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ITEM
2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking
Statements
The
discussion in this Item 2 of this Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “1934 Act”). Those Sections of the 1933 Act and 1934 Act provide
a “safe harbor” from liability for forward-looking statements in order to encourage companies to provide prospective
information about their expected future financial performance so long as they provide cautionary statements identifying important
factors that could cause their actual results to differ from projected or anticipated results. Other than statements of historical
fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning
our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking
statements. Forward-looking statements often include the words “believe,” “expect,” “anticipate,”
“intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future
or conditional verbs such as “will,” “would,” “should,” “could,” or “may.”
Our actual financial performance in future periods may differ significantly from the currently expected financial performance
set forth in the forward-looking statements contained in this Report due to the risks to which our business is subject and other
circumstances or occurrences which are not presently predictable and over which we 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.
Recent
Developments:
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.
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(ii)
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Coronavirus
(COVID-19)
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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.
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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 October 2020, we leased additional
space at our headquarters and operating facility in Santa Ana, California, to increase operating capacity in response to the
on-going demand 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 December 2020, but which did not require us to cease operations.
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●
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We
earn higher average service fees from onsite authentication and grading activities at many coin trade shows and to a lesser
extent, trading card shows. All scheduled trade shows in the first half of fiscal 2021 were cancelled by the operators of
those shows due to the pandemic. However, we replaced some of the cancelled U.S. coins shows with smaller coin authentication
and grading events that we conducted ourselves, and were successful in generating show revenues of approximately of $0.9 million
and $2.4 million in the three and six months ended December 31, 2020 as compared to approximately $1.3 million and $3.0 million
in the same periods of fiscal 2020, respectively. In addition, we encouraged customers to redirect trade show submissions
to our California operations facility, for authentication and 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.
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●
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There
continues to be uncertainty as to the U.S. Mint’s, (the “Mint”) 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 December 31, 2020 we were successful in increasing U.S. modern coin revenues by $1.0 million and $1.2 million
respectively, through customer engagement efforts around older Mint programs. At this time, our expectation is that the high-volume
Silver Eagle Mint program that typically 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.
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●
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Our
China coin operation generated revenues of approximately $2.0 million and $3.6 million in the three and six months ended December
31, 2020, as compared to approximately $2.0 million and $3.3 million in the same pre-COVID periods of fiscal 2020. At December
31, 2020 we had a sizeable backlog of submissions for authentication and grading in China and therefore, we will continue
to ramp up our China operations through adding local grading capacity, when possible. However, while the travel restrictions
that prevent our U.S. coins experts from travelling to China are in effect, growth in China will continue to be hampered.
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●
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Our
Expos Long Beach trade shows scheduled to take place in the first and 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 December 31, 2020 as compared to
$464,000 in the same period of fiscal 2020.
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Despite
the uncertainties arising from COVID-19 discussed above, our cards and autographs business had a record backlog as of December
31, 2020 and continues 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.
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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 December 31, 2020
The
following table sets forth comparative financial data for the three and six months ended December 31, 2020 and 2019 (in thousands):
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Three Months Ended December 31,
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Six Months Ended December 31,
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2020
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2019
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2020
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2019
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Amount
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% of Net Revenues
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Amount
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% of Net Revenues
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Amount
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% of Net Revenues
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Amount
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% of Net Revenues
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Net Revenues
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$
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35,440
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100.0
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%
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$
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19,456
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100.0
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%
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$
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66,225
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100.0
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%
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$
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39,666
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100.0
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%
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Cost of Revenues
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12,737
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35.9
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%
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8,533
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43.9
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%
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24,211
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36.6
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%
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16,634
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41.9
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%
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Gross Profit
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22,703
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64.1
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%
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10,923
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56.1
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%
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42,014
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63.4
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%
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23,032
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58.1
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%
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Selling and marketing expenses
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2,414
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6.8
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%
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2,489
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12.8
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%
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4,683
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7.1
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%
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5,122
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12.9
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%
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General & administrative expenses
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10,284
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29.1
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%
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5,160
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26.5
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%
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19,517
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29.4
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%
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9,999
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25.3
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%
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Operating income
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10,005
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28.2
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%
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3,274
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16.8
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%
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17,814
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26.9
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%
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7,911
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19.9
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%
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Interest and other income (expense), net
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175
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0.5
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%
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4
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-
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193
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0.3
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%
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75
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0.2
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%
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Income before provision for income taxes
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10,180
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28.7
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%
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3,278
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16.8
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%
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18,007
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27.2
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%
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7,986
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20.1
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%
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Provision for income taxes
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2,787
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7.8
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%
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664
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3.4
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%
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4,652
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7.0
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%
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1,759
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4.4
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%
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Net income
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$
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7,393
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20.9
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%
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$
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2,614
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13.4
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%
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$
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13,355
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20.2
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%
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$
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6,227
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15.7
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%
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|
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Net income per diluted share
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$
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0.81
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$
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0.29
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$
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1.47
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$
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0.69
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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 three and 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
ended December 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 ended December 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 Ended December 31, 2020, as compared to the Three and Six Months Ended December 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 ended December 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, at December 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 the U.S., depending on the timing and size of modern coin marketing programs by the United States Mint and by customers
or dealers who specialize in sales of such coins. Our overseas revenues can fluctuate on a quarterly basis due to the number of
authentication and grading events we conduct at our overseas operations on a quarterly basis. See Recent Developments: COVID-19
above.
Our
revenues and gross profit margin can also be affected by the number of primarily coin authentication and grading submissions we
receive at collectibles trade shows, where we provide on-site authentication and grading services to show attendees, because show
attendees typically request higher priced same-day turnaround for the coins they submit to us for authentication and grading at
those shows. In addition, our cards and autographs business also provides on-site authentication and grading at one large national
convention on an annual basis. For coins, the number of trade show submissions varies from period to period depending upon a number
of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought
and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and
gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by dealer and collectors
sentiment arising from short-term changes in the prices of gold that may occur around the time of shows, because short-term changes
in gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows. See Recent Developments:
COVID-19 above which discusses the 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 ended December
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 the U.S. dollar, and uncertainties regarding the
strength of the economy in the United States, Western Europe and China, because conditions and uncertainties of this nature often
lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the
purchasing power of the U.S. currency; as well as an alternative to investments in government bonds and other treasury instruments;
and (v) the performance and volatility of the trading cards and gold and other precious metals markets, which can affect the level
of purchases and sales of collectibles, because investors and consumers will often increase their purchases of those 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 the U.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally
decline during periods characterized by lower market prices for collectibles, economic downturns or recessions, declines in consumer
and business confidence, an absence of inflationary pressures, or periods of stagnation or a downward trend in the market prices
of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift
funds from gold to other investments during periods of economic growth and growing consumer and business confidence and from stocks
and other investments to gold during periods of economic uncertainties and decreases in disposable income and consumer and in
business confidence.
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 ended December 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.
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 ended December 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 to the United States from China, due to exchange control regulations in China.
As
discussed in note 1 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, and in “Liquidity
and Capital Resources” below, the Company continues to have a $15,000,000 two-year unsecured revolving credit line
through March 2022.
We
expect that internally generated cash flows, current cash and cash equivalent balances and borrowings under our Credit Line, if
necessary, will be sufficient to fund our operations at least through the end of December 2021.
Critical
Accounting Policies and Estimates
During
the three and six months ended December 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 at December
31, 2020, and June 30, 2020, included elsewhere in this Report, includes the liability to make
lease payments (the lease liability) and a right-of-use asset, representing our right to use the underlying asset for the lease
term. We do not recognize lease assets 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 at December 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 ended December 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.
In
accordance with ASC 606 we recognize revenue for our main revenue streams as follows:
Authentication
and Grading Revenues: As the time it takes to authenticate and grade the collectible is short, we recognize revenue at the
time of shipment (i.e. point of time) of the authenticated and graded collectible to the customer, net of any taxes collected.
Due to the insignificant delay between the completion of our authentication and grading services and the shipment of the collectible
back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sale of
special coin inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers
prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record
those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to the customer.
At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct
this amount from deferred revenue. For certain dealers to whom we extend credit, we record revenue at the time of shipment of
the authenticated and graded collectible to the dealer. We provide a limited warranty covering the coins and trading cards that
we authenticate and grade.
Collectors
Club Revenues: These revenues represent membership fees paid by customers for annual memberships in our Collectors Club. Those
membership fees entitle members to access our on-line and printed publications and, depending on their membership level, to receive
vouchers for authentication and grading services during the membership period. We allocate revenue between the vouchers and the
membership. We recognize revenue attributable to the authentication and grading vouchers consistent with our authentication and
grading services above. The balance of the membership fees is recognized ratably over the life of the membership. Memberships
are paid in advance of the membership period and prepaid memberships fees are classified as deferred revenue.
Certified
Coin Exchange Subscription Revenues: We recognize subscription revenues related to our CCE exchange for certified coins, ratably
over the relevant subscription period. Subscriptions are typically billed and paid on a monthly basis, although certain quarterly
and annual subscriptions can be paid in advance. Prepaid subscriptions are classified as part of deferred revenue.
Expos
Trade Show Revenue: We recognize fees earned from promoting, managing, and operating trade shows in the periods in which the
shows take place. Trade show booth fees are typically paid to us in advance. Certain fees that are paid to conduct auctions at
the show are paid to us at the end of the show. Prepaid show fees are classified as part of deferred revenue.
Advertising
and Commission Revenues: Advertising revenues are recognized in the period when an advertisement is displayed in our publications
or websites and customers typically have 30 day credit terms. Click-through commission revenues earned through our websites from
third party affiliate programs are recognized in the period in which the commissions are earned, and such commissions are paid
in the following month.
Product
Sales: Product sales consist primarily of sales of collectibles coins that we have purchased pursuant to our coin authentication
and grading warranty program. We recognize revenues from coin sales when the coins are shipped or delivered to customers or if
the coins are sold through auction, when the auction settles. However, those sales are not considered to be the focus of nor an
integral part of the Company’s ongoing revenue generating activities.
Contract
Balances. As discussed above, the timing of revenue recognition can differ from the timing of invoicing to customers. Contract
liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We
refer to these contract liabilities as “Deferred Revenue” in the accompanying condensed consolidated balance sheets.
During the three and six months ended December
31, 2020, we recognized $1,070,000 and $3,376,000 in revenue from the deferred revenue balance
of $4,968,000 at June 30, 2020.
Shipping
and Handling Costs
Shipping
and handling costs incurred to process and return customer collectibles submitted to us for grading or authentication are recorded
as costs of revenues, net of amounts received from customers, in accordance with the guidance for Principals versus Agents as
set out in ASC 606.
Goodwill
and other Long-Lived Assets
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.
During
the first quarter ended September 30, 2020, we completed the annual goodwill impairment assessment with respect to the goodwill
acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess
of their fair values over 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, (through December 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 ending June 30, 2021, 2022 and 2023, (each a “Performance Period”), in fiscal 2021 (through
December 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.
For
any of the PSUs to vest, an LTIP Participant must remain in the continuous service of the Company through June 30, 2021 for the
fiscal 2019 PSUs, June 30, 2022 for the fiscal 2020 PSUs, and June 30, 2023 for fiscal 2021 PSUs and the threshold net cash flows
goal must be achieved in at least one of the years, during the three year Performance Period. 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 ended December 31, 2020.
Accelerated
Vesting
In
the three and six months ended December 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 ended December 31, 2020.
Total
stock-based compensation expense recognized in the three and six months ended December 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 ended December 31, 2019.
Results
of Operations for the Three and Six Months Ended December 31, 2020 as compared to the Three and Six Months Ended December 31,
2019
Net
Revenues
See
Recent Developments: COVID-19 in conjunction with the following discussion.
Net
revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including
trading cards and autographs, coins, and related special inserts, if applicable. To a lesser extent, we generate collectibles
related service revenues (which we refer to as “other related revenues”) from advertising and commissions earned on
our websites and in printed publications and collectibles price guides; subscription/membership revenues related to our CCE (dealer-to-dealer
Internet bid-ask market for certified coins), and Collectors Club memberships; and fees earned from promoting, managing and operating
collectibles trade shows. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which
consist primarily of coins that we have purchased under our coin authentication and grading warranty policy. We do not consider
such product sales to be the focus or an integral part of our ongoing revenue generating activities.
The
following tables set forth the information regarding our net revenues for the three and six months ended December 31, 2020 and
2019 (in thousands):
|
|
|
Three Months Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Increase (Decrease)
|
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
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)
|
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
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 December 31, 2020 and 2019 (in thousands):
|
|
|
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 December 31, 2020, our total revenues increased by $26,559,000, or 67.0%, to a first half-year record of
$66,225,000 from $39,666,000 in the six months ended December 31, 2019. That increase was attributable to an increase of $25,708,000,
or 71.6%, in authentication and grading fees and $851,000, or 22.4%, in other related services.
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 ended
December 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 at December 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 the U.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.
Our
China operation continued to generate improved revenues, despite the impact of COVID-19 on the three and six months ended December
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 in China to help offset the effect of travel restrictions
that continue to prevent our U.S. coin experts from travelling to China in support of authentication and grading events.
Revenue
generation at our Hong Kong and France offices continued to suffer in the current year periods, due to the international travel
restrictions. As a result, all coins submissions comprising the Hong Kong and France revenues need to be authenticated and graded
in the U.S. and returned to those local offices, which delays turnaround times to customers and revenue generation at those offices.
Our
cards / autographs and coin authentication and grading revenues represented approximately 98% of total revenues in the current
quarter and reflects the continued importance of those two businesses to our overall financial performance.
For
the reasons discussed above under “Factors That Can Affect our Revenues and Gross Profit Margin”, and “Impact
of Economic Conditions on our Financial Performance”, the level of coin revenues can be volatile.
With
respect to our cards and autographs business, we plan on continuing to increase 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
October 2020, in support of the growth of the business.
As
previously disclosed, our third fiscal quarter ending March 31, 2021, is typically our seasonally strongest quarter of the year
for coins in the United States due to the release of Gold and Silver 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.
With
respect to China, 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 our
U.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 December 31, 2020 and 2019 (in thousands):
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amounts
|
|
|
% of
Revenues
|
|
|
Amounts
|
|
|
% of
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 ended December 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
ended December 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 ended December 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.
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 ended December
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 ended December 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 ended December 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 ended December 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
|
|
$
|
24
|
|
|
$
|
12
|
|
|
$
|
31
|
|
|
$
|
29
|
|
|
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.
|
Fiscal Year Ending June 30,
|
|
Amount
(in
thousands)
|
|
|
2021 (remaining 6 months)
|
|
$
|
2,050
|
|
|
2022
|
|
|
1,289
|
|
|
2023
|
|
|
403
|
|
|
|
|
$
|
3,742
|
|
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 at December 31, 2020 under our Term Loan and we have $15 million of availability, but no borrowings,
under our Revolving Line of Credit.
At
December 31, 2020, we had cash and cash equivalents of approximately $42,646,000, as compared to cash and cash equivalents of
$28,640,000 at June 30, 2020.
Cash
Flows
Cash
Provided by Operating Activities. During the six months ended December 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 ended December 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 at December 31,
2020 as compared to June 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 at December 31, 2020 as compared to June 30,
2020, reflects higher Collector Club memberships, resulting from an increase in the number of Collectors 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 ended December
31, 2020 and 2019, respectively. In the six months ended December 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 ended
December 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 ended December 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 ended December 31, 2020, as
compared to $3,154,000 in the six months ended December 31, 2019. In both six months periods, we repaid $375,000 under our Term
Loan (see “Term Loan” below) and in the six months ended December 31, 2020, we used cash of $1,979,000 to satisfy
tax withholdings for employee vested awards under our equity incentive programs.
Outstanding
Financial Obligations
Lease
Obligations
The
Company has various operating lease commitments for facilities and equipment some of which contain renewal options. On February
3, 2017, the Company, as tenant, entered into a triple net lease pursuant to which the Company is leasing approximately 62,755
rentable square feet space, through September 2028, for its operations and headquarters facility in Santa Ana, California. On
October 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 of December
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 our Shanghai office that commenced in November
2017, with aggregate minimum obligations over the term of the lease of approximately $3.0 million and a three year lease for our
offices in Hong Kong, which commenced in July 2018, with aggregate minimum obligations over the term of that lease of approximately
$625,000.
At
December 31, 2020, future minimum lease payments under the lease agreements associated with our operations were as follows (in
thousands):
|
Year Ending June 30,
|
|
Gross Amount
|
|
|
2021 (remaining 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.
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 cash dividends in the future.
Future
Uses of Cash.
We
plan to use our cash resources, consisting of available cash and cash equivalent balances, internally generated cash flows, and
borrowings under our Credit Line (i) to introduce new collectibles related services and initiatives for our existing and new customers
(ii) to fund the expansion of our business (domestically and internationally); (iii) to fund capital expenditures and working
capital requirements; (iv) to fund possible start-ups or acquisitions of businesses (v) to fund repayments under the term loan;
(vi) to fund the payment of cash dividends; and (vii) for other general corporate purposes.
Although
we have no current plans to do so, we also may seek additional borrowings and we may issue additional shares of our stock to finance
the growth and international expansion of our businesses. However, there is no assurance that we would be able to raise additional
borrowings or capital on terms acceptable to us, if at all.
Recent
Accounting Pronouncements
In
June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instrument. Subsequent to the issuance of ASU 2016-13, the FASB clarified the guidance through
several ASUs. The collective new guidance (ASC 326) generally requires entities to use a current expected credit loss model, which
is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an
impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The
entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable
forecasts. ASC 326 is effective for annual and interim fiscal reporting periods beginning after December 15, 2022, with early
adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is continuing to evaluate the expected
impact of this ASC 326 but does not expect it to have a material impact on its consolidated financial statements upon adoption.
