COLLECTORS UNIVERSE, INC. 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 have little or no 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 of this Report.
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.
16
Recent Developments:
(i) Tender Offer
On January 20, 2021 , the Company entered into an Amended and Restated Agreement
and Plan of Merger (the "A&R Merger Agreement") with Cards Parent LP , a Delaware
limited partnership ("Parent"), and Cards Acquisition Inc. , a Delaware
corporation and an indirect wholly owned subsidiary of Parent ("Purchaser"). The
A&R Merger Agreement amended and restated the Agreement and Plan of Merger,
dated November 30, 2020 , between Parent, Purchaser and the Company.
Pursuant to the A&R Merger Agreement, Purchaser extended the expiration time of
its tender offer (the "Tender Offer") to purchase each issued and outstanding
share of common stock to February 3, 2021 , and increased the offer price to
$92.00 per share of common stock (the "Offer Price") from $75.25 per share of
common stock. On February 4, 2021 , Purchaser announced an extension of the
expiration of the Tender Offer until February 5, 2021 . The Tender Offer was
extended to allow additional time for the shares of common stock tendered by
guaranteed delivery to be received.
The Tender Offer expired at 12:00 midnight, New York time on February 5, 2021
(the "Expiration Date"). Broadridge Corporate Issuer Solutions, Inc. , the
depositary for the Tender Offer (the "Depositary"), advised Parent and Purchaser
that, as of the Expiration Date, an aggregate of 5,179,075 shares of common
stock (including shares of common stock treated as "rollover stock" within the
meaning of Section 251(h) of the General Corporation Law of the State of
Delaware , but excluding 1,093,255 shares of common stock tendered pursuant to
guaranteed delivery procedures that have not yet been "received" (as defined by
Section 251(h)(6) of the General Corporation Law of the State of Delaware )) had
been validly tendered and not validly withdrawn pursuant to the Tender Offer.
These shares of common stock represented approximately 57% of the aggregate
number of shares of common stock outstanding. Because all conditions to the
Tender Offer were satisfied or waived as of the Expiration Date, Purchaser
accepted for payment all shares of common stock validly tendered and not validly
withdrawn pursuant to the Tender Offer, and, in accordance with the terms of the
Tender Offer, payment for such shares of common stock will be promptly made to
the Depositary, which will then transmit such payments to the Company's
stockholders whose shares of common stock have been accepted for payment.
Following consummation of the Tender Offer, on February 8, 2021 , pursuant to the
terms of the A&R Merger Agreement and in accordance with Section 251(h) of the
General Corporation Law of the State of Delaware , the merger of the Purchaser
into the Company with the Company as the surviving corporation was consummated
(the "Merger"). In connection with the Merger, each share of common stock that
was issued and outstanding as of immediately prior to the effective time of the
Merger (the "Effective Time") (except as provided in the A&R Merger Agreement)
was cancelled and extinguished and automatically converted into the right to
receive cash in an amount equal to the Offer Price.
In addition, with respect to each unvested equity award, at the Effective Time,
(1) any vesting conditions applicable to such award were automatically
accelerated in full, and (2) such award was cancelled and the holder thereof
became entitled to receive, without interest, an amount in cash equal to the
product obtained by multiplying (A) the number of shares of common stock subject
to such award by (B) the Offer Price, less applicable taxes required to be
withheld with respect to such payment.
Purchaser paid aggregate consideration of approximately $853 million in cash in
the Tender Offer and the Merger, without giving effect to related transaction
fees and expenses. As a result of the consummation of the Offer and the Merger,
a change in control of the Company occurred. Following the consummation of the
Merger, the Company became a wholly owned subsidiary of Cards Holding Inc. , a
Delaware corporation and a wholly owned subsidiary of Parent.
On February 8, 2021 , the Company notified The Nasdaq Stock Market ("Nasdaq") of
the occurrence of the Merger and requested that trading in the Company's common
stock be suspended and that the Company's shares of common stock be withdrawn
from listing on Nasdaq, effective prior to the opening of Nasdaq on February 8,
2021 . On February 8, 2021 , Nasdaq filed with the SEC a notification of removal
from listing on Form 25 to report that the Company common stock will no longer
be listed on Nasdaq. The Company's common stock ceased trading on Nasdaq
effective prior to the opening of Nasdaq on February 8, 2021 . The Company
intends to file with the SEC a certification and notice of termination on Form
15 to terminate the registration of the shares of common stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and suspend the
Company's reporting obligations under Section 13 and Section 15(d) of the
Exchange Act.
17
(ii) Coronavirus (COVID-19)
Despite the continuing COVID-19 pandemic, we achieved revenues of $35.4 million
and $66.2 million in the three and six months ended December 31, 2020
respectively, as compared to revenues of $19.5 million and $39.7 million in the
three and six months ended December 31, 2019 . Operating income was $10.0 million
and $17.8 million in three and six months ended December 31, 2020 as compared to
$3.3 million and $7.9 million in the three and six months ended December 31,
2019 .
Set forth below is a summary of the impact of COVID -19 on our business in the first half of fiscal 2021, the possible impact on future periods and the mitigation measures we implemented in response to the pandemic.
? We have continued to apply enhanced measures to protect the health and safety
of our employees and the community. Those health and safety measures included
reconfiguring of our authentication and grading facility to permit social
distancing and continuing to allow certain administrative and clerical
personnel work remotely from their homes. As a result of these measures, 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. In addition, in
additional space at our headquarters and operating facility in
for our services which facilitated social distancing as we ramped up capacity.
Some of our employees have tested positive for COVID-19, although it is
unclear where they contracted the virus, which modestly impacted our
operations in
? 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 half of fiscal 2021 were
cancelled by the operators of those shows due to the pandemic. However, we
replaced some of the cancelled
authentication and grading events that we conducted ourselves, and were
successful in generating show revenues of approximately of
to approximately
2020, respectively. In addition, we encouraged customers to redirect trade
show submissions to our
grading. At this time there are coin shows tentatively scheduled for the end
of the third quarter and the fourth quarter of fiscal 2021, although our
expectation is that they will also be cancelled due to the pandemic. Although
our efforts to replace coin trade shows were reasonably successful in the
first half of fiscal 2021, it is uncertain what level of on-going revenues we
will be able to generate at these smaller coin authentication and grading
events, in future periods.
? There continues to be uncertainty as to the
production and release schedule for all modern coin programs in this year's
third and fourth quarters, due to the current surge in COVID-19. In the three
and six months ended
modern coin revenues by
customer engagement efforts around older Mint programs. At this time, our
expectation is that the high-volume
occurs in our third fiscal quarter is on track to occur. However, other third
quarter programs may be delayed. So far in the third quarter, we are
continuing to see modern coin revenues at about comparable levels as the third
quarter of fiscal 2020.
? Our
to approximately
of fiscal 2020. At
for authentication and grading in
ramp up our
possible. However, while the travel restrictions that prevent our
experts from travelling to
to be hampered.
18
? Our Expos
third quarters of fiscal 2021 have been cancelled due to COVID-19 concerns. As
a result, we generated no Expos revenues in the six months ended
2020 as compared to
? Despite the uncertainties arising from COVID-19 discussed above, our cards and
autographs business had a record backlog as of
to generate record customer submissions. We increased capacity through adding,
primarily, operations personnel in both the first and second quarters of
fiscal 2021, and we plan to continue increasing capacity in the second half of
fiscal 2021.
As discussed above, our business operated at record levels during the first half of fiscal 2021. However, as discussed in the Risk Factors in the Fiscal 2020 10-K, the extent of continuing and 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 the Operating Results for the Three and Six Months Ended
The following table sets forth comparative financial data for the three and six
months ended
Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Net Revenues $ 35,440 100.0 % $ 19,456 100.0 % $ 66,225 100.0 % $ 39,666 100.0 %
Cost of Revenues 12,737 35.9 % 8,533 43.9 % 24,211 36.6 % 16,634 41.9 %
Gross Profit 22,703 64.1 % 10,923 56.1 % 42,014 63.4 % 23,032 58.1 %
Selling and marketing
expenses 2,414 6.8 % 2,489 12.8 % 4,683 7.1 % 5,122 12.9 %
General & administrative
expenses 10,284 29.1 % 5,160 26.5 % 19,517 29.4 % 9,999 25.3 %
Operating income 10,005 28.2 % 3,274 16.8 % 17,814 26.9 % 7,911 19.9 %
Interest and other income
(expense), net 175 0.5 % 4 - 193 0.3 % 75 0.2 %
Income before provision
for income taxes 10,180 28.7 % 3,278 16.8 % 18,007 27.2 % 7,986 20.1 %
Provision for income taxes 2,787 7.8 % 664 3.4 % 4,652 7.0 % 1,759 4.4 %
Net income $ 7,393 20.9 % $ 2,614 13.4 % $ 13,355 20.2 % $ 6,227 15.7 %
Net income per diluted
share $ 0.81 $ 0.29 $ 1.47 $ 0.69
19
Net revenues increased by $16.0 million , or 82%, to $35.4 million and by $26.6
million , or 67%, to $66.2 million in the three and six months ended December 31,
2020 , respectively. These increased revenues were primarily attributable to
increases of $15.0 million , or 185%, and $25.5 million , or 158%, in cards and
autographs revenues, respectively, and increases of $0.9 million , or 8%, and
$1.4 million , or 6%, in coin revenues, respectively. See Net Revenues below, for
a more detailed discussion of the changes in revenues in this year's threeand six months periods. Operating income increased to a quarterly record of$10.0 million and a first six months record of$17.8 million in the three and six months endedDecember 31, 2020 , respectively, from$3.3 million and$7.9 million in the same respective periods of fiscal 2020, and represented operating margins of 28.2% and 26.9% in this year's three and six months, respectively, as compared to 16.8% and 19.9% in last year's three and six months. The increased general and administrative expenses ("G&A") of$5.1 million and$9.5 million in this year's three and six months periods as compared to the same respective periods of the prior year included (i) increased professional fees incurred of$3.1 million in the second quarter and$5.3 million in the six months, in connection with the Tender Offer which was negotiated in this year's second quarter, and the resolution of the, activist issue that occurred in this year's first quarter, and (ii) increased non-cash stock based compensation expense of$1.5 million and$2.3 million in the three and six month periods. Those higher professional fees and non-cash stock-based compensation expense, in the aggregate, represented 13% and 12% of revenues in the three and six month periods, respectively. These, as well as other factors affecting our operating results in the three and six months endedDecember 31, 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 and Six Months EndedDecember 31, 2020 , as compared to the Three and Six Months EndedDecember 31, 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 both the three and six months endedDecember 31, 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 services, such that authentication and grading fees for that business increased by approximately 160% in the first half of this year, representing a higher number of units authenticated and graded at a substantially higher average service fee ("ASP") in response to the increased service demand. In addition, we continue to have a record backlog of card submissions awaiting authentication and grading, atDecember 31, 2020 . Our authentication and grading revenues and gross profit margins are also affected by (i) the volume and mix of authentication and grading submissions among trading cards and coins; (ii) in also 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 theU.S. , depending on the timing and size of modern coin marketing programs by theUnited 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. 20
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 impact of cancelled trade shows on our revenues, as a result of COVID-19.
Our top five customers accounted, in the aggregate, for approximately 7% of our total revenues in the three and six months endedDecember 31, 2020 , as compared to 11% and 10% in the same periods of the prior year. As a result, the loss of those customers, or a significant decrease in the volume of authentication and grading submissions from them, could cause our net revenues to decline and, therefore, could adversely affect our results of operations. 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 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 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 collectibles 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 the 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 theU.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. Additionally, although it may appear to be counterintuitive, we believe that the COVID-19 pandemic has actually contributed to the substantial increases we have experienced in trading card submissions and revenues in the three and six months endedDecember 31, 2020 , because sports enthusiasts and other collectors have had to spend considerably more time at home and have been unable to attend live sporting events as a result of the COVID-19 pandemic and that, , in turn, appears to have led to renewed interest in collecting and in the on-line buying and selling of sports and other cards. There is no assurance that the renewed interest in collecting and in the on-line buying and selling of sports and other cards will continue after the pandemic finally subsides. 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. 21 In addition to the operating performance of our businesses, and, in particular our trading cards / autographs and coins businesses, which accounted for approximately 98% of our revenues in the three and six months endedDecember 31, 2020 , 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 tothe United States fromChina , due to exchange control regulations inChina .
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
We expect that internally generated cash flows, current cash and cash equivalent balances and borrowings under our Credit Line, if necessary, will be sufficient to fund our operations at least through the end ofDecember 2021 .
Critical Accounting Policies and Estimates
During the three and six months endedDecember 31, 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 atDecember 31, 2020 , andJune 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 or 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, included elsewhere in this Report. 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 to be recognized atDecember 31, 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 93% of our consolidated revenues in the six months endedDecember 31, 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. 22
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 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. 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 and six months endedDecember 31, 2020 , we recognized$1,070,000 and$3,376,000 in revenue from the deferred revenue balance of$4,968,000 atJune 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.
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 when 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. 23
During the first quarter endedSeptember 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 the respective carrying values 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 Expense
We recognize stock-based compensation expense 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, (throughDecember 31, 2020 ), 2020 and 2019, respectively, with vesting in three annual installments on the last day of each of the fiscal years following the grants, with the vesting of each such installment contingent on the LTIP 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. As discussed above, at the Effective time of the Merger, (1) any vesting conditions applicable to RSUs were automatically accelerated in full, and (2) such RSUs were cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such RSU award by (B) the Offer Price, less applicable taxes required to be withheld with respect to such payment.
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 endingJune 30, 2021 , 2022 and 2023, (each a "Performance Period"), in fiscal 2021 (throughDecember 31, 2020 ), 2020 and 2019, the Compensation Committee of the Board of Directors, 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 each Performance Period, subject to possible downward or upward adjustment of 20% of the preliminary vested 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. In the normal course, 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. 24 For any of the PSUs to vest, an LTIP Participant must remain in the continuous service of the Company throughJune 30, 2021 for the fiscal 2019 PSUs,June 30, 2022 for the fiscal 2020 PSUs, andJune 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. PSUs that fail to vest will be forfeited. As discussed above, at the Effective time of the Merger, (1) any vesting conditions applicable to PSUs were automatically accelerated in full, and (2) such PSUs were cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such PSU award by (B) the Offer Price, less applicable taxes required to be withheld with
respect to such payment. Non LTIP Stock Awards In the first quarter of fiscal 2021, 10,812 fully vested shares were granted to certain management employees and to five new outside directors appointed during the quarter, for an expense of approximately$503,000 in the six months endedDecember 31, 2020 . Accelerated Vesting
In the three and six months endedDecember 31, 2020 , the vesting of a total of 43,792 LTIP equity awards (of which 41,450 had been granted to the Company's CEO,Mr. Orlando ), was accelerated in order to mitigate against potential adverse tax consequences under Section 280(g) of the Tax Code. Stock-based compensation expense of approximately$617,000 was recognized for the acceleration of these equity awards in the three and six months endedDecember 31, 2020 . Total stock-based compensation expense recognized in the three and six months endedDecember 31, 2020 was$1,816,000 and$2,956,000 , respectively, as compared to$341,000 and$605,000 in the three and six months endedDecember 31, 2019 .
Results of Operations for the Three and Six Months Ended
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), andCollectors 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. 25
The following tables set forth the information regarding our net revenues for
the three and six months ended
Three Months Ended December 31,
2020 2019 Increase (Decrease)
% of Net % of Net
Amount Revenues Amount Revenues Amount %
Authentication and grading fees $ 32,877 92.8 % $ 17,766 91.3 %$ 15,111 85.1 % Other related revenues 2,563 7.2 % 1,690 8.7 % 873 51.7 % Total service revenues$ 35,440 100.0 %$ 19,456 100.0 %$ 15,984 82.2 % Six Months Ended December 31, 2020 2019 Increase (Decrease) % of Net % of Net Amount Revenues Amount Revenues Amount % Authentication and grading fees$ 61,574 93.0 %$ 35,866
90.4 %$ 25,708 71.6 % Other related revenues 4,651 7.0 % 3,800 9.6 % 851 22.4 % Total service revenues$ 66,225 100.0 %$ 39,666 100.0 %$ 26,559 67.0 %
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 and six months ended
Three Months Ended December 31,
2020 2019 2020 vs. 2019
% of Net % of Net Increase (Decrease)
Amount Revenues Amount Revenues Amounts %
Cards / autographs (1) $ 23,066 65.1 % $ 8,079 41.5 % $ 14,987 185.5 %
Coins:
United States 8,734 24.7 % 8,026 41.2 % 708 8.8 %
China 2,019 5.7 % 1,957 10.1 % 62 3.2 %
France & Hong Kong 856 2.4 % 717 3.7 % 139 19.4 %
Total Coins 11,609 32.8 % 10,700 55.0 % 909 8.5 %
Other (2) 765 2.1 % 677 3.5 % 88 13.0 %
$ 35,440 100.0 % $ 19,456 100.0 % $ 15,984 82.2 %
Six Months Ended December 31,
2020 2019 2020 vs. 2019
% of Net % of Net Increase (Decrease)
Amount Revenues Amount Revenues Amounts %
Cards / autographs (1) $ 41,678 62.9 % $ 16,172 40.8 % $ 25,506 157.7 %
Coins:
United States 17,900 27.0 % 16,717 42.1 % 1,183 7.1 %
China 3,589 5.4 % 3,264 8.3 % 325 10.0 %
France & Hong Kong 1,570 2.4 % 1,701 4.3 % (131 ) (7.7 %)
Total Coins 23,059 34.8 % 21,682 54.7 % 1,377 6.4 %
Other (2) 1,488 2.3 % 1,812 4.5 % (324 ) (17.9 %)
$ 66,225 100.0 % $ 39,666 100.0 % $ 26,559 67.0 %
(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.
In the three months ended December 31, 2020 , our total revenues increased by
$15,984,000 , or 82.2% to a quarterly record of $35,440,000 , from $19,456,000 in
the three months ended December 31, 2019 . That increase was attributable to
increases of $15,111,000 , or 85.1%, in authentication and grading fees and
$873,000 , or 51.7%, in other related services.
In the six months ended
26 Revenues from other related services included increased collectors club revenues (for both our cards / autographs and coin businesses) and higher third-party affiliate revenue programs, partially offset by a reduction in Expos trade
show revenues, due to COVID-19. Cards/Autographs Revenues Revenues from our trading cards / autographs business showed accelerated growth over prior year periods in the three and six months endedDecember 31, 2020 and revenues increased in the second quarter by 185.5% to a quarterly record of$23,066,000 , due to record demand for our services over recent quarters. We have been increasing capacity, which has allowed us to increase the number of cards authenticated and graded over prior year periods, which combined with significantly higher ASPs earned from customers requiring faster turnaround times for their cards / autographs, resulted in the significant revenues increase in both the second quarter and the first-half of the year. Our card / autographs business has achieved quarter-over-quarter revenue growth in 41 of our last 42 quarters, although earlier period increases were not at current
year levels. The increases in volume of trading cards and autographs we were able to authenticate and grade during the first six months of this year comprised a higher mix of higher priced top-tier services which was reflected in a higher ASP as compared to the prior year six months. Our remaining backlog atDecember 31, 2020 was comprised, to a greater extent, of submissions for lower priced services. Consequently, we expect that the rate of growth of trading cards / autographs revenues will slow somewhat over time; but revenues in this year's second half will nevertheless substantially exceed the trading cards / autographs revenues generated in the second half of last year. Coin Revenues
U.S. coin revenues increased by 8.8% and 7.1% in this year's second quarter and six months, respectively, as compared to the same respective periods of last year, and primarily reflected (i) higher modern fees of$968,000 , or 48.6%, and$1,240,000 , or 26.2% respectively, due to higher number of modern coins authenticated and graded from recent releases of coins by the Mint, and (ii) higher revenues of$286,000 and$503,000 , primarily reflecting a higher number of world coins authenticated and graded in the current year periods in theU.S. Those increases were partially offset by lower coin show revenues of$395,000 , or 29.6%, and$614,000 , or 20.3%, respectively, due to the effects of COVID-19, as discussed above under the Recent Developments: COVID-19 and lower vintage coin revenues of$201,000 in this year's second quarter, due to the absence of a large customer collection that was authenticated and graded in last year's second quarter. OurChina operation continued to generate improved revenues, despite the impact of COVID-19 on the three and six months endedDecember 31, 2020 . We generated revenues of about the same level as the second quarter of fiscal 2020, which was prior to COVID-19. In the current year periods, we added local authentication and grading capacity inChina to help offset the effect of travel restrictions that continue to prevent ourU.S. coin experts from travelling toChina in support of authentication and grading events. Revenue generation at ourHong Kong andFrance offices continued to suffer in the current year periods, due to the international travel restrictions. As a result, all coins submissions comprising theHong Kong andFrance revenues need to be authenticated and graded in theU.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 mainly operations and grading personnel capacity to address the
continued record backlog in that business, and we will further utilize the
additional space we began leasing in
As previously disclosed, our third fiscal quarter endingMarch 31, 2021 , is typically our seasonally strongest quarter of the year for coins inthe United States due to the release of Gold andSilver Eagles by the Mint that occur in that quarter, and we are hopeful that this will continue this year's third quarter. However, COVID-19 may adversely affect Mint production. See Recent Developments: COVID-19 above. 27 With respect toChina , we will continue to focus on increasing local capacity to offset the travel restrictions discussed above which we expect will facilitate revenue growth over time. In addition, when travel restrictions are lifted, we will resume sending ourU.S. experts to support that business. 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 and six
months ended
Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
% of % of % of % of
Amount Revenues Amount Revenues Amounts Revenues Amounts Revenues
Gross profit $ 22,703 64.1 % $ 10,923 56.1 % $ 42,014 63.4 % $ 23,032 58.1 %
As indicated in the above table, our gross profit margin was 64.1% and 63.4%,
respectively, for the three and six months ended December 31, 2020 as compared
to 56.1% and 58.1% in the same periods of the prior year. The higher gross
profit in the current year periods was, primarily, due to the higher ASP earned
in our cards and autographs business, resulting from customers paying higher
fees to obtain faster turnaround times of their trading card submissions and a
higher number of cards authenticated and graded in the current year periods, due
to increased capacity. 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. 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 and six months endedDecember 31, 2020 and 2019 (in thousands): Three Months Ended Six Months Ended December 31, December 31, 2020 2019 2020 2019 Selling and marketing expenses$ 2,414 $ 2,489 $ 4,683 $ 5,122 Percent of net revenue 6.8 % 12.8 % 7.1 % 12.9 % As indicated in the above table, selling and marketing expenses decreased to 6.8% and 7.1% of net revenues in the three and six months endedDecember 31, 2020 , respectively, as compared to 12.8% and 12.9% in the same periods of the prior year. We benefited from having a record backlog in our cards / autographs business which did not require investment in sales and marketing programs. In absolute dollars, selling and marketing expenses were substantially unchanged in this year's second quarter and decreased by$439,000 in this year's six months endedDecember 31, 2020 , primarily due to the cancellation of trade shows as a consequence of COVID-19. Those cost savings were partially offset by higher business development and customer service personnel costs incurred, due to the growth of our cards and autographs business. 28
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 and six months ended
December 31, 2020 and 2019, (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2020 2019 2020 2019
General and administrative expenses $ 10,284 $ 5,160 $ 19,517 $ 9,999
Percent of net revenue 29.1 % 26.5 % 29.4 % 25.3 %
As indicated in the above table, G&A expenses increased to 29.1% and 29.4% of revenues in the three and six months endedDecember 31, 2020 , respectively, as compared to 26.5% and 25.3% in the same periods of the prior year. In absolute dollars, G&A expenses increased by$5,124,000 in this year's second quarter and by$9,518,000 in the six months endedDecember 31, 2020 as compared to same periods of the prior year and primarily included (i) higher professional fees of$3,071,000 and$5,307,000 in the three and six months endedDecember 31, 2020 , respectively, incurred in connection with the Tender Offer which was negotiated in this year's second quarter and the resolution of the activist issue in this year's first quarter and (ii) higher non-cash stock based compensation costs of$1,463,000 and$2,349,000 , respectively, in the three and six months endedDecember 31, 2020 (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 and Estimates: Stock-Based Compensation Expense above, the Company recognized stock-based compensation expense as follows (in thousands): Three Months Ended Six Months Ended December 31, December 31, Included In: 2020 2019 2020 2019
Selling and marketing expenses
31
General and administrative expenses 1,792 329 2,925 576
$ 1,816 $ 341 $ 2,956 $ 605
The increases in non-cash stock based compensation expense to $1,816,000 and
$2,956,000 in the three and six months ended December 31, 2020 as compared to
the $341,000 and $605,000 in the three and six months ended December 31, 2019 ,
were primarily attributable to (i) the grant of fully vested shares, with grant
date fair values of $503,000 to certain management employees and five new
outside directors during the first quarter and (ii) increased expense recognized
under the Company's multi-year LTIPs and (iii) approximately $617,000 of expense
attributable to the accelerated vesting of shares that occurred in December
2020 , in connection with the Tender Offer.
The following table sets forth unrecognized non-cash stock-based compensation
expense totaling $3,742,000 related to unvested stock-based equity awards
outstanding at December 31, 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 in the table do not include the costs of (i) possible grants
of additional stock-based compensation awards in the future, (ii) PSUs granted
in fiscal 2021 and 2020, for which goals are to be established in fiscal 2022
and 2023 and (iii) the effect of the change of control that will occur if the
Tender Offer is consummated, as discussed in under Recent Developments: Tender
Offer above.
Amount
Fiscal Year Ending June 30, (in thousands)
2021 (remaining 6 months) $ 2,050
2022 1,289
2023 403
$ 3,742
29
Income Tax Expense
Three Months Ended Six Months Ended
December 31, December 31,
2020 2019 2020 2019
(In Thousands)
Provision for income taxes $ 2,787 $ 664 $ 4,652 $ 1,759
The income tax provisions in the three and six months ended December 31, 2020
and 2019, were determined based on estimated annual effective tax rates ("ETR")
of approximately 27%, and 26%, respectively, as compared to 20% and 22% in the
same periods of the prior year. All periods were adjusted for excess tax
benefits or deficiencies. The ETRs in the three and six months ended December
31, 2020 , reflect limitations on the deductibility of (i) Tender Offer
transaction costs, that were incurred in this year's second quarter and (ii)
compensation costs in accordance with Section 162(m) of the Federal Tax Code.
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$1.3 million atDecember 31, 2020 under our Term Loan and we have$15 million of availability, but no borrowings, under our Revolving Line of Credit.
At
Cash Flows Cash Provided by Operating Activities. During the six months endedDecember 31, 2020 and 2019, net cash provided by continuing operating activities was$22,817,000 and$7,917,000 , respectively. The increase in cash provided by operating activities in the six months endedDecember 31, 2020 , reflects the significantly higher operating results of our businesses in that period, as adjusted for non-cash expenses and changes in working capital. The higher level of accounts payable and accrued expenses atDecember 31, 2020 as compared toJune 30, 2020 , reflects approximately$3.0 million of accrued professional fees incurred in connection with the Tender Offer. In addition, the increase in deferred revenues of$2.6 million atDecember 31, 2020 as compared toJune 30, 2020 , reflects higherCollector Club memberships, resulting from an increase in the number ofCollectors Club members and higher customer advance payments
for services and subscriptions. Cash used in Investing Activities. Investing activities used cash of$3,288,000 and$1,424,000 in the six months endedDecember 31, 2020 and 2019, respectively. In the six months endedDecember 31, 2020 , we used$2,570,000 for capital expenditures (comprised IT and infrastructure costs incurred due to the addition of operations personnel to increase capacity, combined with on-going tooling requirements to support the growth of the business) and$718,000 for capitalized software costs. In the six months endedDecember 31, 2019 , we used$803,000 for capital expenditures and$621,000 for capitalized software costs. Cash used in Financing Activities. In the six months endedDecember 31, 2020 and 2019, financing activities used net cash of$5,523,000 and$3,529,000 , respectively. The cash dividends paid to stockholders were$3,169,000 in six months endedDecember 31, 2020 , as compared to$3,154,000 in the six months endedDecember 31, 2019 . In both six months periods, we repaid$375,000 under our Term Loan (see "Term Loan" below) and in the six months endedDecember 31, 2020 , we used cash of$1,979,000 to satisfy tax withholdings for employee vested awards under our equity incentive programs. 30
Outstanding Financial Obligations
Lease Obligations The Company has various operating lease commitments for facilities and equipment some of which contain renewal options. 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 space, throughSeptember 2028 , for its operations and headquarters facility inSanta Ana, California . OnOctober 1, 2020 , the Company signed an amendment to this lease to increase the rentable square feet by 62,870, to a total of 125,625 square feet of space occupied. As ofDecember 31, 2020 , the remaining aggregate minimum obligations over the term of the expanded lease was approximately$18.2 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 offices inHong Kong , which commenced inJuly 2018 , with aggregate minimum obligations over the term of that lease of approximately$625,000 .
At
Year Ending June 30, Gross Amount
2021 (remaining 6 months) $ 1,287
2022 2,262
2023 1,680
2024 1,798
2025 2,940
Thereafter 10,155
$ 20,122
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 term 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 lender'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 December 31, 2020 .
At December 31, 2020 , the Company had $1,313,000 of outstanding borrowings under
this Term Loan of which $750,000 is classified as a current liability and
$563,000 is classified as a long-term liability in the condensed consolidated
balance sheet at December 31, 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 .
31
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 December 31, 2020 the Company was
in compliance with those covenants. Availability to borrow under the line of
credit was $15,000,000 at December 31, 2020 as there were no borrowings
outstanding under the line of credit as of that date.
Dividends. Our dividend policy during the period called 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 cashdividends 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
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.
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