COLLECTORS UNIVERSE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the "Selected Consolidated Financial Data" included above and our Consolidated Financial Statements and the related notes, included below in this Part II of this Annual Report. This discussion also should be read in conjunction with the information in Item IA of Part I of this Report, entitled "Risk Factors," which contains information about certain risks and uncertainties that can affect our business and our financial performance in the future. Introduction and Overview Our BusinessCollectors Universe, Inc. ("we", "us" "our" or the "Company") provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs, and 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 and collectors and consumers that own, buy and sell such collectibles. We principally generate revenues from the fees paid by our customers for our authentication and grading services. To a much lesser extent, we generate revenues from "other related revenues" which consist of: (i) the sale of advertising and commissions earned on our websites; (ii) the sale of printed publications, and advertising in those publications; (iii) the sale of membership subscriptions in ourCollectors Club , which is designed primarily to attract interest in collectibles among collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins; and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from sales of our collectibles inventory, which is primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus of nor an integral part of, our on-going revenue generating activities.
Recent Developments: Coronavirus ("COVID-19")
Despite COVID-19, our business achieved record revenues of$78.9 million and operating income of$14.1 million in fiscal 2020 as compared to revenues of$72.5 million and operating income$14.3 million in fiscal 2019. Set forth below is a summary of the impact of COVID -19 on fiscal 2020 and what we believe, at this time, could be the possible future effects on our business. As previously reported, onMarch 20, 2020 we shut down our authentication and grading operations inCalifornia as a result of a state-wide "shelter-in-place" and "stay-at-home" orders issued by the Governor ofCalifornia . As a result, in the third quarter endedMarch 31, 2020 (which is typically our biggest revenue quarter of the year), our revenues declined by$0.7 million , or 4%, as compared to the third quarter of fiscal 2019 and as compared to a 19% growth in revenues in the first half of fiscal 2020. Furthermore, our operating income declined by$2.1 million , or 45%, as compared to the third quarter of fiscal 2019 and as compared to a 57% increase in operating income in the first half of fiscal 2020. Contributing to the decrease in operating income in this year's third quarter was our decision to continue paying the salaries of all employees throughMarch 31, 2020 despite closing our operations onMarch 21, 2020 .
? On
and collectors of investment assets, consisting of coins and other high-value
collectibles, in selling and increasing the liquidity of those assets. At that
time, we implemented 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 were
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 clerical personnel working remotely.
With the safety measures in place we ramped up our operations and resumed
accepting submissions from customers in May and
autographs business already had a strong backlog of submissions for
authentication and grading prior to the closure of our operations in March
2020. As a result, we generated record revenues of
operating income of
compared to revenues of
the fourth quarter of fiscal 2019. In addition, we increased our cash and cash
equivalents from
2020. See Quarterly Results of Operations below which highlights certain
additional costs in this year's fourth quarter.
29
? Our Expos
of fiscal 2020 and the first quarter of fiscal 2021 were 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 concerns that will limit
the numbers of dealers and attendees at future shows. As a result, in the
fourth quarter of fiscal 2020, we recognized a non-cash impairment charge of
assets of that business, which reduced operating income in the fourth quarter.
? We earn higher average service fees for onsite authentication and grading
activities at coin and to a lesser extent, trading card trade shows. In the
fourth quarter of fiscal 2020, coin trade shows were cancelled due to social
distancing issues and travel restrictions, which mostly eliminated our trade
show revenues in the quarter, although when possible, we requested customers
to redirect potential show submissions to our
for authentication and grading.
the PNG/ANA Numismatic Trade Show which are the largest trade shows for our
cards and autographs and coin businesses, which had been scheduled for July
and
which, if any, trade shows will occur in the first and future quarters of
fiscal 2021 although, we expect to be able to conduct and/or replace some of
the cancelled
events. In addition, we will continue to, when possible, redirect trade show
submissions to our
grading.
? There continues to be uncertainty as to the
schedule for modern coin programs through the end of the calendar year 2020,
although to date in the first quarter of fiscal 2021 our domestic modern coin
revenues are at the same levels during the same period of last year's first
quarter.
? Our
revenues than in the third quarter (as COVID-19 led to the disruption of the
for authentication and grading in
difficult to ramp up our operations in
due to the continuing travel restrictions, that prevent our
from travelling to
there.
? Despite the uncertainties arising from COVID-19 discussed above, our cards and
autographs business had a record backlog as of
experience strong customer submissions. To address that backlog, we have been
increasing operating capacity in the first quarter of fiscal 2021, with the
objective of improving the performance of those parts of the business that
continue to have a strong demand for our services. We will also be seeking to
identify and take advantage of opportunities that may present themselves in
other parts of the business where demand for our services are currently
uncertain.
Factors That Can Affect Operating Results and our Financial Position in Addition to COVID-19
Factors That Can Affect our Revenue. Our authentication and grading fees accounted for approximately 90% of our total net revenues in the year endedJune 30, 2020 . The amounts of those fees are primarily driven by the volume and mix of coins and trading cards and collectibles sales and purchase transactions by collectibles dealers and collectors, because our authentication and grading services generally facilitate sales and purchases of coins and trading cards 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 coins, trading cards and autographs to us for authentication and grading at those times when they are in the market to sell or buy those collectibles. The amounts of our authentication and grading revenues are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards, (ii) in the case of coins and trading cards, the "turnaround" times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or "classic" coins and trading cards, on the one hand, and modern coins and trading cards, on the other hand, because, vintage or classic collectibles are of significantly higher value and justify a higher average service fee.
30
OurU.S. coin authentication and grading revenues are also impacted by the volume of modern coin submissions, which can fluctuate from period to period, depending on the timing and size of modern coin marketing programs conducted by theUnited States Mint and by customers or dealers who specialize in sales
of such coins. Our revenues are also affected by the volume of coin authentication and grading submissions we receive at collectibles trade shows where we provide on-site authentication and grading services to show attendees, because they typically request higher-priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. The level 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 short-term changes in the prices of gold that can occur around the time of the shows, because gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows. Due to mix issues discussed above, the number of collectibles authenticated and graded, and the fees that they generate can vary by period between coins, and cards and autographs. For example, the total numbers of collectibles authenticated and graded by the Company was approximately 5.0 million, 4.6 million and 4.8 million units in fiscals 2020, 2019 and 2018, respectively, of which, coins represented 42%, 47% and 59%, in fiscals 2020, 2019 and 2018, respectively, and cards and autographs represented 58%, 53% and 41%, in the same respective periods. Coin fees represented 55%, 62% and 68%, of total authentication and grading fees in fiscals 2020, 2019 and 2018, respectively, and cards and autographs fees represented 45%, 38% and 32% of those fees in the same respective periods, as average service fees are generally higher for coins than for cards and autographs, and for vintage units than for modern units. See Results of Operations:Net Revenues below, which discusses revenues in greater detail.
Five of our customers (all of which were coin customers) accounted, in the aggregate, for approximately 10%, 11% and 16% of our total net revenues in the years endedJune 30, 2020 , 2019 and 2018, respectively. In fiscal 2018 a banking channel customer inChina , accounted for about 6% of net revenues. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations. Factors Affecting our Gross Profit Margins. The gross profit margins we earn on collectibles authentication and grading submissions are impacted by many of the same factors that impact our revenues, as the average service fee and the resulting gross profit margin earned is affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (ii) in the case of both coins and trading cards, the "turnaround" times requested by our customers, because we charge higher fees for faster service times, and (iii) the level of other related revenues in any reporting period. In addition, because a significant proportion of our costs of sales are relatively fixed, our gross profit margin is also affected as we build authentication and grading capacity in response to the record cards and autographs backlog (as there is a delay between incurring the cost of additional capacity and the resulting full revenue benefits) and by the overall volume of collectibles that we authenticate and grade in any period. Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected primarily 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 high-value collectibles are generally purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of theU.S. dollar, and uncertainties regarding the strength of the economy inthe United States ,Western Europe andChina , 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 theU.S. currency; as well as an alternative to investments in government bonds and other treasury instruments; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of gold coins, as well as other hard assets 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 and the availability of lower cost borrowings, 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 theU.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by 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 securities or 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. SinceJuly 1, 2020 , gold prices have increased inthe United States which we believe is due primarily to the economic uncertainties created by the COVID-19 pandemic. Based on historical experience, strong gold prices can over time lead to increases in coin authentication and grading submissions to us. 31
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 for authentication and grading, or prior to the shipment of the collectible back to them. As a result, historically, we have been able to rely on internally generated cash to fund our continuing operations. However, as discussed in note 7 to the Consolidated Financial Statements included elsewhere in this Annual Report, and in "Liquidity and Capital Resources-Outstanding Financial Obligations" below, to augment our cash resources, inMarch 2020 the Company increased its revolving and unsecured credit line to$15 million from$10 million and extended its line of credit by two years. In addition, in the first half of fiscal 2018, the Company borrowed$3 million under an unsecured term loan, primarily to fund capital expenditures and costs associated with the move to our new operations and headquarters facility, in the second quarter of fiscal 2018. In addition to the operating performance of our businesses, and in particular our coin and cards and autographs authentication and grading businesses, which account for over 90% of our revenues, our overall financial position can also be affected by other factors, including the Company's tax position and effective tax rates, our obligation to repay borrowings under our Term Loan, the dividend policy adopted by the Board of Directors from time to time, the level of capital expenditures, the decisions to invest in and to fund start-ups of or the acquisition of new businesses and any capital raising activities or stock repurchases. Furthermore, our domestic cash position can be impacted by delays in the timing of the repatriation of cash balances back tothe United States fromChina , due to the exchange control regulations inChina . OnFebruary 4, 2018 , the Board of Directors approved a reduction in the amount of our future quarterly cash dividends to$0.175 per share, from$0.35 per share, primarily to provide the Company with additional cash that the Board of Directors believes will be needed to grow the Company's existing businesses, to fund other potential growth opportunities and to enhance the Company's financial flexibility. The Board of Directors also concluded that this change in dividend will make the payment of future cash dividends sustainable for a longer period of time.
We currently expect that internally generated cash flows, current cash and cash equivalent balances and availability of borrowings under our revolving line of credit, will be sufficient to fund our continuing operations at least through the end of fiscal 2021. Trends in our Businesses Our overall financial performance is largely dependent on the performance of our coins and trading cards and autographs authentication and grading businesses which can be impacted by the matters as discussed above. Although our coin business, which accounted for 53%, 57% and 63% of consolidated revenues in fiscal 2020, 2019 and 2018, respectively, continues to be our largest business, our cards and autographs business is growing more rapidly than our coin business and accounted for 43%, 36% and 31% of our consolidated revenues in fiscal 2020, 2019 and 2018, respectively. Our quarterly results can also be significantly impacted by seasonality and the timing of revenues from modern coin programs (that are largely dependent on new coins issuances from the US Mint) and the number of tradeshows or grading events that occur in a quarter both domestically and overseas. Our cards and autographs business is less affected by seasonality, due to the record backlog and strong customer submissions currently being experienced by that business. See "Factors That Can Affect our Revenue" above. 32
Overview of Fiscal 2020 Operating Results
The following table sets forth comparative financial data for the years ended
Year Ended June 30, 2020 Year Ended June 30, 2019
Percent of Percent of
Amount Revenues Amount Revenues
Net revenues $ 78,891 100.0 % $ 72,453 100.0 %
Cost of revenues 33,655 42.7 % 30,153 41.6 %
Gross profit 45,236 57.3 % 42,300 58.4 %
Selling and marketing
expenses 9,436 11.9 % 10,361 14.3 %
General and administrative
expenses 21,212 26.9 % 17,597 24.3 %
Impairment Charge 486 0.6 % - -
Operating income 14,102 17.9 % 14,342 19.8 %
Interest income, (expense)
net 78 0.1 % (69 ) (0.1 )%
Other income (expense) 15 - (148 ) (0.2 )%
Income before provision for
income taxes 14,195 18.0 % 14,125 19.5 %
Provision for income taxes 3,409 4.3 % 4,148 5.7 % Net Income$ 10,786 13.7 %$ 9,977 13.8 % Net income per diluted share:$ 1.19 $ 1.11
Despite the adverse impact of COVID-19, on our third and fourth quarters of fiscal 2020, net revenues increased by$6.4 million , or 9%, to a record$78.9 million in fiscal 2020, from$72.5 million generated in fiscal 2019. The increase, primarily comprised (i) increased cards and autographs revenues of$7.2 million or 27%, and (ii) increasedChina revenues of$1.0 million or 24%, partially offset by decreases in our other coin revenues of$0.8 million . In addition, revenues from our non-grading and authentication businesses and activities, decreased by$1.0 million . Operating income was$14.1 million in fiscal 2020 as compared to$14.3 million in fiscal 2019 and reflected (i) higher general and administrative expenses in fiscal 2020, including approximately$1.0 million of pre-trial litigation settlements and approximately$0.6 million of higher non-cash stock based compensation and (ii) an impairment charge of$0.5 million , related to our
Expos
trade show business.
These, as well as other factors affecting our operating results are described in
more detail below. Also, see "Recent Developments: Coronavirus ("COVID-19")",
above in this Item 7 and "Factors that Can Affect our Operating Results and
Financial Position" and "Results of Operations", below.
Critical Accounting Policies and Estimates
General. In accordance with accounting principles generally accepted inthe United States of America ("GAAP"), we record our assets at the lower of cost, net realizable value or fair value. In determining the fair value of certain of our assets, principally accounts receivable, inventories, goodwill, capitalized software and intangible assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or circumstances that could impact, for example our ability to fully collect our accounts receivable or realize the value of our inventories, in future periods. Those judgments, estimates, and assumptions are based on current information available to us at the time we make such determinations. Many of these conditions and circumstances on which our judgments or estimates are based; however, are outside of our control and, if changes were to occur in the events, or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates. Changes in such estimates may require that we reduce the carrying values of the affected assets on our balance sheet (which are commonly referred to as "write-downs" of the assets involved). 33
It is our practice to establish reserves, allowances, charges or losses to record such downward adjustments or write-downs in the carrying values of assets, such as, for example, accounts receivable and inventory. Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the period when those reserves, allowances, charges or losses are established or increased to take account of changed conditions or events. As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations. The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments and judgments about the effects and duration of events or changes in circumstances. For example, it is difficult to predict whether events or conditions, such as COVID-19, changes in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for their full effects to be recognized. Therefore, we make such estimates based upon the information available to us at that time and reevaluate and adjust the Company's reserves, allowances, charges or losses on a quarterly basis. On a quarterly basis, we make estimates or judgements with respect to the (i) valuation of stock-based compensation awards and the timing and recognition of related stock-based compensation expense for the performance shares that are part of the Company's Long-Term Incentive Plans, (ii) the amount and adequacy of warranty reserves, (iii) the provision for income taxes and the timing of related valuation allowances, (iv) the carrying value of capitalized software costs (v) the valuation of coin and grading consumable inventory, (vi) the impairment of goodwill and other intangible assets and (vii) litigation related accruals. In making our estimates and assumptions, we follow GAAP in order to make fair and consistent estimates of the fair value of assets and to establish adequate reserves, allowances, charges or losses for possible write-downs in the carrying values of our assets or the recognition of liabilities. Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition
and results of operations. Leases EffectiveJuly 1, 2019 the Company adopted Accounting Standards Codification ("ASC") 842 Accounting for Leases and recognized lease obligations and corresponding right-of-use (ROU) assets for its existing non-cancelable operating leases. The core principle of this guidance is that a lessee should recognize the assets and liabilities that arise from leases. Therefore, the Consolidated Balance Sheet atJune 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 elected not to recognize lease assets and liabilities for leases with a term of 12 months or less and are recognizing lease expenses for such leases on a straight-line basis over the lease term. The Company adopted this new accounting guidance, utilizing the current period adoption method without revising comparative periods and elected not to reassess existing leases. The new standard provides a number of optional practical expedients in transition. The Company elected to use the package of practical expedients that allows us to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. In addition, the new standard provides for an accounting election that permits a lessee to elect not to apply the recognition requirements of Topic 842 to short-term leases by class of underlying asset. The Company adopted this accounting election for all classes of assets. The Company's leases consist primarily of office facilities and the adoption of the new lease standard onJuly 1, 2019 resulted in the recognition of right-of-use assets of approximately$9.8 million and lease liabilities for operating leases of approximately$13.6 million on the consolidated balance sheets, with no material impact on the consolidated statements of operations or consolidated statements of cash flows. See "Note 9-Leases" 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 atJune 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 fiscal 2020. Our other sources of revenues represent the balance of our revenues which are small and individually account for less than five percent of total revenues.
In accordance with ASC 606 we recognize revenue for our main revenue streams as follows:
34 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 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. See Warranty Costs below. Collectors Club Revenues: These revenues represent membership fees paid by customers for annual memberships in ourCollectors 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. In the event vouchers expire unused (i.e. there are unexercised customer rights), we consider the guidance under ASC 606 in determining when to recognize revenue. Certified Coin Exchanges 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". During fiscal 2020, we recognized revenue for substantially all of the deferred revenue balance of$3,428,000 atJune 30, 2019 . 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. Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an ongoing basis. We regularly review our accounts receivable and exercise judgment in estimating the amounts of, and establish an allowance for, uncollectible accounts in each quarterly period. The amount of that allowance is based on several factors, including the age and extent of significant past due accounts and known conditions or trends that may affect the ability of account debtors to pay their accounts receivable balances. Each quarter we review our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of our specific account debtors to pay their accounts in full. Since the allowance is increased by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause an increase in such expenses. AtJune 30, 2020 and 2019, the allowance for doubtful accounts was$98,000 , and$72,000 , respectively. 35 Inventory Valuation Reserves. Our collectibles inventories, which consist of collectible coins that we have purchased pursuant to our coin warranty program and other consumable inventory related to our authentication and grading activities, are valued at the lower of cost or estimated fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories below their carrying values. The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sales value of the collectibles inventories. Additionally, due to the relative uniqueness and special features of some of the collectible coins included in our collectibles inventory and the volatility in the prices of precious metals, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products. As a result, we review the estimated market values of the collectibles in our inventory on a quarterly basis and make adjustments to the valuation reserve that we believe are necessary or prudent based on our judgments regarding these matters. In the event that a collectible is sold for a price below its carrying value, we record a charge to cost of services. In addition, we review our other consumable inventory on a regular basis for recoverability and expected future usage and, if considered necessary, establish reserves for those items that have no future value to us. AtJune 30, 2020 and 2019, gross inventories were$3,584,000 and$3,243,000 , respectively, and inventory reserves were$1,072,000 and$1,278,000 , respectively. See Note 3 to the Consolidated Financial Statements. If we liquidate collectible coins at amounts below their carrying values, we may incur losses in excess of our recorded inventory reserves. Warranty Costs. We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if a coin or trading card that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible for a price equal to the value of collectible at its original grade, or, at the customer's option, pay the difference between the value of the collectible at its original grade as compared with the value at its lower grade. However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item or if we otherwise determine that the collectible had been altered after we had authenticated and graded it. If we purchase an item under a warranty claim, we recognize the difference in the value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve. We include the purchased item in our inventory at the estimated value of the re-graded collectible, which will be lower than the price we paid to purchase the item. We accrue for estimated warranty costs based on historical trends and related experience, and we monitor the adequacy of our warranty reserve on an ongoing basis. There also are a number of factors that can cause the estimated values of the collectibles purchased under our warranty program to change over time and, as a result, we review the market values of those collectibles on a quarterly basis (see Inventory Valuation Reserves above). However, once we have classified such items as inventory and they have been held in inventory beyond the end of the fiscal quarter in which we purchased them, we classify any further losses in the estimated fair value of the items or the subsequent disposal of such items, as part of the gain or loss on product sales on a quarterly basis.
We recognized warranty expense of
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 formal goodwill impairment test in accordance with FASB 2017-04 on Simplifying the Test for Goodwill Impairment. We use a discounted cash flow model or an income approach to estimate the 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. If the fair value is less than the carrying value, we recognize goodwill impairment for that difference. 36
During the first quarter of fiscal 2020, which endedSeptember 30, 2019 , we completed the annual impairment evaluations 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 fair values over carrying values in prior years, and any material changes in the estimated cash flows of those reporting units, and determined that it was more likely than not that the respective fair values of CCE and CoinFacts exceeded their respective carrying values, including goodwill, and as a result, there was no impairment. There were no impairment triggers identified for these businesses throughJune 30, 2020 . With respect to our Expos trade show business, we typically perform our annual goodwill impairment evaluation as ofJune 30 of each fiscal year. As a result of COVID-19 and as discussed under Recent Developments: Coronavirus ("COVID-19") above, we concluded that the Expos business was impaired, due to two shows having already been cancelled and the uncertainty as to the future viability of that business as a result of social distancing and the timing of future shows. Therefore atJune 30, 2020 , we recognized an impairment charge for the remaining Expos goodwill of$458,000 . Long-Lived Assets Other Than Goodwill. We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment. Such reviews occur annually, or more frequently, if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full. In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred. If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write-down the asset to its estimated fair value. As discussed above underGoodwill , we concluded that Expos business was impaired and therefore atJune 30, 2020 , we recognized an impairment charge for the remaining intangible assets of$28,000 . Stock-Based Compensation Expense. Stock-based compensation expense is measured at the grant date fair value of a restricted share awards and is recognized as expense over the employee's or non-employee director's requisite service period, which is generally the vesting period of the award. However, if the vesting of a stock-based compensation award is subject to satisfaction of a performance requirement or condition, stock-based compensation expense is recognized if, and when, (i) performance goals have been established for the vesting of shares and (ii) it is determined that the achievement of the performance requirement or condition (and therefore, the vesting of the award) has become probable. If stock-based compensation is recognized due to a determination that a performance condition has become probable, but it is subsequently determined that the performance condition was not met in the expected vesting period, then if the shares may still vest in future periods, we will extend the period over which the remaining expense would be recognized. If the award fails to vest, or we conclude that it is not probable the shares will vest, then all previously recognized expense with respect to that performance condition would be reversed. Stock Awards In recent years, to create incentives for management, to remain in the service of the Company and to drive cash generation, restricted stock awards are made on an annual basis to officers and key employees under Long Term Incentive Plans ("LTIPs") comprising service-based awards ("RSUs") and performance based-awards ("PSUs"). In addition, there are annual RSU awards to directors for their annual services as directors and special awards to certain officers or employees, at the discretion of the Compensation Committee of the Board of Directors. In all instances for the awards to vest the employee or outside director must provide continuous service through the vesting date of the award. In the event of a termination of continuous service, for any reason, prior to its vesting date, the award is forfeited.
Fiscal 2020, 2019 and 2018 LTIP Awards
RSUs
One Time Award. A total, net of forfeitures, of 17,505 RSUs were awarded in
37 Annual Awards. A total, net of forfeitures, of 25,952, 44,763 and 16,731 RSUs were awarded in fiscal 2020, 2019 and 2018, respectively, with vesting in three annual installments on the last day of the fiscal years following the grants.
At
Fiscal 2020 and 2019 PSUs To focus management's efforts on the achievement of increases in net cash flows (defined as net cash generated by the Company's continuing activities, minus capital expenditures and capitalized software costs), during the three years endingJune 30, 2022 and 2021, (the "Performance Periods"), in fiscal 2020 and 2019, the Compensation Committee granted 51,905 and 89,542 PSUs (at maximum) to LTIP Participants. Provisional vesting of the PSUs was made contingent on the achievement of net cash flows on an annual basis with final vesting, subject to possible upward or downward adjustment of 20% of the PSUs, based on a comparison of the Company's total shareholder return ("TSR") for the three year Performance Period, to the TSR of the Russell 2000 Index, for the same Performance Period. Threshold, target and maximum net cash flow goals were established for fiscal 2020 and 2019 and grant dates were established for that year's PSUs, for expense recognition purposes. In fiscal 2019 and 2020, the Company achieved the maximum net cash flows performance under the targets established for those years and as a result 14,426 and 49,121 shares are provisionally vested under the fiscal
2020 and 2019 LTIP, respectively. For any of the PSUs to fully vest, a Participant must provide continuous service through the end of the respective three year Performance Periods. Stock-based compensation expense of$610,000 and$80,000 was recognized in fiscal 2020 and 2019, respectively, for these PSUs, and such expense includes an estimate for the Company's expected TSR performance as compared to the Russell 2000 Index, over the respective performance periods to date. Fiscal 2018 PSUs
Through
The net cash flows goals for fiscal years 2021 and 2022 will be set in those fiscal years, which will give rise to grant dates for expense recognition purposes.
2013 LTIP Awards As previously reported, based on the financial results achieved in fiscal 2017, the Company achieved the maximum performance goal under the 2013 LTIP, in fiscal 2017. Therefore, in accordance with the terms of the 2013 LTIP, the remaining 50% of the 2013 LTIP shares vested onJune 30, 2018 . Stock-based compensation expense recognized for those shares was approximately$503,000 , in fiscal 2018. There was no compensation expense required to be recognized under the 2013
LTIP in fiscal 2020 and 2019. Non-Employee Director Award In each of fiscal years 2020, 2019, and 2018, each of our non-employee directors was granted restricted service-based shares with grant date fair values of$45,000 , for a total fair value of$180,000 in both fiscal 2020, and fiscal 2019, and$315,000 in fiscal 2018. Those shares have a one year vesting period, coinciding with the directors' service period and the shares vest 25% on a
quarterly basis. CEO Awards OnMarch 16, 2020 , the Company grantedMr. Orlando , the Company's CEO, a total of 32,278 restricted shares, comprising 16,139 service-based RSUs and 16,139 performance-based PSUs.
The RSUs vest in three equal annual installments on
38 The PSUs vest in three equal installments based on the annual revenue performance of the business in fiscal years endingJune 30, 2020 , 2021 and 2022, respectively. The 16,139 PSUs referenced above represent the number of shares that can be earned at target. If maximum performance is achieved, an additional 25% of that year's PSUs will be earned. Threshold, target and maximum revenue goals were established by the Compensation Committee of the Board of Directors for fiscal 2020. Based on the revenue generated by the Company in fiscal 2020, a determination was made by the Compensation Committee that one-third of the PSUs or 5,379 had vested. Threshold, target and maximum performance goals will be established for the fiscal years 2021 and 2022 PSUs in those respective years, which will give rise to grant dates for expense recognition purposes.
Stock-based compensation expense related to these grants was
Other Service-Based Awards In each of fiscal 2019 and 2018 the Company granted to other employees 5,000 service-based restricted shares, with grant date fair values of$111,000 and$83,000 respectively, and with vesting periods of four years. Total Expense
Total stock-based compensation expense recognized for all restricted share
awards was
Capitalized Software . In fiscal years 2020, 2019, and 2018, we capitalized approximately$1,330,000 ,$1,055,000 , and$911,000 , respectively, of software development costs related to a number of in-house software development projects. GAAP requires that certain software development costs incurred, either from internal or external sources, be capitalized as part of intangible assets and amortized on a straight-line basis over the useful life of the software, which we have estimated at three years. On the other hand, planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software development project are recognized as expense in the periods in which they are incurred. During the fiscal years endedJune 30, 2020 , 2019, and 2018, we recorded approximately$1,039,000 ,$892,000 , and$701,000 , respectively, as amortization expense related to such capitalized software projects. We evaluate the carrying values of capitalized software to determine whether those values are impaired and, if necessary, we record an impairment charge in the period in which we determine that an impairment has occurred. Income Taxes, Deferred Tax Assets and Valuation Allowances. We account for income taxes in accordance with GAAP, which requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company's financial statements or tax returns or for uncertain tax positions. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets or liabilities result in a deferred tax asset, GAAP requires that we evaluate the probability of realizing the future income tax benefits comprising that asset based on a number of factors, which include projections of future taxable income and the nature of the tax benefits and the respective expiration dates of tax credits and net operating losses. As the Company has been generating taxable income inthe United States , we have concluded that it is more likely than not, that we will realize ourU.S. deferred tax assets. However, we have established valuation allowances against the deferred tax assets of ourHong Kong ,Japan andChina subsidiaries and ourFrance branch, due to losses incurred, which makes it uncertain that we will realize the benefits from those deferred tax assets in future periods. The income tax provisions of$3,409,000 ,$4,148,000 , and$2,760,000 , in fiscal 2020, 2019 and 2018, respectively, represented annual effective tax rates ("ETRs"), of approximately 24%, 29%, and 31%, respectively. The ETR for 2020 and 2019 reflects a federal tax rate of 21%, as a result of the 2017 Tax Cuts and Jobs Act ("Tax Act") enacted into law inDecember 2017 . The ETR in fiscal 2020 benefited from the release of valuation allowances inChina whereas in fiscal 2019 a non-cash valuation allowance was established against our deferred tax assets inChina which represented about 4% of the ETR of 29%. In fiscal 2018, a blended federal tax rate of approximately 28% applied as the Tax Act only applied for the second half of the year. The provisions for each year were adjusted for excess tax benefits or deficiencies related to the vesting of restricted shares.
See note 8 to the Consolidated Financial Statements included elsewhere in this report which discusses the Tax Act in more detail.
39 Results of Operations
See Recent Developments: Coronavirus (COVID-19) in conjunction with the following discussions:
The following table sets forth certain financial data, expressed as a percentage
of net revenues, derived from our Consolidated Statements of Operations for the
respective periods indicated below:
Fiscal Year Ended June 30,
2020 2019 2018
Net revenues 100.0 % 100.0 % 100.0 %
Cost of revenues 42.7 % 41.6 % 43.1 %
Gross profit 57.3 % 58.4 % 56.9 %
Operating expenses:
Selling and marketing expenses 11.9 % 14.3 % 14.8 %
General & administrative expenses 26.9 % 24.3 % 29.0 %
Impairment Charge 0.6 % - -
Total operating expenses 39.4 % 38.6 % 43.8 %
Operating income 17.9 % 19.8 % 13.1 %
Interest and other income (expense), net 0.1 % (0.3 )% (0.1 )%
Income before provision for income taxes 18.0 % 19.5 % 13.0 %
Provision for income taxes 4.3 % 5.7 % 4.0 %
Income from continuing operations 13.7 % 13.8 % 9.0 %
Income from discontinued operations - - 0.1 % Net income 13.7 % 13.8 % 9.1 %
Net Revenues. Net revenues consist primarily of fees that we generate from the authentication and grading of collectibles, including coins, trading cards and autographs 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 affiliate program commissions earned from our websites and in printed publications; subscription/membership revenues from CCE, andCollectors Club ; and fees generated from promoting, managing and operating our Expos tradeshow events. We also generate revenues from product sales, (primarily coins that we purchase under our warranty policy); however, they are not considered to be the focus of or an integral part of our ongoing revenue generating activities).
The following tables set forth the total net revenues for the fiscal years ended
2020 vs. 2019
2020 2019 Increase (Decrease)
% of Net % of Net
Amount Revenues Amount Revenues Amount PercentAuthentication and grading fees$ 71,069 90.1 %$ 63,790 88.0 %$ 7,279 11.4 % Other related revenues 7,822 9.9 % 8,663 12.0 % (841 ) (9.7 )% Total revenues$ 78,891 100.0 %$ 72,453 100.0 %$ 6,438 8.9 % 2019 vs. 2018 2019 2018 Increase (Decrease) % of Net % of Net Amount Revenues Amount Revenues Amount Percent
Authentication and grading fees$ 63,790 88.0 %$ 60,076
87.8 %$ 3,714 6.2 % Other related revenues 8,663 12.0 % 8,373 12.2 % 290 3.5 % Total revenues$ 72,453 100.0 %$ 68,449 100.0 %$ 4,004 5.8 % 40
The following tables set forth certain information regarding the increases or
decreases in net revenues from our larger markets (which are inclusive of
revenues from our other related services) in each of the periods presented below
(in thousands):
2020 2019 2020 vs. 2019
% of Net % of Net Increase (Decrease)
Coins: Amount Revenues Amount Revenues Amounts %
United States $ 33,563 42.5 % $ 33,860 46.7 % $ (297 ) (0.9 )%
China 5,208 6.6 % 4,186 5.8 % 1,022 24.4 %
France & Hong Kong 2,828 3.6 % 3,348 4.6 % (520 ) (15.5) %
Total Coins 41,599 52.7 % 41,394 57.1 % 205 0.5 %
Cards and autographs (1) 33,673 42.7 % 26,420 36.5 % 7,253 27.5 %
Other (2) 3,619 4.6 % 4,639 6.4 % (1,020 ) (22.0 )%
$ 78,891 100.0 % $ 72,453 100.0 % $ 6,438 8.9 %
2019 2018 2019 vs. 2018
% of Net % of Net Increase (Decrease)
Coins: Amount Revenues Amount Revenues Amounts %
United States $ 33,860 46.7 % $ 31,693 46.3 % $ 2,167 6.8 %
China 4,186 5.8 % 7,663 11.2 % (3,477 ) (45.4 )%
France & Hong Kong 3,348 4.6 % 3,481 5.1 % (133 ) (3.8 )%
Total Coins 41,394 57.1 % 42,837 62.6 % (1,443 ) (3.4 )%
Cards and autographs (1) 26,420 36.5 % 21,065 30.8 % 5,355 25.4 %
Other (2) 4,639 6.4 % 4,547 6.6 % 92 2.0 %
$ 72,453 100.0 % $ 68,449 100.0 % $ 4,004 5.8 %
(1) Consists of revenues from our PSA trading card authentication and grading
business (including
grading business.
(2) Includes the revenues generated by our CCE subscription business,
Coinflation.com, Collectors.com, the Expos trade show and product sales.
Fiscal 2020 vs. 2019. In fiscal 2020, our total service revenues increased by$6,438,000 , or 8.9%, to a record$78,891,000 , from$72,453,000 in 2019. That increase was primarily attributable to an increase of$7,279,000 , or 11.4%, in authentication and grading fees, partially offset by lower other related revenues of$841,000 . The increased authentication and grading fees were comprised of an increase of$7,067,000 , or 28.8%, in cards / autographs and an increase of$212,000 , or 0.5%, in coin fees, as discussed in more detail below. The lower other related revenues in fiscal 2020, as compared to fiscal 2019, was primarily due to the cancellation of an Expos trade show in the fourth quarter of fiscal 2020 and lower product sales. Despite the impact of COVID-19 primarily in the month ofApril 2020 , the Company generated record quarterly revenues of$20,502,000 in its fourth quarter of fiscal 2020 as compared to$19,784,000 in the fourth quarter of fiscal 2019, driven by an increase of 27% in our cards and autograph revenue. Revenues from our trading cards / autographs business continued to show consistent growth in fiscal 2020, although that revenue growth was curtailed somewhat by COVID-19, primarily in the months of March andApril 2020 . Those revenues increased by 27.5% in fiscal year 2020 and represented record revenues for that business. Moreover, our card and autographs business has achieved quarter-over-quarter revenue growth in 39 of the last 40 quarters. The increased revenues fromChina in fiscal 2020, reflected an improved revenue performance in ourChina business in the first half of fiscal 2020 prior to the outbreak of COVID-19. As discussed under Recent Developments: Coronavirus COVID-19 above, we expect there will be slower revenue growth inChina , while travel restrictions continue between theU.S. andChina . 41 Changes inU.S. Coin fees include increases of (i)$1,181,000 inU.S. modern coin revenues, primarily reflecting increased revenues in the fourth quarter of fiscal 2020 from the Emergency Issue Silver Program from theU.S. Mint and (ii) higher vintage coin revenues of$1,125,000 , reflecting revenues earned in this year's second quarter from the authentication and grading of a large customer collection and in the fourth quarter from redirecting what would have been show submissions to ourCalifornia facility for authentication and grading. Those increases were mostly offset by lower trade show revenues, related to the cancellation of coin shows in the third and fourth quarters of fiscal 2020 due to COVID-19, and one less show and lower average per show submissions in the first half of the year.
Our coin and cards and autographs authentication and grading businesses represented approximately 95% of total revenues in fiscal 2020, reflecting 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 "Impact of Economic Conditions on our Financial Performance", the level of coin service revenues can be volatile. OurU.S. coin revenue in fiscal 2020 was substantially the same as 2019, despite COVID-19 and we will continue our efforts to identify and take advantage of revenue opportunities in that business. With respect to our cards and autographs business, which ended fiscal 2020 with a record backlog of cards to be authenticated and graded, we expect continued growth in that business in fiscal 2021 as we continue to increase authentication and grading operations capacity. With respect toChina , we will continue to focus on growing that business, which finished fiscal 2020 with a relatively high backlog and we will be focused on making that business less reliant on ourU.S. personnel to offset travel restrictions between theU.S. andChina . Fiscal 2019 vs. 2018. In fiscal 2019, our total revenues increased by$4,004,000 or 5.8%, to a then annual record of$72,453,000 from$68,449,000 in fiscal 2018. That increase was attributable to an increase of$3,714,000 , or 6.2%, in authentication and grading fees, and a$290,000 , or 3.5%, increase in other related services. The increase in authentication and grading fees was attributable to an increase of$5,241,000 , or 27.1%, in cards and autograph fees partially offset by a net decrease of$1,527,000 or 3.7%, in coin fees, attributable to a decrease in fees generated inChina (see below).
Revenues from our trading cards and autographs business showed consistent growth. Those revenues increased by 25% in fiscal 2019 and represented record annual revenues for that business through fiscal 2019.
The decreased revenues in
The increase inU.S. coin fees in fiscal 2019 compared to the prior year, primarily reflected, (i) higher show fees of$1,852,000 or 33%, reflecting higher average fees earned per show in fiscal 2019 (ii) higher modern coin fees of$452,000 or 4%, which included a stronger second half of the year and was inclusive of the Apollo program primarily in this year's third quarter and (iii) lowerU.S. vintage fees of$241,000 or 1.9%, due to a decrease in submissions in the second half of fiscal 2019. Gross Profit Gross profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percentage of net revenues. The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense, occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of the revenues generated by our other non-grading related services and the costs of product sales (which represent the carrying value of the inventory of products, that are primarily collectible coins that we sold) and any inventory-related reserves on our consumable inventory and coins, that may be considered necessary. 42 Set forth below is information regarding our gross profit and gross profit margins in the fiscal years endedJune 30, 2020 , 2019 and 2018 (in thousands): Fiscal Year Ended June 30, 2020 2019 2018 Gross profit$ 45,236 $ 42,300 $ 38,978 Gross profit margin 57.3 % 58.4 % 56.9 % Fiscal 2020 vs. 2019. As indicated in the above table, our gross profit margin was 57.3% in fiscal 2020, as compared to 58.4% in fiscal 2019. The gross profit margin in fiscal 2020, reflects the adverse effects of COVID-19, including our decision to continue paying all personnel throughMarch 31, 2020 , despite the closures of our businesses during that quarter. The gross profit margin in the fourth quarter of fiscal 2020 was 59.8% as compared to 58.7% in the fourth quarter of fiscal 2019, despite the COVID-19 disruption, primarily inApril 2020 . The gross profit margin for coins was consistent in fiscal 2020 as compared to fiscal 2019. The gross profit margin for our cards and autographs business was down in fiscal 2020 as compared to fiscal 2019 and reflects continued costs incurred to increase capacity to address the record backlog in that business. As previously reported, there can be on-going variability in the gross profit margin due to the mix of revenue and the seasonality of our business. During the three years endedJune 30, 2020 , our quarterly gross profit margins varied between 53% and 62%. Fiscal 2019 vs. 2018. As indicated in the above table, our gross profit margin was 58.4% and 56.9% in fiscal, 2019 and 2018, respectively. The higher gross profit margin earned in fiscal 2019, reflects an improved gross profit margin earned on our coin and cards and autograph businesses, primarily due to higher average service fees in those businesses, (due to the mix of collectibles authenticated and graded and also higher fees charged for certain services) and in the case of cards and autographs a higher number of units authenticated
and graded.
Selling and Marketing Expenses
Selling and marketing expenses are comprised primarily of advertising and promotions costs, trade-show expenses, customer service personnel costs, business development salaries and incentive compensation costs, depreciation and third-party consulting costs.
The following table sets forth selling and marketing expenses that we incurred in fiscals 2020, 2019 and 2018 (in thousands):
Fiscal Year Ended June 30,
2020 2019 2018
Selling and marketing expenses $ 9,436 $ 10,361 $ 10,137
As a percentage of net revenues 11.9 % 14.3 % 14.8 %
Fiscal 2020 vs. 2019. As indicated in the above table, selling and marketing
expenses were 11.9% of revenues in the fiscal 2020, as compared to 14.3% in the
fiscal 2019. In absolute dollars, selling and marketing expenses in 2020
decreased by $925,000 , primarily as a result of cancellations of coin trade
shows that had been scheduled to take place in the fourth quarter of fiscal
2020, due to COVID-19 and lower coin business development costs at our overseas
coin businesses. Those cost savings were partially offset by higher sales and
marketing expenses in our growing cards / autographs business.
Fiscal 2019 vs. 2018. As indicated in the above table, selling and marketing
expenses represented 14.3% of revenues in fiscal 2019, as compared to 14.8% in
fiscal 2018. In absolute dollars, selling and marketing expenses increased by
$224,000 or 2.2% in fiscal 2019 as compared with fiscal 2018. We incurred higher
selling and marketing expenses in our growing cards and autograph business
(including costs incurred for business development activities in Japan for the
Company's new Japanese subsidiary), which for the most part was offset by lower
selling and marketing expenses in our other businesses.
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, information technology and, facilities
management, depreciation, amortization and other miscellaneous expenses. G&A
expenses also include non-cash stock-based compensation costs, arising from the
grant or vesting of stock awards to general and administrative personnel and
outside directors.
43
The following table sets forth G&A expenses that we incurred in fiscals 2020, 2019 and 2018 (in thousands):
Fiscal Year Ended June 30,
2020 2019 2018
General & administrative expenses
As a percentage of net revenues 26.9 % 24.3 % 29.0 %
Fiscal 2020 vs. 2019. As indicated in the above table, G&A expenses represented 26.9% of revenues in fiscal 2020, as compared to 24.3% in fiscal 2019. The dollar increase in G&A expenses in fiscal 2020 of$3,615,000 , included (i) higher payroll related costs of$1,092,000 (which was inclusive of higher performance based incentive costs of$449,000 in connection with the improved operating performance of the business, as certain of those incentive costs are based on an individual's areas of responsibility), (ii) higher legal expenses of$1,114,000 , (of which$967,000 were related to pre-trial settlements), (iii) higher non-cash stock based compensation of$642,000 in connection with the Company's LTIP programs (see below) and (iv) higher consulting and outside service costs of$392,000 (which are inclusive of costs incurred on improving our operational processes and productivity). Fiscal 2019 vs. 2018. As indicated in the above table, G&A expenses decreased to 24.3% of revenues in fiscal 2019, from 29.0% in fiscal 2018. In absolute dollars, G&A expenses decreased by$2,267,000 in fiscal 2019 due to (i) lower payroll and related costs of$824,000 in fiscal 2019, arising from staff reductions implemented in the fourth quarter of fiscal 2018, and management changes in the Company's coin division that occurred in the first half of fiscal 2019, partially offset by increased management incentives due to the improved performance of our businesses in fiscal 2019, as compared to fiscal 2018; (ii) the non-recurrence in fiscal 2019 of$869,000 , comprised of moving and lease exit costs, in connection with the Company's new operations and headquarter facility, and a pre-litigation net settlement that was incurred in fiscal 2018; (iii) lower non-cash stock based compensation of$419,000 in fiscal 2019 (discussed below) and (iv) lower recruitment and travel costs of$315,000 . Those reductions were partially offset by higher depreciation expense of$279,000 , primarily related to depreciation of tenant improvements and other assets capitalized as part of our new operations and headquarters facility and higher amortization of capitalized software projects of$193,000 this year.
Stock-Based Compensation Expense
We recognize non-cash stock-based compensation expense that is attributable to grants or the vesting of restricted stock. Stock-based compensation expense is recorded as part of (i) sales and marketing expenses, in the case of stock awards granted to employees whose compensation is classified as sales and marketing expenses and (ii) general and administrative expenses, in the case of stock awards granted to directors, executive and financial management and administrative personnel.
The following table sets forth the stock-based compensation expense we recognized in fiscal 2020, 2019 and 2018 (in thousands):
Fiscal Year Ended June 30,
Included In: 2020 2019 2018
Sales and marketing $ 29 $ 70 $ 98
General and administrative expenses 1,546 904 1,323
$ 1,575 $ 974 $ 1,421 The related tax benefit recognized for stock-based compensation expense was
approximately
For PSUs that are contingent on the achievement of financial performance goals for vesting to occur, the amount of stock-based compensation recognized in any period can vary depending on an assessment as to whether it has become probable that the Company will achieve the performance goals and the time periods in which those goals are expected to be achieved. If it becomes probable that a performance goal will be achieved, there can be catch-up of stock-based compensation expense in that period, reflecting the additional expense required to be recognized from the service inception date through the period when it became probable that the goal would be achieved. Thereafter, stock-based compensation expense for the performance goal is recognized over the expected remaining service period to vesting. 44
Stock-based compensation expense related to financial performance goals was$693,000 ,$80,000 and$503,000 in fiscal 2020, 2019 and 2018, respectively. The increased expense in fiscal 2020, as compared to fiscal 2019, reflects the achievement of the maximum net cash performance goals for those years in both fiscal 2019 and 2020, with the associated expense recognized over the performance period. A total of$1,935,000 of stock-based compensation expense for unvested restricted stock awards remained unrecognized as ofJune 30, 2020 , based on the assumption that the holders of those awards would remain in the Company's service through fiscal 2023. That expense will be recognized in future periods, as follows (in thousands): Year Ending June 30, 2021$ 1,321 2022 530 2023 84 Total$ 1,935 The$1,935,000 of unrecognized expense does not include any expense that may arise from (i) grants of any additional restricted stock awards in future periods, (ii) the PSUs granted under the 2020 and 2019 LTIPs for which grant dates are to be established in fiscal 2021 and 2022. Impairment Charge Fiscal Year Ended June 30, (in thousands) 2020 2019 2018 Impairment Charge$ 486 $ - $ - The impairment charge of$486,000 in fiscal 2020 relates to our Expos business and as discussed above under Recent Developments: Coronavirus (COVID-19), there continues to be uncertainty as to the viability of the Expos trade show business, due to COVID-19 that resulted in the cancellation of shows and due to expected social distancing concerns that will limit the numbers of dealers
and attendees at future shows. Interest Income, Net Interest income is generated on cash balances that we have invested, primarily in highly liquid money market accounts and funds. Interest expense consists of interest incurred on outstanding borrowings, loan arrangement fees and unused commitment fees on credit facilities. The following table compares the net interest income (expense) in the fiscal years endedJune 30, 2020 , 2019 and 2018, (in thousands): Fiscal Year Ended June 30, 2020 2019 2018 Interest income (expense), net$ 78 $ (69 ) $ (114 ) Due to the Company maintaining higher cash balances and higher prevailing interest rates throughFebruary 2020 , interest income was$213,000 in fiscal 2020, as compared to$111,000 and$19,000 in fiscal 2019 and 2018, respectively. Interest expense of$135,000 ,$180,000 and$133,000 was recognized in fiscal 2020, 2019 and 2018, respectively. Interest expense in fiscal 2020, 2019 and 2018, primarily related to borrowings under the Company's term loan and commitment fees incurred under the revolving line of credit. 45 Provision for Income Taxes Fiscal Year Ended June 30, (in thousands) 2020 2019 2018 Provision for income taxes$ 3,409 $ 4,148 $ 2,760 The income tax provisions of$3,409,000 ,$4,148,000 , and$2,760,000 , in fiscals 2020, 2019 and 2018, respectively, represented ETRs, of approximately 24%, 29%, and 31%, respectively. The ETR for 2020 and 2019 reflect a federal tax rate of 21%, as a result of the Tax Act enacted into law inDecember 2017 . The ETR in fiscal 2020 benefited from the release of valuation allowances inChina , whereas in fiscal 2019 a non-cash valuation allowance was established against our deferred tax assets inChina and represented about 4% of the ETR of 29%. In fiscal 2018, a blended federal tax rate of approximately 28% applied as the Tax Act only applied for the second half of that year. The income tax provisions for each fiscal year were adjusted for excess tax benefits or deficiencies related to the vesting of restricted shares. Discontinued Operations Fiscal Year Ended June 30, (in thousands) 2020 2019 2018 Income from discontinued operations, (net of income taxes) $ - $ -$ 104 The income from discontinued operations (net of income taxes), reflected pre-tax accretion expenses of$2,000 in fiscal year 2018, recognized in connection with the facilities, formerly occupied by our discontinued jewelry businesses and the write-off of all remaining discontinued balances as ofMarch 31, 2018 .
Quarterly Results of Operations
Generally, the revenues generated by our collectibles grading and authentication businesses are lower during our second quarter, which ends onDecember 31 , than in other quarterly periods, because collectibles commerce generally decreases during the holiday season. As discussed under "Factors that can Affect Operating Results and our Financial Position" and "Trends in our Businesses" above there can be period to period variability in coin revenues due to general market conditions that will impact the level of coin revenues in a given quarter, and the level ofU.S. modern coin revenues, which are typically higher in our third quarter.
Prior to the onset of COVID-19, our collectibles trade show business added to the variability in our quarter-to-quarter operating results, because its revenues can vary based on the timing of the collectibles trade shows. Historically, the revenues of this business were higher in the first, third and fourth quarters of our fiscal years, compared to the second quarter, because theLong Beach, California Collectibles Shows took place during the first, third and fourth quarters. See also Recent Developments-Coronavirus (COVID-19) above, which discusses the impact of COVID-19 on our quarterly operating results in fiscal 2020 and may have in future quarters. The tables below present unaudited selected quarterly financial data for each of the eight quarters beginningSeptember 30, 2018 and ending onJune 30, 2020 . The information has been derived from our unaudited quarterly condensed consolidated financial statements, which have been prepared on a basis consistent with our audited Consolidated Financial Statements appearing in ITEM 8 of this Annual Report. The consolidated financial information set forth below includes all adjustments (consisting of normal adjustments and accruals) that we consider necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the Consolidated Financial Statements and the notes thereto appearing elsewhere in ITEM 8 of this Annual Report. These quarterly operating results are not necessarily indicative of results that may be expected for
any subsequent fiscal periods. 46 Quarterly Results of Quarter Ended Operations (In
thousands, except per share data)
Sept. 30, Mar.31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
2018 Dec.31, 2018 2019 2019 2019 2019 2020 2020
Statement of Operations
Data:
Net revenues $ 17,495 $ 15,704 $ 19,471 $ 19,783 $ 20,210 $ 19,456 $ 18,723 $ 20,502
Cost of revenue 7,202 6,953 7,827 8,171 8,101 8,533 8,771 8,250
Gross profit 10,293 8,751 11,644 11,612 12,109 10,923 9,952 12,252
Operating Expenses:
SG&A expense(i) 7,466 6,537 6,879 7,076 7,472 7,649 7,310 8,217
Impairment Charge(ii) - - - - - - - 486
Operating income 2,827 2,214 4,765 4,536 4,637 3,274 2,642 3,549
Interest and other
income (expense), net 3 (145 ) (4 ) (71 ) 71 4 38 (20 )
Income before provision
for income taxes 2,830 2,069 4,761 4,465 4,708 3,278 2,680 3,529
Provision for income
taxes (iii) 699 588 1,202 1,659 1,095 664 753 897
Net Income $ 2,131 $ 1,481 $ 3,559 $ 2,806 $ 3,613 $ 2,614 $ 1,927 $ 2,632
Net income per share:
Basic $ 0.24 $ 0.17 $ 0.40 $ 0.31 $ 0.40 $ 0.29 $ 0.21 $ 0.29
Diluted $ 0.24 $ 0.17 $ 0.40 $ 0.31 $ 0.40 $ 0.29 $ 0.21 $ 0.29
Weighted average shares
outstanding:
Basic 8,933 8,936 8,938 8,943 8,973 8,980 8,989 8,993
Diluted 8,962 8,947 8,966 9,004 9,060 9,061 9,073 9,078
(i) In the fourth quarter of fiscal 2020, the Company recognized approximately
in that quarter.
(ii) The impairment reserve in the fourth quarter of fiscal 2020 related to our
Expos tradeshow business. See Recent Developments-Coronavirus (COVID-19)
above.
(iii) The higher ETR in the fourth quarter of fiscal 2019, reflects a non-cash
valuation allowance established against deferred tax assets in
June 30, 2019 . See Provisions for Income Taxes above. 47
Liquidity and Capital Resources
See Recent Developments: Coronavirus (COVID-19) in conjunction with the discussion below:
Cash and Cash Equivalent Balances. At
Historically, we have been able to rely on internally generated funds, rather than borrowings, as our primary source of funds to support our continuing grading operations, because many of our authentication and grading customers prepay our fees at the time they submit their collectibles to us for authentication and grading or prior to the shipment of the collectible back to them. InMarch 2020 , we increased our$10 million revolving unsecured bank line of credit to$15 million and extended the term by two years throughMarch 2022 . There were no borrowings under the line of credit in fiscal 2020. Additionally, inSeptember 2017 , we obtained the$3.5 million Term Loan, under which we borrowed$3.0 million , to fund capital expenditures, moving costs and lease exit costs, in connection with our move to our new operations and headquarters facility. See below. Cash Flows Cash Flows from Operating Activities. In the fiscal years endedJune 30, 2020 , 2019, and 2018, our operating activities generated cash of$19,166,000 ,$17,530,000 , and$11,872,000 , respectively. The increase in cash generated from operating activities in fiscal 2020 as compared to 2019 primarily reflects changes in working capital and higher non-cash expenses in fiscal 2020 as operating income was about the same in both years. The increased cash generated from operating income in fiscal 2019 as compared to 2018, reflected higher operating income in fiscal 2019, as adjusted for non-cash expenses and changes in working capital. Cash Flows of Discontinued Operations. In the fiscal years endedJune 30, 2019 , and 2018 discontinued operations used cash of$10,000 , and$215,000 , respectively, related primarily to the payment of obligations for our discontinued jewelry businesses facilities, which were fully satisfied during fiscal 2018.
Cash Used in Investing Activities. In the fiscal years endedJune 30, 2020 , 2019, and 2018, investing activities used net cash of$2,701,000 ,$1,834,000 , and$4,819,000 , respectively. The higher cash used in investing activities in fiscal 2018, related to the buildout of the Company's new operations and headquarters facility, which resulted in lower capital expenditures required in fiscal 2019.
Cash Used in Financing Activities. In the fiscal years endedJune 30, 2020 , 2019 and 2018, financing activities used net cash of$7,050,000 ,$7,042,000 and$6,083,000 , respectively. The Company borrowed$3,000,000 under its term loan in fiscal 2018 whereas the Company made principal repayments under that loan of$750,000 and$563,000 in fiscal 2020 and 2019, respectively. Dividends paid to stockholders were$6,300,000 ,$6,479,000 and$9,083,000 in fiscal 2020, 2019 and 2018, respectively. The lower dividend payments in 2020 and 2019, reflect a decrease in the Company's cash dividend rate implemented in the third quarter of fiscal 2018. (See Dividends below).
Overall, the Company generated cash of
Outstanding Financial Obligations
Lease Obligations OnFebruary 3, 2017 , the Company, as tenant, entered into a triple net lease pursuant to which the Company is leasing approximately 62,755 rentable square feet of space for its operations and headquarters facility. The term of this lease is 10 years and 10 months, which commenced on the completion of tenant improvements, which wasDecember 1, 2017 . The Company received an abatement of the monthly rent for the period fromJanuary 1, 2018 throughOctober 31, 2018 . The landlord contributed approximately$2.9 million to the tenant improvements. AtJune 30, 2020 aggregate minimum obligations over the remaining term of the lease were approximately$12.0 million . We also lease smaller offices for our overseas operations including a five year lease for ourShanghai office that commenced inNovember 2017 , with aggregate minimum obligations over the term of the lease of approximately$3.0 million and a three year lease for our officesHong Kong , which commenced inJuly 2018 , with aggregate minimum obligations over the term of that lease of approximately
$625,000 . 48
At
Year Ending June 30, Gross Amount
2021 $ 2,514
2022 2,138
2023 1,663
2024 1,473
2025 1,470
Thereafter 5,069
$ 14,327
Term Loan. As previously reported, on September 15, 2017 the Company obtained a
five-year, $3,500,000 unsecured term loan from a commercial bank. The Company
borrowed $3,000,000 under this loan to fund the Company's share of the
construction and related facility costs for its new operations and headquarter
facility, as well as its moving costs, and lease exit costs for its former
operations and headquarters facility. During that first year the Company was
only required to make monthly payments of interest on the borrowings.
In September 2018 , the loan balance outstanding was automatically converted into
a four-year term loan in the principal amount of the borrowings then
outstanding, which was $3,000,000 . In October 2018 , the Company began repaying
the loan 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, as the Company chose a 90-day LIBOR rate to apply to the outstanding
balance upon conversion to the four-year term loan.
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, (see below) (ii) purchase money indebtedness and (iii)
capitalized lease obligations.
At June 30, 2020 , the Company had $1,688,000 of outstanding borrowings under
this term loan, of which $750,000 was classified as a current liability and
$938,000 was classified as a long-term liability in the Consolidated Balance
Sheet at June 30, 2020 . The Company was in compliance with the term loan
covenants at June 30, 2020 .
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 at such times and in amounts as it may request, as
supported by an EBITDA 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 will bear interest, at the Company's option, 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 and certain other covenants typical
for this type of credit. At June 30, 2020 the Company was in compliance with
those covenants. Availability to borrow under the line of credit was $15,000,000
at June 30, 2020 however, there were no borrowings outstanding under the line of
credit at June 30, 2020 .
49
Dividends. Effective the third quarter of fiscal 2018, our quarterly cash
dividend was lowered to
The declaration and payment of cash dividends in the future, pursuant to the Company's dividend policy, is subject to final determination each quarter by the Board of Directors based on a number of factors, including the Company's financial performance and 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 and its stockholders. Accordingly, there is no assurance that, in the future, the amount of the quarterly cash dividend will not be reduced or that the payment of dividends will not be suspended or altogether discontinued. 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 revolving credit line, (i) to introduce new collectibles related services and initiatives for 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 repayments under the Company's term loan (v) to fund possible start-ups or acquisitions of businesses, (vi) to pay 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 geographic expansion of our collectibles businesses. However, there is no assurance that we would be able to obtain such additional borrowings or additional equity capital on terms acceptable to us, or at all.
Recent Accounting Pronouncements
InJune 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 afterDecember 15, 2022 , with early adoption permitted for annual reporting periods beginning afterDecember 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. InJanuary 2017 , the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ("ASU 2017-04") The new guidance eliminates Step 2 of the goodwill impairment test. Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years beginning afterDecember 15, 2022 , with early adoption permitted. The Company early adopted this guidance in the current fiscal year on a prospective basis and we applied this guidance in calculating the goodwill impairment charge recognized in fiscal 2020. 50
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