SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|[X]||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended June 30, 2020
|[ ]||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from _______ to _____
Commission file number: 1-34240
COLLECTORS UNIVERSE, INC.
(Exact name of Registrant as specified in its charter)
or other jurisdiction
of Incorporation or organization)
|1610 E. Saint Andrew Place, Santa Ana, California, 92705|
|(address of principal executive offices and zip code)|
|Registrant’s telephone number, including area code: (949) 567-1234|
|(Former name, former address and former fiscal year, if changed, since last year)|
Securities registered pursuant to Section 12(b) of the Act:
|Title of Class||Trading Symbol||Name of each Exchange on which registered|
|Common Stock, par value $.001 per share||CLCT||NASDAQ Global Market|
Securities registered pursuant to Section 12(g) of the Exchange Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||[ ]||Accelerated filer||[ ]|
|Non-accelerated filer||[X]||Smaller reporting company||[X]|
|Emerging growth company||[ ]|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the outstanding shares of registrant’s common stock held by registrant’s non-affiliates, based on the closing price of registrant’s common stock on December 31, 2019 (the last business day of registrant’s most recently completed second fiscal quarter), as reported on the NASDAQ Global Market on that date, was approximately $204,461,000. Shares of registrant’s common stock held by its executive officers and directors have been excluded from this calculation as such persons may be deemed to be affiliates. The determination of affiliate status for this purpose does not reflect a determination that any of such persons is an affiliate of the registrant for any other purpose.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Set forth below is the number of outstanding shares of registrant’s common stock, as of the latest practicable date.
|Class||As of August 21, 2020|
|Common Stock $.001 Par Value||9,239,911|
DOCUMENTS INCORPORATED BY REFERENCE
Except as otherwise stated therein, Items 10, 11, 12, 13 and 14 in Part III of this Annual Report on Form 10-K (the “Annual Report”) are incorporated by reference from registrant’s Definitive Proxy Statement, which is expected to be filed with the Securities and Exchange Commission on or before October 28, 2020, for its 2020 Annual Meeting of Stockholders. Other information contained in that Proxy Statement and any other related solicitation materials are not deemed to be incorporated into or filed as part of this Annual Report.
COLLECTORS UNIVERSE, INC.
FOR THE FISCAL YEAR ENDED JUNE 30, 2020
TABLE OF CONTENTS
|Item 1A.||Risk Factors||13|
|Item 1B.||Unresolved Staff Comments||23|
|Item 3.||Legal Proceedings||23|
|Item 4.||Mine Safety Disclosures||23|
|Executive Officers of Registrant||24|
|Item 5.||Market for Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities||25|
|Item 6.||Selected Consolidated Financial Data||27|
|Item 7.||Management’s Discussion and Analysis of Financial Condition and Results of Operations||29|
|Item 7A.||Quantitative and Qualitative Disclosures About Market Risk||51|
|Item 8.||Financial Statements and Supplementary Data||52|
|Report of Independent Registered Public Accounting Firm||53|
|Consolidated Balance Sheets at June 30, 2020 and 2019||54|
|Consolidated Statements of Operations for the Years ended June 30, 2020, 2019 and 2018||55|
|Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2020, 2019 and 2018||56|
|Consolidated Statements of Cash Flows for the Years Ended June 30, 2020, 2019 and 2018||57|
|Notes to Consolidated Financial Statements||59|
|Schedule II – Valuation and Qualifying Accounts||79|
|Item 9.||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure||79|
|Item 9A.||Controls and Procedures||79|
|Item 9B.||Other Information||81|
|Item 10.||Directors, Executive Officers and Corporate Governance||81|
|Item 11.||Executive Compensation||81|
|Item 13.||Certain Relationships and Related Transactions and Director Independence||81|
|Item 14.||Principal Accountant Fees and Services||81|
|Item 15.||Exhibits and Financial Statement Schedules||82|
|INDEX TO EXHIBITS||E-1|
Statements contained in this annual report on Form 10-K (the “Annual Report”) that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or markets, constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, such statements 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.” Forward-looking statements contain estimates or predictions about or forecasts of our future financial condition and operating results and trends in our business and markets. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, those statements are necessarily based on current information available to us. Therefore, the information contained in the forward looking statements in this Annual Report are subject to change due to (i) future events and circumstances of which we are not currently aware and (ii) to a number of risks and uncertainties that could cause our future financial condition or operating results to differ significantly from those expected at the current time as described in those forward-looking statements, including the continuing impact that the Coronavirus (“COVID-19”) may have on our business, financial condition and results of operations. Those known risks and uncertainties are described in ITEM 1A in Part I of this Annual Report under the caption “RISK FACTORS,” and in ITEM 7 in Part II of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Accordingly, readers of this Annual Report are urged to read the cautionary statements and risk factors contained in this Annual Report. Also, our actual results in the future may differ from the results expressed in the forward-looking statements included in this Annual Report, due to additional risks and uncertainties of which we are not currently aware or which we do not currently view as material to our business or operating results. Due to all of these uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Annual Report, which speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law or the applicable rules of the NASDAQ Global Market.
References in this Annual Report to “Collectors Universe”, “we”, “us”, “our”, “management” and the “Company” refer to Collectors Universe, Inc., a Delaware Corporation, and its consolidated subsidiaries.
We provide authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia (“collectibles”). We believe that our authentication and grading services add value to these collectibles by enhancing their marketability and thereby providing increased liquidity to the dealers, collectors and consumers that own and buy and sell them.
Once we have authenticated and assigned a quality grade to a collectible, we encapsulate it in a tamper-evident, clear plastic holder, or issue a certificate of authenticity, that (i) identifies the specific collectible; (ii) sets forth the quality grade we have assigned to it; and (iii) bears one of our brand names and logos: “PCGS” for coins, “PSA” for trading cards and event tickets and “PSA/DNA” for autographs and memorabilia. Additionally, we warrant our certification of authenticity and the quality grades that we assign to the coins and trading cards that we authenticate and grade. We do not warrant our authenticity determinations for autographs or memorabilia. For ease of reference in this Annual Report, we will sometimes refer to coins, trading cards and other collectibles that we have authenticated or graded as having been “certified.”
We generate revenues principally from the fees paid for our authentication and grading services. To a much lesser extent, we generate revenues from other related service revenues, which consist of (i) the sale of advertising and click-through commissions earned on our websites, (ii) the sale of printed publications and collectibles price guides and advertising in such publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our Certified Coin Exchange (CCE) dealer-to-dealer Internet bid-ask market for certified coins, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) collectibles trade shows that we operate, at which primarily coins are exhibited and are bought and sold by collectibles dealers and collectors. 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, those sales are not the focus, and we do not consider them to be an integral part of, our ongoing revenue-generating activities.
We have developed some of the leading brands in the collectibles markets in which we conduct our business:
|●||“PCGS” (Professional Coin Grading Service), which is the brand name for our independent coin authentication and grading service;|
|●||“PSA” (Professional Sports Authenticator), which is the brand name for our independent sports and trading cards authentication and grading service and;|
|●||“PSA/DNA” (PSA/DNA Authentication Services), which is the brand name for our independent authentication and grading service for vintage autographs and memorabilia.|
PCGS, PSA and PSA/DNA are among the leading independent authentication and grading services in their respective markets.
We foster brand loyalty and stimulate demand for our services by providing information and value added content to collectors and dealers through various means including our CCE websites, Collectors Clubs, Set RegistrySM programs, Collectors.com, CoinFacts and PSA Collectibles Facts, collectibles population reports and price guides. We believe that by providing this information and content we generate more knowledgeable and active collectors and dealers.
We began offering our PCGS coin authentication and grading services in 1986 and, from inception through the fiscal year ended June 30, 2020, we have authenticated and graded approximately 44 million coins. In 1991, we launched our PSA trading cards authentication and grading service and through June 30, 2020, had authenticated and graded approximately 37 million trading cards. In 1999, we launched our PSA/DNA vintage autograph authentication business and in June 2004 we extended that business by introducing vintage autograph grading services to dealers and collectors of autographed sports memorabilia.
Our revenues are comprised principally of our authentication and grading service fees. Those fees ranged from $1 to $10,300 but averaged $13.98 per item, based primarily on the type of collectible authenticated or graded, the turnaround times and the specific service selected by the customer. We charge higher fees for faster turnaround times. In fiscal 2020, our coin authentication and grading fees ranged from $1 to $10,300, and averaged $18.82, per coin. In the case of trading cards, in fiscal 2020, the authentication and grading fees ranged from approximately $1 to $5,000 and averaged $10.27, per trading card. As a general rule, collectibles dealers and, to a lesser extent, individual collectors, request faster turnaround times and, therefore, generally pay higher fees for more valuable, older or “vintage” collectibles than they do for modern collectibles. See Management’s Discussion and Analysis of Financial Condition and Results of Operations: Factors that can Affect our Revenues below.
The primary determinants of the prices of, and the willingness of sellers, buyers and collectors to purchase high-value or high-priced collectibles, are their authenticity, quality and rarity. The authenticity of a collectible relates not only to the genuineness of the collectible, but also to the absence of any alterations or repairs that may have been made to hide, damage or to restore the item. The quality of a collectible relates to its state of preservation relative to its original state of manufacture or creation. The rarity of a collectible relates to its uniqueness and depends primarily on the number of identical collectibles of equivalent or better quality that become available for purchase from time to time. With regard to value, confirmation of authenticity generally is required before a buyer is willing to proceed with a purchase of a high-priced collectible. Quality and rarity directly affect value and price, with higher quality and rare collectibles generally attracting dramatically higher prices than those of lower quality and lesser rarity. Even a relatively modest difference in quality can translate into a significant difference in perceived value and, therefore, in price.
Until the advent of independent third-party authentication and grading, most prospective buyers, including experienced collectibles dealers and retailers, insisted on physically examining high-priced collectibles before consummating transactions. However, unlike professionals in the trade, most purchasers and collectors lacked the experience and knowledge needed to determine, with confidence, the authenticity, quality or rarity, and hence the value, of high-priced collectibles, even when they had the opportunity to examine them physically. Therefore, they had to rely on representations made by sellers regarding authenticity, quality and rarity. For these reasons, “buyer beware” characterized the high-value collectibles markets, and “sight-unseen” markets for rare coins and other high-value collectibles were practically non-existent.
High-value collectibles have been traditionally marketed at retail by dealers through direct mail, catalogues, price lists and advertisements in trade publications, and sold and purchased by them at collectibles shows, auction houses and local dealer shops. These markets were highly inefficient because:
|●||they were fragmented and localized, which limited both the variety of available collectibles and the number of potential buyers;|
|●||transaction costs were often relatively high due to the number of intermediaries involved;|
|●||buyers usually lacked the information needed to determine the authenticity and quality and, hence the value, of the collectibles being sold; and|
|●||buyers and sellers were vulnerable to fraudulent practices because they had to rely on the dealers or other sellers for opinions or representations as to authenticity, quality and rarity.|
Coin Market. In an effort to overcome some of these inefficiencies, approximately 40 years ago, professional coin dealers began using a numerical quality grading scale for coins. That scale ranged from 1 to 70, with higher numbers denoting a higher quality. Previously, professional dealers used descriptive terms, such as “Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they sold, a practice that continued after the development of the numeric grading system. However, whether using a numeric or a descriptive system, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Moreover, dealers were hardly disinterested or independent since, as the sellers or buyers of the coins they were grading, they stood to benefit financially from the assignment of a particular grade.
Trading Cards Market. Misrepresentations of authenticity, quality and rarity also operated as a barrier to the liquidity and growth of the collectibles market for trading cards. Even experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher-priced trading cards. Most collectors lacked the knowledge needed to purchase collectible trading cards with confidence, even when they had physically examined them. Trading card dealers eventually developed a rudimentary adjectival system to provide measures of quality, using descriptive terms such as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of quality were assigned on the basis of such characteristics as the centering of the image on the card and the presence or absence of bent or damaged corners, scratches and color imperfections. However, as was the case with coins, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Additionally, since the dealers who bought and sold trading cards were the ones that assigned these grades, collectors remained vulnerable to misrepresentations as to the authenticity, quality and rarity of trading cards being sold or purchased by dealers.
Autographed Memorabilia Market. The market for autographed sports, entertainment and historical memorabilia has been plagued by a high incidence of forgeries and misrepresentations of authenticity. For example, Operation Bullpen, initiated by the FBI and other law enforcement agencies beginning in 1997, uncovered a high volume of outright forgeries of signatures and widespread misrepresentations as to the genuineness of sports memorabilia. We believe that the high incidence of such fraudulent activities was due, in large part, to a dearth of independent third-party memorabilia authentication services and an absence of systematic methodologies and specimen data needed for verification of authenticity.
These conditions created a need and the demand for independent authentication and grading services from which sellers, purchasers and collectors could obtain:
|●||determinations, from independent, third-party experts, of the authenticity of the high-value collectibles that are sold and purchased by dealers and collectors, particularly “sight-unseen” or over the Internet;|
|●||representations of quality based on uniform standards consistently applied by independent, third-party experts; and|
|●||authoritative information, compiled by a credible third party, to help purchasers and collectors understand the factors that affect an item’s perceived value and price, including:|
|—||its quality or grade; and|
|—||its historical and recent selling prices.|
The Impact of eBay and Other e-Commerce Websites on the Collectible Markets. The advent of the Internet and, in particular, eBay’s development of an Internet or “virtual” marketplace and other Internet-selling websites, such as Amazon, have overcome many of the inefficiencies that had characterized the traditional collectibles markets. eBay and other online marketplaces (i) offer enhanced interaction between and greater convenience for sellers and buyers of high-value collectibles; (ii) eliminate or reduce the involvement of dealers and other “middlemen;” (iii) reduce transaction costs; (iv) allow trading to be conducted at all hours; and (v) regularly provide updated information to collectors. In addition, in August 2015, the Company launched its Collectors.com website where it aggregates and organizes collectibles listings from sellers and collectibles categories and markets; to enable collectors to expeditiously locate collectibles they are interested in buying. However, Internet commerce still raises, and has even heightened, concerns about the authenticity and quality of the collectibles that are listed for sale on the Internet. Buyers have no ability to physically examine the collectibles and no means to confirm the identity or the credibility of the dealers or sellers on the Internet. As a result, we believe that the growth of Internet-selling websites, such as eBay and Amazon, and individual dealer-owned websites, has increased awareness of the importance of, and the demand for, independent third-party authentication and grading services of the type we provide. Our services enable purchasers and collectors to use the Internet to purchase high-value collectibles, without physical examination (“sight-unseen”), with the confidence of knowing that they are authentic and are of the quality represented by sellers. The importance and value of our services to purchasers and collectors, we believe, are demonstrated by eBay’s inclusion, on its collectibles websites, of information that identifies, and encourages visitors to use, our independent third-party authentication and grading services, as well as similar services offered by some of our competitors.
PCGS Coin Authentication and Grading Services. Recognizing the need for third-party authentication and grading services, we launched Professional Coin Grading Service in 1986. PCGS employs or retains the services of expert coin graders, who are independent of coin buyers and sellers, to provide impartial authentication and grading services. We also established uniform standards of quality measured against an actual “benchmark” set of coins kept at our offices. We place each coin that we authenticate and grade in a tamper-evident, clear plastic holder which bears our logo, so that any prospective buyer will know that it is a PCGS authenticated and graded coin. We also provide a warranty as to the accuracy of our coin authentication and grading determinations. As of June 30, 2020, we employed or retained the services of 39 coin experts who have an average of 11 years of service with the Company.
By providing an independent assessment by coin experts of the authenticity and quality of coins, we believe that PCGS has increased the liquidity of the trading market for collectible coins. Following the introduction of our independent, third-party authentication and grading service, buyer confidence, even between dealers, increased to such a degree that coins authenticated and graded by PCGS were able to be traded “sight-unseen.” In 1990, a dealer market was developed, known as Certified Coin Exchange, (“CCE”) on which coin dealers trade rare coins “sight-unseen.” We acquired CCE in 2005.
Our coin authentication and grading services have facilitated the development of a growing Internet or “virtual” marketplace for collectible coins. A prospective buyer, who might otherwise be reluctant to purchase a high-priced coin listed “sight-unseen” on the Internet, is able to rely on a PCGS certification, as well as authoritative information about the coin that is accessible on our website or smartphone applications, in deciding whether or not to bid and in determining the amount to offer for the coin. As a result, to enhance the marketability of higher-priced coins, many sellers submit their coins to PCGS for authentication and grading. That enables the sellers to include, in their Internet sales listings, digital images of the coins in their tamper-evident, clear plastic holders, which identify the coins as having been authenticated and graded by PCGS, as well as their PCGS-assigned grades. We also provide a range of authoritative content on coin collecting to inform and communicate with the collector community, including guides and reports that track the trading prices and the rarity of PCGS-graded coins.
PSA Trading Card Authentication and Grading Services. Leveraging the credibility and using the methodologies that we had established with PCGS in the coin market, in 1991 we launched Professional Sports Authenticator (PSA), which instituted a similar authentication and grading system for trading cards. We are now the leading authenticator and grader of trading cards. Our independent trading card experts certify the authenticity of and assign quality grades to trading cards using a numeric system with a scale from 1-to-10 that we developed, together with an adjectival system to describe their condition. As of June 30, 2020, we employed 33 experts who have an average of 14 years of service with the Company. We believe that our authentication and grading services have removed barriers that were created by the historical seller-biased grading process and, thereby, have improved the overall marketability of and facilitated commerce in trading cards, including over the Internet and at telephonic sports memorabilia auctions.
The trading cards submitted to us for authentication and grading include primarily (i) older or vintage trading cards, particularly of memorable or historically famous players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle, and (ii) modern or newly produced trading cards of current or new athletes who have become popular with sports fans or have achieved new records or milestones, such as Derek Jeter, Albert Pujols, Mariano Rivera and Miguel Cabrera. These trading cards have, or are perceived to have, sufficient collectible value and are sold more frequently than are trading cards of less notable athletes, leading dealers and collectors to submit them for grading to enhance their marketability. Also, the production and sale of each new series of trading cards, which take place at the beginning and during the course of each new sports season, create new collectibles that provide a source of future additional authentication and grading submissions to us.
PSA/DNA Autograph Authentication and Grading Services. In 1999, we launched our vintage autograph authentication business, initially offering authentication services for “vintage” sports autographs and memorabilia that were autographed or signed prior to the time they were presented to us for authentication. The vintage autograph authentication business is distinctly different from the “signed-in-the-presence” authentication of autographs where an “authenticator” is present and witnesses the actual signing. Our vintage autograph authentication service involves the rendering of an opinion of authenticity by an industry expert based on (i) an analysis of the signed object, such as the signed document or autographed item of memorabilia, to confirm its consistency with similar materials or items that existed during the signer’s lifetime; (ii) a comparison of the signature submitted for authentication with exemplars of such signatures; and (iii) a handwriting analysis. As of June 30, 2020, we employed five autograph experts, as well as outside consultants that we sometimes use on a contract basis.
In June 2004, we also began offering grading services for autographs, beginning with baseballs containing a single signature or autograph. We use uniform grading standards that we have developed and a numeric scale of 1-to-10, with the highest number representing top quality or “Gem Mint” condition. We assign grades to the collectibles based on the physical condition or state of preservation of the autograph.
CCE Certified Coin Exchange and Collectors Corner. In September 2005, we acquired the Certified Coin Exchange (CCE), a subscription-based, business-to-business Internet bid-ask market for coins that have been certified by us or by other independent coin authentication and grading services. The CCE website now features over 100,000 bid and ask prices for certified coins at www.certifiedcoinexchange.com. CCE, since 1990, has provided liquidity in the geographically dispersed and highly fragmented market for rare coins. In March 2007, we introduced the Collectors Corner, a business-to-consumer website that enables sellers on CCE to offer many certified coins simultaneously at wholesale prices on CCE and at retail prices on Collectors Corner (www.collectorscorner.com). Registration on Collectors Corner is free for consumers, who can search for and sort coins listed on the Collectors Corner website. Coin sellers must register and pay a fixed monthly subscription fee to us for access to and to effectuate sale transactions on both CCE and Collectors Corner. Currently, there are over 180,000 collectibles, consisting primarily of coins, trading cards, currency and stamps, which are offered for sale on Collectors Corner, with offering prices aggregating approximately $330 million. The enhanced liquidity provided by CCE and Collectors Corner for certified coins, trading cards, and certified stamps, has increased the volume and turnover of these items, which benefits us because, as a general rule, increases in sales and purchases of those collectibles increase the demand for our authentication and grading services.
Publications and Advertising. We publish authoritative price guides, rarity reports and other collectibles data to provide collectors with information that makes them better informed consumers and makes collecting more interesting and exciting. Our publications also enable us to market our services, to create increased brand awareness and to generate advertising revenues. We publish the Sports Market Report on a monthly basis and the Rare Coins Market Report on a 2-month basis primarily for distribution to approximately 31,000 Collectors Club members. We sell advertising to dealers and vendors for placement in our publications. We manage a Collectors Universe website and individual websites for our authentication and grading services. On those websites, we offer collectible content, relevant to the marketplace for the specific authentication and grading service. We believe our websites for PCGS in coins, and PSA in trading cards, have the highest number of visitors and web traffic in their respective markets. We sell advertising to dealers and vendors on these two websites and on the websites, we maintain for PSA/DNA in autographs and CCE and Collectors Corner in coins.
Collectible Trade Shows. We own Expos Unlimited LLC (“Expos”) a trade show management company that operates one of the larger coins and collectibles shows, staged in Long Beach, California, three times a year. At these shows, collectibles are exhibited and are bought and sold by collectibles dealers and collectors. See Recent Developments: Coronavirus (“COVID-19”) under Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our mission is to provide the finest available independent authentication and grading services to sellers and buyers of high-value collectibles in order to:
|●||increase the values and liquidity of collectibles;|
|●||enable and facilitate transactions in collectibles;|
|●||generally, enhance interest, activity and trading in collectibles; and|
|●||achieve profitable growth, build long-term value for our stockholders and provide rewarding opportunities for our employees.|
Our Growth Strategy
We have established leading brands in our existing collectibles markets, including PCGS, PSA and PSA/DNA. We use those brands to promote Collectors Universe as the premier independent provider of authentication and grading services in the collectibles markets, in order to (i) increase our market share among existing users of authentication and grading services, (ii) increase the use of our services by the numerous collectors that do not currently use any independent third-party authentication or grading services, and (iii) expand our coin and trading cards services to selected international markets.
Although we have authenticated and graded approximately 44 million coins since the inception of PCGS, and approximately 37 million trading cards since the inception of PSA, we believe that less than 10% of the vintage United States coins and less than 10% of the vintage trading cards have been authenticated and graded by independent providers of authentication and grading services. Additionally, we estimate that we have authenticated and graded less than 10% of the potential market of autographs in the United States. Moreover, new collectibles are introduced each year into the markets in which we operate, some of which are authenticated and graded in the year of their introduction. Over time, these collectibles will increase the supply of vintage items that are sold by dealers and collectors, and we expect that many of them will be submitted for independent authentication and grading.
To take advantage of market opportunities to expand our service offerings to customers and to solidify our position as a leading authority in the collectible markets that we serve, we have:
|●||increased and will continue to increase operational capacity to enable us to authenticate and grade a higher number of primarily collectible cards, in response to continued increased demand for our services. This involves adding additional operating personnel, reviewing and improving our operational processes, introducing multiple daily work shifts and making additional operational space available.|
|●||begun embedding high-security Near Field Communication (NFC) chip technology into PCGS coin holders that allow collectors and dealers with a modern smartphone to verify that the coin encapsulated within the holder is a genuine PCGS certified coin.|
|●||expanded our geographical reach by opening offices in France, Japan, Hong Kong and China, the operations of which, in total, accounted for approximately 10% of our net revenues in fiscal 2020;|
|●||provided special packaging on certain modern coin programs that enhances the value of commemorative coins and helps drive increased volumes of coins sold by dealers and distributors of those coins;|
|●||provided collectibles information and value-added content through our online encyclopedia- CoinFacts and PSA Collectible Facts, as well as through printed publications;|
|●||participated at collectibles industry trade shows and organized “members only” shows for PCGS authorized dealers and Collectors Club members, at which we offer on-site authentication and grading services to facilitate collectibles trading activities;|
|●||established authorized PCGS and PSA dealer networks to increase the visibility of our brands and the use of our services by those dealers and their customers;|
|●||continued to enhance our Set RegistrySM programs to increase demand for our collectible coin and trading card authentication and grading services, among collectors and to increase traffic on our websites;|
|●||promoted our Collectors Clubs to attract and to provide incentives for collectors to use our services, and|
|●||expanded our website information services, to include auction results, reference materials and ongoing collectibles price guides and population reports.|
We offer authentication and grading services for coins, trading cards, autographs and autographed memorabilia. Our trained and experienced authentication and grading experts determine the authenticity of and using uniform quality standards, assign quality grades to these collectibles.
PCGS. Our authentication and grading of coins involves an exacting and standardized process. We receive coins from dealers and collectors and remove all packaging that identifies the submitter in any way. We then enter information regarding each coin into our proprietary computerized inventory system, which tracks the coin at every stage of the authentication and grading process. Generally, our process requires that at least two of our experts evaluate each coin independently. In some cases, depending on the type of coin being authenticated and graded or on the results of the initial review process, we involve a third expert to make the final determinations of authenticity and grade. The coin’s authenticity and grade are then verified by one of our senior experts, who has the authority to resubmit the coin for further review if he or she deems it to be necessary. Only after this process is complete is the coin reunited with its identifying paperwork, thus keeping the authentication and grading process from being influenced by the identity of the owner and the history of the coin. The coin is then sonically sealed in our specially designed, tamper-evident, clear plastic holder, which also encases a label describing the coin, the quality grade that we have assigned to it, a unique certificate number, the PCGS hologram and brand name and if requested by the customer, special inserts that can enhance the collectible value of the coin.
PSA. On receipt of trading cards from dealers and collectors, we remove all packaging that identifies the submitter in any way and enter information regarding the trading card into our proprietary computerized inventory system that enables us to track the trading cards throughout the authentication and grading process. Only after the authentication and grading process is complete is the trading card reunited with its identifying paperwork, thus keeping the authentication and grading process independent of the identity of the owner and the history of the trading card. The trading card is then sonically sealed in our specially designed, tamper-evident, clear plastic holder, which also encases a label that identifies the trading card, the quality grade that we have assigned to it and a unique certificate number, and the PSA hologram and brand name. We primarily authenticate and grade sportscards and, to a lesser extent, entertainment, as well as other types of collectible cards that are growing in popularity.
PSA/DNA. Because of the variability in the size of autographed memorabilia, the authentication and grading procedures we use necessarily differ from those used in authenticating and grading coins and trading cards. Customers may ship the autographed memorabilia to us for authentication at our offices or, in the case of dealers or collectors that desire to have a large number of items authenticated, we will sometimes send an expert to the customer’s location for “on-site” examination and authentication. Our experts reference what we believe is one of the largest databases of known genuine exemplars of signatures for comparison to a submitted item and draw upon their training and experience in handwriting analysis. In most cases, we take a digital photograph of the autographs that we have authenticated and store those photographs in a master database. Before shipping the item back to the customer, a tamper-evident label is affixed to the collectible at the customer’s option. The label contains our PSA/DNA name and logo and a unique certificate number. For additional security, in all cases when an item is fully authenticated, we tag the items with synthetic DNA-laced ink, which is odorless, colorless and tasteless and visible only when exposed to a narrow band wavelength of laser light using a hand-held, battery-powered lamp. Additional verification that an autographed item was authenticated by us can be obtained by using a chemical analysis to determine whether or not the ink used in the unique DNA code by PSA/DNA was applied to the autographed item. As a result, if the tamper-evident label that we affixed to an autographed item were to be removed or otherwise separated from the item, it is still possible to verify that the item was authenticated by us.
We employ both “pull” and “push” strategies in marketing our services to dealers and collectors of high-value collectibles. For collectibles, our “pull” strategies are designed to promote our brands, increase the preference among collectors for our authentication and grading services and encourage collectors to communicate that preference to their collectibles dealers, because most authentication and grading submissions are made by dealers. In our experience, if a customer requests a particular grading service, the dealer ordinarily will comply with that request. On the other hand, if the customer expresses no preference, the dealer will make its own choice of authentication and grading service or may even decide not to submit the collectible to an independent service for authentication and grading. Therefore, our “pull” oriented marketing programs emphasize (i) the protections that collectors and retail customers will have if they purchase collectibles that we have authenticated and graded; and (ii) the improved marketability and higher prices that they and the associated retailers can realize if they use our independent third-party authentication and grading services. Our “push” strategy, on the other hand, is designed to market our services directly to collectibles dealers to encourage them to use and promote our services.
Our “Pull” Strategy. We have developed and implemented a number of marketing programs and initiatives designed to create consumer preference for collectibles that have been authenticated and graded by us. Those programs and initiatives include:
|●||Set Registry Programs. We provide collectors with the opportunity to participate in free Internet “Set Registry” programs that we host on our collectibles websites. These programs encourage collectors to assemble full sets of related collectibles that have been authenticated and graded by us. Generally, each registered set is comprised of between 50 and 200 separate, but related, collectibles. Examples include particular issues of coins, such as Twenty Dollar Gold Double Eagles or Morgan Silver Dollars; particular sets of trading cards, such as all Hall of Fame pitchers or a particular team, like the 1961 Yankees. Our Set Registry programs enable collectors:|
|—||to register their sets on our websites, which provides them with an off-site reference source for insurance and informational purposes;|
|—||to display on our websites, and compare the completeness and quality grades of the collectibles making up their sets to those of other collectors who have registered similar sets on our websites, thereby creating a competitive aspect to collecting that adds to its excitement; and|
|—||to enter our annual Company-sponsored Set Registry competitions and awards programs in which collectors can win awards for having collected the most complete and highest graded sets of particular series or issues of coins or trading cards.|
The collectibles that may be registered on our Set Registries and included in our Set Registry competitions are generally limited to collectibles that have been authenticated and graded by us, although in November 2019 we began allowing collectors to build collections of PCGS-graded coins that have also been approved by Certified Acceptance Corporation (CAC). To register the collectibles to be included in a particular set, a collector is required to enter the unique certificate number that we had assigned to each of the collectibles when last authenticated and graded by us. We use the certificate number to compare the information being submitted by the collector with our database of information to verify that the collectibles being registered by a participant for inclusion in a particular set, qualify to be included in that set. We have found that our Set Registry competitions (i) create a preference and increase demand among collectors for our brands, and (ii) promote the trading of collectibles authenticated and graded by us by set registrants seeking to improve the completeness and overall quality of their sets, which generally results in additional authentication and grading submissions to us. Annual awards for set completeness and quality have been issued by PCGS and PSA each year since 2002. As an indication of the increasing popularity of our Set Registry programs, approximately 295,000 sets were registered on our Set Registries as of June 30, 2020, which represents a 16% increase over the number registered as of June 30, 2019.
|●||Collectors Club Subscription Program. We also have established “Collectors Clubs” for coin and trading card collectors. For an annual membership fee, ranging from $59 to $249, collectors receive a number of benefits, including (i) the right to have, without any further charge, a specified number of collectibles authenticated and graded by us, a privilege that non-member collectors do not have; and (ii) access to certain proprietary data that we make available on our websites or in print. At June 30, 2020, there were approximately 31,000 members in our Collectors Clubs.|
|●||Certified Coin Exchange (“CCE”) Business-to-Business Website and Collectors Corner Business-to-Consumer Website. The CCE website is a business-to-business website where recognized dealers make markets in and can sell and purchase coins and other collectibles that have been certified by us or by other independent coin grading services. Currently, there are over 180,000 certified coins being offered at bid and ask prices. We believe that the liquidity created for certified coins by CCE increases the demand for PCGS certified coins among dealers. In addition, we provide a market on Collectors Corner, which is a business to consumer website where consumers can identify and purchase coins, trading cards and currency offered for sale by authorized dealers. We believe that Collectors Corner has advantages over other business-to-consumer websites because the counterparties to the consumers, who buy and sell collectibles via Collectors Corner, have been accepted as sellers on the Collectors Corner website and are known members in the collectibles markets and the collectibles selling communities. Collectibles are listed at fixed prices, with the opportunity to negotiate lower prices. We believe that the increased turnover offered for collectibles listed on Collectors Corner, as well as the ability to use Collectors Corner to improve a coin or trading card set in the PCGS and PSA Set Registries, respectively, creates increased brand preference for PCGS and PSA authenticated and graded collectibles.|
Our “Push” Strategy. We also market our services directly to collectibles dealers and auctioneers to promote their use of our authentication and grading services. Our marketing message is focused on the enhanced marketability of collectibles that we have certified due to the increase in customer confidence that is attributable to our independent authentication and grading of those collectibles. These marketing programs include:
|●||Trade Shows and Conventions. There are numerous collectibles trade shows and conventions held annually in the United States and overseas, where collectibles dealers gather on a trading floor to buy and sell collectibles. We attend the largest and most significant of those trade shows and conventions, at many of which we offer same-day on-site authentication and grading services, which facilitate the trading and sales of collectibles at these shows and conventions. At the same time, we obtain additional brand exposure and generate increased revenues, because dealers and collectors generally are willing to pay higher fees for same- day on-site authentication and grading services at such trade shows and conventions. See Recent Developments: Coronavirus (COVID-19) under Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.|
|●||Expos. We own Expos Unlimited LLC (“Expos”), a trade show management company that operates one of the larger and better-known coin and collectibles shows staged, three times a year, in Long Beach, California. Those shows enable us to showcase our services and expertise better than at trade shows that we do not own or operate. In addition, Expos assures us of the continued availability of this show venue for our onsite authentication and grading services. See Recent Developments: Coronavirus (COVID-19) under Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.|
|●||Authorized Dealer Network. We have implemented authorized dealer programs for coin and trading card collectibles dealers and auction companies. Authorized dealers are able to use our marketing materials which are designed to promote our services and those of our authorized dealers to collectors. Those materials include “point of sale” and “point of purchase” displays and brochures and direct mail pieces for insertion in customer mailings. In addition, authorized dealers may use our brand logotypes on their websites to attract buyers for coins and trading cards that have been authenticated and graded by us. We also conduct joint marketing programs with our authorized dealers in which we provide financial support for dealer marketing programs, approved by us, that promote both the dealer’s products and services and our authentication and grading services.|
Our intellectual property consists primarily of trademarks, copyrights, proprietary software and trade secrets. As part of our confidentiality procedures, we generally enter into agreements with our employees and consultants and limit access to, and distribution of, our software, documentation and other proprietary information.
The following table sets forth a list of our trademarks, both registered and unregistered, that are currently being used in the conduct of our business both in the United States and overseas:
|Registered Marks||Unregistered Marks|
|Collectors Universe||PSA||Coin Universe|
|Professional Coin Grading Services||PSA/DNA||Collectors.com|
|PCGS||Quick Opinion||Expos Unlimited|
|PCGS Secure||PSA Cardfacts||Long Beach Coin, Stamp and Collectibles Expo|
|PCGS Gold Shield||PSA CollectibleFacts||Early Find|
|First Strike||Sports Market Report|
|Mobile CoinFacts||Rookie Ball and Graph|
|PCGS3000||Certified Coin Exchange|
|History in Your Hands||Coinflation|
|PCGS Banknote||Collectors Corner|
|Professional Currency Grading||FACTS|
|Professional Sports Authenticator||SPOTS DATA|
We have not conducted an exhaustive search of possible prior users of the unregistered trademarks listed above, and therefore it is possible that our use of some of these trademarks may conflict with others.
As of June 30, 2020, we employed 77 experts in our authentication and grading operations, with an average of 12 years of service with the Company. Our experts include individuals that either (i) had previously been collectibles dealers or were recognized as experts in the markets we serve, (ii) have been trained by us in our authentication and grading methodologies and procedures, or (iii) had gained authentication and grading experience at competing authentication and grading companies. However, talented collectibles authentication and grading experts are in short supply, and there is considerable competition among collectibles authentication and grading companies for their services. As a result, we focus on training young authenticators and graders (including non-US individuals) who we believe have the skills or knowledge base to become collectibles experts. We also contract with outside experts, usually collectibles dealers, to assist us with special grading issues or to enable us to address short-term increases in authentication and grading orders.
We generally issue an authenticity or grading warranty with every coin and trading card authenticated or graded by us. Under the terms of the warranty, in general, if a coin or trading card that was authenticated or graded by us later receives a lower grade upon resubmission to us for grading, or is determined not to be authentic, based on our opinion, we will offer either to purchase the coin or trading card at the current market value at the originally assigned grade or, instead, at the customer’s option, to pay the difference in the current market value of the item between its original assigned grade and its lower grade. We accrue for estimated warranty costs based on historical claims experience, and we monitor the adequacy of the warranty reserves on an ongoing basis. If warranty claims were to increase in relation to historical trends and experience, we would increase the warranty reserve and incur additional charges that would have the effect of reducing income in those periods during which the warranty reserve is increased. See ITEM 7: “Management Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies: Grading Warranty Costs”, and ITEM 8: Consolidated Financial Statements -Note 6 of this report for more information regarding our warranty reserves. As discussed above, before returning an authenticated or graded coin or trading card to our customer, we place the coin or trading card in a tamper-evident, clear plastic holder that encapsulates a label identifying the collectible as having been authenticated and graded by us. The warranty is voided if the plastic holder has been broken or damaged or shows signs of tampering.
We do not provide a warranty with respect to our opinions regarding the authenticity or quality of autographs or memorabilia.
Customer Service and Support
We devote significant resources to customer services, including a 44-person staff that provides personalized customer service and support in a timely manner, while also supporting our Set Registry, trade show programs and overseas offices. On our websites, customers are able to check the status of their collectibles submissions throughout the authentication and grading process and to confirm the authenticity of the collectibles that we have graded. When customers need services or have any questions, they can telephone or e-mail our support staff, Monday through Friday between the hours of 7:00 a.m. and 5:00 p.m., Pacific Time. We also involve our collectibles experts in providing support services, when necessary, to address special issues.
In order to obtain volume discounts, we have chosen to purchase the injection-molded critical high-volume plastic parts for our clear plastic holders from a limited number of suppliers. We typically concentrate the purchase of holders through one supplier when developing new holders, although, we now have back up suppliers and dies for our critical parts. If it became necessary for us to obtain parts from an additional supplier, we would have to arrange for the fabrication of a die for that new supplier, which can be a lengthy process. However, as we own the dies used to manufacture the parts, they should be able to be moved to replacement suppliers. We believe the inventory of parts we maintain and the availability of back-up suppliers (including overseas suppliers) is sufficient to give us the time to change suppliers, if considered necessary.
Coin Authentication and Grading. Our principal competitors in the coin authentication and grading market are Numismatic Guaranty Corporation of America (“NGC”), Independent Coin Grading, Certified Acceptance Corporation (“CAC”) and ANACS, all of which are privately owned businesses.
Trading Card Authentication and Grading. Our primary competitors in trading card authentication and grading are Beckett Trading Card Grading Corporation, and Trading Card Guaranty, LLC.
Autograph Authentication and Grading. In the vintage autograph authentication market, we compete with James Spence Authentication and a few smaller competitors.
We believe that the principal competitive factors in our collectibles authentication and grading markets are (i) brand recognition and awareness; (ii) an established reputation for integrity, independence and consistency in our approach to establishing authenticity and in the application of grading standards; and (iii) responsiveness of service. We have found that price is much less of a factor in the case of vintage collectibles, but is a more important consideration with respect to modern coins and trading cards because of their significantly lower values. We believe that our PCGS, PSA and PSA/DNA brands compete favorably with respect to all of these factors and are among the leaders in each of their respective markets. Barriers to entry into the authentication and grading market are relatively low, especially in the trading card authentication and grading market. However, brand name recognition and a reputation for integrity, independence and consistency in the application of grading standards can take several years to develop. In addition, we believe that the sheer number of coins and cards that are in PCGS and PSA holders acts as a barrier to entry to new competitive start-up brands. The limited supply of experienced collectibles experts also operates as a barrier to entry.
IT Systems. We have developed a number of proprietary software systems for use in our authentication and grading operations, as well as for the operation and maintenance of our websites. Custom applications include grading systems, inventory control and order tracking systems, and other internally developed applications to manage the day-to-day operations of the Company. Websites have multiple customer-facing content/information systems, including (but not limited to) PSA CollectibleFacts, PCGS CoinFacts, multiple price guide and population reports, and multiple eCommerce solutions. Internally, these websites and applications are managed through a proprietary content management system. The majority of internally developed systems are written in Microsoft C# .NET and, in some limited cases, Microsoft Visual Basic .NET (all using a number of high-availability virtual machine systems or Microsoft SQL Server clusters on the back end).
The majority of the information technology systems (both for internal use and on publicly-accessible websites) are located at a Statement on Standards for Attestation Engagements (“SSAE”) 18 compliant data center in Southern California. This data center offers:
|●||24/7/365 monitoring and alerting of environmental conditions (including temperature, humidity, power status, etc.) through multiple/redundant hardware sensors and systems;|
|●||24/7/365 physical security through both technology (cameras, sensors, biometric access control, etc.) and always-present security staff; and|
|●||redundant Internet connectivity, power, and cooling systems that are tested on a regular basis.|
We also maintain a number of systems to monitor the availability and performance of our sites and systems, including:
|●||24/7/365 monitoring and alerting of website availability and performance through both internally developed and third-party solution providers; and|
|●||24/7/365 monitoring and alerting of Internet-based security threats through internal security systems, dedicated hardware devices, and external third-party solution providers.|
In addition to the Southern California data center, smaller internal-use-only local area networks exist in our Southern California, New Jersey, Paris, Shanghai, Hong Kong, and Japan operations centers. However, the Information Technology infrastructure in those smaller offices is limited. Therefore, any damage to, or failure of, our computer systems due to a catastrophic event in Southern California, such as an earthquake, could cause an interruption in our services. We believe that these risks are mitigated by a comprehensive data backup/protection solution, which includes regular rotation of offsite data storage.
Cyber Security. Cyber security is one of our top priorities and is always contemplated when developing and deploying new systems (both software and hardware). To this end, key staff members maintain industry-standard security and audit certifications and regularly expand their security knowledge and deploy new security tools as considered necessary.
We maintain multiple Internet connections for both web serving and outbound Internet access. Internet access points (across all offices) are protected with Palo Alto enterprise-level firewalls and security products. Additional security features include limiting access to critical infrastructure components through next generation end point protection that includes dynamic machine learning capabilities and predictive models. In addition to the constant monitoring of these security devices, network security scans (of both internal and publicly-accessible servers) are performed on a regular basis. These scans include penetration/intrusion testing, vulnerability assessments, and attack surface analysis. We have multiple overlapping security infrastructures to mitigate potential single failures. However, as many other businesses have experienced, there can be no assurance that the security measures we have adopted will prove to be adequate to enable us to detect and prevent all cyber-security breaches that could lead to the theft by hackers of confidential information entrusted to us by our customers, including passwords and credit card numbers. See “Risk Factors-Our business is subject to online security risks, including security breaches” in ITEM 1A below in this Annual Report.
With the exception of laws in some states that require memorabilia authenticators to certify to the accuracy of their authentication opinions, there are no material government regulations specifically relating to the authentication and grading businesses that we conduct, other than regulations that apply generally to businesses operating in the markets where we maintain operations or conduct business.
As of June 30, 2020, we had a total of 515 employees, of which 446 were full-time employees and 69 were part-time employees, including 49 who were employed outside of the United States. Our authentication and grading-related businesses employed 448 people, including our 77 experts and 44 customer service and support personnel. Of the other 67 employees, 22 work in information services, 6 in our CCE subscription business, 6 in our Expos business (of which 5 were part-time employees), and 33 in other business and administrative services. We have never had a work stoppage due to an employee dispute, and no employees are represented under collective bargaining agreements. We consider relations with our employees to be good.
Our internet address is www.collectorsuniverse.com. We post links to our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. Our SEC filings may also be read and copied at the SEC’s Public Reference Room at 100F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our websites and the information contained thereon are not part of, nor are they incorporated into, this Report.
|ITEM 1A||RISK FACTORS|
Our business is subject to a number of risks and uncertainties that could prevent us from achieving our business objectives and could hurt our future financial performance and the price performance of our common stock. Such risks and uncertainties, many of which are outside of our control, could also cause our future financial condition and future financial performance to differ significantly from our current expectations, which are described in the forward-looking statements contained in this Annual Report. Those risks and uncertainties, many of which are outside of our control, include the following:
The COVID-19 pandemic has had and may continue to have, and other public health crises or epidemics could in the future have, a material adverse impact on our business, operations, liquidity, financial condition, results of operations, and the markets and communities in which we operate.
The COVID-19 pandemic has had, and other public health crises or epidemics in the future could have, repercussions across local, regional, and global economies and financial markets. The outbreak of COVID-19 has significantly adversely impacted global economic activity and contributed to volatility in and negative pressure on financial markets. In response to the pandemic, many federal, state, local and foreign governments have put in place, and others in the future may put in place, travel restrictions, quarantines, stay-at-home orders, and similar government orders and restrictions in an attempt to control the spread and mitigate the impact of the disease. Such restrictions or orders, or the perception that such restrictions or orders could be implemented or extended, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, and cancellation or postponement of events and trade shows, among other effects that have impacted and could continue to negatively impact our business and operations.
For example, during our third quarter ended March 31, 2020, we suspended our coin, trading card and memorabilia authentication and grading operations in California in response to statewide stay-at-home orders, which contributed to a material adverse impact to our revenues and operating income. Although we resumed such operations, as an essential services provider, and allowed our employees to return to work, future government restrictions or orders may require we temporarily cease or limit our operations in California or other geographic regions in which we operate, which could further impact our business and results of operations. In response to guidance from the Centers for Disease Control and Prevention (“CDC”), we have implemented enhanced measures at our authentication and grading facility in California to protect the health and safety of our employees, customers and the communities in which we operate, which included shifting certain of our administrative and clerical personnel to a remote work environment and reconfiguring our authentication and grading facility to enable social distancing. Notwithstanding our adoption of CDC-recommended guidelines and preventative efforts to ensure the health and safety of our employees, it is possible that our employees may contract COVID-19 while at our facilities, which could subject us to litigation.
We are experiencing some inefficiencies in our operations as a result of our administrative and clerical personnel transitioning to remote operations and the changes we have made to the work schedules of our employees working at our California authentication and grading facility in order to accommodate social distancing. Our business operations also may be disrupted in the future if the duration of the COVID-19 pandemic is prolonged, the severity of the pandemic increases or there is a second wave of COVID-19 infections in our community and, as a result, could lead to more COVID-19 infections among our authentication and grading employees. In any such event, we could experience a decrease in the numbers of collectibles that we are able to authenticate and grade and therefore, it would become difficult to meet the turnaround times requested by our customers. Also, our operations could be adversely affected by travel restrictions (in addition to those that have been imposed by the Chinese government) or by other government actions designed to slow the spread of COVID-19 in California.
As a result, there is no assurance that our operations will not be disrupted once again if, for example, the duration of the COVID-19 pandemic becomes prolonged, or the severity of the pandemic worsens , or a substantial number of our onsite employees contract COVID-19 at or about the same time. As a result, it could become necessary for us, in the future, to suspend our on-site authentication and grading operations, which could have a material adverse effect on our results of operations and financial condition. See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—“Recent Developments: Coronavirus (COVID-19)” in Item 7 below.
In addition, the demand for our services, as well as our results of operations, could be adversely impacted due to a number of other factors, including the following:
|●||reduced customer demand for our services as customers seek to reduce or delay spending in response to the impacts of COVID-19, including from the recent rise in unemployment rates, decreased discretionary spending, and diminished consumer confidence;|
|●||a deterioration in our ability to operate in affected domestic and international geographic regions, including a complete or partial closure of, or other operational issues at, our authentication and grading facilities, which could be further exacerbated by government restrictions and changes in consumer behavior;|
|●||the cancellation or postponement of trade shows, at which we offer same day authentication and grading services and meet with current and new prospective customers;|
|●||a decline in the number of modern coin programs conducted by the U.S. Mint, which could adversely impact our revenues from the authentication and grading of modern coins;|
The full extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition is highly uncertain and subject to change, and will depend on a number of factors beyond our control, including, without limitation, the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, the impact of the pandemic on our customers and the communities in which we operate, the extent and duration of any economic recessionary conditions, and the impact on the financial markets and our access to capital. We expect any further spread of the disease, including the potential for a second wave of COVID-19 cases, or even the threat or perception that this could occur, or any protracted duration of decreased economic activity, could have a material adverse impact on our business, results of operations and financial condition. See Recent Developments: Coronavirus (COVID-19) under Item 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, in Part II of this Annual Report.
A decline in the popularity of collectibles and a resulting decrease in submissions for our services could adversely impact our business.
The volume of collectibles submitted to us for authentication and grading is affected by the demand for and market value of those collectibles and the popularity of certain coins released by the United States Mint. As the demand for and value of collectibles increase, authentication and grading submissions, as well as requests by submitters for higher priced faster turnaround times, can also increase. However, that also means that a decline in the popularity or, in the value of the collectibles that we authenticate and grade would cause decreases in authentication and grading submissions to us and in fewer requests for faster turnaround times, resulting in declines in our revenues and profitability. We have found, over the years, as evidenced by the reduction in our U.S. coin grading fees in certain periods of fiscal years 2012 to 2013, 2015 to 2016, and fiscal 2018, that the popularity of collectibles for certain specific coin programs, can vary due to a number of factors, most of which are outside of our control, including perceived scarcity or lack of scarcity of collectibles, changes in consumer confidence and trends and their impact on disposable income, precious metals prices, interest rates and other general economic conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Factors that can Affect our Operating Results and Financial Position” under Item 7 in this Annual Report.
We are dependent on our coins and trading cards and autographs authentication and grading services for most of our revenues which makes us vulnerable to changes in economic or market conditions that could adversely affect the demand for those services and our operating results.
Coin authentication and grading and other coin-related services accounted for approximately 53%, 57% and 63% of total net revenues in fiscal 2020, 2019 and 2018, respectively. Our U.S. and overseas modern coin authentication and grading revenues represented approximately 15%, 15% and 21% of our total revenues in fiscal 2020, 2019 and 2018, respectively. We believe that the principal factors that can lead to fluctuations in U.S. coin grading submissions include:(i) economic downturns which could result in a decline in consumer and business confidence and disposable income and, therefore, the willingness of dealers and collectors to buy collectible coins, (ii) the performance of the stock and bond markets, the level of interest rates and fluctuations in the value of the U.S. dollar and precious metals, which can lead investors to shift some of their investments between stocks and bonds, on the one hand, and precious metals, on the other; (iii) in the case of modern coin submissions, increases or reductions in the marketing activities or the popularity of programs that are conducted by the U.S. Mint or by dealers or customers, who specialize in selling modern coins (iv) the pricing of our services particularly for our modern coin programs and (v) short-term changes in the value of gold, particularly around the time of collectibles trade shows. In addition, our cards and autographs revenues accounted for approximately 43%, 36% and 31% of our total net revenues in fiscal 2020, 2019, 2018 respectively, and that business has continued to grow consistently over a number of years, such that our dependence on that business has increased. This continuing lack of diversity in our sources of revenues and our dependence on submissions from our two main businesses for a majority of our net revenues make us more vulnerable to changes in market conditions, which could result in reductions in our total net revenues and gross margin and, therefore, hurt our operating results, as evidenced by the reduction in both our revenues and operating income in fiscal 2018 as compared with fiscal 2017, due mainly to the lower U.S. coin revenues in fiscal 2018.
Moreover, if the economic downturn resulting from COVID-19 becomes prolonged, demand for our authentication and grading services may decrease and may negatively impact our results of operations and financial condition.
Increases in turnaround times experienced by customers at our trading cards and autographs business may reduce demand for our services and could reduce revenue growth or cause a decline in revenues.
Our cards and autographs business which represents about 43% of total revenues in fiscal 2020, has experienced revenue growth rates of 27% and 25% in fiscal 2020 and 2019, respectively. In addition, as of June 30, 2020, that business had a record backlog of collectible submissions, awaiting authentication and grading by our experts. We continue to add authentication and grading capacity to meet the increased demand for our services, however, our backlog has continued to grow in fiscal 2020. Although to date, we have not experienced a slowdown in submissions from our customers, over time continued increased turnaround times may negatively impact the level of submissions and therefore reduce the growth of our revenues.
Declines in general economic conditions could result in decreased demand for our services, which could adversely affect our operating results.
The availability of discretionary or disposable income and the confidence of collectors and dealers about future economic conditions are important factors that can affect their willingness and ability to purchase, and the prices that they are willing to pay for collectibles. Declines in customer confidence resulting from reductions in cash flows, and the availability of credit, could adversely affect the ability of customers to purchase high-value collectibles and delay the sale of collectibles that may have declined in value due to adverse economic conditions. Declines in purchases and sales, or in the value of collectibles usually result, in turn, in declines in the use of authentication and grading services, as such services are often used in conjunction with and to facilitate collectibles sale and purchase transactions. As a result, economic uncertainties, downturns and recessions can and do adversely affect our operating results by (i) reducing the frequency with which collectibles dealers and collectors submit their coins, trading cards and other collectibles for authentication and grading including, in particular, modern coins and trading cards, primarily because authentication and grading fees are relatively high in relation to the value of those collectibles; and (ii) adversely affecting the ability of customers to pay outstanding accounts receivable on a timely basis.
Temporary popularity of some collectibles may result in short-term increases, followed by decreases, in the volume of submissions for our services, which could cause our revenues to fluctuate.
Temporary popularity or “fads” among collectors, or the popularity of certain modern coin marketing programs, either by the U.S. Mint or by dealers or distributors of collectibles, may lead to short-term or temporary increases, followed by decreases in the volume and in the average service fees that can be generated on collectibles that we authenticate and grade. This can be particularly common with modern coins released by the U.S. Mint or other special releases that are seasonal in nature or have a concentration of demand around the coin release dates but limited follow-on demand. Trends of this nature may result in significant period-to-period fluctuations in our operating results and could result in declines in our net revenues and profitability, not only because of a resulting decline in the volume of authenticating and grading submissions, but also because such trends could lead to increased price competition, or pressure on the fees we are able to charge customers, which could require us to reduce our authentication and grading fees in order to maintain market share.
Our top five customers account for approximately 10% of our total net revenues in fiscal 2020
During the year ended June 30, 2020, five of our customers accounted, in the aggregate, for approximately 10% of our total net revenues. As a result, the loss of any of those customers, or the lack of success of marketing programs by those customers both in the U.S. or in China, or changes in our relationship with any of those customers could lead to a decrease in the volume of grading submissions which could cause our net revenues to decline and, therefore, could harm our operating results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Factors that can Affect our Operating Results and Financial Position” below in the Report.
There are risks associated with new or expanded service offerings and geographic expansion, with which we have limited experience.
On an ongoing basis, we seek to introduce new services that we can offer to our existing authentication and grading customers as a means of increasing our net revenues and profitability. In addition, in recent years we began offering and providing authentication and grading services in China, Hong Kong, France and Japan. Those new services and our international operations, however, may not meet our expectations and may prove to be unprofitable which could lead to impairments of amounts capitalized and negatively impact our operating results. Furthermore, volatility in the level of services generated at our international operations, particularly in China, may add volatility to our quarterly and annual operating results.
Changing market conditions in China have adversely affected the level of China revenues and the future growth of our coin business in China may be slower in the future.
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 in China, and a desire to broaden our customer base, in February 2018, we notified the customer that we had decided to terminate the exclusive relationship. As a result we have not generated any significant revenues from that customer since then. It is difficult to predict the longer-term effect this action will have on future coin submissions from this customer or how successful we will be in attracting submissions from other coin customers in China. However, non-banking channel revenues increased by approximately 24% and 14% in fiscal 2020 and 2019, respectively. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that can Affect our Operating Results and Financial Position” under Item 7.
Our business is subject to risks associated with doing business outside the United States.
We have expanded our coin authentication and grading businesses into foreign markets including China, Hong Kong, France and Japan. Those operations pose risks that might adversely affect, possibly materially, our future financial performance. Those risks include the following:
|●||potential difficulties in complying with multiple and potentially conflicting laws and regulations, which could increase our costs of doing business internationally and could expose us to possible governmental or legal action in the foreign countries where we conduct business;|
|●||difficulties in navigating the evolving exchange control regulations in China that can cause delays in repatriating excess cash balances from China to the United States.|
|●||difficulties in staffing and managing international operations;|
|●||differences in and difficulties in enforcing intellectual property protections;|
|●||potentially adverse tax consequences due to overlapping or differing tax structures;|
|●||fluctuations in currency exchange rates;|
|●||risks associated with operating a business in a potentially unstable political climate, such as (for example) the recent political instability and uncertainty in Hong Kong;|
|●||potential difficulties in identifying and responding to changes in market conditions in overseas markets; and|
|●||possible adverse effects of trade disputes between the United States and foreign countries, such as China, where we conduct business.|
We invoice our overseas customers for our coin authentication and grading services in the local foreign currency in the country in which the business operates, except in the case of Hong Kong, where we invoice our customers in U.S. dollars. In fiscal 2020, the impact of fluctuations in foreign currencies on our financial results was not significant. There is, however, no assurance that there will not be changes in foreign exchange rates that would have a material adverse effect on our results of operations in the future.
We are dependent on our key management personnel.
Our performance is greatly dependent on the performance of our senior management and certain other key employees. As a result, the loss of the services of any of our executive officers or other key management employees could harm our business. Some of our executive officers and key employees are experts in the collectibles markets and have industry-wide reputations for authentication and grading of collectibles. The loss of any of those officers or other key employees, could have a negative effect on our reputation for expertise in the collectibles markets that we serve, which could lead to a reduction in authentication and grading submissions to us and thereby result in decreases in revenues and profitability.
We are dependent on our collectibles experts.
In each of our markets, there are a limited number of individuals who have the expertise to authenticate and grade collectibles, and competition for available collectibles experts is intense. Accordingly, our business and our growth initiatives are heavily dependent on our ability (i) to retain our existing collectibles experts, who have developed relatively unique skills and enjoy a reputation for being experts within the collectibles markets, and (ii) to implement personnel programs to enable us to add collectibles experts, as necessary, to grow our business, both in the United States and overseas and to offset employee turnover that can occur from time to time. Moreover, some of our experts could leave and, in the past, have left our Company to join competitors or start competing businesses. If we are not successful in retaining our existing collectibles experts or in hiring and training new collectibles experts, particularly in our cards and autographs business, which has experienced significant increased demand in recent years, this could limit our ability to grow our business and adversely affect our operating results and financial condition.
Damage to our reputation could have a material adverse effect on our business, financial condition and results of operations.
We have developed a reputation as one of the leading third party providers of collectibles authentication and grading services, as a result of a number of factors including, we believe, the rigorousness and consistency of our grading standards, the integrity of our grading processes and related warranty protection to our customers, our knowledge of the collectibles markets in which we operate, and innovative programs and services that we have developed and are able to offer to our customers, including the Collectors Club, our Set Registry Programs and our Certified Coin Exchange dealer-to-dealer Internet bid-ask market. As a result, our continued success is heavily dependent on our maintaining that reputation among collectibles dealers and collectors. Failures or errors in authentication or grading processes, such as inconsistent application of grading standards or incidents that put the integrity of those processes into question, could significantly impair our reputation in the marketplace which, in turn, could lead to a loss of customer confidence and a decrease in the demand for our services and, therefore, could have a material adverse effect on our business, financial condition and results of operations.
We could suffer losses on authentication and grading warranties.
In general, we issue an authenticity or grading warranty for coins and trading cards that we authenticate or grade. Those warranties provide that:
|●||if a coin or trading card that we authenticated and sealed in one of our tamper-evident plastic holders are later determined by us not to have been genuine, we would have to purchase the collectible at its current market value had it been genuine; or|
|●||if a coin or trading card that we graded and sealed in one of our tamper-evident plastic holders later receives a lower grade upon resubmission to us for grading, we would be obligated either to purchase the collectible at the market value at its original assigned grade or to pay the difference between that value as compared to the value at the lower grade.|
We have no insurance coverage for claims made under these warranties. We monitor the adequacy of our warranty reserves on an ongoing basis and maintain reserves for warranty claims based on historical experience. However, there is no assurance that these warranty reserves will prove to be adequate, and as we expand our services in overseas markets, we may incur higher warranty claims than we have experienced in the past. If our warranty reserves prove to be inadequate, our gross margin and operating results could be harmed.
Increased competition could adversely affect our financial performance.
Although there are few major competitors in the collectibles authentication and grading markets in which we currently operate, competition in these markets is, nevertheless, intense. Increased competition in our collectibles markets could adversely affect our pricing and profit margins and our ability to achieve further growth, and we cannot provide assurances that we will continue to be successful in competing against existing or future competitors in our collectibles markets. Also, if we were to enter into new collectibles markets, it is likely we would face intense competition from existing competitors in those markets who are likely to have greater brand name recognition and long-term relationships with collectibles dealers and individual collectors in those markets than we will have. Such competition could adversely affect our ability to generate profits and could cause us to incur losses or impairment charges in those markets and damage our financial condition.
There is no assurance that we will continue to pay cash dividends at current levels or at all.
As previously reported, the continued payment of cash dividends is subject to a number of factors, including changes in market and financial conditions and the cash requirements of our business. On February 4, 2018 the Board of Directors approved a reduction in the amount of quarterly cash dividends to $0.175 per share from $0.35 per share. Although, we consider the new dividend policy to be at a more sustainable level, there is no assurance that the amount of the current quarterly cash dividend will not be further reduced or the payment of cash dividends will not be suspended or discontinued altogether by the Board of Directors, if e.g. the prolonged effects of COVID-19 were to decrease the demand for our services. See Market for Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities ─ Dividends in Part II, Item 5 of this Annual Report. Any further reduction in the amount of, or any suspension or discontinuation of, our quarterly cash dividend is likely to adversely affect our stock price.
Our reliance on a limited number of suppliers for principally all of our “tamper-evident,” clear plastic coin and trading card holders exposes us to potential supply and quality problems.
We place all of the coins and trading cards that we authenticate and grade, in tamper-evident, clear plastic holders and related gaskets. In addition, we incorporate security features into the holders to mitigate the risk of counterfeits. In order to take advantage of volume-pricing discounts, we purchase substantially all of those holders, from a limited number of suppliers. For our highest volume most critical plastic parts, we now have back-up suppliers and dies used in the manufacture of those parts. However, some of our back-up suppliers for these plastic holders are not U.S. based suppliers. In addition, when developing new holders, we concentrate the purchase of holders through a single supplier, at least initially. Our reliance on a limited number of suppliers for a substantial portion of those plastic holders could expose us to the potential for delays in our ability to deliver timely authentication and grading services in the event that a supplier was to terminate its services to us or encounter financial or production problems. If, in such an event, we were unable to obtain replacement holders from a back-up supplier in a relatively short period of time, we could lose customer orders, or incur additional production costs, or both. To mitigate this risk, the Company (i) owns the dies used to manufacture the parts and (ii) has increased its inventory of holders to give us more time to arrange for production from other suppliers in the event of a termination of or interruption in service from our existing suppliers. If holders obtained from alternative suppliers are not of consistent quality, we could be exposed to additional warranty claims because tampering with those holders may not be as readily detectible. In addition, using overseas suppliers for holders may expose us to a higher risk of counterfeit holders that could damage our reputation. These factors could cause a decline in our net revenues and increases in our costs of sales which could have a material adverse effect on our results of operations.
Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act and tax laws, in general, could materially affect our tax obligations and effective tax rate.
The 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and significantly affected U.S. tax law by changing the rate and how the U.S. imposes income tax on U.S. and multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will be able to apply the law which could impact our tax obligations in the period issued.
In addition, tax laws can require complex computations, the application of which, can be uncertain. Furthermore, a rollback of the reduced rates in the Tax Act, could materially affect our tax obligations and effective tax rates, in the future.
Our computer systems and network systems may be vulnerable to system failure due to a lack of redundant systems at other locations.
Our operations are dependent on our ability to protect our computer systems against damage from fire, power loss, telecommunications failure, fires, earthquakes and similar catastrophic events. In this regard, Southern California, where we are located and our computer systems are housed, is particularly vulnerable to earthquakes and fires that could result in damage to our computer systems which, in turn, could cause interruptions of our services. Additionally, we could encounter disruptions that would harm our business as a result of problems on the internet or actions of internet users that could make it difficult for our customers to access our websites. Difficulties encountered during planned system upgrades or re-implementations also could lead to disruptions of our services.
While we have standby redundancy for most of our computer systems in the cloud, not all systems are being replicated in real time. As a result, if any such events, disruptions or other of these problems were to occur, we could become unable to access information that is critically important to our ability to continue our operations which could cause interruptions in the delivery of our services and harm our business, operating results and financial condition.
Our business is subject to online security risks, including security breaches.
In the ordinary course of our business, we receive, and store confidential personally identifiable information provided to us by our customers, such as passwords and credit card information.
An increasing number of large internet companies and traditional “brick and mortar” businesses have disclosed security breaches of their websites and computer systems that have led to the interruptions of service and, in certain cases, the misappropriation or theft of confidential personally identifiable information of their customers (often referred to as “identity theft”). Because the techniques used by the perpetrators of such security breaches change frequently and may be difficult to detect, like those companies and businesses, we may be unable to anticipate the techniques used in such breaches or to implement adequate preventative measures. Data security breaches may also result from non-technical causes such as, for example, actions of employees or third party service providers. Our servers also are vulnerable to computer viruses or malware and physical or electronic break-ins that could prevent our customers from accessing our online services. In addition, our internal systems could be subjected to ransomware attacks, that would enable hackers to take control of our systems and then demand payments to release those systems or threaten to disclose proprietary information about the Company, if ransoms are not paid. Furthermore, hardware that we procure from third parties may contain defects in design or other problems that could unexpectedly compromise information security or disrupt our operations. We rely on encryption and authentication technology licensed from third parties to provide for secure storage and transmissions of confidential information, including customer passwords and payment card numbers and we back-up our systems and data on a regular basis. However, as the recent disclosures by large internet companies and traditional businesses demonstrate, such technology may not be sufficient to enable us to detect or prevent security breaches or the misappropriation or theft of customer or proprietary information, which could damage our reputation and lead customers to discontinue their use of our services.
In addition, security breaches could result in a violation of privacy and other applicable laws, thereby exposing us to potentially significant legal or financial exposure to government (including overseas governments) actions and private litigation. Governmental agencies (both domestic and foreign) investigating any such breaches may seek to impose fines or other monetary penalties on us or to seek injunctive relief that could materially increase our data security costs and adversely impact our operations.
We rely on third parties for various Internet and processing services.
Our operations depend on a number of third parties for Internet access and delivery services. We have limited control over these third parties and no long-term relationships with any of them. For example, we do not own a gateway onto the Internet, but, instead, rely on Internet service providers to connect our website to the Internet. Should the third parties that we rely on for Internet access or delivery services become unable to serve our needs for a sustained time period whether as a result of a strike, or a natural disaster or for any other reason, our revenues and business could be harmed.
Acquisitions, the commencement of new businesses and expansion into overseas markets, present risks, and we may be unable to achieve our financial and strategic goals related to those activities.
There may be opportunities that present themselves to acquire existing businesses, commence new businesses or expand our markets through foreign expansion that would give us the opportunity to increase our revenues and our earnings. The purchase or commencement of a new business , or the expansion of our overseas businesses, however, present a number of risks and uncertainties, including (i) difficulties in integrating a new business or a new location into our existing operations, as a result of which we may incur increased operating costs that can adversely affect our operating results; (ii) the risk that our current and planned facilities, computer systems and personnel and controls will not be adequate to support our expanded operations; (iii) the diversion of management time and capital resources from our existing businesses, which could adversely affect the performance of those businesses and our operating results; (iv) dependence on key management personnel of an acquired or newly started businesses or at the new geographic locations and the risk that we will be unable to integrate or retain such personnel; and (v) the risk that the anticipated benefits of any acquisition or of the commencement of any new business or overseas operations may not be realized or changes we make to an acquired business may harm the performance of that business, in which event we will not be able to achieve an acceptable return and we may incur losses on those investments.
The Company is subject to litigation risks that can make the timing of expense recognition uncertain and can have a material adverse effect on our results of operations and financial condition.
From time to time, the Company is involved as a defendant in lawsuits that arise in the ordinary course of business. In certain instances, the Company may have insurance coverage that can help mitigate costs and losses that can arise in such a dispute, subject to retentions that apply to the related insurance policy. As litigation progresses, new or changed information can change the Company’s evaluation of the outcome of a lawsuit, which can give rise to a change in the amount of expense accruals for such disputes. In addition, insurance coverage can be complex and uncertain, especially when only some of the alleged acts that give rise to the dispute are covered under the insurance policy or when a dispute spans more than one coverage period, with different insurance carriers providing coverage. Furthermore, insurance carriers may have a different view than management on the potential outcome of a dispute and can apply pressure on management to resolve a lawsuit, when the Company has worked through the retention that applies to an insurance policy. The Company evaluates its position on lawsuits on a quarterly basis and records accruals in accordance with U.S. GAAP. The outcomes of individual lawsuits and disputes, if material, could adversely affect our results of operations and financial condition.
We depend on our ability to protect and enforce our intellectual property rights.
We believe that our trademarks and other proprietary rights are important to our success and competitive position. We rely on a combination of patents, trademarks, copyright and trade secret laws to establish and protect our proprietary rights. However, the actions we take to establish and protect our intellectual and other proprietary rights may prove to be inadequate to prevent imitation of our services or products, especially in international markets, or to prevent others from claiming violations of their intellectual and proprietary rights by us. In addition, others may develop similar trade secrets or other intellectual property independently or assert rights in our intellectual and other proprietary rights that could lead them to seek to block sales of our services based on allegations that use of some of our marks or other intellectual property constitutes a violation of their intellectual property rights.
Our unregistered trademarks could conflict with trademarks of others.
We have not conducted an exhaustive search of possible prior users of our unregistered trademarks or service marks. Therefore, it is possible that our use of some of these trademarks or service marks may conflict with the rights of others. As a result, we could face litigation or incur liabilities for infringing the intellectual rights of others or lose the use of some of these trademarks or service marks, all of which could have an adverse effect on our name recognition and result in a decrease in our revenues and an increase in our expenses.
The imposition of government regulations could increase our costs of doing business.
With the exception of state laws applicable to autograph authentication, the collectible coin and other high-value collectibles markets are not currently subject to direct federal, state, local or overseas regulation. However, from time to time government authorities discuss additional regulations which could impose restrictions on the collectibles industry, such as regulating collectibles as securities or requiring collectibles dealers to meet registration or reporting requirements or regulating the conduct of collectibles auction businesses. Adoption of laws or regulations of this nature could lead to a decline in sales and purchases of collectibles and, therefore, also to a decline in the volume of coins, trading cards and other collectibles that are submitted to us for authentication and grading.
If we are found to have violated laws concerning the privacy and security of consumers’ or other individuals’ personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation and, therefore, our business.
There are a number of domestic and international laws protecting the privacy and security of personal information. These laws include U.S. state laws, such as the California Consumer Privacy Act (CCPA), which took effect on January 1, 2020, as well as the European Union’s General Data Protection Regulation (GDPR), E.U.-member state laws, or similar applicable laws. These laws may place limits or conditions on how we collect, use, and share personal information, and they may impose obligations to protect that information against unauthorized access, use, loss, and disclosure. If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of applicable data protection laws, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and operating results. Although we utilize a variety of measures to comply with applicable obligations and secure the data that we process, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards. We may also face new risks relating to data privacy and security as the United States, individual U.S. states, E.U. member states, and other international jurisdictions adopt or implement new data privacy and security laws and regulations as we continue to commercialize our services worldwide. Our business may need to adapt to the extent any such new laws place new or additional obligations on us.
The market for our shares is limited, which may adversely affect the trading value and liquidity of our common stock.
The trading volume of our shares is relatively low, at a daily average of approximately 97,000 shares during the 90 trading days ended July 7, 2020, which reduces the liquidity of our shares, making it more difficult for our stockholders to sell their shares if the need to do so arises. The low trading volumes also may depress, and make it more difficult to achieve increases in, the trading prices of our shares.
If our quarterly results are below market expectations, the price of our common stock may decline.
Many factors, including those described in this “Risk Factors” section, can affect our business, financial condition and results of operations, which makes the prediction of our future financial results difficult and uncertain. These factors include:
|●||period to period, including quarterly increases or decreases in the numbers and mix of collectibles graded between coins and trading cards and autographs, including the volume of modern coin programs (domestically and/or overseas);|
|●||changes in and the seasonality of the coin markets in the United States and China;|
|●||changes in market conditions that can affect the demand for our authentication and grading services, such as a decline in the popularity of certain collectibles and volatility in the prices of gold and other precious metals, or the existence, popularity or the absence of U.S. Mint programs or continued economic fallout from COVID-19;|
|●||changes in economic conditions that reduce the availability of disposable income or that may cause collectors and collectibles dealers to reduce their purchases of collectibles, which could result in declines in the demand for the services we provide; and|
|●||the actions of our competitors.|
Although, we do not provide guidance on future operating results, if, as a result of these or other conditions or factors, our quarterly operating results fall below market expectations, some of our stockholders may sell their shares, which could adversely affect the trading prices of our common stock. Additionally, in the past, companies that have experienced declines in the trading prices of their shares due to events of this nature have been the subject of securities class action litigation. If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and resources, thus harming our business.
As a result of changes in SEC rules, we have ceased to be an accelerated filer and have become a “smaller reporting company” under the SEC’s disclosure regime. Consequently, our disclosure requirements for this Annual Report are, in certain respects, less stringent than in prior fiscal years when we were an accelerated filer.
As a smaller reporting company under the SEC’s disclosure regime, our disclosure requirements are now less stringent than in previous years when we were an accelerated filer. However, we have decided not to take advantage of many of the lessened disclosure requirements that would have otherwise permitted us, for example, to exclude the sections contained in this Annual Report entitled “Selected Consolidated Financial Data” and “Management’s Discussion of Financial Condition and Results of Operations” and, for that reason, those sections are included below in this Annual Report. We have decided not to include, in this Annual Report, an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Provisions in our charter documents or in Delaware law may make an acquisition of us more difficult or delay a change in control, which may adversely affect the market price of our common stock.
Our Amended and Restated Certificate of Incorporation and Bylaws contain anti-takeover provisions, including those listed below, that could make it more difficult for a third party to acquire control of us, even if that change of control would be beneficial to our stockholders:
|●||our Board of Directors has the authority to issue additional common stock and preferred stock and to determine the price, rights and preferences of any new series of preferred stock without stockholder approval;|
|●||there are limitations on who can call special meetings of our stockholders;|
|●||stockholders may not take action by written consent; and|
|●||Provisions of Delaware law and provisions of our stock incentive plans and some of our employment contracts may also discourage, delay or prevent a change in control or unsolicited acquisition proposals.|
|ITEM 1B.||UNRESOLVED STAFF COMMENTS|
On February 3, 2017, the Company, as tenant, entered into an office lease, pursuant to which the Company is leasing approximately 62,755 rentable square feet space for its headquarters office and principal business operations. Under the terms of the lease, the Company is responsible for its share of real estate taxes, building insurance and maintenance costs (“triple net”). The term of this lease was for 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, 2020, aggregate minimum obligation over the remaining term of the lease was approximately $12.0 million.
We also leased smaller facilities 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 Hong Kong office that commenced in July 2018 with aggregate minimum obligations over the term of the lease of approximately $625,000.
|ITEM 3.||LEGAL PROCEEDINGS|
We are named from time to time as a defendant in lawsuits that arise in the ordinary course of business.
We establish accruals for lawsuits or disputes when it is determined that a loss is both probable and can be reasonably estimated. Accruals can be adjusted from time to time, in light of additional or changed information or based on a re-assessment of the risks and costs of proceeding with lawsuits and disputes. We do not believe that any of such lawsuits that are currently pending are likely to have a material adverse effect on our business, financial condition or results of operations.
|ITEM 4.||MINE SAFETY DISCLOSURES|
|Joseph J. Orlando||48||President and Chief Executive Officer|
|Joseph J. Wallace||60||Senior Vice President and Chief Financial Officer|
JOSEPH J. ORLANDO was appointed as the Company’s Chief Executive Officer effective October 9, 2017. Mr. Orlando joined the Company in 1999 and in 2002 was promoted to the position of President of Professional Sports Authenticators, the Company’s sports trading card authentication and grading division. In 2003, he was also appointed as President of PSA/DNA, the Company’s autograph and memorabilia authentication division. Mr. Orlando has an extensive knowledge of the collectibles markets, which will be valuable in evaluating the Company’s strategic initiatives in, those markets. Mr. Orlando has earned both a Bachelor’s Degree and a Law Degree.
JOSEPH J. WALLACE became the Company’s Chief Financial Officer in September 2005. Prior to becoming Chief Financial Officer, he was the Company’s Vice President of Finance from November 2004 and Controller from June 2004. From 1997 to 2003, Mr. Wallace was Vice President of Finance, Chief Financial Officer and Secretary of STM Wireless, Inc., a publicly traded company engaged in the business of developing, manufacturing and marketing satellite communications products and services. Mr. Wallace is a Fellow of the Institute of Chartered Accountants in Ireland, and a CPA in the State of California.
|ITEM 5.||MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES|
Our common stock is listed on the NASDAQ Global Market, trading under the symbol CLCT. The following tables set forth the high and low closing prices of our common stock, as reported by NASDAQ, and the cash dividends per share that we paid to our stockholders, in each of the fiscal quarters in the fiscal years ended June 30, 2020 and 2019:
Closing Share Prices
|Fiscal 2020||High||Low||Per Share|
Closing Share Prices
|Fiscal 2019||High||Low||Per Share|
We had approximately 93 holders of record and approximately 6,500 beneficial owners of our common stock as of June 30, 2020.
Dividends. In February 2018, the Board of Directors reduced the Company’s quarterly cash dividend to $0.175, for an annual dividend of $0.70 per share. The previous dividend policy was $0.35 per share per quarter and was in effect for the period January 2015 to January 2018. Dividends paid to our stockholders in fiscal 2020, 2019 and 2018 totaled $6.3 million, $6.5 million, and $9.1 million, 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.
STOCK PERFORMANCE GRAPH
Set forth below is a graph which compares, for each of the years in the five year period ended June 30, 2020, the cumulative total returns for the Company and for (i) the companies included in the Russell 2000 Index, of which the Company is a member, and (ii) an index of fifteen companies that we selected (the “New Peer Group”) and (iii) an index of ten companies that we selected for inclusion in our fiscal 2019 10-K (the “Prior Year Peer Group”).
The companies comprising the New Peer Group and their respective trading symbols are: Asure Software Inc. (“ASUR”), Cass Information Systems Inc. (“CASS”), Century Casinos, Inc. (“CNTY”), ChannelAdvisor Corporation (“ECOM”), eGain Corporation (“EGAN”), Franchise Group, Inc. (“FRG”), Franklin Covey, Co. (“FC”), Hemisphere Media Group, Inc. (“HMTV”), Majesco (“MJCO”), OneSpan, Inc. (“OSPN”), Saga Communications, Inc. (“SGA”), Techtarget Inc. (“TTGT”), The Meet Group, Inc. (“MEET”), Travelzoo (“TZOO”) and Value Line, Inc. (“VALU”).
The companies that comprised the Prior Year Peer Group and their respective trading symbols are: Apex Global Brands (“APEX”), Cass Information Systems Inc. (“CASS”), Daily Journal Corp. (“DJCO”), Forward Industries Inc. (“FORD”), Innodata Inc. (“INOD”), Lakeland Industries Inc. (“LAKE”), PRGX Global Inc. (“PRGX”), Sequential Brands Group Inc. (“SQBG”), Techtarget Inc. (“TTGT”) and, Value Line Inc. (“VALU”).
We utilized the services of a third party consulting firm to assist us in the selecting of companies comprising the New Peer Group. We believe that those companies are more comparable to Collectors Universe in terms of revenue, market capitalization and industry than the companies that made up the Prior Year Peer Group.
The selection of Peer Group companies presented a challenge for us, because of the relative uniqueness of our business, which consists primarily of providing authentication, grading and information services to collectibles dealers and to individuals, who collect and buy and sell coins and cards/autographs.
|At June 30,|
|Collectors Universe, Inc.||100.00||107.39||143.86||89.68||135.87||224.69|
|Russell 2000 Index||100.00||93.27||116.21||136.63||132.11||123.35|
|New Peer Group||100.00||86.07||92.34||123.88||107.62||121.37|
|Prior Year Peer Group||100.00||84.24||84.10||106.09||88.37||96.27|
Copyright© 2020 Russell Investment Group. All rights reserved.
This Stock Performance Graph assumes that $100 was invested, on June 30, 2015, in the Company’s shares, the Russell 2000 Index and in the shares of the companies in the New Peer Group and Prior Year Peer Group, respectively, and that any dividends paid for the indicated periods were reinvested. Stockholder returns shown in the Stock Performance Graph are not necessarily indicative of future stock performance.
This above performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Collectors Universe, Inc. under that Act or the Securities Act of 1933, as amended.
|ITEM 6.||SELECTED CONSOLIDATED FINANCIAL DATA|
The selected operating data for the fiscal years ended June 30, 2020, 2019 and 2018, and the selected balance sheet data at June 30, 2020 and 2019 set forth below are derived from the Company’s audited consolidated financial statements included elsewhere in this Annual Report. The other operating data and balance sheet data were derived from audited consolidated financial statements that are not included in this Annual Report. The following selected consolidated data should be read in conjunction with our Consolidated Financial Statements and the related notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below in this Annual Report.
The results of our operations, as set forth in the table below, consist primarily of the results of operations of our collectible coin, trading card, autographs and memorabilia authentication and grading businesses and to a lesser extent our Certified Coin Exchange (“CCE”), Expos, Collectors.com and Coinflation.com businesses for each of the fiscal years in the five-year period ended June 30, 2020.
Consolidated Statements of Operations Data:
|Year Ended June 30,|
|(In thousands, except per share data)|
|Cost of revenues||33,655||30,153||29,471||26,847||22,902|
|Selling, general and administrative expenses(i)||30,648||27,958||30,001||30,087||25,682|
|Interest income (expense), net||78||(69||)||(114||)||(1||)||22|
|Other income (expense), net||15||(148||)||29||11||(73||)|
|Income before provision for income taxes||14,195||14,125||8,892||13,234||12,319|
|Provision for income taxes||3,409||4,148||2,760||4,718||4,720|
|Income from continuing operations||10,786||9,977||6,132||8,516||7,599|
|Income (loss) from discontinued operations, (net of income taxes)||-||-||104||(7||)||41|
|Net income per basic share:|
|Income from continuing operations||$||1.20||$||1.12||$||0.71||$||1.00||$||0.90|
|Income from discontinued operations, (net of income taxes)||-||-||0.01||-||-|
|Net income per share||$||1.20||$||1.12||$||0.72||$||1.00||$||0.90|
|Net income per diluted share:|
|Income from continuing operations||$||1.19||$||1.11||$||0.70||$||0.99||$||0.89|
|Income from discontinued operations, (net of income taxes)||-||-||0.01||-||-|
|Net income per share||$||1.19||$||1.11||$||0.71||$||0.99||$||0.89|
|Weighted average shares outstanding|
|Cash dividends paid on common stock||$||6,300||$||6,479||$||9,083||$||11,912||$||12,008|
|Cash dividends declared per share of common stock||$||0.70||$||0.70||$||1.05||$||1.40||$||1.40|
|At June 30,|
|Balance Sheet Data:||(In thousands)|
|Cash and cash equivalents||$||28,640||$||19,225||$||10,581||$||9,826||$||11,967|
|Working capital – continuing operations||15,266||11,704||5,760||5,799||6,980|
|Working capital (deficit) – discontinued operations||-||-||-||(391||)||(619||)|
|Goodwill and Intangibles – continuing||4,071||4,412||4,402||4,266||3,845|
|Total assets – continuing operations||55,482||37,693||32,214||28,530||28,111|
|Total assets – discontinued operations||-||-||-||79||79|
|(i)||Selling, general and administrative expenses (“SG&A”) include non-cash stock-based compensation expense of $1,575,000, $974,000, $1,421,000, $4,025,000 and $596,000 in fiscal 2020, 2019 2018, 2017 and 2016, respectively. See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates: Stock-Based Compensation Expense and Results of Operations-Stock-Based Compensation Expense below. In addition, in fiscal 2020, SG&A includes higher legal expenses of $1,114,000 (of which $967,000 were related to pre-trial settlements).|
|(ii)||The impairment charge relates to our Expos business and was recognized in the fourth quarter of fiscal 2020. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Development-Coronavirus (“COVID-19”) below.|
|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
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.
Recent Developments: Coronavirus (“COVID-19”)
Despite COVID-19, our business achieved record revenues of $78.9 million and operating income of $14.1 million in fiscal 2020 as compared to revenues of $72.5 million and operating income $14.3 million in fiscal 2019. Set forth below is a summary of the impact of COVID -19 on fiscal 2020 and what we believe, at this time, could be the possible future effects on our business.
As previously reported, on March 20, 2020 we shut down our authentication and grading operations in California as a result of a state-wide “shelter-in-place” and “stay-at-home” orders issued by the Governor of California. As a result, in the third quarter ended March 31, 2020 (which is typically our biggest revenue quarter of the year), our revenues declined by $0.7 million, or 4%, as compared to the third quarter of fiscal 2019 and as compared to a 19% growth in revenues in the first half of fiscal 2020. Furthermore, our operating income declined by $2.1 million, or 45%, as compared to the third quarter of fiscal 2019 and as compared to a 57% increase in operating income in the first half of fiscal 2020. Contributing to the decrease in operating income in this year’s third quarter was our decision to continue paying the salaries of all employees through March 31, 2020 despite closing our operations on March 21, 2020.
|●||On April 15, 2020, we resumed our authentication and grading operations in California, albeit on a limited basis, in order primarily, to assist dealers and collectors of investment assets, consisting of coins and other high-value collectibles, in selling and increasing the liquidity of those assets. At that time, we implemented enhanced measures to protect the health and safety of our returning employees and the community. Those health and safety measures included a reconfiguration of our authentication and grading facility to permit social distancing and continuing to have certain administrative and clerical personnel work remotely from their homes. As a result, there were inefficiencies in our business that did not exist prior to the COVID-19 outbreak, although we mitigated the effect of those inefficiencies by operating with multiple shifts and making extra space available to operations personnel that was previously used by the clerical personnel working remotely. With the safety measures in place we ramped up our operations and resumed accepting submissions from customers in May and June 2020. Our cards and autographs business already had a strong backlog of submissions for authentication and grading prior to the closure of our operations in March 2020. As a result, we generated record revenues of $20.5 million and earned operating income of $3.5 million in the fourth quarter ended June 30, 2020 as compared to revenues of $19.8 million and operating income of $4.5 million in the fourth quarter of fiscal 2019. In addition, we increased our cash and cash equivalents from $22.2 million at March 31, 2020 to $28.6 million at June 30, 2020. See Quarterly Results of Operations below which highlights certain additional costs in this year’s fourth quarter.|
|●||Our Expos Long Beach trade shows scheduled to take place in the fourth quarter of fiscal 2020 and the first quarter of fiscal 2021 were cancelled due to COVID-19 and there continues to be uncertainty as to the viability of the Expos trade show business, due to social distancing concerns that will limit the numbers of dealers and attendees at future shows. As a result, in the fourth quarter of fiscal 2020, we recognized a non-cash impairment charge of $486,000 relating to the write-off of the remaining goodwill and intangible assets of that business, which reduced operating income in the fourth quarter.|
|●||We earn higher average service fees for onsite authentication and grading activities at coin and to a lesser extent, trading card trade shows. In the fourth quarter of fiscal 2020, coin trade shows were cancelled due to social distancing issues and travel restrictions, which mostly eliminated our trade show revenues in the quarter, although when possible, we requested customers to redirect potential show submissions to our California operations facility for authentication and grading. The National Sports Collectors Convention, and the PNG/ANA Numismatic Trade Show which are the largest trade shows for our cards and autographs and coin businesses, which had been scheduled for July and August 2020 have been cancelled. There continues to be uncertainty as to which, if any, trade shows will occur in the first and future quarters of fiscal 2021 although, we expect to be able to conduct and/or replace some of the cancelled U.S. coins shows with smaller coin authentication and grading events. In addition, we will continue to, when possible, redirect trade show submissions to our California operations facility, for authentication and grading.|
|●||There continues to be uncertainty as to the U.S. Mint’s production and release schedule for modern coin programs through the end of the calendar year 2020, although to date in the first quarter of fiscal 2021 our domestic modern coin revenues are at the same levels during the same period of last year’s first quarter.|
|●||Our China operation, in the fourth quarter of fiscal 2020 generated higher revenues than in the third quarter (as COVID-19 led to the disruption of the China operation in the third quarter). Despite a strong backlog of submissions for authentication and grading in China at June 30, 2020, it continues to be difficult to ramp up our operations in China to pre-COVID-19 levels, for now, due to the continuing travel restrictions, that prevent our U.S. coins experts from travelling to China in support of authentication and grading events there.|
|●||Despite the uncertainties arising from COVID-19 discussed above, our cards and autographs business had a record backlog as of June 30, 2020 and continues to experience strong customer submissions. To address that backlog, we have been increasing operating capacity in the first quarter of fiscal 2021, with the objective of improving the performance of those parts of the business that continue to have a strong demand for our services. We will also be seeking to identify and take advantage of opportunities that may present themselves in other parts of the business where demand for our services are currently uncertain.|
Factors That Can Affect Operating Results and our Financial Position in Addition to COVID-19
Factors That Can Affect our Revenue. Our authentication and grading fees accounted for approximately 90% of our total net revenues in the year ended June 30, 2020. The amounts of those fees are primarily driven by the volume and mix of coins and trading cards and collectibles sales and purchase transactions by collectibles dealers and collectors, because our authentication and grading services generally facilitate sales and purchases of coins and trading cards by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins, trading cards and autographs to us for authentication and grading at those times when they are in the market to sell or buy those collectibles.
The amounts of our authentication and grading revenues are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards, (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards, on the one hand, and modern coins and trading cards, on the other hand, because, vintage or classic collectibles are of significantly higher value and justify a higher average service fee.
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 collectibles authenticated and graded, and the fees that they generate can vary by period between coins, and cards and autographs. For example, the total numbers of collectibles authenticated and graded by the Company was approximately 5.0 million, 4.6 million and 4.8 million units in fiscals 2020, 2019 and 2018, respectively, of which, coins represented 42%, 47% and 59%, in fiscals 2020, 2019 and 2018, respectively, and cards and autographs represented 58%, 53% and 41%, in the same respective periods. Coin fees represented 55%, 62% and 68%, of total authentication and grading fees in fiscals 2020, 2019 and 2018, respectively, and cards and autographs fees represented 45%, 38% and 32% of those fees in the same respective periods, as average service fees are generally higher for coins than for cards and autographs, and for vintage units than for modern units. See Results of Operations: Net Revenues below, which discusses revenues in greater detail.
Five of our customers (all of which were coin customers) accounted, in the aggregate, for approximately 10%, 11% and 16% of our total net revenues in the years ended June 30, 2020, 2019 and 2018, respectively. In fiscal 2018 a banking channel customer in China, accounted for about 6% of net revenues. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.
Factors Affecting our Gross Profit Margins. The gross profit margins we earn on collectibles authentication and grading submissions are impacted by many of the same factors that impact our revenues, as the average service fee and the resulting gross profit margin earned is affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (ii) in the case of both coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times, and (iii) the level of other related revenues in any reporting period. In addition, because a significant proportion of our costs of sales are relatively fixed, our gross profit margin is also affected as we build authentication and grading capacity in response to the record cards and autographs backlog (as there is a delay between incurring the cost of additional capacity and the resulting full revenue benefits) and by the overall volume of collectibles that we authenticate and grade in any period.
Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected primarily by the number of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of 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. Since July 1, 2020, gold prices have increased in the United States which we believe is due primarily to the economic uncertainties created by the COVID-19 pandemic. Based on historical experience, strong gold prices can over time lead to increases in coin authentication and grading submissions to us.
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 March 2020 the Company increased its revolving and unsecured credit line to $15 million from $10 million and extended its line of credit by two years. In addition, in the first half of fiscal 2018, the Company borrowed $3 million under an unsecured term loan, primarily to fund capital expenditures and costs associated with the move to our new operations and headquarters facility, in the second quarter of fiscal 2018.
In addition to the operating performance of our businesses, and in particular our coin and cards and autographs authentication and grading businesses, which account for over 90% of our revenues, our overall financial position can also be affected by other factors, including the Company’s tax position and effective tax rates, our obligation to repay borrowings under our Term Loan, the dividend policy adopted by the Board of Directors from time to time, the level of capital expenditures, the decisions to invest in and to fund start-ups of or the acquisition of new businesses and any capital raising activities or stock repurchases. Furthermore, our domestic cash position can be impacted by delays in the timing of the repatriation of cash balances back 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 2021.
Trends in our Businesses
Our overall financial performance is largely dependent on the performance of our coins and trading cards and autographs authentication and grading businesses which can be impacted by the matters as discussed above. Although our coin business, which accounted for 53%, 57% and 63% of consolidated revenues in fiscal 2020, 2019 and 2018, respectively, continues to be our largest business, our cards and autographs business is growing more rapidly than our coin business and accounted for 43%, 36% and 31% of our consolidated revenues in fiscal 2020, 2019 and 2018, respectively. Our quarterly results can also be significantly impacted by seasonality and the timing of revenues from modern coin programs (that are largely dependent on new coins issuances from the US Mint) and the number of tradeshows or grading events that occur in a quarter both domestically and overseas. Our cards and autographs business is less affected by seasonality, due to the record backlog and strong customer submissions currently being experienced by that business. See “Factors That Can Affect our Revenue” above.
Overview of Fiscal 2020 Operating Results
The following table sets forth comparative financial data for the years ended June 30, 2020 and 2019 (in thousands):
|Year Ended June 30, 2020||Year Ended June 30, 2019|
|Percent of Revenues|
|Percent of Revenues|
|Cost of revenues||33,655||42.7||%||30,153||41.6||%|
|Selling and marketing expenses||9,436||11.9||%||10,361||14.3||%|
|General and administrative expenses||21,212||26.9||%||17,597||24.3||%|
|Interest income, (expense) net||78||0.1||%||(69||)||(0.1||)%|
|Other income (expense)||15||-||(148||)||(0.2||)%|
|Income before provision for income taxes||14,195||18.0||%||14,125||19.5||%|
|Provision for income taxes||3,409||4.3||%||4,148||5.7||%|
|Net income per diluted share:||$||1.19||$||1.11|
Despite the adverse impact of COVID-19, on our third and fourth quarters of fiscal 2020, net revenues increased by $6.4 million, or 9%, to a record $78.9 million in fiscal 2020, from $72.5 million generated in fiscal 2019. The increase, primarily comprised (i) increased cards and autographs revenues of $7.2 million or 27%, and (ii) increased China revenues of $1.0 million or 24%, partially offset by decreases in our other coin revenues of $0.8 million. In addition, revenues from our non-grading and authentication businesses and activities, decreased by $1.0 million.
Operating income was $14.1 million in fiscal 2020 as compared to $14.3 million in fiscal 2019 and reflected (i) higher general and administrative expenses in fiscal 2020, including approximately $1.0 million of pre-trial litigation settlements and approximately $0.6 million of higher non-cash stock based compensation and (ii) an impairment charge of $0.5 million, related to our Expos trade show business.
These, as well as other factors affecting our operating results are described in more detail below. Also, see “Recent Developments: Coronavirus (“COVID-19”)”, above in this Item 7 and “Factors that Can Affect our Operating Results and Financial Position” and “Results of Operations”, below.
Critical Accounting Policies and Estimates
General. In accordance with accounting principles generally accepted 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 the time we make such determinations. Many of these conditions and circumstances on which our judgments or estimates are based; however, are outside of our control and, if changes were to occur in the events, or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates. Changes in such estimates may require that we reduce the carrying values of the affected assets on our balance sheet (which are commonly referred to as “write-downs” of the assets involved).
It is our practice to establish reserves, allowances, charges or losses to record such downward adjustments or write-downs in the carrying values of assets, such as, for example, accounts receivable and inventory. Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the period when those reserves, allowances, charges or losses are established or increased to take account of changed conditions or events. As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations.
The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments and judgments about the effects and duration of events or changes in circumstances. For example, it is difficult to predict whether events or conditions, such as COVID-19, changes in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for their full effects to be recognized. Therefore, we make such estimates based upon the information available to us at that time and reevaluate and adjust the Company’s reserves, allowances, charges or losses on a quarterly basis.
On a quarterly basis, we make estimates or judgements with respect to the (i) valuation of stock-based compensation awards and the timing and recognition of related stock-based compensation expense for the performance shares that are part of the Company’s Long-Term Incentive Plans, (ii) the amount and adequacy of warranty reserves, (iii) the provision for income taxes and the timing of related valuation allowances, (iv) the carrying value of capitalized software costs (v) the valuation of coin and grading consumable inventory, (vi) the impairment of goodwill and other intangible assets and (vii) litigation related accruals.
In making our estimates and assumptions, we follow GAAP in order to make fair and consistent estimates of the fair value of assets and to establish adequate reserves, allowances, charges or losses for possible write-downs in the carrying values of our assets or the recognition of liabilities.
Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.
Effective July 1, 2019 the Company adopted Accounting Standards Codification (“ASC”) 842 Accounting for Leases and recognized lease obligations and corresponding right-of-use (ROU) assets for its existing non-cancelable operating leases. The core principle of this guidance is that a lessee should recognize the assets and liabilities that arise from leases. Therefore, the Consolidated Balance Sheet at 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 elected not to recognize lease assets and liabilities for leases with a term of 12 months or less and are recognizing lease expenses for such leases on a straight-line basis over the lease term. The Company adopted this new accounting guidance, utilizing the current period adoption method without revising comparative periods and elected not to reassess existing leases. The new standard provides a number of optional practical expedients in transition. The Company elected to use the package of practical expedients that allows us to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. In addition, the new standard provides for an accounting election that permits a lessee to elect not to apply the recognition requirements of Topic 842 to short-term leases by class of underlying asset. The Company adopted this accounting election for all classes of assets. The Company’s leases consist primarily of office facilities and the adoption of the new lease standard on July 1, 2019 resulted in the recognition of right-of-use assets of approximately $9.8 million and lease liabilities for operating leases of approximately $13.6 million on the consolidated balance sheets, with no material impact on the consolidated statements of operations or consolidated statements of cash flows. See “Note 9-Leases” for additional information. As a result of COVID-19, we reviewed our lease obligations for impairment and potential excess space reserve requirements and concluded there were no impairments or charges, required at June 30, 2020.
The core principle of ASC 606, Revenue from Contracts with Customers, is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations are satisfied.
Our primary source of revenue is the authentication and grading of collectibles, which represented about 90% of our consolidated revenues in fiscal 2020. Our other sources of revenues represent the balance of our revenues which are small and individually account for less than five percent of total revenues.
In accordance with ASC 606 we recognize revenue for our main revenue streams as follows:
Authentication and Grading Revenues: As the time it takes to authenticate and grade the collectible is short, we recognize revenue at the time of shipment (i.e. point of time) of the authenticated graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our authentication and grading services and the shipment of the collectible back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sale of special coin inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to the customer. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend credit, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer. We provide a limited warranty covering the coins and trading cards that we authenticate and grade. See Warranty Costs below.
Collectors Club Revenues: These revenues represent membership fees paid by customers for annual memberships in 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. In the event vouchers expire unused (i.e. there are unexercised customer rights), we consider the guidance under ASC 606 in determining when to recognize revenue.
Certified Coin Exchanges Subscription Revenues: We recognize subscription revenues related to our CCE exchange for certified coins, ratably over the relevant subscription period. Subscriptions are typically billed and paid on a monthly basis, although certain quarterly and annual subscriptions can be paid in advance. Prepaid subscriptions are classified as part of deferred revenue.
Expos Trade Show Revenue: We recognize fees earned from promoting, managing, and operating trade shows in the periods in which the shows take place. Trade show booth fees are typically paid to us in advance. Certain fees that are paid to conduct auctions at the show are paid to us at the end of the show. Prepaid show fees are classified as part of deferred revenue.
Advertising and Commission Revenues: Advertising revenues are recognized in the period when an advertisement is displayed in our publications or websites and customers typically have 30 day credit terms. Click-through commission revenues earned through our websites from third party affiliate programs are recognized in the period in which the commissions are earned, and such commissions are paid in the following month.
Product Sales: Product sales consist primarily of sales of collectibles coins that we have purchased pursuant to our coin authentication and grading warranty program. We recognize revenues from coin sales when the coins are shipped or delivered to customers or if the coins are sold through auction, when the auction settles. However, those sales are not considered to be the focus of nor an integral part of the Company’s ongoing revenue generating activities.
Contract Balances. As discussed above, the timing of revenue recognition can differ from the timing of invoicing to customers. Contract liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We refer to these contract liabilities as “Deferred Revenue”. During fiscal 2020, we recognized revenue for substantially all of the deferred revenue balance of $3,428,000 at June 30, 2019.
Shipping and Handling Costs
Shipping and handling costs incurred to process and return customer collectibles submitted to us for grading or authentication are recorded as costs of revenues, net of amounts received from customers, in accordance with the guidance for Principals versus Agents as set out in ASC 606.
Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an ongoing basis. We regularly review our accounts receivable and exercise judgment in estimating the amounts of, and establish an allowance for, uncollectible accounts in each quarterly period. The amount of that allowance is based on several factors, including the age and extent of significant past due accounts and known conditions or trends that may affect the ability of account debtors to pay their accounts receivable balances. Each quarter we review our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of our specific account debtors to pay their accounts in full. Since the allowance is increased by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause an increase in such expenses. At June 30, 2020 and 2019, the allowance for doubtful accounts was $98,000, and $72,000, 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, 2020 and 2019, gross inventories were $3,584,000 and $3,243,000, respectively, and inventory reserves were $1,072,000 and $1,278,000, respectively. See Note 3 to the Consolidated Financial Statements. If we liquidate collectible coins at amounts below their carrying values, we may incur losses in excess of our recorded inventory reserves.
Warranty Costs. We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if a coin or trading card that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible for a price equal to the value of collectible at its original grade, or, at the customer’s option, pay the difference between the value of the collectible at its original grade as compared with the value at its lower grade. However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item or if we otherwise determine that the collectible had been altered after we had authenticated and graded it. If we purchase an item under a warranty claim, we recognize the difference in the value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve. We include the purchased item in our inventory at the estimated value of the re-graded collectible, which will be lower than the price we paid to purchase the item. We accrue for estimated warranty costs based on historical trends and related experience, and we monitor the adequacy of our warranty reserve on an ongoing basis. There also are a number of factors that can cause the estimated values of the collectibles purchased under our warranty program to change over time and, as a result, we review the market values of those collectibles on a quarterly basis (see Inventory Valuation Reserves above). However, once we have classified such items as inventory and they have been held in inventory beyond the end of the fiscal quarter in which we purchased them, we classify any further losses in the estimated fair value of the items or the subsequent disposal of such items, as part of the gain or loss on product sales on a quarterly basis.
We recognized warranty expense of $462,000, $568,000 and $764,000 in fiscal years 2020, 2019, and 2018, respectively. Our warranty reserves were $698,000 and $852,000 at June 30, 2020 and 2019, 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 a formal goodwill impairment test in accordance with FASB 2017-04 on Simplifying the Test for Goodwill Impairment. We use a discounted cash flow model or an income approach to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, we recognize goodwill impairment for that difference.
During the first quarter of fiscal 2020, which ended September 30, 2019, we completed the annual impairment evaluations with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair values over carrying values in prior years, and any material changes in the estimated cash flows of those reporting units, and determined that it was more likely than not that the respective fair values of CCE and CoinFacts exceeded their respective carrying values, including goodwill, and as a result, there was no impairment. There were no impairment triggers identified for these businesses through June 30, 2020.
With respect to our Expos trade show business, we typically perform our annual goodwill impairment evaluation as of June 30 of each fiscal year. As a result of COVID-19 and as discussed under Recent Developments: Coronavirus (“COVID-19”) above, we concluded that the Expos business was impaired, due to two shows having already been cancelled and the uncertainty as to the future viability of that business as a result of social distancing and the timing of future shows. Therefore at June 30, 2020, we recognized an impairment charge for the remaining Expos goodwill of $458,000.
Long-Lived Assets Other Than Goodwill. We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment. Such reviews occur annually, or more frequently, if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full. In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred. If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write-down the asset to its estimated fair value. As discussed above under Goodwill, we concluded that Expos business was impaired and therefore at June 30, 2020, we recognized an impairment charge for the remaining intangible assets of $28,000.
Stock-Based Compensation Expense. Stock-based compensation expense is measured at the grant date fair value of a restricted share awards and is recognized as expense over the employee’s or non-employee director’s requisite service period, which is generally the vesting period of the award. However, if the vesting of a stock-based compensation award is subject to satisfaction of a performance requirement or condition, stock-based compensation expense is recognized if, and when, (i) performance goals have been established for the vesting of shares and (ii) it is determined that the achievement of the performance requirement or condition (and therefore, the vesting of the award) has become probable. If stock-based compensation is recognized due to a determination that a performance condition has become probable, but it is subsequently determined that the performance condition was not met in the expected vesting period, then if the shares may still vest in future periods, we will extend the period over which the remaining expense would be recognized. If the award fails to vest, or we conclude that it is not probable the shares will vest, then all previously recognized expense with respect to that performance condition would be reversed.
In recent years, to create incentives for management, to remain in the service of the Company and to drive cash generation, restricted stock awards are made on an annual basis to officers and key employees under Long Term Incentive Plans (“LTIPs”) comprising service-based awards (“RSUs”) and performance based-awards (“PSUs”). In addition, there are annual RSU awards to directors for their annual services as directors and special awards to certain officers or employees, at the discretion of the Compensation Committee of the Board of Directors.
In all instances for the awards to vest the employee or outside director must provide continuous service through the vesting date of the award. In the event of a termination of continuous service, for any reason, prior to its vesting date, the award is forfeited.
Fiscal 2020, 2019 and 2018 LTIP Awards
One Time Award. A total, net of forfeitures, of 17,505 RSUs were awarded in December 2017, which vested in two installments, on June 30, 2019 and 2018, respectively. Through June 30, 2019 these service shares were fully vested.
Annual Awards. A total, net of forfeitures, of 25,952, 44,763 and 16,731 RSUs were awarded in fiscal 2020, 2019 and 2018, respectively, with vesting in three annual installments on the last day of the fiscal years following the grants.
At June 30, 2020 17,303 and 15,519 of the fiscal 2020 and 2019 awards remained unvested.
Fiscal 2020 and 2019 PSUs
To focus management’s efforts on the achievement of increases in net cash flows (defined as net cash generated by the Company’s continuing activities, minus capital expenditures and capitalized software costs), during the three years ending June 30, 2022 and 2021, (the “Performance Periods”), in fiscal 2020 and 2019, the Compensation Committee granted 51,905 and 89,542 PSUs (at maximum) to LTIP Participants. Provisional vesting of the PSUs was made contingent on the achievement of net cash flows on an annual basis with final vesting, subject to possible upward or downward adjustment of 20% of the PSUs, based on a comparison of the Company’s total shareholder return (“TSR”) for the three year Performance Period, to the TSR of the Russell 2000 Index, for the same Performance Period. Threshold, target and maximum net cash flow goals were established for fiscal 2020 and 2019 and grant dates were established for that year’s PSUs, for expense recognition purposes. In fiscal 2019 and 2020, the Company achieved the maximum net cash flows performance under the targets established for those years and as a result 14,426 and 49,121 shares are provisionally vested under the fiscal 2020 and 2019 LTIP, respectively.
For any of the PSUs to fully vest, a Participant must provide continuous service through the end of the respective three year Performance Periods. Stock-based compensation expense of $610,000 and $80,000 was recognized in fiscal 2020 and 2019, respectively, for these PSUs, and such expense includes an estimate for the Company’s expected TSR performance as compared to the Russell 2000 Index, over the respective performance periods to date.
Fiscal 2018 PSUs
Through June 30, 2020 no stock-based compensation expense was recognized for 30,370 2018 PSUs awards, as the 2018 Performance Goal was not achieved, and those shares were forfeited as of June 30, 2020.
The net cash flows goals for fiscal years 2021 and 2022 will be set in those fiscal years, which will give rise to grant dates for expense recognition purposes.
2013 LTIP Awards
As previously reported, based on the financial results achieved in fiscal 2017, the Company achieved the maximum performance goal under the 2013 LTIP, in fiscal 2017. Therefore, in accordance with the terms of the 2013 LTIP, the remaining 50% of the 2013 LTIP shares vested on June 30, 2018. Stock-based compensation expense recognized for those shares was approximately $503,000, in fiscal 2018. There was no compensation expense required to be recognized under the 2013 LTIP in fiscal 2020 and 2019.
Non-Employee Director Award
In each of fiscal years 2020, 2019, and 2018, each of our non-employee directors was granted restricted service-based shares with grant date fair values of $45,000, for a total fair value of $180,000 in both fiscal 2020, and fiscal 2019, and $315,000 in fiscal 2018. Those shares have a one year vesting period, coinciding with the directors’ service period and the shares vest 25% on a quarterly basis.
On March 16, 2020, the Company granted Mr. Orlando, the Company’s CEO, a total of 32,278 restricted shares, comprising 16,139 service-based RSUs and 16,139 performance-based PSUs.
The RSUs vest in three equal annual installments on March 16, 2021, 2022, and 2023, respectively.
The PSUs vest in three equal installments based on the annual revenue performance of the business in fiscal years ending June 30, 2020, 2021 and 2022, respectively. The 16,139 PSUs referenced above represent the number of shares that can be earned at target. If maximum performance is achieved, an additional 25% of that year’s PSUs will be earned. Threshold, target and maximum revenue goals were established by the Compensation Committee of the Board of Directors for fiscal 2020. Based on the revenue generated by the Company in fiscal 2020, a determination was made by the Compensation Committee that one-third of the PSUs or 5,379 had vested. Threshold, target and maximum performance goals will be established for the fiscal years 2021 and 2022 PSUs in those respective years, which will give rise to grant dates for expense recognition purposes.
Stock-based compensation expense related to these grants was $108,000 in fiscal 2020.
Other Service-Based Awards
In each of fiscal 2019 and 2018 the Company granted to other employees 5,000 service-based restricted shares, with grant date fair values of $111,000 and $83,000 respectively, and with vesting periods of four years.
Total stock-based compensation expense recognized for all restricted share awards was $1,575,000, $974,000, and $1,421,000, in fiscal years ended June 30, 2020, 2019, and 2018, respectively. See Results of Operations: Stock-Based Compensation Expense below for additional information on stock-based compensation expense.
Capitalized Software. In fiscal years 2020, 2019, and 2018, we capitalized approximately $1,330,000, $1,055,000, and $911,000, respectively, of software development costs related to a number of in-house software development projects. GAAP requires that certain software development costs incurred, either from internal or external sources, be capitalized as part of intangible assets and amortized on a straight-line basis over the useful life of the software, which we have estimated at three years. On the other hand, planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software development project are recognized as expense in the periods in which they are incurred. During the fiscal years ended June 30, 2020, 2019, and 2018, we recorded approximately $1,039,000, $892,000, and $701,000, respectively, as amortization expense related to such capitalized software projects.
We evaluate the carrying values of capitalized software to determine whether those values are impaired and, if necessary, we record an impairment charge in the period in which we determine that an impairment has occurred.
Income Taxes, Deferred Tax Assets and Valuation Allowances. We account for income taxes in accordance with GAAP, which requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns or for uncertain tax positions. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, GAAP requires that we evaluate the probability of realizing the future income tax benefits comprising that asset based on a number of factors, which include projections of future taxable income and the nature of the tax benefits and the respective expiration dates of tax credits and net operating losses. As the Company has been generating taxable income 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 allowances against the 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 of $3,409,000, $4,148,000, and $2,760,000, in fiscal 2020, 2019 and 2018, respectively, represented annual effective tax rates (“ETRs”), of approximately 24%, 29%, and 31%, respectively. The ETR for 2020 and 2019 reflects a federal tax rate of 21%, as a result of the 2017 Tax Cuts and Jobs Act (“Tax Act”) enacted into law in December 2017. The ETR in fiscal 2020 benefited from the release of valuation allowances in China whereas in fiscal 2019 a non-cash valuation allowance was 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 provisions for each year were adjusted for excess tax benefits or deficiencies related to the vesting of restricted shares.
See note 8 to the Consolidated Financial Statements included elsewhere in this report which discusses the Tax Act in more detail.
Results of Operations
See Recent Developments: Coronavirus (COVID-19) in conjunction with the following discussions:
The following table sets forth certain financial data, expressed as a percentage of net revenues, derived from our Consolidated Statements of Operations for the respective periods indicated below:
|Fiscal Year Ended June 30,|
|Cost of revenues||42.7||%||41.6||%||43.1||%|
|Selling and marketing expenses||11.9||%||14.3||%||14.8||%|
|General & administrative expenses||26.9||%||24.3||%||29.0||%|
|Total operating expenses||39.4||%||38.6||%||43.8||%|
|Interest and other income (expense), net||0.1||%||(0.3||)%||(0.1||)%|
|Income before provision for income taxes||18.0||%||19.5||%||13.0||%|
|Provision for income taxes||4.3||%||5.7||%||4.0||%|
|Income from continuing operations||13.7||%||13.8||%||9.0||%|
|Income from discontinued operations||-||-||0.1||%|
Net Revenues. Net revenues consist primarily of fees that we generate from the authentication and grading of collectibles, including coins, trading cards and autographs and related special inserts, if applicable. To a lesser extent, we generate collectibles related service revenues (which we refer to as “other related revenues”) from advertising and affiliate program commissions earned from our websites and in printed publications; subscription/membership revenues from CCE, and Collectors Club; and fees generated from promoting, managing and operating our Expos tradeshow events. We also generate revenues from product sales, (primarily coins that we purchase under our warranty policy); however, they are not considered to be the focus of or an integral part of our ongoing revenue generating activities).
The following tables set forth the total net revenues for the fiscal years ended June 30, 2020, 2019 and 2018 between authentication and grading services revenues and other related services (in thousands):
|2020 vs. 2019|
|% of Net Revenues||Amount||%
|Authentication and grading fees||$||71,069||90.1||%||$||63,790||88.0||%||$||7,279||11.4||%|
|Other related revenues||7,822||9.9||%||8,663||12.0||%||(841||)||(9.7||)%|
|2019 vs. 2018|
|% of Net Revenues|
|% 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||%|
The following tables set forth certain information regarding the increases or decreases in net revenues from our larger markets (which are inclusive of revenues from our other related services) in each of the periods presented below (in thousands):
|2020||2019||2020 vs. 2019|
|% of Net||% of Net||Increase (Decrease)|
|France & Hong Kong||2,828||3.6||%||3,348||4.6||%||(520||)||(15.5)||%|
|Cards and autographs (1)||33,673||42.7||%||26,420||36.5||%||7,253||27.5||%|
|2019||2018||2019 vs. 2018|
|% of Net||% of Net||Increase (Decrease)|
|France & Hong Kong||3,348||4.6||%||3,481||5.1||%||(133||)||(3.8||)%|
|Cards and autographs (1)||26,420||36.5||%||21,065||30.8||%||5,355||25.4||%|
|(1)||Consists of revenues from our PSA trading card authentication and grading business (including Japan) 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 2020 vs. 2019. In fiscal 2020, our total service revenues increased by $6,438,000, or 8.9%, to a record $78,891,000, from $72,453,000 in 2019. That increase was primarily attributable to an increase of $7,279,000, or 11.4%, in authentication and grading fees, partially offset by lower other related revenues of $841,000. The increased authentication and grading fees were comprised of an increase of $7,067,000, or 28.8%, in cards / autographs and an increase of $212,000, or 0.5%, in coin fees, as discussed in more detail below. The lower other related revenues in fiscal 2020, as compared to fiscal 2019, was primarily due to the cancellation of an Expos trade show in the fourth quarter of fiscal 2020 and lower product sales.
Despite the impact of COVID-19 primarily in the month of April 2020, the Company generated record quarterly revenues of $20,502,000 in its fourth quarter of fiscal 2020 as compared to $19,784,000 in the fourth quarter of fiscal 2019, driven by an increase of 27% in our cards and autograph revenue.
Revenues from our trading cards / autographs business continued to show consistent growth in fiscal 2020, although that revenue growth was curtailed somewhat by COVID-19, primarily in the months of March and April 2020. Those revenues increased by 27.5% in fiscal year 2020 and represented record revenues for that business. Moreover, our card and autographs business has achieved quarter-over-quarter revenue growth in 39 of the last 40 quarters.
The increased revenues from China in fiscal 2020, reflected an improved revenue performance in our China business in the first half of fiscal 2020 prior to the outbreak of COVID-19. As discussed under Recent Developments: Coronavirus COVID-19 above, we expect there will be slower revenue growth in China, while travel restrictions continue between the U.S. and China.
Changes in U.S. Coin fees include increases of (i) $1,181,000 in U.S. modern coin revenues, primarily reflecting increased revenues in the fourth quarter of fiscal 2020 from the Emergency Issue Silver Program from the U.S. Mint and (ii) higher vintage coin revenues of $1,125,000, reflecting revenues earned in this year’s second quarter from the authentication and grading of a large customer collection and in the fourth quarter from redirecting what would have been show submissions to our California facility for authentication and grading. Those increases were mostly offset by lower trade show revenues, related to the cancellation of coin shows in the third and fourth quarters of fiscal 2020 due to COVID-19, and one less show and lower average per show submissions in the first half of the year.
Our coin and cards and autographs authentication and grading businesses represented approximately 95% of total revenues in fiscal 2020, reflecting the continued importance of those two businesses to our overall financial performance.
For the reasons discussed above under “Factors That Can Affect our Revenues”, and “Impact of Economic Conditions on our Financial Performance”, the level of coin service revenues can be volatile. Our U.S. coin revenue in fiscal 2020 was substantially the same as 2019, despite COVID-19 and we will continue our efforts to identify and take advantage of revenue opportunities in that business.
With respect to our cards and autographs business, which ended fiscal 2020 with a record backlog of cards to be authenticated and graded, we expect continued growth in that business in fiscal 2021 as we continue to increase authentication and grading operations capacity.
With respect to China, we will continue to focus on growing that business, which finished fiscal 2020 with a relatively high backlog and we will be focused on making that business less reliant on our U.S. personnel to offset travel restrictions between the U.S. and China.
Fiscal 2019 vs. 2018. In fiscal 2019, our total revenues increased by $4,004,000 or 5.8%, to a then annual record of $72,453,000 from $68,449,000 in fiscal 2018. That increase was attributable to an increase of $3,714,000, or 6.2%, in authentication and grading fees, and a $290,000, or 3.5%, increase in other related services. The increase in authentication and grading fees was attributable to an increase of $5,241,000, or 27.1%, in cards and autograph fees partially offset by a net decrease of $1,527,000 or 3.7%, in coin fees, attributable to a decrease in fees generated in China (see below).
Revenues from our trading cards and autographs business showed consistent growth. Those revenues increased by 25% in fiscal 2019 and represented record annual revenues for that business through fiscal 2019.
The decreased revenues in 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. 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 the fourth quarter of fiscal 2019.
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.
Gross profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percentage of net revenues. The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense, occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of the revenues generated by our other non-grading related services and the costs of product sales (which represent the carrying value of the inventory of products, that are primarily collectible coins that we sold) and any inventory-related reserves on our consumable inventory and coins, that may be considered necessary.
Set forth below is information regarding our gross profit and gross profit margins in the fiscal years ended June 30, 2020, 2019 and 2018 (in thousands):
|Fiscal Year Ended June 30,|
|Gross profit margin||57.3||%||58.4||%||56.9||%|
Fiscal 2020 vs. 2019. As indicated in the above table, our gross profit margin was 57.3% in fiscal 2020, as compared to 58.4% in fiscal 2019. The gross profit margin in fiscal 2020, reflects the adverse effects of COVID-19, including our decision to continue paying all personnel through March 31, 2020, despite the closures of our businesses during that quarter. The gross profit margin in the fourth quarter of fiscal 2020 was 59.8% as compared to 58.7% in the fourth quarter of fiscal 2019, despite the COVID-19 disruption, primarily in April 2020. The gross profit margin for coins was consistent in fiscal 2020 as compared to fiscal 2019. The gross profit margin for our cards and autographs business was down in fiscal 2020 as compared to fiscal 2019 and reflects continued costs incurred to increase capacity to address the record backlog in that business. As previously reported, there can be on-going variability in the gross profit margin due to the mix of revenue and the seasonality of our business. During the three years ended June 30, 2020, our quarterly gross profit margins varied between 53% and 62%.
Fiscal 2019 vs. 2018. As indicated in the above table, our gross profit margin was 58.4% and 56.9% in fiscal, 2019 and 2018, respectively. The higher gross profit margin earned in fiscal 2019, reflects an improved gross profit margin earned on our coin and cards and autograph businesses, primarily due to higher average service fees in those businesses, (due to the mix of collectibles authenticated and graded and also higher fees charged for certain services) and in the case of cards and autographs a higher number of units authenticated and graded.
Selling and Marketing Expenses
Selling and marketing expenses are comprised primarily of advertising and promotions costs, trade-show expenses, customer service personnel costs, business development salaries and incentive compensation costs, depreciation and third-party consulting costs.
The following table sets forth selling and marketing expenses that we incurred in fiscals 2020, 2019 and 2018 (in thousands):
|Fiscal Year Ended June 30,|
|Selling and marketing expenses||$||9,436||$||10,361||$||10,137|
|As a percentage of net revenues||11.9||%||14.3||%||14.8||%|
Fiscal 2020 vs. 2019. As indicated in the above table, selling and marketing expenses were 11.9% of revenues in the fiscal 2020, as compared to 14.3% in the fiscal 2019. In absolute dollars, selling and marketing expenses in 2020 decreased by $925,000, primarily as a result of cancellations of coin trade shows that had been scheduled to take place in the fourth quarter of fiscal 2020, due to COVID-19 and lower coin business development costs at our overseas coin businesses. Those cost savings were partially offset by higher sales and marketing expenses in our growing cards / autographs business.
Fiscal 2019 vs. 2018. As indicated in the above table, selling and marketing expenses represented 14.3% of revenues in fiscal 2019, as compared to 14.8% in fiscal 2018. In absolute dollars, selling and marketing expenses increased by $224,000 or 2.2% in fiscal 2019 as compared with fiscal 2018. We incurred higher selling and marketing expenses in our growing cards and autograph business (including costs incurred for business development activities in Japan for the Company’s new Japanese subsidiary), which for the most part was offset by lower selling and marketing expenses in our other businesses.
General and Administrative Expenses
General and administrative (“G&A”) expenses are comprised primarily of compensation paid to general and administrative personnel, including executive management, finance and accounting, information technology and, facilities management, depreciation, amortization and other miscellaneous expenses. G&A expenses also include non-cash stock-based compensation costs, arising from the grant or vesting of stock awards to general and administrative personnel and outside directors.
The following table sets forth G&A expenses that we incurred in fiscals 2020, 2019 and 2018 (in thousands):
|Fiscal Year Ended June 30,|
|General & administrative expenses||$||21,212||$||17,597||$||19,864|
|As a percentage of net revenues||26.9||%||24.3||%||29.0||%|
Fiscal 2020 vs. 2019. As indicated in the above table, G&A expenses represented 26.9% of revenues in fiscal 2020, as compared to 24.3% in fiscal 2019. The dollar increase in G&A expenses in fiscal 2020 of $3,615,000, included (i) higher payroll related costs of $1,092,000 (which was inclusive of higher performance based incentive costs of $449,000 in connection with the improved operating performance of the business, as certain of those incentive costs are based on an individual’s areas of responsibility), (ii) higher legal expenses of $1,114,000, (of which $967,000 were related to pre-trial settlements), (iii) higher non-cash stock based compensation of $642,000 in connection with the Company’s LTIP programs (see below) and (iv) higher consulting and outside service costs of $392,000 (which are inclusive of costs incurred on improving our operational processes and productivity).
Fiscal 2019 vs. 2018. As indicated in the above table, G&A expenses decreased to 24.3% of revenues in fiscal 2019, from 29.0% in fiscal 2018. In absolute dollars, G&A expenses decreased by $2,267,000 in fiscal 2019 due to (i) lower payroll and related costs of $824,000 in fiscal 2019, arising from staff reductions implemented in the fourth quarter of fiscal 2018, and management changes in the Company’s coin division that occurred in the first half of fiscal 2019, partially offset by increased management incentives due to the improved performance of our businesses in fiscal 2019, as compared to fiscal 2018; (ii) the non-recurrence in fiscal 2019 of $869,000, comprised of moving and lease exit costs, in connection with the Company’s new operations and headquarter facility, and a pre-litigation net settlement that was incurred in fiscal 2018; (iii) lower non-cash stock based compensation of $419,000 in fiscal 2019 (discussed below) and (iv) lower recruitment and travel costs of $315,000. Those reductions were partially offset by higher depreciation expense of $279,000, primarily related to depreciation of tenant improvements and other assets capitalized as part of our new operations and headquarters facility and higher amortization of capitalized software projects of $193,000 this year.
Stock-Based Compensation Expense
We recognize non-cash stock-based compensation expense that is attributable to grants or the vesting of restricted stock. Stock-based compensation expense is recorded as part of (i) sales and marketing expenses, in the case of stock awards granted to employees whose compensation is classified as sales and marketing expenses and (ii) general and administrative expenses, in the case of stock awards granted to directors, executive and financial management and administrative personnel.
The following table sets forth the stock-based compensation expense we recognized in fiscal 2020, 2019 and 2018 (in thousands):
|Fiscal Year Ended June 30,|
|Sales and marketing||$||29||$||70||$||98|
|General and administrative expenses||1,546||904||1,323|
The related tax benefit recognized for stock-based compensation expense was approximately $418,000, $254,000 and $1,035,000 in fiscals 2020, 2019 and 2018, respectively.
For PSUs that are contingent on the achievement of financial performance goals for vesting to occur, the amount of stock-based compensation recognized in any period can vary depending on an assessment as to whether it has become probable that the Company will achieve the performance goals and the time periods in which those goals are expected to be achieved. If it becomes probable that a performance goal will be achieved, there can be catch-up of stock-based compensation expense in that period, reflecting the additional expense required to be recognized from the service inception date through the period when it became probable that the goal would be achieved. Thereafter, stock-based compensation expense for the performance goal is recognized over the expected remaining service period to vesting.
Stock-based compensation expense related to financial performance goals was $693,000, $80,000 and $503,000 in fiscal 2020, 2019 and 2018, respectively. The increased expense in fiscal 2020, as compared to fiscal 2019, reflects the achievement of the maximum net cash performance goals for those years in both fiscal 2019 and 2020, with the associated expense recognized over the performance period.
A total of $1,935,000 of stock-based compensation expense for unvested restricted stock awards remained unrecognized as of June 30, 2020, based on the assumption that the holders of those awards would remain in the Company’s service through fiscal 2023. That expense will be recognized in future periods, as follows (in thousands):
|Year Ending June 30,|
The $1,935,000 of unrecognized expense does not include any expense that may arise from (i) grants of any additional restricted stock awards in future periods, (ii) the PSUs granted under the 2020 and 2019 LTIPs for which grant dates are to be established in fiscal 2021 and 2022.
Fiscal Year Ended June 30,
The impairment charge of $486,000 in fiscal 2020 relates to our Expos business and as discussed above under Recent Developments: Coronavirus (COVID-19), there continues to be uncertainty as to the viability of the Expos trade show business, due to COVID-19 that resulted in the cancellation of shows and due to expected social distancing concerns that will limit the numbers of dealers and attendees at future shows.
Interest Income, Net
Interest income is generated on cash balances that we have invested, primarily in highly liquid money market accounts and funds. Interest expense consists of interest incurred on outstanding borrowings, loan arrangement fees and unused commitment fees on credit facilities. The following table compares the net interest income (expense) in the fiscal years ended June 30, 2020, 2019 and 2018, (in thousands):
|Fiscal Year Ended June 30,|
|Interest income (expense), net||$||78||$||(69||)||$||(114||)|
Due to the Company maintaining higher cash balances and higher prevailing interest rates through February 2020, interest income was $213,000 in fiscal 2020, as compared to $111,000 and $19,000 in fiscal 2019 and 2018, respectively. Interest expense of $135,000, $180,000 and $133,000 was recognized in fiscal 2020, 2019 and 2018, respectively. Interest expense in fiscal 2020, 2019 and 2018, primarily related to borrowings under the Company’s term loan and commitment fees incurred under the revolving line of credit.
Provision for Income Taxes
Fiscal Year Ended June 30,
|Provision for income taxes||$||3,409||$||4,148||$||2,760|
The income tax provisions of $3,409,000, $4,148,000, and $2,760,000, in fiscals 2020, 2019 and 2018, respectively, represented ETRs, of approximately 24%, 29%, and 31%, respectively. The ETR for 2020 and 2019 reflect a federal tax rate of 21%, as a result of the Tax Act enacted into law in December 2017. The ETR in fiscal 2020 benefited from the release of valuation allowances in China, whereas in fiscal 2019 a non-cash valuation allowance was established against our deferred tax assets in China and represented about 4% of the ETR of 29%. In fiscal 2018, a blended federal tax rate of approximately 28% applied as the Tax Act only applied for the second half of that year. The income tax provisions for each fiscal year were adjusted for excess tax benefits or deficiencies related to the vesting of restricted shares.
Fiscal Year Ended June 30,
|Income from discontinued operations, (net of income taxes)||$||-||$||-||$||104|
The income from discontinued operations (net of income taxes), reflected pre-tax accretion expenses of $2,000 in fiscal year 2018, recognized in connection with the facilities, formerly occupied by our discontinued jewelry businesses and the write-off of all remaining discontinued balances as 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” and “Trends in our Businesses” above there can be period to period variability in coin revenues due to general market conditions that will impact the level of coin revenues in a given quarter, and the level of U.S. modern coin revenues, which are typically higher in our third quarter.
Prior to the onset of COVID-19, our collectibles trade show business added to the variability in our quarter-to-quarter operating results, because its revenues can vary based on the timing of the collectibles trade shows. Historically, the revenues of this business were higher in the first, third and fourth quarters of our fiscal years, compared to the second quarter, because the Long Beach, California Collectibles Shows took place during the first, third and fourth quarters. See also Recent Developments-Coronavirus (COVID-19) above, which discusses the impact of COVID-19 on our quarterly operating results in fiscal 2020 and may have in future quarters.
The tables below present unaudited selected quarterly financial data for each of the eight quarters beginning September 30, 2018 and ending on June 30, 2020. The information has been derived from our unaudited quarterly condensed consolidated financial statements, which have been prepared on a basis consistent with our audited Consolidated Financial Statements appearing in ITEM 8 of this Annual Report. The consolidated financial information set forth below includes all adjustments (consisting of normal adjustments and accruals) that we consider necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the Consolidated Financial Statements and the notes thereto appearing elsewhere in ITEM 8 of this Annual Report. These quarterly operating results are not necessarily indicative of results that may be expected for any subsequent fiscal periods.
Quarterly Results of Operations
(In thousands, except per share data)
|June 30, 2019||Sept. 30, 2019||Dec. 31, 2019||Mar. 31, 2020||June 30, 2020|
|Statement of Operations Data:|
|Cost of revenue||7,202||6,953||7,827||8,171||8,101||8,533||8,771||8,250|
|Interest and other income (expense), net||3||(145||)||(4||)||(71||)||71||4||38||(20||)|
|Income before provision for income taxes||2,830||2,069||4,761||4,465||4,708||3,278||2,680||3,529|
|Provision for income taxes (iii)||699||588||1,202||1,659||1,095||664||753||897|
|Net income per share:|