above, our business operated at record levels during the first quarter of fiscal 2021. However, as discussed in the
Risk Factors in the Fiscal 2020 10-K, the extent of future waves of COVID-19, could have a material adverse impact on the Company’s
business, results of operations and financial condition in future periods.
Overview
of First Quarter Fiscal 2021 Operating Results
The
following table sets forth comparative financial data for the three months ended September 30, 2020 and 2019 (in thousands):
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Three Months Ended
September 30, 2020
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Three Months Ended
September 30, 2019
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Amount
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Percent of Revenues
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Amount
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Percent of Revenues
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Net revenues
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$
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30,785
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100.0
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%
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$
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20,210
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100.0
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%
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Cost of revenues
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11,474
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37.3
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%
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8,101
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40.1
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%
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Gross Profit
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19,311
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62.7
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%
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12,109
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59.9
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%
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Operating Expenses:
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Selling and marketing expenses
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2,269
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7.3
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%
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2,633
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13.0
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%
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General and administrative expenses
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9,233
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30.0
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%
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4,839
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24.0
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%
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Total Operating Expenses
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11,502
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37.3
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%
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7,472
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37.0
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%
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Operating income
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7,809
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25.4
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%
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4,637
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22.9
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%
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Net Interest and other income
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18
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-
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71
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0.4
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%
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Income before provision for income taxes
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7,827
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25.4
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%
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4,708
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23.3
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%
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Provision for income taxes
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1,865
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6.0
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%
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1,095
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5.4
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%
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Net Income
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$
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5,962
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19.4
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%
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$
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3,613
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17.9
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%
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Net income per diluted share
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$
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0.65
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$
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0.40
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Net
revenues increased by $10.6 million, or 52%, to record quarterly revenues of $30.8 million in the three months ended September
30, 2020 from $20.2 million in the three months ended September 30, 2019. The increase in revenues in this year’s first
quarter was primarily attributable to a $10.5 million, or 130%, increase in our cards / autographs revenues. See Net Revenues
below for a more detailed discussion of the changes in revenues in this year’s first quarter.
Operating
income increased by $3.2 million, or 68%, to $7.8 million in this year’s first quarter from $4.6 million in the last year’s
first quarter, representing increased operating margins of 25.4% in this year’s first quarter as compared to 22.9% in last
year’s first quarter. The increased operating income was due to the higher gross profit margin of 63% earned on the higher
revenues in the quarter as compared to the 60% in the three months ended September 30, 2019, primarily due to higher average service
fees earned on our cards / autograph revenues.
The
increased operating expenses of $4.0 million in this year’s first quarter included (i) $2.2 million of professional fees
incurred in connection with the settled activist issue and the recruitment of new board members, and (ii) non-cash stock based
compensation expense of $0.9 million, as compared to the same period of the prior year. Those higher expenses reduced the operating
margin of this year’s first quarter by $3.1 million or 10% of revenues in the quarter.
These,
as well as other factors affecting our operating results in the three months ended September 30, 2020, are described in more detail
below. See “Factors that Can Affect Our Operating Results and Financial Position” and “Results of Operations
for the Three Months Ended September 30, 2020, as compared to the Three Months Ended September 30, 2019”, below.
Factors
That Can Affect our Operating Results and Financial Position
Factors
That Can Affect our Revenues and Gross Profit Margins. Authentication and grading fees accounted for approximately 93% of
our revenues in the three months ended September 30, 2020. The amount of those fees and our gross profit margins are primarily
driven by the volume and mix of trading cards and coins sales and purchase transactions by collectibles dealers and collectors,
because our authentication and grading services generally facilitate sales and purchases of trading cards and coins by providing
dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell
or buy. Consequently, dealers and collectors most often submit trading cards and coins to us for authentication and grading at
those times when they are in the market to sell or buy trading cards, coins and the other collectibles, that we authenticate and
grade. Currently, our cards and autographs business is experiencing a significant increase in demand for its service, such that
revenues for that business increased by 130% in this year’s first quarter and we continue to have a record backlog of card
submissions awaiting authentication and grading at September 30, 2020.
Our
authentication and grading revenues and gross profit margins are affected by (i) the volume and mix of authentication and grading
submissions among trading cards and coins; (ii) in the case of trading cards and coins, the turnaround times requested by our
customers, because we charge higher fees for faster service times; and (iii) the volume and mix of authentication and grading
submissions between vintage or “classic” trading cards and coins, and modern trading cards and coins, as vintage or
classic collectibles generally are of significantly higher value than modern collectibles; and justify a higher average service
fee. Furthermore, because a proportion of our costs of revenues are relatively fixed in nature in the short term, our gross profit
margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.
In
addition, our coin authentication and grading revenues are impacted by the volume of modern coin submissions, which can be volatile,
primarily in the U.S., depending on the timing and size of modern coin marketing programs by the United States Mint and by customers
or dealers who specialize in sales of such coins. Our overseas revenues can fluctuate on a quarterly basis due to the number of
authentication and grading events we conduct at our overseas operations on a quarterly basis. See Recent Developments: COVID-19
above.
Our
revenues and gross profit margin can also be affected by the number of primarily coin authentication and grading submissions we
receive at collectibles trade shows, where we provide on-site authentication and grading services to show attendees, because show
attendees typically request higher priced same-day turnaround for the coins they submit to us for authentication and grading at
those shows. In addition, our cards and autographs business also provides on-site authentication and grading at one large national
convention on an annual basis. For coins, the number of trade show submissions varies from period to period depending upon a number
of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought
and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and
gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by dealer and collectors
sentiment arising from short-term changes in the prices of gold that may occur around the time of shows, because short-term changes
in gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows. See Recent Developments:
COVID-19 above which discusses the expected impact on trade show revenues, resulting from COVID-19.
Our
top five customers accounted, in the aggregate, for approximately 8% of our total revenues in the three months ended September
30, 2020, as compared to 12% in the same period of the prior year. As a result, the loss of any of those customers, or a significant
decrease in the volume of authentication and grading submissions from any of them to us, could cause our net revenues to decline
and, therefore, could adversely affect our results of operations.
Due
to submissions mix issues discussed above, the number of units authenticated and graded can vary by period between cards / autographs
and coins. In addition, revenue generated in a period will vary based on the mix of cards / autographs and coins authenticated
and graded and the average service fees (“ASP”) we charge for such services. Generally, ASPs are higher for coins
than for cards / autographs and for vintage units than for modern units.
Impact
of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the number
of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows
generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the
ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles
dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors
and their confidence about future economic conditions, because collectibles are generally purchased with disposable income; (iv)
prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, and uncertainties regarding the
strength of the economy in the United States, Western Europe and China, because conditions and uncertainties of this nature often
lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the
purchasing power of the U.S. currency; as well as an alternative to investments in government bonds and other treasury instruments;
and (v) the performance and volatility of the trading cards and gold and other precious metals markets, which can affect the level
of purchases and sales of collectibles, because investors and consumers will often increase their purchases of those if they believe
that the market prices of those assets will increase. As a result, the volume of collectibles transactions and, therefore, the
demand for our authentication and grading services, generally increase during periods characterized by increases in disposable
income or availability of lower cost borrowings and increases in market price for collectibles, on the one hand, or increases
in inflation or in gold prices, economic uncertainties and declines in business and consumer confidence or a weakening of the
U.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally decline
during periods characterized by lower market prices for collectibles, economic downturns or recessions, declines in consumer and
business confidence, an absence of inflationary pressures, or periods of stagnation or a downward trend in the market prices of
gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift
funds from gold to other investments during periods of economic growth and growing consumer and business confidence and from stocks
and other investments to gold during periods of economic uncertainties and decreases in disposable income and consumer and in
business confidence.
Factors
That Can Affect our Liquidity and Financial Position. A substantial number of our authentication and grading customers pay
our authentication and grading fees when they submit their collectibles to us or prior to the shipment of the collectibles back
to them. As a result, historically, we have been able to rely on internally generated cash to fund our continuing operations.
In
addition to the operating performances of our businesses, and, in particular our trading cards / autographs and coins businesses,
which accounted for approximately 98% of our revenues in this year’s first quarter, our overall financial position can also
be affected by other factors, including the Company’s tax position and effective tax rate, the dividend policy adopted by
the Board of Directors from time to time, the Company’s decisions to invest in capital expenditures that may, benefit the
business through operational efficiencies over time, the acquisition of established and/or early stage businesses and capital
raising activities or stock repurchases. Furthermore, our domestic financial position can be impacted by delays in repatriating
cash balances to the United States from China, due to exchange control regulations in China.
As
discussed in note 1 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, and in “Liquidity
and Capital Resources” below, the Company continues to have a $15,000,000 two-year unsecured revolving credit line through
March 2022.
We
expect that internally generated cash flows, current cash and cash equivalent balances and borrowings under our Credit Line, will
be sufficient to fund our operations at least through the end of September 2021.
Critical
Accounting Policies and Estimates
During
the three months ended September 30, 2020 there were no changes in our critical accounting policies or estimates which are described
in Item 7 of our Fiscal 2020 10-K. Readers of this Report are urged to read that section of the Fiscal 2020 10-K for a more complete
understanding and detailed discussion of our critical accounting policies and estimates.
Leases
The
Company accounts for leases, which consist primarily of office and operations facilities, in accordance with Accounting Standards
Codification (“ASC”) 842 Accounting for Leases. We recognize lease obligations and corresponding right-of-use
(ROU) assets for non-cancelable operating leases. Therefore, the Condensed Consolidated Balance Sheets at September 30, 2020,
and June 30, 2020, included elsewhere in this report, includes the liability to make lease payments (the lease liability) and
a right-of-use asset, representing our right to use the underlying asset for the lease term. We do not recognize lease assets
and liabilities for leases with a term of 12 months or less and recognize lease expenses for such leases on a straight-line basis
over the lease term. See Note 9-Leases to the accompanying condensed consolidated financial statements for additional
information. As a result of COVID-19, we reviewed our lease obligations for impairment and potential excess space reserve requirements
and concluded there were no impairments or charges, required at September 30, 2020.
Revenue
Recognition
The
core principle of ASC 606, Revenue from Contracts with Customers, is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach
to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with
the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating
the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations
are satisfied.
Our
primary source of revenue is the authentication and grading of collectibles, which represented about 90% of our consolidated revenues
in the fiscal year ended June 30, 2020. Our other sources of revenues represent the balance of our revenues which are small and
individually account for less than 5% of total revenues.
In
accordance with ASC 606 we recognize revenue for our main revenue streams as follows:
Authentication
and Grading Revenues: As the time it takes to authenticate and grade the collectible is short, we recognize revenue at the
time of shipment (i.e. point of time) of the authenticated and graded collectible to the customer, net of any taxes collected.
Due to the insignificant delay between the completion of our authentication and grading services and the shipment of the collectible
back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sale of
special coin inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers
prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record
those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to the customer.
At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct
this amount from deferred revenue. For certain dealers to whom we extend credit, we record revenue at the time of shipment of
the authenticated and graded collectible to the dealer. We provide a limited warranty covering the coins and trading cards that
we authenticate and grade.
Collectors
Club Revenues: These revenues represent membership fees paid by customers for annual memberships in our Collectors Club. Those
membership fees entitle members to access our on-line and printed publications and, depending on their membership level, to receive
vouchers for authentication and grading services during the membership period. We allocate revenue between the vouchers and the
membership. We recognize revenue attributable to the authentication and grading vouchers consistent with our authentication and
grading services above. The balance of the membership fees is recognized ratably over the life of the membership. Memberships
are paid in advance of the membership period and prepaid memberships fees are classified as deferred revenue.
Certified
Coin Exchange Subscription Revenues: We recognize subscription revenues related to our CCE exchange for certified coins, ratably
over the relevant subscription period. Subscriptions are typically billed and paid on a monthly basis, although certain quarterly
and annual subscriptions can be paid in advance. Prepaid subscriptions are classified as part of deferred revenue.
Expos
Trade Show Revenue: We recognize fees earned from promoting, managing, and operating trade shows in the periods in which the
shows take place. Trade show booth fees are typically paid to us in advance. Certain fees that are paid to conduct auctions at
the show are paid to us at the end of the show. Prepaid show fees are classified as part of deferred revenue.
Advertising
and Commission Revenues: Advertising revenues are recognized in the period when an advertisement is displayed in our publications
or websites and customers typically have 30 day credit terms. Click-through commission revenues earned through our websites from
third party affiliate programs are recognized in the period in which the commissions are earned, and such commissions are paid
in the following month.
Product
Sales: Product sales consist primarily of sales of collectibles coins that we have purchased pursuant to our coin authentication
and grading warranty program. We recognize revenues from coin sales when the coins are shipped or delivered to customers or if
the coins are sold through auction, when the auction settles. However, those sales are not considered to be the focus of nor an
integral part of the Company’s ongoing revenue generating activities.
Contract
Balances. As discussed above, the timing of revenue recognition can differ from the timing of invoicing to customers. Contract
liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We
refer to these contract liabilities as “Deferred Revenue” in the accompanying condensed consolidated balance sheets.
During the three months ended September 30, 2020, we recognized $2,306,000 in revenue from the deferred revenue balance of $4,968,000
at June 30, 2020.
Shipping
and Handling Costs
Shipping
and handling costs incurred to process and return customer collectibles submitted to us for grading or authentication are recorded
as costs of revenues, net of amounts received from customers, in accordance with the guidance for Principals versus Agents as
set out in ASC 606.
Goodwill
We
test the carrying value of goodwill and other indefinite-lived intangible assets at least annually on their respective acquisition
anniversary dates, or more frequently if indicators of impairment are determined to exist. When testing for impairment, we consider
qualitative factors, and where determined necessary, we proceed to a goodwill impairment test. When applying the impairment test,
we apply a discounted cash flow model or an income approach in determining a fair value of the reporting unit on a total basis,
which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying
value of the reporting unit, no impairment of goodwill exists as of the measurement date. However, if the fair value is less than
the carrying value, then goodwill impairment exists and an impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value is recognized. However, the charge recognized would not exceed the total amount of goodwill.
During
the first quarter ended September 30, 2020, we completed the annual goodwill impairment assessment with respect to the goodwill
acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess
of their fair values over carrying value in prior years, and any material changes in the estimated cash flows of the reporting
units, and determined that it was more likely than not that the fair values of CCE and CoinFacts were greater than their respective
carrying values, including goodwill, and therefore, it was not necessary to proceed to an impairment test.
Stock-Based
Compensation
We
recognize stock-based compensation attributable to service-based equity grants over the service period based on the grant date
fair values of the awards. For performance-based equity grants with financial performance goals, we begin recognizing compensation
expense based on their respective grant date fair values when it becomes probable that we will achieve the financial performance
goals.
Restricted
Stock Awards: 2021, 2020 and 2019 Long Term Incentive Plans (“LTIPs”)
Retention
Restricted Service Shares (“RSUs”)
To
create incentives for the officers and other key employees (“LTIP Participants”) to remain in the Company’s
service, RSUs were granted to them as follows:
Annual
Grants. A total, net of forfeitures, of 16,864, 25,952 and 44,763 RSUs were granted in fiscal 2021, 2020 and 2019, respectively,
with vesting in three annual installments on the last day of the fiscal years following the grants, with the vesting of each such
installment contingent on the Participant remaining in the continuous service of the Company through the vesting date of that
installment.
If
a Participant’s continuous service with the Company ceases, for any reason whatsoever, including a termination of the Participant’s
employment with or without cause, prior to any vesting date or dates, the then unvested RSUs will be forfeited.
Fiscal
2021, 2020 and 2019 Performance Restricted Shares (“PSUs”)
To
create incentives for the LTIP Participants to focus their efforts on the achievement of increases in net cash flows (defined
as net cash generated by the Company’s operating activities, minus capital expenditures and capitalized software costs),
during the three years ending June 30, 2021, 2022 and 2023, (the “Performance Periods”), in fiscal 2021, 2020 and
2019, the Compensation Committee granted 33,728, 51,905 and 89,542 PSUs (at maximum) respectively, to the LTIP Participants. Vesting
of the PSUs was made dependent upon the achievement of net cash flow goals on an annual basis during the Performance Period, subject
to possible downward or upward adjustment of 20% of the PSUs, based on a comparison of the Company’s annualized total shareholder
return (“TSR”) for each Performance Period, to the annualized TSR of the Russell 2000 Index, for the same Performance
Period. As the Compensation Committee establishes performance goals on an annual basis, threshold, target and maximum net cash
flow goals were established for fiscal years 2021, 2020 and 2019 which give rise to a grant date for expense recognition purposes,
assuming it is probable that the goals will be achieved. Grant dates will be established for future year’s PSUs early in
those fiscal years which will give rise to grant dates for expense recognition purposes.
For
any of the PSUs to vest, a Participant must remain in the continuous service of the Company through June 30, 2021 for the fiscal
2019 PSUs, June 30, 2022 for the fiscal 2020 PSUs, and June 30, 2023 for fiscal 2021 PSUs and the threshold net cash flows goal
must be achieved in at least one of the years, during the three year Performance Period.
LTIP
related stock-based compensation expenses of $517,000 and $77,000 were recognized in the three months ended September 30, 2020
and 2019, respectively and comprise expense associated with the FY 2019, FY 2020 and FY 2021 LTIP awards for which expense is
recognized over the service period for RSUs and for PSUs as goals are established and it becomes probable that those goals will
be achieved.
Non
LTIP Stock Awards
In
the three months ended September 30, 2020, 10,812 fully vested shares were granted to management and new outside directors appointed
during the first quarter, for an expense of approximately of $503,000 for the quarter.
Total
stock-based compensation expense for all fully vested stock grants and all unvested RSUs and PSUs in the three months ended September
30, 2020 was $1,140,000 as compared to $264,000 in the three months ended September 30, 2019.
Results
of Operations for the Three Months Ended September 30, 2020 as compared to the Three Months Ended September 30, 2019
Net
Revenues
See
Recent Developments: COVID-19 in conjunction with the following discussion.
Net
revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including
trading cards and autographs, coins, and related special inserts, if applicable. To a lesser extent, we generate collectibles
related service revenues (which we refer to as “other related revenues”) from advertising and commissions earned on
our websites and in printed publications and collectibles price guides; subscription/membership revenues related to our CCE (dealer-to-dealer
Internet bid-ask market for certified coins), and Collectors Club memberships; and fees earned from promoting, managing and operating
collectibles trade shows. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which
consist primarily of coins that we have purchased under our coin authentication and grading warranty policy. We do not consider
such product sales to be the focus or an integral part of our ongoing revenue generating activities.
The
following tables set forth the information regarding our net revenues for the three months ended September 30, 2020 and 2019 (in
thousands):
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020 vs. 2019
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
%
|
|
Authentication and grading fees
|
|
$
|
28,697
|
|
|
|
93.2
|
%
|
|
$
|
18,101
|
|
|
|
89.6
|
%
|
|
$
|
10,596
|
|
|
|
58.5
|
%
|
Other related services
|
|
|
2,088
|
|
|
|
6.8
|
%
|
|
|
2,109
|
|
|
|
10.4
|
%
|
|
|
(21
|
)
|
|
|
(1.0
|
)%
|
Total revenues
|
|
$
|
30,785
|
|
|
|
100.0
|
%
|
|
$
|
20,210
|
|
|
|
100.0
|
%
|
|
$
|
10,575
|
|
|
|
52.3
|
%
|
The
following tables set forth certain information regarding the increases (decreases) in net revenues in our larger markets (which
are inclusive of revenues from our other related services) in the three months ended September 30, 2020 and 2019 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020 vs. 2019
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
%
|
|
Cards / autographs (1)
|
|
$
|
18,612
|
|
|
|
60.5
|
%
|
|
$
|
8,094
|
|
|
|
40.0
|
%
|
|
$
|
10,518
|
|
|
|
129.9
|
%
|
Coins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
9,166
|
|
|
|
29.8
|
%
|
|
|
8,690
|
|
|
|
43.0
|
%
|
|
|
476
|
|
|
|
5.5
|
%
|
China
|
|
|
1,570
|
|
|
|
5.1
|
%
|
|
|
1,308
|
|
|
|
6.5
|
%
|
|
|
262
|
|
|
|
20.0
|
%
|
France & Hong Kong
|
|
|
714
|
|
|
|
2.3
|
%
|
|
|
984
|
|
|
|
4.8
|
%
|
|
|
(270
|
)
|
|
|
(27.4
|
)%
|
Total Coins
|
|
|
11,450
|
|
|
|
37.2
|
%
|
|
|
10,982
|
|
|
|
54.3
|
%
|
|
|
468
|
|
|
|
4.3
|
%
|
Other (2)
|
|
|
723
|
|
|
|
2.3
|
%
|
|
|
1,134
|
|
|
|
5.7
|
%
|
|
|
(411
|
)
|
|
|
(36.2
|
)%
|
|
|
$
|
30,785
|
|
|
|
100.0
|
%
|
|
$
|
20,210
|
|
|
|
100.0
|
%
|
|
$
|
10,575
|
|
|
|
52.3
|
%
|
(1)
|
Consists
of revenues from our PSA trading card authentication and grading business and our PSA/DNA autograph authentication and grading
business.
|
|
|
(2)
|
Includes
the revenues generated by our CCE subscription business, Coinflation.com, Collectors.com, the Expos trade shows and sales
of products.
|
For
the three months ended September 30, 2020, our total revenues increased by $10,575,000, or 52.3% to a quarterly record of $30,785,000,
from $20,210,000 in the three months ended September 30, 2019. That increase was attributable to an increase of $10,596,000 or
58.5% in authentication and grading fees.
Revenues
from other related services in the three months ended September 30, 2020 were essentially the same as the three months ended September
30, 2019 at approximately $2,100,000, as we generated higher collectors club revenue (for both our cards / autographs and coin
businesses) and higher affiliate revenues which offset there being no Expos trade show in this year’s first quarter, due
to COVID-19.
Revenues
from our trading cards / autographs business showed accelerated growth in the three months ended September 30, 2020 as revenues
increased by 129.9% to a quarterly record of $18,612,000, due to record demand for our services over recent quarters. We have
been increasing capacity, primarily personnel, in recent quarters and again in this year’s first quarter. This allowed us
to increase the number of cards authenticated and graded, which combined with higher average service fees earned from customers
requiring faster turnaround times for their cards / autographs, resulted in the significant revenues increase. Although revenue
growth accelerated this quarter, our card / autographs business has achieved quarter-over-quarter revenue growth in 40 of the
last 41 quarters.
U.S.
coin revenues increased by 5.5% increase in this year’s first quarter as compared to the same quarter last year, and primarily
reflected (i) higher modern fees of $273,000, or 10%, due to higher number of modern coin authenticated and graded from recent
releases of coins by the U.S. Mint, and (ii) higher vintage revenues of $194,000 or 5.7%, primarily reflecting a slightly higher
average service fee earned due to the mix of coins authenticated and graded in the quarter. Those increases were partially offset
by lower coin show revenues in this year’s first quarter of $219,000 or 13%, due to the effects of COVID-19, as discussed
above under the Recent Developments: COVID-19.
Our
China operation continued to generate improved revenues, with revenue growing by $262,000, or 20.0%, as we added local authentication
and grading capacity in China to help offset the effect of travel restrictions that continue to prevent our U.S. coin experts
from travelling to China in support of authentication and grading events.
Revenue
generation at our Hong Kong and France offices also suffered due to the international travel restrictions and as a result, all
coins submissions comprising the Hong Kong and France revenues need to be authenticated and graded in the U.S. and returned to
those local offices, which delays turnaround times to customers and revenue generation at those offices.
Our
cards / autographs and coin authentication and grading revenues represented approximately 98% of total revenues in the current
quarter and reflects the continued importance of those two businesses to our overall financial performance.
For
the reasons discussed above under “Factors That Can Affect our Revenues and Gross Profit Margin”, and “Impact
of Economic Conditions on our Financial Performance”, the level of coin revenues can be volatile.
With
respect to our cards and autographs business, we plan on continuing to increase personnel and authentication and grading capacity
to address the continued record backlog in that business. In addition, in early October 2020, we leased additional space which
will enable us to support the continued growth of our cards and autographs business.
As
previously disclosed, our second fiscal quarter ending December 31, 2020, is typically our seasonally slowest quarter of the year
for coins in the United States due to the winter holidays that occur in that quarter and we expect that trend to continue this
year. See also Recent Developments: COVID-19.
With
respect to China, we will continue to focus on increasing local capacity to offset the travel restrictions discussed above which
we expect will result in progressive revenue growth in future quarters.
Gross
Profit
Gross
profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percent
of net revenues. The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles,
production costs, credit card fees, warranty expense and occupancy, security and insurance costs that directly relate to providing
authentication and grading services. Cost of revenues also includes printing, other direct costs of generating our non-grading
related services revenues and the costs of product revenues, which represent the carrying value of the inventory of products (primarily
collectible coins) that we sold and any inventory related reserves, considered necessary.
Set
forth below is information regarding our gross profit in the three months ended September 30, 2020 and 2019 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amounts
|
|
|
% of Revenues
|
|
|
Amounts
|
|
|
% of Revenues
|
|
Gross profit
|
|
$
|
19,311
|
|
|
|
62.7
|
%
|
|
$
|
12,109
|
|
|
|
59.9
|
%
|
As
indicated in the above table, our gross profit margin was 62.7% for the three months ended September 30, 2020 as compared to 59.9%
in the same period of the prior year. The higher gross profit margin in this year’s first quarter was due to the higher
average service price (“ASP”) earned in our cards and autographs business, mainly resulting from customers paying
higher ASPs to improve the turnaround times of their trading card submissions. As discussed in prior filings, there can be variability
in the gross profit margin due to the mix of revenues within our businesses, and seasonality (which will primarily impact our
U.S. coin business, since we have a record backlog of card submissions). During the three years ended June 30, 2020, our quarterly
gross profit margins varied between 53% and 62%.
Selling
and Marketing Expenses
Selling
and marketing expenses include advertising and promotions costs, trade-show related expenses, customer service personnel costs,
business development incentives, depreciation and outside services. Set forth below is information regarding our selling and marketing
expenses in the three months ended September 30, 2020 and 2019 (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Selling and marketing expenses
|
|
$
|
2,269
|
|
|
$
|
2,633
|
|
Percent of net revenue
|
|
|
7.3
|
%
|
|
|
13.0
|
%
|
As
indicated in the above table, selling and marketing expenses decreased to 7.3% of net revenues in the three months ended September
30, 2020, as compared to 13.0% in the same period of the prior year. In absolute dollars, selling and marketing expenses decreased
by $364,000 in this year’s first quarter, primarily due to the cancellation of the National Sports Collection Convention
and the PNG/ANA Numismatic Trade shows due to COVID-19. Those cost savings were partially offset by higher business development
and customer service personnel costs, due to the growth of our cards and autographs business.
General
and Administrative Expenses
General
and administrative (“G&A”) expenses are comprised primarily of compensation paid to general and administrative
personnel, including executive management, finance and accounting and information technology personnel, non-cash stock-based compensation
expense, facilities management costs, depreciation, amortization and other miscellaneous expenses. Set forth below is information
regarding our G&A expenses in the three months ended September 30, 2020 and 2019, (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
General and administrative expenses
|
|
$
|
9,233
|
|
|
$
|
4,839
|
|
Percent of net revenue
|
|
|
30.0
|
%
|
|
|
24.0
|
%
|
As
indicated in the above table, G&A expenses increased to 30.0% of revenues in the three months ended September 30, 2020 as
compared to 24.0% in the same period of the prior year. In absolute dollars, G&A expenses increased by $4,394,000 in this
year’s first quarter as compared to last year’s first quarter and included (i) higher professional fees of $2,235,000
incurred in connection with the activist issue and the recruitment of new board members (ii) higher G&A payroll costs of $993,000
(which was inclusive of higher incentive costs of $645,000 due to the improved performance of the business) and (iii) higher non-cash
stock based compensation costs of $885,000 (see below).
Stock-Based
Compensation
As
discussed in Note 1, to the Company’s condensed consolidated financial statements, included elsewhere in this report, and
Critical Accounting Policies above, the Company recognized stock-based compensation expense as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
Included In:
|
|
2020
|
|
|
2019
|
|
Selling and marketing expenses
|
|
$
|
8
|
|
|
$
|
17
|
|
General and administrative expenses
|
|
|
1,132
|
|
|
|
247
|
|
|
|
$
|
1,140
|
|
|
$
|
264
|
|
The
increase in non-cash stock based compensation to $1,140,000 in the three months ended September 30, 2020 as compared to $264,000
in the three months ended September 30, 2019 included (i) the grant of fully vested shares with grant date fair values of $503,000
to management and new outside directors during the quarter and (ii) increased expense of $440,000 recognized under the Company’s
multi-year LTIPs. The expense attributable to the LTIP PSUs is recognized, based on a grant date fair value set when the annual
net cash flow goals are established, and it is probable that those goals will be achieved.
The
following table sets forth unrecognized non-cash stock-based compensation expense totaling $5,554,000 related to unvested stock-based
equity awards outstanding at September 30, 2020, which represents the expense currently expected to be recognized through June
30, 2023, on the assumption that the holders of the equity awards will remain in the Company’s service through that date.
The amounts do not include the costs of (i) possible grants of additional stock-based compensation awards in the future, and (ii)
PSUs granted in fiscal 2021 and 2020, for which goals are to be established in fiscal 2022 and 2023.
Fiscal Year Ending June 30,
|
|
Amount
(in thousands)
|
|
2021 (remaining 9 months)
|
|
$
|
3,492
|
|
2022
|
|
|
1,523
|
|
2023
|
|
|
539
|
|
|
|
$
|
5,554
|
|
Income
Tax Expense
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Income tax expense
|
|
$
|
1,865
|
|
|
$
|
1,095
|
|
The
income tax provisions in the three months ended September 30, 2020 and 2019, were determined based on estimated annual effective
tax rates of approximately 24%, and 23%, respectively. Both three-month periods were adjusted for excess tax benefits or deficiencies.
Liquidity
and Capital Resources
Cash
and Cash Equivalent Balances
Historically,
we have been able to rely on internally generated funds, rather than borrowings, as our primary source of funds to support our
operations, because many of our authentication and grading customers pay our fees at the time they submit their collectibles to
us for authentication and grading or prior to the shipment of their collectibles back to them. In addition, as discussed below,
we have borrowings of $1.5 million at September 30, 2020 under our Term Loan and we have $15 million of availability, but no borrowings,
under our Revolving Line of Credit.
At
September 30, 2020, we had cash and cash equivalents of approximately $36,731,000, as compared to cash and cash equivalents of
$28,640,000 at June 30, 2020.
Cash
Flows
Cash
Provided by Operating Activities. During the three months ended September 30, 2020 and 2019, net cash provided by continuing
operating activities was $11,693,000 and $4,336,000, respectively. The increase in cash provided by operating activities in the
three months ended September 30, 2020, reflects the significantly higher operating results of our businesses in this year’s
first quarter, as adjusted for non-cash expenses and changes in working capital. The higher level of accrued expenses and deferred
revenues at September 30, 2020, reflect approximately $1.8 million of accrued professional fees incurred in connection with the
activist issue and the recruitment of new board members and an increase in deferred revenues of $1.4 million in prepaid Collector
Club memberships, resulting from an increase in the number of Collectors Club members in the quarter.
Cash
used in Investing Activities. Investing activities used cash of $1,588,000 and $490,000 in the three months ended September
30, 2020 and 2019, respectively. In the three months ended September 30, 2020, we used $1,207,000 for capital expenditures (comprising
IT and infrastructure costs incurred with the addition of operations personnel to increase capacity, combined with on-going tooling
requirements to support the growth of the business) and $381,000 for capitalized software costs. In the three months ended September
30, 2019, we used $211,000 for capital expenditures and $279,000 for capitalized software costs.
Cash
used in Financing Activities. In the three months ended September 30, 2020 and 2019, financing activities used net cash of
$2,014,000 and $1,771,000, respectively. The cash dividends paid to stockholders was $1,588,000 in three months ended September
30, 2020, as compared to $1,583,000 in the three months ended September 30, 2019. In both the three months ended September 30,
2020 and 2019, we repaid $188,000 under our Term Loan (see “Term Loan” below) and in the three months ended September
30, 2020, we repurchased shares of our common stock for $238,000 to satisfy tax withholdings for employee vested shares under
our equity incentive programs.
Outstanding
Financial Obligations
Lease
Obligations
The
Company has various operating lease commitments for facilities and equipment some of which contain renewal options. On February
3, 2017, the Company, as tenant, entered into a triple net lease pursuant to which the Company was leasing at September 30, 2020
approximately 62,755 rentable square feet space for its operations and headquarters facility. As of September 30, 2020, the remaining
aggregate minimum obligations over the term of the lease was approximately $11.7 million. See Subsequent Events to the
Condensed Consolidated Financial Statements included elsewhere in this document which discusses the amendment to this lease
to increase the rentable square feet by 62,870 as of October 1, 2020, for a total of 125,625 square feet of space occupied.
We
also lease smaller offices for our overseas operations including a five year lease for our Shanghai office that commenced in November
2017, with aggregate minimum obligations over the term of the lease of approximately $3.0 million and a three year lease for our
offices in Hong Kong, which commenced in July 2018, with aggregate minimum obligations over the term of that lease of approximately
$625,000.
At
September 30, 2020, future minimum lease payments under the lease agreements associated with our operations were as follows (in
thousands):
Year
Ending June 30,
|
|
Gross Amount
|
|
2021
(remaining 9 months)
|
|
$
|
1,930
|
|
2022
|
|
|
2,166
|
|
2023
|
|
|
1,671
|
|
2024
|
|
|
1,473
|
|
2025
|
|
|
1,470
|
|
Thereafter
|
|
|
5,070
|
|
|
|
$
|
13,780
|
|
Term
Loan. As previously reported, on September 15, 2017 the Company obtained a five-year, $3,500,000 unsecured term loan.
In October 2018, the Company began repaying the then loan balance of $3,000,000 in 48 equal monthly principal payments of $62,500
or $750,000 on an annual basis, through September 2022. There are no prepayment penalties on loan repayments.
The
agreement governing the term loan contains two financial covenants, which require the Company to maintain (a) a funded debt coverage
ratio and (b) a debt service coverage ratio, respectively. The loan agreement also contains certain other covenants typical for
this type of loan, including a covenant which provides that, without the bank’s consent, the Company may not incur additional
indebtedness for borrowed money, except for (i) borrowings under the Company’s revolving credit line, (ii) purchase money
indebtedness and (iii) capitalized lease obligations. The Company was in compliance with those loan covenants at September 30,
2020.
At
September 30, 2020, the Company had $1,500,000 of outstanding borrowings under this Term Loan of which $750,000 is classified
as a current liability and $750,000 is classified as a long-term liability in the condensed consolidated balance sheet at September
30, 2020, included elsewhere in this Report.
Revolving
Credit Line. On March 10, 2020 the Company amended and increased its $10 million unsecured revolving credit line (the “Credit
Line”) to $15 million and extended the term for two years through March 2022. The Company is entitled to obtain borrowings
under the Credit Line at such times and in amounts as it may request, as supported by an EBITDA (earnings before interest, taxes,
depreciation and amortization) calculation for the last four quarters, provided that the maximum principal amount of the borrowings
that may be outstanding at any one time under the Credit Line may not exceed $15 million and each year there must be a period
of 30 consecutive days during which no borrowings are outstanding. The Company also may, at any time or from time to time and
at its option, repay outstanding borrowings, in whole or in part, and may reborrow amounts so repaid at such times and in such
amounts as it deems appropriate.
Credit
Line borrowings bear interest, at the Company’s option, either at LIBOR plus 2.25% or at 0.25% below the highest prime lending
rate published from time to time by the Wall Street Journal. The Company is required to pay a quarterly unused commitment fee
of 0.0625% of the amount by which (if any) that the average of the borrowings outstanding under the Credit Line in any calendar
quarter is less than $6 million.
The
Credit Line agreement contains a financial covenant that requires the Company to maintain a funded debt coverage ratio, similar
to the debt coverage ratio that is applicable to the term loan (see above) and certain other covenants typical for this type of
credit. At September 30, 2020 the Company was in compliance with those covenants. Availability to borrow under the line of credit
was $15,000,000 at September 30, 2020 as there were no borrowings outstanding under the line of credit as of September 30, 2020.
Dividends.
Our current dividend policy calls for us to pay quarterly cash dividends of $0.175 per share of common stock to our stockholders,
for an expected total annual cash dividend of $0.70 per common share.
The
declaration of cash dividends in the future, pursuant to our current dividend policy, is subject to determination each quarter
by the Board of Directors based on a number of factors, including the Company’s financial performance, its available cash
resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate
a greater return on investment for the Company. For these reasons, as well as others, there can be no assurance that the Board
of Directors will not decide to reduce the amount, or suspend or discontinue the payment, of cash dividends in the future.
Future
Uses of Cash.
We
plan to use our cash resources, consisting of available cash and cash equivalent balances, internally generated cash flows, and
borrowings under our Credit Line (i) to introduce new collectibles related services and initiatives for our existing and new customers
(ii) to fund the expansion of our business (domestically and internationally); (iii) to fund capital expenditures and working
capital requirements; (iv) to fund possible start-ups or acquisitions of businesses (v) to fund repayments under the term loan;
(vi) to fund the payment of cash dividends; and (vii) for other general corporate purposes.
Although
we have no current plans to do so, we also may seek additional borrowings and we may issue additional shares of our stock to finance
the growth and international expansion of our businesses. However, there is no assurance that we would be able to raise additional
borrowings or capital on terms acceptable to us, if at all.
Recent
Accounting Pronouncements
In
June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instrument. Subsequent to the issuance of ASU 2016-13, the FASB clarified the guidance through
several ASUs. The collective new guidance (ASC 326) generally requires entities to use a current expected credit loss model, which
is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an
impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The
entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable
forecasts. ASC 326 is effective for annual and interim fiscal reporting periods beginning after December 15, 2022, with early
adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is continuing to evaluate the expected
impact of this ASC 326 but does not expect it to have a material impact on its consolidated financial statements upon adoption.