ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Consolidated Financial Data” included above and our Consolidated Financial Statements and the related notes, included below in this Part II of this Annual Report. This discussion also should be read in conjunction with the information in Item IA of Part I of this Report, entitled “Risk Factors,” which contains information about certain risks and uncertainties that can affect our business and our financial performance in the future.
Introduction and Overview
Our 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, and sports and historical memorabilia. We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to buy or sell; thereby enhancing their marketability and providing increased liquidity to the dealers and collectors and consumers that own, buy and sell such collectibles.
We principally generate revenues from the fees paid by our customers for our authentication and grading services. To a much lesser extent, we generate revenues from “other related revenues” which consist of: (i) the sale of advertising and commissions earned on our websites; (ii) the sale of printed publications, and advertising in those publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in collectibles among collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins; and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from sales of our collectibles inventory, which is primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus of nor an integral part of, our on-going revenue generating activities.
Factors That Can Affect Operating Results and our Financial Position
Factors That Can Affect our Revenue. Our authentication and grading fees accounted for approximately 88% of our total net revenues in the three year ended June 30, 2019. The amounts of those fees are primarily driven by the volume and mix of coins and trading cards and collectibles sales and purchase transactions by collectibles dealers and collectors, because our authentication and grading services generally facilitate sales and purchases of coins and trading cards by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins, trading cards and autographs to us for authentication and grading at those times when they are in the market to sell or buy those collectibles.
The amounts of our authentication and grading revenues are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards, (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards, on the one hand, and modern coins and trading cards, on the other hand, because, vintage or classic collectibles are of significantly higher value and justify a higher average service fee.
Our U.S. coin authentication and grading revenues are also impacted by the volume of modern coin submissions, which can fluctuate from period to period, depending on the timing and size of modern coin marketing programs conducted by the United States Mint and by customers or dealers who specialize in sales of such coins.
Our revenues are also affected by the volume of coin authentication and grading submissions we receive at collectibles trade shows where we provide on-site authentication and grading services to show attendees, because they typically request higher-priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. The level of trade show submissions varies from period to period, depending upon a number of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by short-term changes in the prices of gold that can occur around the time of the shows, because gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows.
Due to mix issues discussed above, the number of units authenticated and graded can vary by period between coins, and cards and autographs. For example, the total number of units authenticated and graded by the Company was approximately 4.8 million units in both fiscal 2017 and 2018 and 4.6 million in fiscal 2019. Of the total units authenticated and graded, coins represented 64%, 59% and 47% in fiscals 2017, 2018 and 2019, respectively, and cards and autographs represented 36%, 41% and 53% in the same respective periods. There were a lower number of coins authenticated and graded in fiscals 2018 and 2019, primarily reflecting, in fiscal 2018, a lower number of US moderns coins authenticated and graded due to prevailing market conditions and in fiscal 2019, a lower number of modern coins authenticated and graded in China, due to the absence of banking channel submissions (see below).
Revenue generated in a period will vary based on the mix of coins, and cards and autographs authenticated and graded and the average service fees (“ASP”) we charge for such services. Generally, ASPs are higher for coins than for cards and autographs and for vintage units than for modern units. As a result, although fees generated from our authentication and grading services represented about 88% of total revenues each year, in fiscals 2017 through 2019, coin fees represented 74%, 68% and 62% of those fees in fiscals 2017, 2018 and 2019, respectively, and cards and autographs fees represented 26%, 32% and 38% of those fees in the same respective periods. See Results of Operations: Net Revenues below, which discusses revenues in more detail.
Our overseas revenues can fluctuate in China and in our other overseas operations due to the number of authentication and grading events we conduct at those operations on a quarterly basis. The reduction in China revenues to $4.2 million in fiscal 2019, from $7.7 million in fiscal 2018, reflects the absence of any significant revenues from the banking channel in China. As previously reported, through February 2018, we had an exclusive relationship with a banking channel customer in China. Due to changing market conditions, and a desire to broaden our customer base in China, in February 2018, we notified the customer that we had decided to terminate the exclusive relationship but were prepared to continue to authenticate and grade coins on a non-exclusive basis. At this time, we do not expect future coin submissions from this customer. In addition, we cannot predict how successful we will be in attracting submissions from other coin customers in China. However, non-banking channel revenues in China, increased by $0.5 million or 14% in fiscal 2019 as compared to fiscal 2018.
Five of our customers accounted, in the aggregate, for approximately 11%, 16% and 18% of our total net revenues in the years ended June 30, 2019, 2018 and 2017, respectively. In both fiscal 2018 and 2017 the banking channel customer discussed above, accounted for about 6% of net revenues. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.
Factors Affecting our Gross Profit Margins. The gross profit margins we earn on collectibles authentication and grading submissions are impacted by many of the same factors that impact our revenues, as the average service fee and the resulting gross profit margin earned is affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times, and (iii) the level of other related services in any reporting period. In addition, because a significant proportion of our costs of sales are 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.
Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected primarily by the number of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of 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 gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of gold coins, as well as other hard assets if they believe that the market prices of those assets will increase. As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by increases in disposable income and the availability of lower cost borrowings, on the one hand, or increases in inflation or in gold prices, economic uncertainties and declines in business and consumer confidence or a weakening of 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 economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressures, or periods of stagnation or a downward trend in the market prices of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to securities or other investments during periods of economic growth and growing consumer and business confidence and from stocks and other investments to gold during periods of economic uncertainties and decreases in disposable income and consumer and in business confidence.
Factors That Can Affect our Liquidity and Financial Position. A substantial number of our authentication and grading customers pay our authentication and grading fees when they submit their collectibles to us for authentication and grading or prior to the shipment of the collectible back to them. As a result, historically, we have been able to rely on internally generated cash to fund our continuing operations. However, as discussed in note 7 to the Consolidated Financial Statements included elsewhere in this Annual Report, and in “Liquidity and Capital Resources—Outstanding Financial Obligations” below, to augment our cash resources, in January 2017 the Company obtained a $10 million three year unsecured revolving credit line from a commercial bank. In addition, in the first half of fiscal 2018, the Company borrowed $3 million under an unsecured term loan, primarily to fund capital expenditures and costs associated with the move to our new operations and headquarters facility, in the second quarter of fiscal 2018.
In addition to the operating performance of our businesses, and in particular our coin and cards and autographs authentication and grading businesses which accounts for over 90% of our revenues, the overall financial position can also be affected by other factors, including the Company’s tax position and effective tax rate, our obligation to repay borrowings under our Term Loan, the dividend policy adopted by the Board of Directors from time to time, the level of capital expenditures, the Company’s decisions to invest in and to fund start-ups of or the acquisition of new businesses and any capital raising activities or stock repurchases. Furthermore, our domestic cash position can be impacted by delays in the timing of the repatriation of cash balances back to the United States from China, due to the exchange control regulations in China.
On February 4, 2018, the Board of Directors approved a reduction in the amount of our future quarterly cash dividends to $0.175 per share, from $0.35 per share, primarily to provide the Company with additional cash that the Board of Directors believes will be needed to grow the Company's existing businesses, to fund other potential growth opportunities and to enhance the Company's financial flexibility. The Board of Directors also concluded that this change in dividend will make the payment of future cash dividends sustainable for a longer period of time.
We currently expect that internally generated cash flows, current cash and cash equivalent balances and availability of borrowings under our revolving line of credit, will be sufficient to fund our continuing operations at least through the end of fiscal 2020.
Trends in our Businesses
Our overall financial performance is largely dependent on the performance of our coins and trading cards and autographs authentication and grading businesses which can be impacted by the matters as discussed above. Although our coin business, which represented 57%, 63% and 68% of consolidated revenues in fiscal years 2019, 2018 and 2017, respectively, continues to be our largest business, our cards and autographs business is growing more rapidly than our coin business and represented 36%, 31% and 25% of our consolidated revenues in fiscal year 2019, 2018 and 2017, respectively. Our quarterly results can also be significantly impacted by seasonality and the timing of revenues from modern coin programs (that are largely dependent on new coins issuances from the US Mint) and the number of tradeshows or grading events that occur in a quarter both domestically and overseas. See “Factors That Can Affect our Revenue” above.
Overview of Fiscal 2019 Operating Results
The following table sets forth comparative financial data for the years ended June 30, 2019 and 2018:
|
|
Year Ended June 30, 2019
|
|
|
Year Ended June 30, 2018
|
|
|
|
Amount
|
|
|
Percent of
Revenues
|
|
|
Amount
|
|
|
Percent of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
72,453
|
|
|
|
100.0
|
%
|
|
$
|
68,449
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
30,153
|
|
|
|
41.6
|
%
|
|
|
29,471
|
|
|
|
43.1
|
%
|
Gross profit
|
|
|
42,300
|
|
|
|
58.4
|
%
|
|
|
38,978
|
|
|
|
56.9
|
%
|
Selling and marketing expenses
|
|
|
10,361
|
|
|
|
14.3
|
%
|
|
|
10,137
|
|
|
|
14.8
|
%
|
General and administrative expenses
|
|
|
17,597
|
|
|
|
24.3
|
%
|
|
|
19,864
|
|
|
|
29.0
|
%
|
Operating income
|
|
|
14,342
|
|
|
|
19.8
|
%
|
|
|
8,977
|
|
|
|
13.1
|
%
|
Interest income, (expense) net
|
|
|
(69
|
)
|
|
|
(0.1
|
%)
|
|
|
(114
|
)
|
|
|
(0.1
|
%)
|
Other income (expense)
|
|
|
(148
|
)
|
|
|
(0.2
|
%)
|
|
|
29
|
|
|
|
-
|
|
Income before provision for income taxes
|
|
|
14,125
|
|
|
|
19.5
|
%
|
|
|
8,892
|
|
|
|
13.0
|
%
|
Provision for income taxes
|
|
|
4,148
|
|
|
|
5.7
|
%
|
|
|
2,760
|
|
|
|
4.0
|
%
|
Income from continuing operations
|
|
|
9,977
|
|
|
|
13.8
|
%
|
|
|
6,132
|
|
|
|
9.0
|
%
|
Income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
104
|
|
|
|
0.1
|
%
|
Net income
|
|
$
|
9,977
|
|
|
|
13.8
|
%
|
|
$
|
6,236
|
|
|
|
9.1
|
%
|
Net income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.11
|
|
|
|
|
|
|
$
|
0.70
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
Net income
|
|
$
|
1.11
|
|
|
|
|
|
|
$
|
0.71
|
|
|
|
|
|
Net revenues increased by 6% to a record $72.5 million in fiscal 2019, from $68.4 million generated in fiscal 2018 and primarily comprised (i) increased cards and autographs revenues of $5.4 million or 25%, (ii) increased U.S. coin revenues of $2.2 million or 7% partially offset by (iii) decreased China revenues of $3.5 million or 45%.
As result of the improved revenues as discussed above, the gross profit increased by $3.3 million. In addition, general and administrative expenses decreased by approximately $2.3 million, (as discussed in more detail below). This resulted in operating income increasing by $5.4 million or 60% to a record $14.3 million in fiscal 2019, from $9.0 million in fiscal 2018.
These, as well as other factors affecting our operating results are described in more detail below. See “Factors that Can Affect our Operating Results and Financial Position” and “Results of Operations”, below.
Critical Accounting Policies and Estimates
General. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record our assets at the lower of cost, net realizable value or fair value. In determining the fair value of certain of our assets, principally accounts receivable, inventories, goodwill, capitalized software and intangible assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or circumstances that could impact, for example our ability to fully collect our accounts receivable or realize the value of our inventories, in future periods. Those judgments, estimates, and assumptions are based on current information available to us at that time. Many of these conditions and circumstances on which our judgments or estimates are based; however, are outside of our control and, if changes were to occur in the events, or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates. Changes in such estimates may require that we reduce the carrying values of the affected assets on our balance sheet (which are commonly referred to as “write-downs” of the assets involved).
It is our practice to establish reserves, allowances, charges or losses to record such downward adjustments or write-downs in the carrying value of assets, such as, for example, accounts receivable and inventory. Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the period when those reserves, allowances, charges or losses are established or increased to take account of changed conditions or events. As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations.
The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments and judgments about the effects and duration of events or changes in circumstances. For example, it is difficult to predict whether events or conditions, such as increases in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for their full effects to be recognized. Therefore, we make such estimates based upon the information available at that time and reevaluate and adjust the Company’s reserves, allowances, charges or losses on a quarterly basis.
On a quarterly basis, we make estimates or judgements with respect to the (i) valuation of stock-based compensation awards and the timing and recognition of related stock-based compensation expense for the performance shares that are part of the Company’s Long-Term Incentive Plans, (ii) the amount and adequacy of warranty reserves, (iii) the provision for income taxes and the timing of related valuation allowances, (iv) the carrying value of capitalized software costs (v) the valuation of coin and grading consumable inventory, and (vi) the impairment of goodwill and other intangible assets.
In making our estimates and assumptions, we follow GAAP in order to make fair and consistent estimates of the fair value of assets and to establish adequate reserves, allowances, charges or losses for possible write-downs in the carrying values of our assets or the recognition of liabilities.
Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.
Revenue Recognition Policies. Effective, July 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 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 good 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. The Company analyzed the effect of the ASC 606 on its revenue streams and concluded that the adoption of the ASC 606 did not change the amounts and timing of revenue under previous revenue recognition guidance.
Our primary source of revenue is the authentication and grading of collectibles, which accounted for about 88% of our consolidated revenues in fiscal 2019, 2018 and 2017, respectively. Our other sources of revenues are individually less than 5%. 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 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 for 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 shipped back to them. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend credit, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer. We provide a limited warranty covering the coins and trading cards that we authenticate and grade. See Warranty Costs below.
Collectors Club Revenues: These revenues represent membership fees paid by customers for annual memberships in 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 fee is recognized ratably over the life of the membership. Membership fees are paid in advance of the membership period and prepaid memberships are classified as deferred revenue. In the event vouchers expire unused (i.e. there are unexercised customer rights), we consider the guidance under ASC 606 in determining when to recognize revenue.
Certified Coin Exchanges Subscription Revenues: We recognize subscription revenues related to our CCE exchange for certified coins, ratably over the relevant subscription period. Subscriptions are typically billed and paid on a monthly basis although certain quarterly and annual subscriptions can be paid in advance. Prepaid subscriptions are classified as part of deferred revenue.
Expos Trade Show Revenue: We recognize fees earned from promoting, managing, and operating trade shows in the periods in which the shows take place. Trade show booth fees are typically paid to us in advance of the show taking place. 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 the 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 typically paid in the following month.
Coin Sales: Coin 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 on-going 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 fiscal 2019, we recognized substantially all of the deferred revenue balance of $3,213,000 at June 30, 2018.
Shipping and Handling Costs. Shipping and handling costs incurred to process and return customer collectibles submitted to us for grading or authentication are recorded as costs of revenues, net of amounts received from customers, in accordance with the guidance for Principals versus Agents as set out in ASC 606.
Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an ongoing basis. We regularly review our accounts receivable and exercise judgment in estimating the amounts of, and establish an allowance for, uncollectible accounts in each quarterly period. The amount of that allowance is based on several factors, including the age and extent of significant past due accounts and known conditions or trends that may affect the ability of account debtors to pay their accounts receivable balances. Each quarter we review our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of our specific account debtors to pay their accounts in full. Since the allowance is increased by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause an increase in such expenses. At June 30, 2019 and 2018, the allowance for doubtful accounts was $72,000, and $80,000, respectively.
Inventory Valuation Reserves. Our collectibles inventories, which consist of collectible coins that we have purchased pursuant to our coin warranty program and other consumable inventory related to our authentication and grading activities, are valued at the lower of cost or estimated fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories below their carrying values. The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sales value of the collectibles inventories. Additionally, due to the relative uniqueness and special features of some of the collectible coins included in our collectibles inventory and the volatility in the prices of precious metals, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products. As a result, we review the estimated market values of the collectibles in our inventory on a quarterly basis and make adjustments to the valuation reserve that we believe are necessary or prudent based on our judgments regarding these matters. In the event that a collectible is sold for a price below its carrying value, we record a charge to cost of services. In addition, we review our other consumable inventory on a regular basis for recoverability and expected future usage and, if considered necessary, establish reserves for those items that have no future value to us. At June 30, 2019 and 2018, inventories were $3,243,000 and $3,793,000, respectively, and inventory reserves were $1,278,000 and $1,214,000, respectively. See Note 3 to the Consolidated Financial Statements. If we liquidate collectible coins at amounts below their carrying values, we may incur losses in excess of our recorded inventory reserves.
Warranty Costs. We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if a coin or trading card that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible for a price equal to the value of collectible at its original grade, or, at the customer’s option, pay the difference between the value of the collectible at its original grade as compared with the value at its lower grade. However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item or if we otherwise determine that the collectible had been altered after we had authenticated and graded it. If we purchase an item under a warranty claim, we recognize the difference in the value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve. We include the purchased item in our inventory at the estimated value of the re-graded collectible, which will be lower than the price we paid to purchase the item. We accrue for estimated warranty costs based on historical trends and related experience, and we monitor the adequacy of our warranty reserve on an ongoing basis. There also are a number of factors that can cause the estimated values of the collectibles purchased under our warranty program to change over time and, as a result, we review the market values of those collectibles on a quarterly basis (see Inventory Valuation Reserves above). However, once we have classified such items as inventory and they have been held in inventory beyond the end of the fiscal quarter in which we purchased them, we classify any further losses in the estimated fair value of the items or the subsequent disposal of such items, as part of the gain or loss on product sales on a quarterly basis.
We recognized warranty expense of $568,000, $764,000 and $302,000 in fiscal years 2019, 2018, and 2017, respectively. Our warranty reserves were $852,000 and $862,000 at June 30, 2019 and 2018, respectively.
Goodwill. We test the carrying value of goodwill and other indefinite-lived intangible assets at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist. When testing for impairment, we consider qualitative factors, and where determined necessary, we proceed to the two-step goodwill impairment test. When applying the two-step impairment test, we use a discounted cash flow model or an income approach to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.
During the first quarter of fiscal 2019, which ended September 30, 2018, we completed the annual impairment evaluations with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair values over carrying values in prior years, and any material changes in the estimated cash flows of those reporting units, and determined that it was more likely than not that the respective fair values of CCE and CoinFacts exceeded their respective carrying values, including goodwill, and as a result, it was not necessary to proceed to the two-step impairment test.
We completed our annual goodwill impairment evaluation with respect to Expos at June 30, 2019 and concluded that no impairment had occurred.
Long-Lived Assets Other Than Goodwill. We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment. Such reviews occur annually, or more frequently, if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full. In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred. If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write-down the asset to its estimated fair value.
Stock-Based Compensation Expense. Stock-based compensation expense is measured at the grant date fair value of an equity award and is recognized as expense over the employee’s or non-employee director’s requisite service period, which is generally the vesting period of the award. However, if the vesting of a stock-based compensation award is subject to satisfaction of a performance requirement or condition, stock-based compensation expense is recognized if, and when, it is determined that the achievement of the performance requirement or condition (and therefore, the vesting of the award) has become probable. If stock-based compensation is recognized due to a determination that a performance condition has become probable, but it is subsequently determined that the performance condition was not met in the expected vesting period, then if the shares may still vest in future periods, we will extend the period over which the remaining expense would be recognized. If the award fails to vest, or we conclude that it is not probable the shares will vest, then all previously recognized expense with respect to that performance condition would be reversed.
Restricted Shares
Annual Non-Employee Director Grants. In each of fiscal years 2019, 2018, and 2017, each of our non-employee directors were granted restricted service-based stock with grant date fair values of $45,000, respectively, for a total fair value of $180,000 in fiscal 2019, $315,000 in fiscal 2018, and $270,000 in fiscal 2017. In fiscal 2019, the number of non-employee directors elected at our annual stockholders meeting was reduced to four from seven in fiscal 2018.
Other Service-Based Awards. In fiscal 2019, 2018 and 2017 the Company granted to other employees 5,000, 5,000 and 10,000 service-based restricted shares, respectively, with grant date fair values of $111,000, $83,000 and $209,000 respectively, and with vesting periods ranging from three to four years.
2013 Long-Term Incentive Plan (“2013 LTIP”)
As previously reported, based on the financial results achieved in fiscal 2017, a determination was made that the Company had achieved the maximum performance goal under the 2013 LTIP, in fiscal 2017. Therefore, in accordance with the terms of the 2013 LTIP, 50% of the remaining unvested shares awarded under the 2013 LTIP vested at the determination date and the remaining 50% of the shares vested on June 30, 2018. Stock-based compensation expense recognized under the 2013 LTIP was approximately $503,000, and $3,661,000 in fiscal 2018 and 2017, respectively.
Restricted Stock Awards: 2019 and 2018 Long Term Incentive Plan (“LTIP”)
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:
One Time Grant. A total, net of forfeitures, of 17,505 RSUs were granted in December 2017, with vesting in two installments, on June 30, 2019 and 2018, respectively.
Annual Grants. A total, net of forfeitures, of 44,763 and 16,731 RSUs were granted in fiscal 2019 and 2018, respectively, with vesting in three annual installments on the last day of the fiscal years following the grants, with the vesting of each such installment contingent on the Participant remaining in the continuous service of the Company through the vesting date of that installment.
If a Participant's continuous service with the Company ceases, for any reason whatsoever, including a termination of the Participant’s employment with or without cause, prior to any vesting date or dates, the then unvested RSUs will be forfeited.
Fiscal 2018 Performance Restricted Shares (“PSUs”)
To create incentives for the LTIP Participants to drive significant improvements in the Company’s operating results during the three fiscal years ending June 30, 2020 (the "Performance Period"), in December 2017, the Compensation Committee granted a total, net of forfeitures, of 30,370 PSUs and established threshold, target and maximum CARGR (defined as compounded annual consolidated revenue growth rate) goals and Operating Margin (defined as operating income before stock-based compensation expense expressed as a percentage of consolidated revenue) goals, to be achieved over the Performance Period for vesting to occur.
To date, no stock-based compensation expense has been recognized for the 30,370 PSUs shares, as it is not considered probable, based on the level of operating income before stock-based compensation achieved through June 30, 2019, that the Company will achieve any of the performance goals by fiscal 2020.
Fiscal 2019 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 continuing activities, minus capital expenditures and capitalized software costs), during the three years ending June 30, 2021, (the “Performance Period”), in fiscal 2019, the Compensation Committee granted 89,542 PSUs (at maximum) to LTIP Participants. Vesting of the PSUs was made dependent upon the achievement of net cash flows on an annual basis for the fiscal years ending, June 30, 2019, 2020 and 2021, subject to possible downward or upward adjustment of 20% of the PSUs, based on a comparison of the Company’s total shareholder return (“TSR”) for the Performance Period, to the TSR of the Russell 2000 Index, for the same Performance Period. Threshold, target and maximum net cash flow goals were established for fiscal year 2019 and a grant date was established for that year’s PSUs for expense recognition purposes. The net cash flows goals for fiscal years 2020 and 2021 will be set early in those fiscal years, which will give rise to grant dates for expense recognition purposes.
For any of the PSUs to vest, a Participant must provide continuous service through June 30, 2021 and the threshold net cash flows goal must be achieved in at least one of the years in the Performance Period. Stock-based compensation expense of $80,000 was recognized in fiscal 2019 for these PSUs and the maximum net cash flows performance was achieved for fiscal 2019.
Total Expense
Total stock-based compensation expense recognized for all restricted share awards was $974,000, $1,421,000, and $4,025,000, in fiscal years ended June 30, 2019, 2018, and 2017, respectively. See Results of Operations: Stock-Based Compensation Expense below for additional information on stock-based compensation expense.
Capitalized Software. In fiscal years 2019, 2018, and 2017, we capitalized approximately $1,055,000, $911,000, and $1,045,000, respectively, of software development costs related to a number of in-house software development projects. GAAP requires that certain software development costs incurred, either from internal or external sources, be capitalized as part of intangible assets and amortized on a straight-line basis over the useful life of the software, which we have estimated at three years. On the other hand, planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software development project are recognized as expense in the periods in which they are incurred. During the fiscal years ended June 30, 2019, 2018, and 2017, we recorded approximately $892,000, $701,000, and $480,000, respectively, as amortization expense related to such capitalized software projects.
We evaluate the carrying values of capitalized software to determine whether those values are impaired and, if necessary, we record an impairment charge in the period in which we determine that an impairment has occurred.
Income Taxes, Deferred Tax Assets and Valuation Allowances. We account for income taxes in accordance with GAAP, which requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns or for uncertain tax positions. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, GAAP requires that we evaluate the probability of realizing the future income tax benefits comprising that asset based on a number of factors, which include projections of future taxable income and the nature of the tax benefits and the respective expiration dates of tax credits and net operating losses. As the Company has been generating taxable income in the United States, we have concluded that it is more likely than not, that we will realize our U.S. deferred tax assets. However, we have established valuation allowance against deferred tax assets of our Hong Kong, Japan and China subsidiaries and our France branch, due to losses incurred, which makes it uncertain that we will realize the benefits from those deferred tax assets in future periods.
The income tax provisions in the fiscal 2019, 2018 and 2017 were determined based on estimated annual effective tax rates (“ETRs”) of approximately 29%, 31% and 36%, respectively. The ETR for 2019 reflects a federal tax rate of 21%, as a result of the 2017 The Tax Cuts and Jobs Act (the “Tax Act”) enacted into law in December 2017 and a non-cash valuation allowance established against our deferred tax assets in China, which represented about 4% of the ETR of 29%. In fiscal 2018, a blended federal tax rate of approximately 28% applied as the Tax Act only applied for the second half of that year. The 2019 and 2018 provisions were adjusted for excess tax benefits or deficiencies, primarily resulting from the vesting of the 2013 LTIP stock awards.
See note 8 to the Consolidated Financial Statements included elsewhere in this report which discusses the Tax Act in more detail.
Results of Operations
The following table sets forth certain financial data, expressed as a percentage of net revenues, derived from our Consolidated Statements of Operations for the respective periods indicated below:
|
|
Fiscal Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
41.6
|
%
|
|
|
43.1
|
%
|
|
|
38.3
|
%
|
Gross profit
|
|
|
58.4
|
%
|
|
|
56.9
|
%
|
|
|
61.7
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
14.3
|
%
|
|
|
14.8
|
%
|
|
|
13.3
|
%
|
General & administrative expenses
|
|
|
24.3
|
%
|
|
|
29.0
|
%
|
|
|
29.6
|
%
|
Total operating expenses
|
|
|
38.6
|
%
|
|
|
43.8
|
%
|
|
|
42.9
|
%
|
Operating income
|
|
|
19.8
|
%
|
|
|
13.1
|
%
|
|
|
18.8
|
%
|
Interest and other income, net
|
|
|
(0.3
|
%)
|
|
|
(0.1
|
%)
|
|
|
0.1
|
%
|
Income before provision for income taxes
|
|
|
19.5
|
%
|
|
|
13.0
|
%
|
|
|
18.9
|
%
|
Provision for income taxes
|
|
|
5.7
|
%
|
|
|
4.0
|
%
|
|
|
6.8
|
%
|
Income from continuing operations
|
|
|
13.8
|
%
|
|
|
9.0
|
%
|
|
|
12.1
|
%
|
Income (loss) from discontinued operations
|
|
|
-
|
|
|
|
0.1
|
%
|
|
|
-
|
|
Net income
|
|
|
13.8
|
%
|
|
|
9.1
|
%
|
|
|
12.1
|
%
|
Net Revenues. Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, consisting of coins, trading cards and autographs and related special inserts, if applicable. To a lesser extent, we generate collectibles related service revenues (which we refer to as “other related revenues”) from advertising and affiliate program commissions earned from our websites and in printed publications; subscription/membership revenues from CCE, and Collectors Club; and fees generated from promoting, managing and operating our Expos tradeshow events. We also generate revenues from the sale of products, (primarily coins that we purchase under our warranty policy); however, they are not considered to be the focus of or an integral part of our ongoing revenue generating activities).
The following tables set forth the total net revenues for the fiscal years ended June 30, 2019, 2018 and 2017 between authentication and grading services revenues and other related services (in the thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 vs. 2018
|
|
|
|
2019
|
|
|
2018
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
Percent
|
|
Authentication and grading fees
|
|
$
|
63,790
|
|
|
|
88.0
|
%
|
|
$
|
60,076
|
|
|
|
87.8
|
%
|
|
$
|
3,714
|
|
|
|
6.2
|
%
|
Other related revenues
|
|
|
8,663
|
|
|
|
12.0
|
%
|
|
|
8,373
|
|
|
|
12.2
|
%
|
|
|
290
|
|
|
|
3.5
|
%
|
Total revenues
|
|
$
|
72,453
|
|
|
|
100.0
|
%
|
|
$
|
68,449
|
|
|
|
100.0
|
%
|
|
$
|
4,004
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 vs. 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
Percent
|
|
Authentication and grading fees
|
|
$
|
60,076
|
|
|
|
87.8
|
%
|
|
$
|
62,260
|
|
|
|
88.7
|
%
|
|
$
|
(2,184
|
)
|
|
|
(3.5
|
%)
|
Other related revenues
|
|
|
8,373
|
|
|
|
12.2
|
%
|
|
|
7,898
|
|
|
|
11.3
|
%
|
|
|
475
|
|
|
|
6.0
|
%
|
Total revenues
|
|
$
|
68,449
|
|
|
|
100.0
|
%
|
|
$
|
70,158
|
|
|
|
100.0
|
%
|
|
$
|
(1,709
|
)
|
|
|
(2.4
|
%)
|
The following tables set forth certain information regarding the increases or decreases in net revenues from our larger markets (which are inclusive of revenues from our other related services) in each of the periods presented below (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2019 vs. 2018
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
% of Net
|
|
|
Increase (Decrease)
|
|
Coins:
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
%
|
|
United States
|
|
$
|
33,860
|
|
|
|
46.7
|
%
|
|
$
|
31,693
|
|
|
|
46.3
|
%
|
|
$
|
2,167
|
|
|
|
6.8
|
%
|
China
|
|
|
4,186
|
|
|
|
5.8
|
%
|
|
|
7,663
|
|
|
|
11.2
|
%
|
|
|
(3,477
|
)
|
|
|
(45.4
|
%)
|
France & Hong Kong
|
|
|
3,348
|
|
|
|
4.6
|
%
|
|
|
3,481
|
|
|
|
5.1
|
%
|
|
|
(133
|
)
|
|
|
(3.8
|
%)
|
Total Coins
|
|
|
41,394
|
|
|
|
57.1
|
%
|
|
|
42,837
|
|
|
|
62.6
|
%
|
|
|
(1,443
|
)
|
|
|
(3.4
|
%)
|
Cards and autographs (1)
|
|
|
26,420
|
|
|
|
36.5
|
%
|
|
|
21,065
|
|
|
|
30.8
|
%
|
|
|
5,355
|
|
|
|
25.4
|
%
|
Other (2)
|
|
|
4,639
|
|
|
|
6.4
|
%
|
|
|
4,547
|
|
|
|
6.6
|
%
|
|
|
92
|
|
|
|
2.0
|
%
|
|
|
$
|
72,453
|
|
|
|
100.0
|
%
|
|
$
|
68,449
|
|
|
|
100.0
|
%
|
|
$
|
4,004
|
|
|
|
5.8
|
%
|
|
|
2018
|
|
|
2017
|
|
|
2018 vs. 2017
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
% of Net
|
|
|
Increase (Decrease)
|
|
Coins:
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
%
|
|
United States
|
|
$
|
31,693
|
|
|
|
46.3
|
%
|
|
$
|
38,134
|
|
|
|
54.4
|
%
|
|
$
|
(6,441
|
)
|
|
|
(16.9
|
%)
|
China
|
|
|
7,663
|
|
|
|
11.2
|
%
|
|
|
6,588
|
|
|
|
9.4
|
%
|
|
|
1,075
|
|
|
|
16.3
|
%
|
France & Hong Kong
|
|
|
3,481
|
|
|
|
5.1
|
%
|
|
|
2,822
|
|
|
|
4.0
|
%
|
|
|
659
|
|
|
|
23.4
|
%
|
Total Coins
|
|
|
42,837
|
|
|
|
62.6
|
%
|
|
|
47,544
|
|
|
|
67.8
|
%
|
|
|
(4,707
|
)
|
|
|
(9.9
|
%)
|
Cards and autographs (1)
|
|
|
21,065
|
|
|
|
30.8
|
%
|
|
|
17,926
|
|
|
|
25.5
|
%
|
|
|
3,139
|
|
|
|
17.5
|
%
|
Other (2)
|
|
|
4,547
|
|
|
|
6.6
|
%
|
|
|
4,688
|
|
|
|
6.7
|
%
|
|
|
(141
|
)
|
|
|
(3.0
|
%)
|
|
|
$
|
68,449
|
|
|
|
100.0
|
%
|
|
$
|
70,158
|
|
|
|
100.0
|
%
|
|
$
|
(1,709
|
)
|
|
|
(2.4
|
%)
|
|
(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 show and product sales.
|
Fiscal 2019 vs. 2018. In fiscal 2019, our total revenues increased by $4,004,000 or 5.8%, to an annual record of $72,453,000 from $68,449,000 in fiscal 2018. That increase was attributable to an increase of $3,714,000, or 6.2%, in authentication and grading fees, and a $290,000, or 3.5%, increase in other related services. The increase in authentication and grading fees was attributable to an increase of $5,241,000, or 27.1%, in cards and autograph fees partially offset by a net decrease of $1,527,000 or 3.7%, in coin fees, attributable to a decrease in fees generated in China (see below).
Revenues from our trading cards and autographs business continued to show consistent growth. Those revenues increased by 25% in fiscal 2019 and represented record annual revenues for that business. Moreover, our card and autographs business has achieved quarter-over-quarter revenue growth in 35 of the last 36 quarters.
The decreased revenues in China in fiscal 2019, represented a reduction of revenues from the banking channel in China of approximately $4.0 million in fiscal 2019 as compared to fiscal 2018. See Factors that can Affect our Revenues above, which discusses the banking channel in China in greater detail. We generated non-banking channel revenues in China of $4,115,000 in fiscal 2019, as compared to $3,598,000 in fiscal 2018, representing an annual increase of 14% in fiscal 2019, which included a 42% increase in this year’s fourth quarter.
The increase in U.S. coin fees in fiscal 2019 compared to the prior year, primarily reflected, (i) higher show fees of $1,852,000 or 33%, reflecting higher average fees earned per show in fiscal 2019 (ii) higher modern coin fees of $452,000 or 4%, which included a stronger second half of the year and was inclusive of the Apollo program primarily in this year’s third quarter and (iii) lower U.S. vintage fees of $241,000 or 1.9%, due to a decrease in submissions in the second half of fiscal 2019. See Factors that can Affect our Revenues above, which discusses the factors that can impact our coin revenues.
Despite the net decrease in our coin authentication and grading revenues in fiscal 2019, our coin business represented approximately 57% of total revenues in fiscal 2019 which reflects the continued importance of our coin authentication and grading business to our overall financial performance.
For the reasons discussed above under “Factors That Can Affect our Revenues”, and “Impact of Economic Conditions on our Financial Performance”, the level of coin service revenues can be volatile. Our U.S. coin revenue in fiscal 2019 rebounded with a 7% increase in revenues as compared to a 17% decline in fiscal 2018 and we will continue our efforts to maximize revenue opportunities in that business.
With respect to our cards and autographs business, which ended fiscal 2019 with a record backlog of cards to be authenticated and graded, we expect continued growth in fiscal 2020 as we continue to increase grading capacity.
With respect to China, we will continue to focus on growing our non-banking channel revenues. At this time, we do not expect to generate revenues from the banking channel in fiscal 2020.
The improved other related revenues in fiscal 2019 as compared to fiscal 2018, reflects higher coin sales in fiscal 2019.
Fiscal 2018 vs. 2017. For fiscal 2018, our total service revenues decreased by $1,709,000, or 2.4%, as compared to the then record revenues of $70,158,000 in fiscal 2017. That decrease was attributable to a $2,184,000, or 3.5%, decrease in authentication and grading fees partially offset by an increase of $475,000, or 6.0%, in other related services. That decrease in authentication and grading fees was attributable to a $2,919,000, or 17.8%, increase in cards and autograph fees offset by a $5,103,000, or 11.1%, decrease in coin fees.
Revenues from our trading cards and autographs business showed consistent growth in fiscal 2018. Those revenues increased by 17.5% in the fiscal 2018 and represented record annual revenues for that business.
The net decrease in coin authentication and grading fees of $5,103,000 in fiscal 2018, as compared to fiscal 2017, comprised (i) higher world coin fees of $2,176,000, or 20.7%, resulting in record world fees, primarily reflecting an increase in revenues in China (which was inclusive of banking channel revenues as discussed above) and Hong Kong, as we continued to see brand acceptance in that region, offset by (ii) lower U.S. modern fees of $3,659,000, or 26.9%, reflecting a decrease in demand by dealers and customers for recent issuances of coins by the U.S. Mint, (iii) lower U.S. vintage coin fees of $1,960,000 or 13.5%, reflecting generally lower vintage submissions in the second and third quarters of fiscal 2018 and (iv) lower U.S. coin trade show revenues of $1,660,000, or 23.1%, reflecting lower average submissions per show and less shows, in the current year periods.
The improved other related services revenues in fiscal 2018 as compared to fiscal 2017, reflects higher affiliate program commissions and Collectors Club revenues.
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, occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of the revenues generated by our other non-grading related services and the costs of product revenues (which represent the carrying value of the inventory of products, that are primarily collectible coins that we sold) and any inventory-related reserves on our consumable inventory and coins, considered necessary.
Set forth below is information regarding our gross profit and gross profit margins in the fiscal years ended June 30, 2019, 2018 and 2017:
|
|
Fiscal Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Gross profit
|
|
$
|
42,300
|
|
|
$
|
38,978
|
|
|
$
|
43,311
|
|
Gross profit margin
|
|
|
58.4
|
%
|
|
|
56.9
|
%
|
|
|
61.7
|
%
|
Fiscal 2019 vs. 2018. As indicated in the above table, our gross profit margin was 58.4% and 56.9% in fiscal, 2019 and 2018, respectively. The higher gross profit margin earned in fiscal 2019, reflects an improved gross profit margin earned on our coin and cards and autograph businesses, primarily due to higher average service fees in those businesses, (due to the mix of collectibles authenticated and graded and also higher fees charged for certain services) and in the case of cards and autographs a higher number of units authenticated and graded. As previously reported, there can be variability in the gross profit margin due to the mix of revenues and the seasonality of our business. During the three years ended June 30, 2019, our quarterly gross profit varied between 54% and 64%.
Fiscal 2018 vs. 2017. As indicated in the above table, our gross profit margin was 56.9% in fiscal 2018 as compared to 61.7% in fiscal 2017. The decrease in fiscal 2018, primarily reflected the lower U.S. coin revenues and to a lesser extent higher warranty expense of $462,000 and increased inventory reserve of $256,000 in fiscal 2018 as compared to fiscal 2017. As discussed above under “Factors that can Affect our Gross Profit Margin,” because a significant portion of our costs of revenues are relatively fixed in nature in the short-term, our gross profit margin can be impacted significantly if revenues decline significantly in a period.
Selling and Marketing Expenses
Selling and marketing expenses are comprised primarily of advertising and promotions costs, trade-show expenses, customer service personnel costs, business development salaries and incentive compensation costs, depreciation and third-party consulting costs.
The following table sets forth selling and marketing expenses that we incurred in fiscals 2019, 2018 and 2017 (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Selling and marketing expenses
|
|
$
|
10,361
|
|
|
$
|
10,137
|
|
|
$
|
9,333
|
|
As a percentage of net revenues
|
|
|
14.3
|
%
|
|
|
14.8
|
%
|
|
|
13.3
|
%
|
Fiscal 2019 vs. 2018. As indicated in the above table, selling and marketing expenses represented 14.3% of revenues in fiscal 2019, as compared to 14.8% in fiscal 2018. In absolute dollars, selling and marketing expenses increased by $224,000 or 2.2% in fiscal 2019 as compared with fiscal 2018. We incurred higher selling and marketing expenses in our growing cards and autograph business (including costs incurred for business development activities in Japan for the Company’s new Japanese subsidiary), which for the most part were offset by lower selling and marketing expenses in our other businesses.
Fiscal 2018 vs. 2017. As indicated in the above table, selling and marketing expenses increased to 14.8% of revenues in 2018, as compared to 13.3% in fiscal 2017. In absolute dollars, sales and marketing expenses increased by $804,000 in fiscal 2018, primarily reflecting increased sales and marketing costs incurred in growing our cards and autographs and overseas coin businesses.
General and Administrative Expenses
General and administrative (“G&A”) expenses are comprised primarily of compensation paid to general and administrative personnel, including executive management, finance and accounting, information technology and, facilities management, depreciation, amortization and other miscellaneous expenses. G&A expenses also include non-cash stock-based compensation costs, arising from the grant or vesting of stock awards to general and administrative personnel and outside directors.
The following table sets forth G&A expenses that we incurred in fiscals 2019, 2018 and 2017 (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
General & administrative expenses
|
|
$
|
17,597
|
|
|
$
|
19,864
|
|
|
$
|
20,754
|
|
As a percentage of net revenues
|
|
|
24.3
|
%
|
|
|
29.0
|
%
|
|
|
29.6
|
%
|
Fiscal 2019 vs. 2018. As indicated in the above table, G&A expenses decreased to 24.3% of revenues in fiscal 2019, from 29.0% in fiscal 2018. In absolute dollars, G&A expenses decreased by $2,267,000 in fiscal 2019 due to (i) lower payroll and related costs of $824,000 in fiscal 2019, arising from staff reductions implemented in the fourth quarter of fiscal 2018, and management changes in the Company’s coin division that occurred in the first half of fiscal 2019, partially offset by increased management incentives due to the improved performance of our businesses in fiscal 2019, as compared to fiscal 2018; (ii) the non-recurrence in fiscal 2019 of $869,000, comprised of moving and lease exit costs, in connection with the Company’s new operations and headquarter facility, and a pre-litigation net settlement that was incurred in fiscal 2018; (iii) lower non-cash stock based compensation of $419,000 in fiscal 2019 (discussed below) and (iv) lower recruitment and travel costs of $315,000. Those reductions were partially offset by higher depreciation expense of $279,000, primarily related to depreciation of tenant improvements and other assets capitalized as part of our new operations and headquarters facility and higher amortization of capitalized software projects of $193,000 this year.
Fiscal 2018 vs. 2017. As indicated in the above table, G&A expenses were 29.0% of revenues in fiscal 2018, as compared to 29.6% in fiscal 2017. In absolute dollars, G&A expenses decreased by $890,000 in fiscal 2018, due to a decrease in stock based compensation of $2,630,000 (see below and Stock-Based Compensation Expense under Critical Accounting Policies and Estimates above) and reductions in performance-based bonuses resulting from the lower operating results in fiscal 2018, partially offset by (i) moving and lease exit costs of approximately $572,000 incurred in connection with the move to the Company’s new operations and headquarters facility (ii) higher depreciation and amortization expense of $641,000 related to depreciation of tenant improvements and other assets capitalized as part of the Company’s new facility and amortization of capitalized software (iii) a pre-litigation net settlement of $325,000 and (iv) higher recruitment costs of $102,000, primarily related to the CEO recruitment process, that occurred in the first quarter of fiscal 2018.
Stock-Based Compensation Expense
We recognize non-cash stock-based compensation expense that is attributable to grants or the vesting of restricted stock. Stock-based compensation expense is recorded as part of (i) costs of revenues, in the case of stock awards granted to employees whose compensation is classified as cost of revenues; (ii) sales and marketing expenses, in the case of stock awards granted to employees whose compensation is classified as sales and marketing expenses and (iii) general and administrative expenses, in the case of stock awards granted to directors, executive and financial management and administrative personnel.
The following table sets forth the stock-based compensation expense we recognized in fiscal 2019, 2018 and 2017 (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
Included In:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of grading, authentication and related services
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Sales and marketing
|
|
|
70
|
|
|
|
98
|
|
|
|
72
|
|
General and administrative expenses
|
|
|
904
|
|
|
|
1,323
|
|
|
|
3,953
|
|
|
|
$
|
974
|
|
|
$
|
1,421
|
|
|
$
|
4,025
|
|
For PSUs that are contingent on the achievement of financial performance goals for vesting to occur, the amount of stock-based compensation recognized in any period can vary depending on an assessment as to whether it has become probable that the Company will achieve the performance goals and the time periods in which those goals are expected to be achieved. If it becomes probable that a performance goal will be achieved, there can be catch-up of stock-based compensation expense in that period, reflecting the expense required to be recognized from the service inception date through the period when it became probable that the goal would be achieved, which can result in additional expense in that period. Thereafter, stock-based compensation expense for the performance goal is recognized over the expected remaining service period to vesting.
Stock-based compensation related to financial performance goals were $80,000, $503,000 and $3,661,000 in fiscal 2019, 2018 and 2017, respectively of which the $503,000 in fiscal 2018 and the $3,661,000 in fiscal 2017, related to the 2013 LTIP program, which was fully expensed as of June 30, 2018.
A total of $1,103,000 of stock-based compensation expense for unvested restricted stock awards remained unrecognized as of June 30, 2019. Based on the assumption that the holders of those awards would remain in the Company’s service through fiscal 2023, the expense will be recognized in future periods, as follows (in thousands):
Year Ending June 30,
|
|
|
|
|
2020
|
|
$
|
647
|
|
2021
|
|
|
388
|
|
2022
|
|
|
43
|
|
2023
|
|
|
25
|
|
Total
|
|
$
|
1,103
|
|
The $1,103,000 of unrecognized expense does not include any expense arising from (i) grants of any additional restricted stock awards in future periods, (ii) the PSUs granted under the 2018 LTIP and (iii) the PSUs granted under the 2019 LTIP for which grant dates are to be established in fiscal 2020 and 2021.
Interest Income, Net
Interest income is generated on cash balances that we have invested, primarily in highly liquid money market accounts and funds. Interest expense consists of interest incurred on outstanding borrowings, loan arrangement fees and unused commitment fees on credit facilities. The following table compares the net interest income (expense) in the fiscal years ended June 30, 2019, 2018 and 2017, (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Interest (expense), net
|
|
$
|
(69
|
)
|
|
$
|
(114
|
)
|
|
$
|
(1
|
)
|
Due to the Company maintaining higher cash balances and higher prevailing interest rates in fiscal 2019, interest income was $111,000, in fiscal 2019 as compared to $19,000, and $15,000, in fiscal 2018, and 2017, respectively. Interest expense of $180,000, $133,000 and $16,000 was recognized in fiscal 2019, 2018 and 2017, respectively. Interest expense in fiscal 2019 and 2018, primarily related to the borrowings under the Company’s term loan and commitment fees under the revolving line of credit.
Provision for Income Taxes
|
|
Fiscal Year Ended June 30,
(in thousands)
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Provision for income taxes
|
|
$
|
4,148
|
|
|
$
|
2,760
|
|
|
$
|
4,718
|
|
The income tax provisions of $4,148,000, $2,760,000, and $4,718,000, in fiscals 2019, 2018 and 2017, respectively, represented ETRs, of approximately 29%, 31%, and 36%, respectively. The ETR for 2019 reflects a federal tax rate of 21%, as a result of the Tax Act enacted into law in December 2017, and a non-cash valuation allowance established against our deferred tax assets in China, which represented about 4% of the ETR of 29%. In fiscal 2018, a blended federal tax rate of approximately 28% applied as the Tax Act only applied for the second half of the year. The 2019 and 2018 provisions were adjusted for excess tax benefits or deficiencies (primarily resulting from the vesting of the 2013 LTIP stock awards).
Discontinued Operations
|
|
Fiscal Year Ended June 30,
(in thousands)
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Income (losses) from discontinued operations, (net of income taxes)
|
|
$
|
-
|
|
|
$
|
104
|
|
|
$
|
(7
|
)
|
The income (losses) from discontinued operations (net of income taxes), reflects pre-tax accretion expenses of $2,000, and $24,000, in fiscal years 2018 and 2017, respectively, recognized in connection with the facilities, formerly occupied by our discontinued jewelry businesses. Coinciding with the expiration of those lease obligations, all remaining discontinued balances were written off as of March 31, 2018.
Quarterly Results of Operations
Generally, the revenues generated by our collectibles grading and authentication businesses are lower during our second quarter, which ends on December 31, than in other quarterly periods, because collectibles commerce generally decreases during the holiday season. As discussed under “Factors that can Affect Operating Results and our Financial Position” above there can be period to period variability in coin revenues due to general market conditions that will impact the level of coin revenues in a given quarter, including the level of revenues generated in the banking channel in China (which only applied to the first quarter of fiscal 2018) and the level of U.S. modern coin revenues, which are typically higher in our third quarter.
Our collectibles trade show business adds to the variability in our quarter-to-quarter operating results, as its revenues vary based on the timing of the collectibles trade shows it conducts. Generally, the revenues of this business are higher in the first, third and fourth quarters of our fiscal years, compared to the second quarter, because the Long Beach, California Collectibles Shows take place during the first, third and fourth quarters.
The tables below present unaudited selected quarterly financial data for each of the eight quarters beginning September 30, 2017 and ending on June 30, 2019. The information has been derived from our unaudited quarterly condensed consolidated financial statements, which have been prepared on a basis consistent with our audited Consolidated Financial Statements appearing in ITEM 8 of this Annual Report. The consolidated financial information set forth below includes all adjustments (consisting of normal adjustments and accruals) that we consider necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the Consolidated Financial Statements and the notes thereto appearing elsewhere in ITEM 8 of this Annual Report. These quarterly operating results are not necessarily indicative of results that may be expected for any subsequent fiscal periods.
Quarterly Results of Operations
|
|
Quarter Ended
(In thousands, except per share data)
|
|
|
|
Sept. 30,
2017
|
|
|
Dec.31,
2017
|
|
|
Mar.31,
2018
|
|
|
June 30,
2018
|
|
|
Sept. 30,
2018
|
|
|
Dec. 31,
2018
|
|
|
Mar. 31,
2019
|
|
|
June 30,
2019
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
19,753
|
|
|
$
|
14,063
|
|
|
$
|
17,512
|
|
|
$
|
17,121
|
|
|
$
|
17,495
|
|
|
$
|
15,704
|
|
|
$
|
19,471
|
|
|
$
|
19,783
|
|
Cost of revenue
|
|
|
7,450
|
|
|
|
6,476
|
|
|
|
7,818
|
|
|
|
7,727
|
|
|
|
7,202
|
|
|
|
6,953
|
|
|
|
7,827
|
|
|
|
8,171
|
|
Gross profit
|
|
|
12,303
|
|
|
|
7,587
|
|
|
|
9,694
|
|
|
|
9,394
|
|
|
|
10,293
|
|
|
|
8,751
|
|
|
|
11,644
|
|
|
|
11,612
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expense
|
|
|
7,781
|
|
|
|
7,347
|
|
|
|
7,708
|
|
|
|
7,165
|
|
|
|
7,466
|
|
|
|
6,537
|
|
|
|
6,879
|
|
|
|
7,076
|
|
Operating income
|
|
|
4,522
|
|
|
|
240
|
|
|
|
1,986
|
|
|
|
2,229
|
|
|
|
2,827
|
|
|
|
2,214
|
|
|
|
4,765
|
|
|
|
4,536
|
|
Interest and other income (expense), net
|
|
|
31
|
|
|
|
(41
|
)
|
|
|
116
|
|
|
|
(191
|
)
|
|
|
3
|
|
|
|
(145
|
)
|
|
|
(4
|
)
|
|
|
(71
|
)
|
Income before provision for income taxes
|
|
|
4,553
|
|
|
|
199
|
|
|
|
2,102
|
|
|
|
2,038
|
|
|
|
2,830
|
|
|
|
2,069
|
|
|
|
4,761
|
|
|
|
4,465
|
|
Provision for income taxes(i)
|
|
|
919
|
|
|
|
129
|
|
|
|
630
|
|
|
|
1,082
|
|
|
|
699
|
|
|
|
588
|
|
|
|
1,202
|
|
|
|
1,659
|
|
Income from continuing operations
|
|
|
3,634
|
|
|
|
70
|
|
|
|
1,472
|
|
|
|
956
|
|
|
|
2,131
|
|
|
|
1,481
|
|
|
|
3,559
|
|
|
|
2,806
|
|
Income (loss) from discontinued operations, (net of income taxes)
|
|
|
(1
|
)
|
|
|
89
|
|
|
|
2
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
$
|
3,633
|
|
|
$
|
159
|
|
|
$
|
1,474
|
|
|
|
970
|
|
|
$
|
2,131
|
|
|
$
|
1,481
|
|
|
$
|
3,559
|
|
|
$
|
2,806
|
|
Net income per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.42
|
|
|
$
|
0.01
|
|
|
$
|
0.17
|
|
|
$
|
0.11
|
|
|
$
|
024
|
|
|
$
|
0.17
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
From discontinued operations, (net of income taxes)
|
|
|
-
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income per share
|
|
$
|
0.42
|
|
|
$
|
0.02
|
|
|
$
|
0.17
|
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
$
|
0.17
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
Net income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.41
|
|
|
$
|
0.01
|
|
|
$
|
0.17
|
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
$
|
0.17
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
From discontinued operations, (net of income taxes)
|
|
|
-
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income per share
|
|
$
|
0.41
|
|
|
$
|
0.02
|
|
|
$
|
0.17
|
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
$
|
0.17
|
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,573
|
|
|
|
8,699
|
|
|
|
8,703
|
|
|
|
8,709
|
|
|
|
8,933
|
|
|
|
8,936
|
|
|
|
8,938
|
|
|
|
8,943
|
|
Diluted
|
|
|
8,765
|
|
|
|
8,923
|
|
|
|
8,902
|
|
|
|
8,715
|
|
|
|
8,962
|
|
|
|
8,947
|
|
|
|
8,966
|
|
|
|
9,004
|
|
|
|
Quarter Ended
(In thousands)
|
|
|
|
Sept. 30,
2017
|
|
|
Dec. 31,
2017
|
|
|
Mar. 31,
2018
|
|
|
June 30,
2018
|
|
|
Sept. 30,
2018
|
|
|
Dec. 31,
2018
|
|
|
Mar. 31,
2019
|
|
|
June 30,
2019
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units authenticated or graded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
|
1,148
|
|
|
|
470
|
|
|
|
654
|
|
|
|
521
|
|
|
|
531
|
|
|
|
463
|
|
|
|
605
|
|
|
|
571
|
|
Trading cards and autographs
|
|
|
468
|
|
|
|
418
|
|
|
|
526
|
|
|
|
561
|
|
|
|
572
|
|
|
|
589
|
|
|
|
621
|
|
|
|
682
|
|
Total
|
|
|
1,616
|
|
|
|
888
|
|
|
|
1,180
|
|
|
|
1,082
|
|
|
|
1,103
|
|
|
|
1,052
|
|
|
|
1,226
|
|
|
|
1,253
|
|
|
(i)
|
The higher ETR in the fourth quarter of fiscal 2018, reflects the final determination of our deferred tax assets at a Federal tax rate of 21%, withholding tax expense associated with foreign repatriation payments (mainly from China) and non-deductible expenses in the quarter. The higher ETR in the fourth quarter of fiscal 2019, reflects a non-cash valuation allowance established against deferred tax assets in China as of June 30, 2019. See Provisions for Income Taxes above.
|
Liquidity and Capital Resources
Cash and Cash Equivalent Balances. At June 30, 2019, we had cash and cash equivalent balances of $19,225,000 as compared to $10,581,000 at June 30, 2018 and $9,826,000 at June 30, 2017.
Historically, we have been able to rely on internally generated funds, rather than borrowings, as our primary source of funds to support our continuing grading operations, because many of our authentication and grading customers prepay our fees at the time they submit their collectibles to us for authentication and grading. However, in January 2017, we obtained a $10 million revolving bank line of credit to provide an additional source of cash for our business. Additionally, in September 2017, we obtained the $3.5 million Term Loan, under which we borrowed $3.0 million, to fund capital expenditures, moving costs and lease exit costs, in connection with our move to our new operations and headquarters facility. See below.
Cash Flows
Cash Flows from Continuing Operations. In the fiscal years ended June 30, 2019, 2018, and 2017, our operating activities from continuing operations generated cash of $17,530,000, $11,872,000, and $12,702,000, respectively. The increase in cash generated from operating activities in fiscal 2019 as compared to 2018, primarily reflects higher operating income in fiscal 2019, whereas the decreased cash generated from operating income in fiscal 2018 as compared to 2017, reflected lower operating income in fiscal 2018 as compared to fiscal 2017, in each case as adjusted for non-cash expenses and changes in working capital.
Cash Flows of Discontinued Operations. In the fiscal years ended June 30, 2019, 2018, and 2017 discontinued operations used cash of $10,000, $215,000, and $518,000, respectively, related primarily to the payment of obligations for our discontinued jewelry businesses facilities, which were fully satisfied during fiscal 2018.
Cash Used in Investing Activities. In the fiscal years ended June 30, 2019, 2018, and 2017, investing activities used net cash of $1,834,000, $4,819,000, and $2,413,000, respectively. The decrease of $2,985,000 in cash used in investing activities in fiscal 2019, as compared to fiscal 2018, related to lower capital expenditures incurred in 2019, as in 2018 there was the non-recurring buildout of the Company’s new operations and headquarters facility.
Cash Used in Financing Activities. In the fiscal years ended June 30, 2019, 2018 and 2017, financing activities used net cash of $7,042,000, $6,083,000 and $11,912,000, respectively. The Company borrowed $3,000,000 under its term loan in fiscal 2018 whereas the Company made principal repayments under the loan of $563,000 in fiscal 2019. Dividends paid to stockholders were $6,479,000, $9,083,000 and $11,912,000 fiscal 2019, 2018 and 2017, respectively. The lower dividend payments in 2019 and 2018, reflect a change in the Company’s cash dividends policy implemented in the third quarter of fiscal 2018. (See Dividends below).
Overall, the Company generated (used) cash of $8,644,000, $755,000 and ($2,141,000) in fiscal 2019, 2018 and 2017, respectively.
Outstanding Financial Obligations
Lease Obligations
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 for its operations and headquarters facility. The term of this lease is 10 years and 10 months, which commenced on the completion of tenant improvements, which was December 1, 2017. The Company received an abatement of the monthly rent for the period from January 1, 2018 through October 31, 2018. The landlord contributed approximately $2.9 million to the tenant improvements. At June 30, 2019 aggregate minimum obligations over the remaining term of the lease were approximately $13.2 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 Hong Kong, which commenced in July 2018, with aggregate minimum obligations over the term of that lease of approximately $625,000.
At June 30, 2019, future minimum lease payments under the lease agreements associated with our continuing operations were as follows (in thousands):
Year Ending June 30,
|
|
Gross
Amount
|
|
2020
|
|
$
|
2,457
|
|
2021
|
|
|
2,424
|
|
2022
|
|
|
2,044
|
|
2023
|
|
|
1,660
|
|
2024
|
|
|
1,465
|
|
Thereafter
|
|
|
6,535
|
|
|
|
$
|
16,585
|
|
Term Loan. As previously reported, on September 15, 2017 the Company obtained a five-year, $3,500,000 unsecured term loan from a commercial bank. The Company borrowed $3,000,000 under this loan to fund the Company’s share of the construction and related facility costs for its new operations and headquarter facility, as well as its moving costs, and lease exit costs for its former operations and headquarters facility. During that first year the Company was only required to make monthly payments of interest on the borrowings.
In September 2018, the loan balance outstanding was automatically converted into a four-year term loan in the principal amount of the borrowings then outstanding, which was $3,000,000. In October 2018, the Company began repaying the loan in 48 equal monthly principal payments of $62,500 or $750,000 on an annual basis, through September 2022. There are no prepayment penalties on loan repayments, as the Company chose a 90-day LIBOR rate to apply to the outstanding balance upon conversion to the four-year term loan.
The agreement governing the term loan contains two financial covenants, which require the Company to maintain (a) a funded debt coverage ratio and (b) a debt service coverage ratio, respectively. The loan agreement also contains certain other covenants typical for this type of loan, including a covenant which provides that, without the bank’s consent, the Company may not incur additional indebtedness for borrowed money, except for (i) borrowings under the Company’s revolving credit line, (see below) (ii) purchase money indebtedness and (iii) capitalized lease obligations.
At June 30, 2019, the Company had $2,438,000 of outstanding borrowings under this term loan, of which $750,000 was classified as a current liability and $1,688,000 was classified as a long-term liability in the Consolidated Balance Sheet at June 30, 2019. The Company was in compliance with its loan covenants at June 30, 2019.
Revolving Credit Line. On January 10, 2017 the Company obtained a three-year, $10 million unsecured revolving credit line (the “Credit Line”) from a commercial bank. The Company is entitled to obtain borrowings under the Credit Line at such times and in such amounts as it may request, provided that the maximum principal amount of the borrowings that may be outstanding at any one time under the Credit Line may not exceed $10 million and each year there must be a period of 30 consecutive days during which no borrowings under the Credit Line are outstanding. The Company also may, at any time or from time to time and at its option, repay outstanding borrowings, in whole or in part, and may reborrow amounts so repaid at such times and in such amounts as it deems appropriate.
Credit Line borrowings will bear interest, at the Company’s option, at LIBOR plus 2.25% or at 0.25% below the highest prime lending rate published from time to time by the Wall Street Journal. The Company is required to pay a quarterly unused commitment fee of 0.0625% of the amount by which (if any) that the average of the borrowings outstanding under the Credit Line in any calendar quarter is less than $4 million.
The Credit Line agreement contains a financial covenant that requires the Company to maintain a funded debt coverage ratio and certain other covenants typical for this type of credit line. At June 30, 2019 the Company was in compliance with those covenants. The Company borrowed and repaid $3 million under the Credit Line in the first quarter of fiscal 2018. There were no borrowings outstanding under the line of credit in fiscal 2019 and as of June 30, 2019.
Dividends. Effective the third quarter of fiscal 2018, our quarterly cash dividend was lowered to $0.175 per share from the $0.35 per share, that had previously been in place since January 2015. As a result, we paid dividends of $6,479,000, $9,083,000, and $11,912,000, in fiscal 2019, 2018, and 2017, respectively.
The declaration and payment of cash dividends in the future, pursuant to the Company’s dividend policy, is subject to final determination each quarter by the Board of Directors based on a number of factors, including the Company’s financial performance and its available cash resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company and its stockholders. Accordingly, there is no assurance that, in the future, the amount of the quarterly cash dividend will not be reduced or that the payment of dividends will not be suspended or altogether discontinued.
Share Buyback Program. In December 2005, our Board of Directors approved a stock buyback program that authorized us to make up to $10,000,000 of stock repurchases in the open market or privately negotiated transactions, in accordance with applicable Securities Exchange Commission (“SEC”) rules, when opportunities to make such repurchases, at attractive prices, become available. There were no share repurchases under this program in fiscals 2019, 2018 or 2017. At June 30, 2019, we have a total of $3.7 million available for share purchases under the share buyback program.
Future Uses of Cash.
We plan to use our cash resources, consisting of available cash and cash equivalent balances, internally generated cash flows, and borrowings under our revolving credit line, (i) to introduce new collectibles related services and initiatives for existing and new customers (ii) to fund the expansion of our business (domestically and internationally); (iii) to fund capital expenditures, and working capital requirements; (iv) to fund possible start-ups or acquisitions of businesses, (v) to pay cash dividends; and (vi) for other general corporate purposes.
Although we have no current plans to do so, we also may seek additional borrowings and we may issue additional shares of our stock to finance the growth and geographic expansion of our collectibles businesses. However, there is no assurance that we would be able to obtain such additional borrowings or additional equity capital on terms acceptable to us, or at all.
Recent Accounting Pronouncements
In February 2016, FASB issued Accounting Standards Update 2016-02 on Accounting for Leases. The core principle of this guidance is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company will adopt this new accounting guidance in the first quarter of fiscal 2020 utilizing the current period adoption method. While the Company is continuing to assess the potential impact of the new guidance, the Company estimates that the adoption will result in the recognition of right-of-use assets and lease liabilities of approximately $10.0 million as of July 1, 2019, of which approximately $2.3 million will be classified as short-term lease liabilities and the balance of approximately $7.7 million, will be classified as long-term lease liabilities. There will be no material impact on the Consolidated Statement of Operations.
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, 2019, 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.
In January 2017, FASB issued 2017-04, on Simplifying the Test for Goodwill Impairment. The updated guidance eliminates step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for fiscal years beginning after December 9, 2019. The guidance is not expected to have a material effect on the Company’s financial statements.