10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended December 31, 2020

 

OR

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[NO FEE REQUIRED]

   
  For the transition period from _______ to _____

 

Commission file number 1-34240

 

COLLECTORS UNIVERSE, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   33-0846191
(State or other jurisdiction of   (I.E. Employer
Incorporation or organization)   Identification No.)

 

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

 

Not Applicable

(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

 

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 is a shell company (as defined in Securities Exchange Act Rule 12b-2). Yes [  ] No [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding as of January 22, 2021
Common Stock $.001 Par Value   9,275,874

 

 

 

   
   

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2020

TABLE OF CONTENTS

 

    Page
PART I Financial Information
  Item 1. Financial Statements (unaudited):  
       
    Condensed Consolidated Balance Sheets as of December 31, 2020 and June 30, 2020 1
       
    Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2020 and 2019 2
       
    Condensed Consolidated Statement of Stockholders’ Equity from July 1, 2019 through December 31, 2020 3
       
    Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2020 and 2019 4
       
    Notes to Condensed Consolidated Financial Statements 5
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
    Forward-Looking Statements 16
    Our Business 16
    Recent Developments: Tender Offer and Coronavirus (COVID-19) 17
    Overview of Operating Results for the Three and Six Months Ended December 31, 2020 19
    Factors That Can Affect Our Operating Results and Financial Position 20
    Critical Accounting Policies and Estimates 22
    Results of Operations for the Three and Six Months Ended December 31, 2020 as compared to the Three and Six Months Ended December 31, 2019 25
    Liquidity and Capital Resources 30
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
  Item 4. Controls and Procedures 33
       
PART II Other Information  
  Item 1A. Risk Factors 34
  Item 6. Exhibits 34
       
SIGNATURES S-1
INDEX TO EXHIBITS E-1

 

 (i) 
   

 

PART 1 – FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share data)

(Unaudited)

 

  

December 31,

2020

  

June 30,

2020

 
ASSETS          
Current assets:          
Cash and cash equivalents  $42,646   $28,640 
Accounts receivable, net of allowance of $146 and $98 at December 31, and June 30, 2020, respectively   2,739    2,324 
Inventories, net   2,991    2,512 
Prepaid expenses and other current assets   2,493    1,872 
Total current assets   50,869    35,348 
           
Property and equipment, net   8,293    6,762 
Operating lease right-of-use assets   14,227    8,214 
Goodwill   1,625    1,625 
Intangible assets, net   2,527    2,446 
Deferred income tax assets   623    623 
Other assets   530    464 
Total assets  $78,694   $55,482 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $6,421   $3,381 
Accrued liabilities   3,671    2,713 
Accrued compensation and benefits   5,553    4,854 
Current portion of long-term debt   750    750 
Operating lease liabilities, current   2,300    2,274 
Income taxes payable   44    1,142 
Deferred revenue   7,608    4,968 
Total current liabilities   26,347    20,082 
           
Long Term Debt   563    938 
Operating lease liabilities, non-current   15,602    9,450 
           
Commitments and contingencies (Note 8)          
           
Stockholders’ equity:          
Preferred stock, $.001 par value; 3,000 shares authorized; no shares issued or outstanding   -    - 
Common stock, $.001 par value; 20,000 shares authorized; 9,276 and 9,240 issued and outstanding at December 31, and June 30, 2020, respectively.   9    9 
Additional paid-in capital   89,895    88,918 
Accumulated deficit   (53,722)   (63,915)
Total stockholders’ equity   36,182    25,012 
Total liabilities and stockholders’ equity  $78,694   $55,482 

 

See accompanying notes to condensed consolidated financial statements.

 

 1 
   

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except per share data)

(Unaudited)

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2020   2019   2020   2019 
Net revenues  $35,440   $19,456   $66,225   $39,666 
Cost of revenues   12,737    8,533    24,211    16,634 
Gross profit   22,703    10,923    42,014    23,032 
Operating expenses:                    
Selling and marketing expenses   2,414    2,489    4,683    5,122 
General and administrative expenses   10,284    5,160    19,517    9,999 
Total operating expenses   12,698    7,649    24,200    15,121 
Operating income   10,005    3,274    17,814    7,911 
Interest and other income (expense), net   175    4    193    75 
Income before provision for income taxes   10,180    3,278    18,007    7,986 
Provision for income taxes   2,787    664    4,652    1,759 
Net income  $7,393   $2,614   $13,355   $6,227 
                     
Net income per basic share:                    
Basic  $0.82   $0.29   $1.48   $0.69 
Diluted  $0.81   $0.29   $1.47   $0.69 
                     
Weighted average shares outstanding:                    
Basic   9,042    8,980    9,032    8,976 
Diluted   9,116    9,061    9,115    9,060 
Dividends declared per common share  $0.175   $0.175   $0.35   $0.35 

 

See accompanying notes to condensed consolidated financial statements.

 

 2 
   

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

   Common Stock  

Additional

Paid-in

   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
Balance at July 1, 2019   9,153   $9   $87,343   $(68,405)  $18,947 
Stock-based compensation – restricted stock   78    -    264    -    264 
Net income   -    -    -    3,613    3,613 
Dividends paid   -    -    -    (1,570)   (1,570)
                          
Balance at September 30, 2019   9,231    9    87,607    (66,362)   21,254 
Stock-based compensation – restricted stock   7    -    341    -    341 
Net income   -    -    -    2,614    2,614 
Dividends paid   -    -    -    (1,571)   (1,571)
                          
Balance at December 31, 2019   9,238    9    87,948    (65,319)   22,638 
Stock-based compensation – restricted stock   32    -    344    -    344 
Net income   -    -    -    1,927    1,927 
Dividends paid   -    -    -    (1,573)   (1,573)
                          
Balance at March 31, 2020   9,270    9    88,292    (64,965)   23,336 
Stock-based compensation -restricted stock   (30)   -    626    -    626 
Net income   -    -    -    2,632    2,632 
Dividends paid   -    -    -    (1,582)   (1,582)
                          
Balance at June 30, 2020   9,240    9    88,918    (63,915)   25,012 
Stock-based compensation -restricted stock   64    -    1,140    -    1,140 
Payments for retirement of common stock   (5)   -    (238)   -    (238)
Net income   -    -    -    5,962    5,962 
Dividends paid   -    -    -    (1,580)   (1,580)
                          
Balance at September 30, 2020   9,299        9    89,820    (59,533)   30,296 
Stock-based compensation -restricted stock   -    -    1,816    -    1,816 
Payments for retirement of common stock   (23)   -    (1,741)   -    (1,741)
Net income   -    -    -    7,393    7,393 
Dividends paid   -    -    -    (1,582)   (1,582)
Balance at December 31, 2020   9,276   $9   $89,895   $(53,722)  $36,182 

 

See accompanying notes to condensed consolidated financial statements.

 

 3 
   

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

  

Six Months Ended

December 31,

 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $13,355   $6,227 
Adjustments to reconcile income from continuing operations to net cash  provided by operating activities:          
Depreciation and amortization expense   1,676    1,469 
Stock-based compensation expense   2,956    605 
Non-cash lease expense   165    (110)
Provision for bad debts   47    27 
Provision for inventory write-down   85    173 
Provision for warranty   437    157 
Change in operating assets and liabilities:          
Accounts receivable   (463)   175 
Inventories   (564)   (411)
Prepaid expenses and other   (623)   (371)
Other assets   (65)   1 
Accounts payable and accrued liabilities   3,571    307 
Accrued compensation and benefits   698    (490)
Income taxes payable   (1,098)   (529)
Deferred revenue   2,640    687 
Net cash provided by operating activities   22,817    7,917 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Capital expenditures   (2,570)   (803)
Capitalized software   (718)   (621)
Net cash used in investing activities   (3,288)   (1,424)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayments under Term Loan   (375)   (375)
Dividends paid to common stockholders   (3,169)   (3,154)
Payments for retirement of common stock   (1,979)   - 
Net cash used in financing activities   (5,523)   (3,529)
           
Net increase in cash and cash equivalents   14,006    2,964 
Cash and cash equivalents at beginning of period   28,640    19,225 
Cash and cash equivalents at end of period  $42,646   $22,189 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Interest paid during the period  $45   $65 
Income taxes paid during the period  $5,750   $2,283 

 

See accompanying notes to condensed consolidated financial statements.

 

 4 
   

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. SUMMARY OF Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Collectors Universe, Inc. and its operating subsidiaries (the “Company”, “we”, “us”, or “our”). At December 31, 2020, our operating subsidiaries were Certified Asset Exchange, Inc. (“CAE”), Collectors Universe (Hong Kong) Limited, Collectors Universe (Shanghai) Limited, Collectors Universe (Japan) Limited, and Expos, LLC. (“Expos”), all of which are ultimately 100% owned by Collectors Universe, Inc. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Tender Offer

 

On January 20, 2021, the Company entered into an Amended and Restated Agreement and Plan of Merger (the “A&R Merger Agreement”) with Cards Parent LP, a Delaware limited partnership (“Parent”), and Cards Acquisition Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Purchaser”). The A&R Merger Agreement amended and restated the Agreement and Plan of Merger, dated November 30, 2020, between Parent, Purchaser and the Company.

 

Pursuant to the A&R Merger Agreement, Purchaser extended the expiration time of its tender offer (the “Tender Offer”) to purchase each issued and outstanding share of common stock to February 3, 2021, and increased the offer price to $92.00 per share of common stock (the “Offer Price”) from $75.25 per share of common stock. On February 4, 2021, Purchaser announced an extension of the expiration of the Tender Offer until February 5, 2021. The Tender Offer was extended to allow additional time for the shares of common stock tendered by guaranteed delivery to be received.

 

The Tender Offer expired at 12:00 midnight, New York time on February 5, 2021 (the “Expiration Date”). Broadridge Corporate Issuer Solutions, Inc., the depositary for the Tender Offer (the “Depositary”), advised Parent and Purchaser that, as of the Expiration Date, an aggregate of 5,179,075 shares of common stock (including shares of common stock treated as “rollover stock” within the meaning of Section 251(h) of the General Corporation Law of the State of Delaware, but excluding 1,093,255 shares of common stock tendered pursuant to guaranteed delivery procedures that have not yet been “received” (as defined by Section 251(h)(6) of the General Corporation Law of the State of Delaware)) had been validly tendered and not validly withdrawn pursuant to the Tender Offer. These shares of common stock represented approximately 57% of the aggregate number of shares of common stock outstanding. Because all conditions to the Tender Offer were satisfied or waived as of the Expiration Date, Purchaser accepted for payment all shares of common stock validly tendered and not validly withdrawn pursuant to the Tender Offer, and, in accordance with the terms of the Tender Offer, payment for such shares of common stock will be promptly made to the Depositary, which will then transmit such payments to the Company’s stockholders whose shares of common stock have been accepted for payment.

 

Following consummation of the Tender Offer, on February 8, 2021, pursuant to the terms of the A&R Merger Agreement and in accordance with Section 251(h) of the General Corporation Law of the State of Delaware, the merger of the Purchaser into the Company with the Company as the surviving corporation was consummated (the “Merger”). In connection with the Merger, each share of common stock that was issued and outstanding as of immediately prior to the effective time of the Merger (the “Effective Time”) (except as provided in the A&R Merger Agreement) was cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to the Offer Price.

 

In addition, with respect to each unvested equity award, at the Effective Time, (1) any vesting conditions applicable to such award were automatically accelerated in full, and (2) such award was cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such award by (B) the Offer Price, less applicable taxes required to be withheld with respect to such payment.

 

 5 
   

 

Purchaser paid aggregate consideration of approximately $853 million in cash in the Tender Offer and the Merger, without giving effect to related transaction fees and expenses.

 

Unaudited Interim Financial Information

 

The accompanying interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with generally accepted accounting principles as in effect in the United States of America (“GAAP”). Operating results for the three and six months ended December 31, 2020 are not necessarily indicative of the results that may be expected for the year ending June 30, 2021 or for any other interim period during such year. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, as filed with the SEC (our “Fiscal 2020 10-K”) on August 26, 2020. Amounts related to disclosure of June 30, 2020 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and the notes thereto.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Leases

 

The Company accounts for leases, which consist primarily of office and operations facilities, in accordance with Accounting Standards Codification (“ASC”) 842 Accounting for Leases and recognizes lease obligations and corresponding right-of-use (ROU) assets for non-cancelable operating leases. Therefore, the accompanying Condensed Consolidated Balance Sheets at December 31, 2020, and June 30, 2020, include the liability to make lease payments (the lease liability) and a right-of-use asset, representing our right to use the underlying asset for the lease term. We do not recognize lease assets or liabilities for leases with a term of 12 months or less and recognize lease expenses for such leases on a straight-line basis over the lease term. See Note 9- Leases for additional information. As a result of the COVID-19 pandemic, we reviewed our lease obligations for impairment and potential excess space reserve requirements and concluded there were no impairments, or charges, required to be recognized at December 31, 2020.

 

Revenue Recognition

 

The core principle of ASC 606, Revenue from Contracts with Customers, is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations are satisfied.

 

Our primary source of revenue is the authentication and grading of collectibles, which represented about 93% of our consolidated revenues in the six months ended December 31, 2020. Our other sources of revenues represent the balance of our revenues which are small and individually account for less than 5% of total revenues.

 

In accordance with ASC 606 we recognize revenue for our main revenue streams as follows:

 

 6 
   

 

Authentication and Grading Revenues: As the time it takes to authenticate and grade the collectible is short, we recognize revenue at the time of shipment (i.e. point of time) of the authenticated and graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our authentication and grading services and the shipment of the collectible back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sale of special coin inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to the customer. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend credit, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer. We provide a limited warranty covering the coins and trading cards that we authenticate and grade. 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.

 

Certified Coin Exchange Subscription Revenues: We recognize subscription revenues related to our CCE exchange for certified coins, ratably over the relevant subscription period. Subscriptions are typically billed and paid on a monthly basis, although certain quarterly and annual subscriptions can be paid in advance. Prepaid subscriptions are classified as part of deferred revenue.

 

Expos Trade Show Revenue: We recognize fees earned from promoting, managing, and operating trade shows in the periods in which the shows take place. Trade show booth fees are typically paid to us in advance. Certain fees that are paid to conduct auctions at the show are paid to us at the end of the show. Prepaid show fees are classified as part of deferred revenue.

 

Advertising and Commission Revenues: Advertising revenues are recognized in the period when an advertisement is displayed in our publications or websites and customers typically have 30 day credit terms. Click-through commission revenues earned through our websites from third party affiliate programs are recognized in the period in which the commissions are earned, and such commissions are paid in the following month.

 

Product Sales: Product sales consist primarily of sales of collectibles coins that we have purchased pursuant to our coin authentication and grading warranty program. We recognize revenues from coin sales when the coins are shipped or delivered to customers or if the coins are sold through auction, when the auction settles. However, those sales are not considered to be the focus of nor an integral part of the Company’s ongoing revenue generating activities.

 

Contract Balances. As discussed above, the timing of revenue recognition can differ from the timing of invoicing to customers. Contract liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We refer to these contract liabilities as “Deferred Revenue” in the accompanying condensed consolidated balance sheets. During the three and six months ended December 31, 2020, we recognized $1,070,000 and $3,376,000 in revenue from the deferred revenue balance of $4,968,000 at June 30, 2020.

 

Shipping and Handling Costs

 

Shipping and handling costs incurred to process and return customer collectibles submitted to us for grading or authentication are recorded as costs of revenues, net of amounts received from customers, in accordance with the guidance for Principals versus Agents as set out in ASC 606.

 

 7 
   

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from results expected on the basis of those estimates, and such differences could be material to our future results of operations and financial condition. Examples of such estimates that could be material include determinations made with respect to the capitalization and recovery of software development costs, the valuation of stock-based compensation awards and the timing of the recognition of related stock-based compensation expense, the valuation of coin inventory, the amount and assessment of goodwill for impairment, the sufficiency of warranty reserves and the provision or benefit for income taxes and related valuation allowances.

 

Goodwill and Other Long-Lived Assets

 

We evaluate the carrying value of goodwill and indefinite-lived intangible assets at least annually, or more frequently if facts and circumstances indicate that impairment may have occurred. Qualitative factors are considered in performing our goodwill impairment assessment, including the significant excess of fair value over carrying value in prior years, and any material changes in the estimated cash flows of the reporting unit. We also evaluate the carrying values of all other tangible and intangible assets for impairment if circumstances arise in which the carrying values of these assets may not be recoverable on the basis of future undiscounted cash flows. We determined that no impairment of goodwill or other long-lived assets existed as of December 31, 2020.

 

During the first quarter ended September 30, 2020, we completed the annual goodwill impairment assessment with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of their fair values over carrying value in prior years, and any material changes in the estimated cash flows of the reporting units, and determined that it was more likely than not that the fair values of CCE and CoinFacts were greater than their respective carrying values, including goodwill.

 

Foreign Currency

 

The Company has determined that the U.S. Dollar is the functional currency for its French branch office and its Hong Kong, Japan and China subsidiaries. Based on this determination, the Company’s foreign operations are re-measured by reflecting the financial results of such operations as if they had taken place within a U.S. dollar-based economic environment. Fixed assets and other non-monetary assets and liabilities are re-measured from foreign currencies to U.S. dollars at historical exchange rates; whereas cash, accounts receivable and other monetary assets and liabilities are re-measured at current exchange rates. Gains and losses resulting from those re-measurements, were not material.

 

Stock-Based Compensation Expense

 

We recognize stock-based compensation expense attributable to service-based equity grants over the service period based on the grant date fair values of the awards. For performance-based equity grants with financial performance goals, we begin recognizing compensation expense based on their respective grant date fair values when it becomes probable that we will achieve the financial performance goals.

 

Restricted Stock Awards: 2021, 2020 and 2019 Long Term Incentive Plans (“LTIPs”)

 

Retention Restricted Service Shares (“RSUs”)

 

To create incentives for the officers and other key employees (“LTIP Participants”) to remain in the Company’s service, RSUs were granted to them as follows:

 

Annual Grants. A total, net of forfeitures, of 16,864, 25,952 and 44,763 RSUs were granted in fiscal 2021, (through December 31, 2020), 2020 and 2019, respectively, with vesting in three annual installments on the last day of each of the fiscal years following the grants, with the vesting of each such installment contingent on the LTIP Participant remaining in the continuous service of the Company through the vesting date of that installment.

 

 8 
   

 

If a Participant’s continuous service with the Company ceases, for any reason whatsoever, including a termination of the Participant’s employment with or without cause, prior to any vesting date or dates, the then unvested RSUs will be forfeited. As discussed above, at the Effective time of the Merger, (1) any vesting conditions applicable to RSUs were automatically accelerated in full, and (2) such RSUs were cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such RSU award by (B) the Offer Price, less applicable taxes required to be withheld with respect to such payment.

 

Fiscal 2021, 2020 and 2019 Performance Restricted Shares (“PSUs”)

 

To create incentives for the LTIP Participants to focus their efforts on the achievement of increases in net cash flows (defined as net cash generated by the Company’s operating activities, minus capital expenditures and capitalized software costs), during the three years ending June 30, 2021, 2022 and 2023, (each a “Performance Period”), in fiscal 2021, (through December 31, 2020), 2020 and 2019, the Compensation Committee of the Board of Directors, granted 33,728, 51,905 and 89,542 PSUs (at maximum) respectively, to the LTIP Participants. Vesting of the PSUs was made dependent upon the achievement of net cash flow goals on an annual basis during each Performance Period, subject to possible downward or upward adjustment of 20% of the preliminary vested PSUs, based on a comparison of the Company’s annualized total shareholder return (“TSR”) for each Performance Period, to the annualized TSR of the Russell 2000 Index, for the same Performance Period. As the Compensation Committee establishes performance goals on an annual basis, threshold, target and maximum net cash flow goals were established for fiscal years 2021, 2020 and 2019 which give rise to a grant date for expense recognition purposes, assuming it is probable that the goals will be achieved. In the normal course, grant dates will be established for future year’s PSUs early in those fiscal years which will give rise to grant dates for expense recognition purposes.

 

For any of the PSUs to vest, an LTIP Participant must remain in the continuous service of the Company through June 30, 2021 for the fiscal 2019 PSUs, June 30, 2022 for the fiscal 2020 PSUs, and June 30, 2023 for fiscal 2021 PSUs and the threshold net cash flows goal must be achieved in at least one of the years, during the three year Performance Period. PSUs that fail to vest will be forfeited. As discussed above, at the Effective time of the Merger, (1) any vesting conditions applicable to PSUs were automatically accelerated in full, and (2) such PSUs were cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such PSU award by (B) the Offer Price, less applicable taxes required to be withheld with respect to such payment.

 

Non LTIP Stock Awards

 

In the first quarter of fiscal 2021, 10,812 fully vested shares were granted to certain management employees and to five new outside directors appointed during the quarter, for an expense of approximately $503,000 in the six months ended December 31, 2020.

 

Accelerated Vesting

 

In the three and six months ended December 31, 2020, the vesting of a total of 43,792 LTIP equity awards (of which 41,450 had been granted to the Company’s CEO, Mr. Orlando), was accelerated in order to mitigate against potential adverse tax consequences under Section 280(g) of the Tax Code. Stock-based compensation expense of approximately $617,000 was recognized for the acceleration of these equity awards in the three and six months ended December 31, 2020.

 

Total stock-based compensation expense recognized in the three and six months ended December 31, 2020 was $1,816,000 and $2,956,000, respectively, as compared to $341,000 and $605,000 in the three and six months ended December 31, 2019.

 

 9 
   

 

Concentrations

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

 

Financial Instruments and Cash Balances. At December 31, 2020, we had cash and cash equivalents totaling approximately $42,646,000, of which approximately $37,460,000 was invested in money market accounts, and the balance of $5,186,000 (which is inclusive of cash in overseas bank accounts) was held in non-interest bearing bank accounts for general day-to-day operations. Cash in overseas bank accounts was approximately $3,101,000 at December 31, 2020 of which $2,163,000 was in China. We plan to remit excess cash from China in accordance with Chinese exchange control regulations. Due to those exchange control regulations in China, delays can be experienced in transferring funds out of China to Hong Kong and the United States.

 

Substantially all of our cash in the United States is deposited at one FDIC insured financial institution. We maintained cash due from banks, inclusive of cash in overseas accounts, in excess of the bank’s FDIC insured deposit limits of approximately $38,693,000 at December 31, 2020.

 

Revolving Credit Line. On March 10, 2020 the Company amended and increased its $10 million unsecured revolving credit line (the “Credit Line”) to $15 million and extended the term for two years through March 2022. The Company is entitled to obtain borrowings under the Credit Line at such times and in amounts as it may request, as supported by an EBITDA (earnings before interest, taxes, depreciation and amortization) calculation for the last four quarters, provided that the maximum principal amount of the borrowings that may be outstanding at any one time under the Credit Line may not exceed $15 million and each year there must be a period of 30 consecutive days during which no borrowings are outstanding. The Company also may, at any time or from time to time and at its option, repay outstanding borrowings, in whole or in part, and may reborrow amounts so repaid at such times and in such amounts as it deems appropriate.

 

Credit Line borrowings bear interest, at the Company’s option, either at LIBOR plus 2.25% or at 0.25% below the highest prime lending rate published from time to time by the Wall Street Journal. The Company is required to pay a quarterly unused commitment fee of 0.0625% of the amount by which (if any) that the average of the borrowings outstanding under the Credit Line in any calendar quarter is less than $6 million.

 

The Credit Line agreement contains a financial covenant that requires the Company to maintain a funded debt coverage ratio, similar to the debt coverage ratio that is applicable to the term loan (see above) and certain other covenants typical for this type of credit. At December 31, 2020 the Company was in compliance with those covenants. Availability to borrow under the line of credit was $15,000,000 at December 31, 2020 as there were no borrowings outstanding under the line of credit as of that date.

 

Term Loan. As previously reported, on September 15, 2017 the Company obtained a five-year, $3,500,000 unsecured term loan. In October 2018, the Company began repaying the then term loan balance of $3,000,000 in 48 equal monthly principal payments of $62,500, or $750,000, on an annual basis, through September 2022. There are no prepayment penalties on loan repayments.

 

The agreement governing the term loan contains two financial covenants, which require the Company to maintain (a) a funded debt coverage ratio and (b) a debt service coverage ratio, respectively. The loan agreement also contains certain other covenants typical for this type of loan, including a covenant which provides that, without the lender’s consent, the Company may not incur additional indebtedness for borrowed money, except for (i) borrowings under the Company’s revolving credit line, (ii) purchase money indebtedness and (iii) capitalized lease obligations. The Company was in compliance with those loan covenants at December 31, 2020.

 

At December 31, 2020, the Company had $1,313,000 of outstanding borrowings under this Term Loan of which $750,000 is classified as a current liability and $563,000 is classified as a long-term liability in the condensed consolidated balance sheet at December 31, 2020, included elsewhere in this Report.

 

Accounts Receivable. A substantial portion of accounts receivable are due from collectibles dealers. There were no individual customer’s accounts receivable balance that exceeded 10% of the Company’s total gross accounts receivable balances at December 31, 2020 and at June 30, 2020. We perform analyses of the expected collectability of accounts receivable based on several factors, including the age and extent of significant past due accounts and economic conditions or trends that may adversely affect the ability of debtors to pay their account receivable balances. Based on that review, we establish an allowance for doubtful accounts, when deemed necessary. The allowance for doubtful accounts receivable was $146,000 and $98,000 at December 31, 2020 and June 30, 2020, respectively. Ultimately, we will write-off accounts receivable balances when it is determined that there is no possibility of collection.

 

 10 
   

 

Cards / Autograph and Coins Revenues. The authentication, and grading of cards / autographs and coins including, related services accounted for approximately 98% of our net revenues for the three and six months ended December 31, 2020, as compared to 97% and 95% in the three and six months ended December 31 2019.

 

Customers. Our top five customers accounted, in the aggregate, for approximately 7% of our total revenues in the three and six months ended December 31, 2020 as compared to 11% and 10% of revenues in the same periods of the prior year.

 

Inventories

 

Our inventories consist primarily of (i) coins which we have purchased pursuant to our coin authentication and grading warranty program and (ii) consumable supplies and special inserts that we use in our authentication and grading businesses. Coin collectibles inventories are recorded at the lower of cost or net realizable value using the specific identification method. Consumable supplies are recorded at the lower of cost (using the first-in first-out method) or market. Inventories are periodically reviewed to identify slow-moving items, and an allowance for inventory losses is recognized, if considered necessary. It is possible that our estimates of market value of collectible coins in inventory could change, due to changes in market conditions in the various collectibles markets served by the Company, which could require us to increase that allowance for inventory losses.

 

Capitalized Software

 

We capitalize certain costs incurred in the development and upgrading of our software, either from internal or external sources, as part of intangible assets and we amortize those costs on a straight-line basis over the estimated useful life of the software of three years. In the three and six months ended December 31, 2020 we capitalized approximately $337,000 and $718,000 of software development costs as compared to $342,000 and $621,000, in the three and six months ended December 31, 2019. In the three and six months ended December 31, 2020, we recorded approximately $310,000 and $593,000 as amortization expense for capitalized software as compared to $261,000 and $490,000 in the three and six months ended December 31, 2019. Planning, training, support and maintenance costs incurred either prior to or following the implementation phase of software development projects are recognized as expense in the period in which they are incurred. We evaluate the carrying value of capitalized software for possible impairment, and, if necessary, an impairment loss is recorded in the period in which any impairment is determined to have occurred.

 

Warranty Costs

 

We provide a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if any collectible 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 that re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible or, in the alternative, at the customer’s option, pay the difference in value of the item at its original grade, as compared to its 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 it. We accrue for estimated warranty costs based on historical trends and related experience. We monitor the adequacy of our warranty reserves on an ongoing basis for significant claims resulting from resubmissions receiving lower grades or deemed not to be authentic. Warranty expense recognized in the three and six months ended December 31, 2020 was $199,000 and $437,000 as compared to $116,000 and $157,000 in the three and six months ended December 31, 2019.

 

Dividends

 

In accordance with the Company’s dividend policy during the period, we paid quarterly cash dividends of $0.175 per share of common stock in the first and second quarters of fiscal 2021 and in fiscal 2020. The declaration of cash dividends in the future 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.

 

 11 
   

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. Subsequent to the issuance of ASU 2016-13, the FASB clarified the guidance through several ASUs. The collective new guidance (ASC 326) generally requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts. ASC 326 is effective for annual and interim fiscal reporting periods beginning after December 15, 2022, with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is continuing to evaluate the expected impact of this ASC 326 but does not expect it to have a material impact on its consolidated financial statements upon adoption.

 

2. INVENTORIES

 

Inventories consist of the following (in thousands):

 

   December 31,   June 30, 
   2020   2020 
Coins  $217   $195 
Grading raw materials consumable inventory   3,640    3,389 
    3,857    3,584 
Less inventory reserve   (866)   (1,072)
Inventories, net  $2,991   $2,512 

 

The inventory reserve represents a valuation allowance on certain items of our coins inventory based on the current market value of those coins and for our consumables inventories, based upon our review of the expected future usage of that inventory.

 

Estimated market value of coins can be subjective and can vary depending on market conditions for precious metals, the number of qualified buyers for a particular coin and the uniqueness and special features of a particular coin.

 

3. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following (in thousands):

 

   December 31,   June 30, 
   2020   2020 
Coins grading reference sets  $68   $68 
Computer hardware and equipment   3,458    2,844 
Computer software   1,997    1,752 
Equipment   6,734    5,566 
Furniture and office equipment   1,566    1,113 
Leasehold improvements   4,890    4,801 
Trading card reference library   52    52 
    18,765    16,196 
Less accumulated depreciation and amortization   (10,472)   (9,434)
Property and equipment, net  $8,293   $6,762 

 

 12 
   

 

4. ACCRUED LIABILITIES

 

Accrued liabilities consist of the following (in thousands):

 

   December 31,   June 30, 
   2020   2020 
Warranty reserves  $914   $698 
Professional fees   1,194    975 
Other   1,563    1,040 
   $3,671   $2,713 

 

The following table presents the changes in the Company’s warranty reserve during the six months ended December 31, 2020 and 2019 (in thousands):

 

  

Six Months Ended

December 31,

 
   2020   2019 
Warranty reserve beginning of period  $698   $852 
Provision charged to cost of revenues   437    157 
Payments   (221)   (229)
Warranty reserve, end of period  $914   $780 

 

5. INCOME TAXES

 

The income tax provisions in the three and six months ended December 31, 2020 were determined based on estimated annual effective tax rates (“ETRs”) of approximately 27% and 26%, respectively, as compared to 20% and 22% in the three and six months ended December 31, 2019. All periods were adjusted for excess tax benefits or deficiencies. The ETRs for the three and six months ended December 31, 2020 also reflect limitations on the deductibility of (i) Tender Offer transaction costs that were incurred in this year’s second quarter and (ii) compensation costs in accordance with Section 162(m) of the Federal Tax code.

 

6. NET INCOME PER SHARE

 

The following table presents the changes in the Company’s weighted average shares outstanding for the three and six months ended December 31, 2020 and 2019 (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2020   2019   2020   2019 
Weighted average shares outstanding: Basic   9,042    8,980    9,032    8,976 
Dilutive effect of unvested equity awards   74    81    83    84 
Weighted average shares outstanding: Diluted   9,116    9,061    9,115    9,060 

 

There were no anti-dilutive unvested restricted awards at December 31, 2020 and 2019. In addition, at December 31, 2020, 89,000 of unvested performance based awards were excluded from the computation of diluted earnings per share because we had not achieved the related performance goals required for those awards to vest.

 

 13 
   

 

7. BUSINESS SEGMENTS

 

Operating segments are defined as the components or “segments” of an enterprise for which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker, or decision-making group, in deciding how to allocate resources to and in assessing performance of those components or “segments”. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s operating segments are organized based on the respective services that they offer to customers. Similar operating segments have been aggregated to reportable operating segments based on having similar services, types of customers, and other criteria.

 

We operate principally in three reportable service segments: trading cards / autographs, coins, and other (which include our smaller non-authentication and grading businesses). Services provided by the trading cards / autographs, and coins segments include authentication, grading, publications, advertising and commissions earned, membership revenues and product sales. The other segment is comprised of CCE, Coinflation.com, Collectors.com and our collectibles trade show business.

 

We allocate certain operating expenses to each service segment based upon each segment’s estimated expense usage. The following tables set forth on a segment basis, including a reconciliation with the condensed consolidated financial statements, (i) revenues, (ii) depreciation and amortization, (iii) stock-based compensation expense, and (iv) operating income for the three and six months ended December 31, 2020 and 2019, respectively.

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2020   2019   2020   2019 
Net revenues from external customers:                    
Trading cards / autographs  $23,066   $8,078   $41,678   $16,172 
Coins (i)   11,614    10,700    23,063    21,682 
Other   760    678    1,484    1,812 
Consolidated total revenue  $35,440   $19,456   $66,225   $39,666 
Amortization and depreciation:                    
Trading cards / autographs  $261   $174   $477   $325 
Coins   422    382    822    746 
Other   53    84    118    176 
Total   736    640    1,417    1,247 
Unallocated amortization and depreciation   134    119    259    222 
Consolidated amortization and depreciation  $870   $759   $1,676   $1,469 
Stock-based compensation:                    
Trading cards / autographs  $127   $27   $190   $44 
Coins   224    63    337    114 
Other   37    11    57    19 
Total   388    101    584    177 
Unallocated stock-based compensation   1,428    240    2,372    428 
Consolidated stock-based compensation  $1,816   $341   $2,956   $605 
Operating income:                    
Trading cards / autographs  $13,127   $1,940   $21,731   $4,195 
Coins   3,229    2,864    6,860    6,618 
Other   358    225    695    533 
Total   16,714    5,029    29,286    11,346 
Unallocated operating expenses   (6,709)   (1,755)   (11,472)   (3,435)
Consolidated operating income  $10,005   $3,274   $17,814   $7,911 

 

(i) Includes service revenues of $3.0 million and $5.3 million generated from outside the United States in the three and six months ended December 31, 2020 as compared to $2.8 million and $5.2 million in the three and six months ended December 31, 2019

 

Net identifiable assets are provided by business segment as of December 31, 2020 and June 30, 2020, respectively (in thousands):

 

   December 31,   June 30, 
   2020   2020 
Identifiable Assets:          
Trading cards / autographs  $6,810   $4,633 
Coins   10,825    10,836 
Other   1,878    1,778 
Total   19,513    17,247 
Unallocated assets   59,181    38,235 
Consolidated assets  $78,694   $55,482 
Goodwill:          
Coins  $515   $515 
Other   1,110    1,110 
Consolidated goodwill  $1,625   $1,625 

 

8. CONTINGENCIES

 

The Company is named from time to time, as a defendant in lawsuits and disputes. 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 information.

 

We believe that none of the lawsuits or disputes currently pending against the Company is likely to have a material adverse effect on the Company’s financial position or results of operations.

 

In connection with the Tender Offer there were contingent fees, consisting, primarily, of investment banking fees, that only become payable upon consummation of merger and therefore those fees have not been accrued at December 31, 2020.

 

 14 
   

 

9. LEASES

 

The Company has operating leases for office facilities and certain equipment. Our leases have remaining terms of one year to eight years, some of which included options to extend. We do not include options to extend in our determination of the valuation of our right-of-use (ROU) assets and lease liabilities, as it was not considered probable that we will exercise those options. Lease expense is recognized on a straight-line basis over the lease term. Some of our leases have variable payments of property taxes, insurance and common area maintenance, in addition to base rent. These variable payments are expensed when incurred and are recorded as variable rent expense.

 

Operating lease right-of-use assets and liabilities are measured using the present value of future minimum lease payments over the lease term. We applied our incremental borrowing rate based on the information available at the adoption date, and for new leases, at the lease commencement date.

 

Information related to the Company’s total lease costs were as follows (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2020   2019   2020   2019 
Operating lease cost  $758   $533   $1,291   $1,069 
Variable lease cost   219    113    340    224 
Total lease cost  $977   $646   $1,631   $1,293 

 

Information related to the Company’s ROU assets and related lease liabilities were as follows (in thousands):

 

  

Six Months Ended

December 31,

 
   2020   2019 
Cash paid for operating lease liabilities  $1,231   $1,148 
ROU assets obtained in exchange for new operating lease liabilities   7,037    - 
Weighted-average remaining lease term   7.2 years    7.6 years 
Weighted-average discount rate   2.8%   4.8%

 

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancellable operating leases with terms of more than one year to the total operating lease liabilities recognized on the condensed consolidated balance sheets as of December 31, 2020 (in thousands):

 

Fiscal Year Ending June 30,  Amount 
2021(remaining 6 months)  $1,244 
2022   2,161 
2023   1,687 
2024   1,798 
2025   2,938 
Thereafter   10,155 
Total undiscounted future minimum lease payments   19,983 
Less: Imputed interest   (2,081)
Total operating lease liabilities  $17,902 
Current operating lease liabilities  $2,300 
Long-term operating lease liabilities   15,602 
Total operating lease liabilities  $17,902 

 

As of December 31, 2020, we do not have additional finance or operating leases that have not commenced that would create significant obligations for us.

 

10. SUBSEQUENT EVENTS

 

Tender Offer

 

On January 20, 2021, the agreement to sell the Company was amended and restated among other matters, to increase the cash offer price to $92.00 per share. See Tender Offer above.

 

 15 
   

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The discussion in this Item 2 of this Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Those Sections of the 1933 Act and 1934 Act provide a “safe harbor” from liability for forward-looking statements in order to encourage companies to provide prospective information about their expected future financial performance so long as they provide cautionary statements identifying important factors that could cause their actual results to differ from projected or anticipated results. Other than statements of historical fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking statements. Forward-looking statements often include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Our actual financial performance in future periods may differ significantly from the currently expected financial performance set forth in the forward-looking statements contained in this Report due to the risks to which our business is subject and other circumstances or occurrences which are not presently predictable and over which we have little or no control, including the continuing impact that the Coronavirus (“COVID-19”) may have on our business, financial condition and results of operations. Consequently, the forward-looking statements and information contained in this Report are qualified in their entirety by, and readers of this Report are urged to read the risk factors that are described in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (the “Fiscal 2020 10-K”), which we filed with the Securities and Exchange Commission (the “SEC”) on August 26, 2020, and the section, entitled “Factors that Can affect our Results of Operations or Financial Position,” below in this Item 2.

 

Due to these and other possible uncertainties and risks, readers of this Report. are cautioned not to place undue reliance on the forward-looking statements that are contained or recent trends that we describe in this Report, which speak only as of the date of this Report, or to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update or revise any forward-looking statements contained in this Report or in our Fiscal 2020 10-K or any of our other prior filings with the SEC, except as may be required by applicable law or applicable NASDAQ rules.

 

Our Business

 

Collectors Universe, Inc. (“we”, “us”, “our”, or the “Company”) provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs, sports and historical memorabilia. We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to buy or sell; thereby enhancing their marketability and providing increased liquidity to the dealers, collectors and consumers that own, buy and sell such collectibles.

 

We principally generate revenues from the fees paid for our authentication and grading services. To a lesser extent, we generate revenues from other related services which consist of: (i) revenues from sales of advertising placed and commissions earned on our websites; (ii) sales of printed publications and collectibles price guides and sales of advertising in our publications; (iii) sales of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) sales of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for coins that have been authenticated and graded (or “certified”) and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.

 

 16 
   

 

Recent Developments:

 

(i)Tender Offer

 

On January 20, 2021, the Company entered into an Amended and Restated Agreement and Plan of Merger (the “A&R Merger Agreement”) with Cards Parent LP, a Delaware limited partnership (“Parent”), and Cards Acquisition Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Purchaser”). The A&R Merger Agreement amended and restated the Agreement and Plan of Merger, dated November 30, 2020, between Parent, Purchaser and the Company.

 

Pursuant to the A&R Merger Agreement, Purchaser extended the expiration time of its tender offer (the “Tender Offer”) to purchase each issued and outstanding share of common stock to February 3, 2021, and increased the offer price to $92.00 per share of common stock (the “Offer Price”) from $75.25 per share of common stock. On February 4, 2021, Purchaser announced an extension of the expiration of the Tender Offer until February 5, 2021. The Tender Offer was extended to allow additional time for the shares of common stock tendered by guaranteed delivery to be received.

 

The Tender Offer expired at 12:00 midnight, New York time on February 5, 2021 (the “Expiration Date”). Broadridge Corporate Issuer Solutions, Inc., the depositary for the Tender Offer (the “Depositary”), advised Parent and Purchaser that, as of the Expiration Date, an aggregate of 5,179,075 shares of common stock (including shares of common stock treated as “rollover stock” within the meaning of Section 251(h) of the General Corporation Law of the State of Delaware, but excluding 1,093,255 shares of common stock tendered pursuant to guaranteed delivery procedures that have not yet been “received” (as defined by Section 251(h)(6) of the General Corporation Law of the State of Delaware)) had been validly tendered and not validly withdrawn pursuant to the Tender Offer. These shares of common stock represented approximately 57% of the aggregate number of shares of common stock outstanding. Because all conditions to the Tender Offer were satisfied or waived as of the Expiration Date, Purchaser accepted for payment all shares of common stock validly tendered and not validly withdrawn pursuant to the Tender Offer, and, in accordance with the terms of the Tender Offer, payment for such shares of common stock will be promptly made to the Depositary, which will then transmit such payments to the Company’s stockholders whose shares of common stock have been accepted for payment.

 

Following consummation of the Tender Offer, on February 8, 2021, pursuant to the terms of the A&R Merger Agreement and in accordance with Section 251(h) of the General Corporation Law of the State of Delaware, the merger of the Purchaser into the Company with the Company as the surviving corporation was consummated (the “Merger”). In connection with the Merger, each share of common stock that was issued and outstanding as of immediately prior to the effective time of the Merger (the “Effective Time”) (except as provided in the A&R Merger Agreement) was cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to the Offer Price.

 

In addition, with respect to each unvested equity award, at the Effective Time, (1) any vesting conditions applicable to such award were automatically accelerated in full, and (2) such award was cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such award by (B) the Offer Price, less applicable taxes required to be withheld with respect to such payment.

 

Purchaser paid aggregate consideration of approximately $853 million in cash in the Tender Offer and the Merger, without giving effect to related transaction fees and expenses. As a result of the consummation of the Offer and the Merger, a change in control of the Company occurred. Following the consummation of the Merger, the Company became a wholly owned subsidiary of Cards Holding Inc., a Delaware corporation and a wholly owned subsidiary of Parent.

 

On February 8, 2021, the Company notified The Nasdaq Stock Market (“Nasdaq”) of the occurrence of the Merger and requested that trading in the Company’s common stock be suspended and that the Company’s shares of common stock be withdrawn from listing on Nasdaq, effective prior to the opening of Nasdaq on February 8, 2021. On February 8, 2021, Nasdaq filed with the SEC a notification of removal from listing on Form 25 to report that the Company common stock will no longer be listed on Nasdaq. The Company’s common stock ceased trading on Nasdaq effective prior to the opening of Nasdaq on February 8, 2021. The Company intends to file with the SEC a certification and notice of termination on Form 15 to terminate the registration of the shares of common stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and suspend the Company’s reporting obligations under Section 13 and Section 15(d) of the Exchange Act.

 

 17 
   

 

(ii)Coronavirus (COVID-19)

 

Despite the continuing COVID-19 pandemic, we achieved revenues of $35.4 million and $66.2 million in the three and six months ended December 31, 2020 respectively, as compared to revenues of $19.5 million and $39.7 million in the three and six months ended December 31, 2019. Operating income was $10.0 million and $17.8 million in three and six months ended December 31, 2020 as compared to $3.3 million and $7.9 million in the three and six months ended December 31, 2019.

 

Set forth below is a summary of the impact of COVID -19 on our business in the first half of fiscal 2021, the possible impact on future periods and the mitigation measures we implemented in response to the pandemic.

 

  We have continued to apply enhanced measures to protect the health and safety of our employees and the community. Those health and safety measures included reconfiguring of our authentication and grading facility to permit social distancing and continuing to allow certain administrative and clerical personnel work remotely from their homes. As a result of these measures, there are inefficiencies in our business that did not exist prior to the COVID-19 outbreak, although we mitigated the effect of those inefficiencies by operating with multiple shifts and making extra space available to operations personnel that was previously used by the administrative and clerical personnel, who began working remotely. In addition, in October 2020, we leased additional space at our headquarters and operating facility in Santa Ana, California, to increase operating capacity in response to the on-going demand for our services which facilitated social distancing as we ramped up capacity. Some of our employees have tested positive for COVID-19, although it is unclear where they contracted the virus, which modestly impacted our operations in December 2020, but which did not require us to cease operations.
     
  We earn higher average service fees from onsite authentication and grading activities at many coin trade shows and to a lesser extent, trading card shows. All scheduled trade shows in the first half of fiscal 2021 were cancelled by the operators of those shows due to the pandemic. However, we replaced some of the cancelled U.S. coins shows with smaller coin authentication and grading events that we conducted ourselves, and were successful in generating show revenues of approximately of $0.9 million and $2.4 million in the three and six months ended December 31, 2020 as compared to approximately $1.3 million and $3.0 million in the same periods of fiscal 2020, respectively. In addition, we encouraged customers to redirect trade show submissions to our California operations facility, for authentication and grading. At this time there are coin shows tentatively scheduled for the end of the third quarter and the fourth quarter of fiscal 2021, although our expectation is that they will also be cancelled due to the pandemic. Although our efforts to replace coin trade shows were reasonably successful in the first half of fiscal 2021, it is uncertain what level of on-going revenues we will be able to generate at these smaller coin authentication and grading events, in future periods.
     
  There continues to be uncertainty as to the U.S. Mint’s, (the “Mint”) production and release schedule for all modern coin programs in this year’s third and fourth quarters, due to the current surge in COVID-19. In the three and six months ended December 31, 2020 we were successful in increasing U.S. modern coin revenues by $1.0 million and $1.2 million respectively, through customer engagement efforts around older Mint programs. At this time, our expectation is that the high-volume Silver Eagle Mint program that typically occurs in our third fiscal quarter is on track to occur. However, other third quarter programs may be delayed. So far in the third quarter, we are continuing to see modern coin revenues at about comparable levels as the third quarter of fiscal 2020.
     
  Our China coin operation generated revenues of approximately $2.0 million and $3.6 million in the three and six months ended December 31, 2020, as compared to approximately $2.0 million and $3.3 million in the same pre-COVID periods of fiscal 2020. At December 31, 2020 we had a sizeable backlog of submissions for authentication and grading in China and therefore, we will continue to ramp up our China operations through adding local grading capacity, when possible. However, while the travel restrictions that prevent our U.S. coins experts from travelling to China are in effect, growth in China will continue to be hampered.

 

 18 
   

 

  Our Expos Long Beach trade shows scheduled to take place in the first and third quarters of fiscal 2021 have been cancelled due to COVID-19 concerns. As a result, we generated no Expos revenues in the six months ended December 31, 2020 as compared to $464,000 in the same period of fiscal 2020.
     
  Despite the uncertainties arising from COVID-19 discussed above, our cards and autographs business had a record backlog as of December 31, 2020 and continues to generate record customer submissions. We increased capacity through adding, primarily, operations personnel in both the first and second quarters of fiscal 2021, and we plan to continue increasing capacity in the second half of fiscal 2021.

 

As discussed above, our business operated at record levels during the first half of fiscal 2021. However, as discussed in the Risk Factors in the Fiscal 2020 10-K, the extent of continuing and future waves of COVID-19, could have a material adverse impact on the Company’s business, results of operations and financial condition in future periods.

 

Overview of the Operating Results for the Three and Six Months Ended December 31, 2020

 

The following table sets forth comparative financial data for the three and six months ended December 31, 2020 and 2019 (in thousands):

 

   Three Months Ended December 31,   Six Months Ended December 31, 
   2020   2019   2020   2019 
   Amount   % of Net Revenues   Amount   % of Net Revenues   Amount   % of Net Revenues   Amount   % of Net Revenues 
Net Revenues  $35,440    100.0%  $19,456    100.0%  $66,225    100.0%  $39,666    100.0%
Cost of Revenues   12,737    35.9%   8,533    43.9%   24,211    36.6%   16,634    41.9%
Gross Profit   22,703    64.1%   10,923    56.1%   42,014    63.4%   23,032    58.1%
Selling and marketing expenses   2,414    6.8%   2,489    12.8%   4,683    7.1%   5,122    12.9%
General & administrative expenses   10,284    29.1%   5,160    26.5%   19,517    29.4%   9,999    25.3%
Operating income   10,005    28.2%   3,274    16.8%   17,814    26.9%   7,911    19.9%
Interest and other income (expense), net   175    0.5%   4    -    193    0.3%   75    0.2%
Income before provision for income taxes   10,180    28.7%   3,278    16.8%   18,007    27.2%   7,986    20.1%
Provision for income taxes   2,787    7.8%   664    3.4%   4,652    7.0%   1,759    4.4%
Net income  $7,393    20.9%  $2,614    13.4%  $13,355    20.2%  $6,227    15.7%
                                         
Net income per diluted share  $0.81        $0.29        $1.47        $0.69      

 

 19 
   

 

Net revenues increased by $16.0 million, or 82%, to $35.4 million and by $26.6 million, or 67%, to $66.2 million in the three and six months ended December 31, 2020, respectively. These increased revenues were primarily attributable to increases of $15.0 million, or 185%, and $25.5 million, or 158%, in cards and autographs revenues, respectively, and increases of $0.9 million, or 8%, and $1.4 million, or 6%, in coin revenues, respectively. See Net Revenues below, for a more detailed discussion of the changes in revenues in this year’s three and six months periods.

 

Operating income increased to a quarterly record of $10.0 million and a first six months record of $17.8 million in the three and six months ended December 31, 2020, respectively, from $3.3 million and $7.9 million in the same respective periods of fiscal 2020, and represented operating margins of 28.2% and 26.9% in this year’s three and six months, respectively, as compared to 16.8% and 19.9% in last year’s three and six months.

 

The increased general and administrative expenses (“G&A”) of $5.1 million and $9.5 million in this year’s three and six months periods as compared to the same respective periods of the prior year included (i) increased professional fees incurred of $3.1 million in the second quarter and $5.3 million in the six months, in connection with the Tender Offer which was negotiated in this year’s second quarter, and the resolution of the, activist issue that occurred in this year’s first quarter, and (ii) increased non-cash stock based compensation expense of $1.5 million and $2.3 million in the three and six month periods. Those higher professional fees and non-cash stock-based compensation expense, in the aggregate, represented 13% and 12% of revenues in the three and six month periods, respectively.

 

These, as well as other factors affecting our operating results in the three and six months ended December 31, 2020, are described in more detail below. See “Factors that Can Affect Our Operating Results and Financial Position” and “Results of Operations for the Three and Six Months Ended December 31, 2020, as compared to the Three and Six Months Ended December 31, 2019”, below.

 

Factors That Can Affect our Operating Results and Financial Position

 

Factors That Can Affect our Revenues and Gross Profit Margins. Authentication and grading fees accounted for approximately 93% of our revenues in both the three and six months ended December 31, 2020. The amount of those fees and our gross profit margins are primarily driven by the volume and mix of trading cards and coins sales and purchase transactions by collectibles dealers and collectors, because our authentication and grading services generally facilitate sales and purchases of trading cards and coins by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit trading cards and coins to us for authentication and grading at those times when they are in the market to sell or buy trading cards, coins and the other collectibles, that we authenticate and grade. Currently, our cards and autographs business is experiencing a significant increase in demand for its services, such that authentication and grading fees for that business increased by approximately 160% in the first half of this year, representing a higher number of units authenticated and graded at a substantially higher average service fee (“ASP”) in response to the increased service demand. In addition, we continue to have a record backlog of card submissions awaiting authentication and grading, at December 31, 2020.

 

Our authentication and grading revenues and gross profit margins are also affected by (i) the volume and mix of authentication and grading submissions among trading cards and coins; (ii) in also the case of trading cards and coins, the turnaround times requested by our customers, because we charge higher fees for faster service times; and (iii) the volume and mix of authentication and grading submissions between vintage or “classic” trading cards and coins, and modern trading cards and coins, as vintage or classic collectibles generally are of significantly higher value than modern collectibles; and justify a higher average service fee. Furthermore, because a proportion of our costs of revenues are relatively fixed in nature in the short term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.

 

In addition, our coin authentication and grading revenues are impacted by the volume of modern coin submissions, which can be volatile, primarily in the U.S., depending on the timing and size of modern coin marketing programs by the United States Mint and by customers or dealers who specialize in sales of such coins. Our overseas revenues can fluctuate on a quarterly basis due to the number of authentication and grading events we conduct at our overseas operations on a quarterly basis. See Recent Developments: COVID-19 above.

 

 20 
   

  

Our revenues and gross profit margin can also be affected by the number of primarily coin authentication and grading submissions we receive at collectibles trade shows, where we provide on-site authentication and grading services to show attendees, because show attendees typically request higher priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. In addition, our cards and autographs business also provides on-site authentication and grading at one large national convention on an annual basis. For coins, the number of trade show submissions varies from period to period depending upon a number of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by dealer and collectors sentiment arising from short-term changes in the prices of gold that may occur around the time of shows, because short-term changes in gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows. See Recent Developments: COVID-19 above which discusses the impact of cancelled trade shows on our revenues, as a result of COVID-19.

 

Our top five customers accounted, in the aggregate, for approximately 7% of our total revenues in the three and six months ended December 31, 2020, as compared to 11% and 10% in the same periods of the prior year. As a result, the loss of those customers, or a significant decrease in the volume of authentication and grading submissions from them, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.

 

Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the number of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because collectibles are generally purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, and uncertainties regarding the strength of the economy in the United States, Western Europe and China, because conditions and uncertainties of this nature often lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; as well as an alternative to investments in government bonds and other treasury instruments; and (v) the performance and volatility of the trading cards and gold and other precious metals markets, which can affect the level of purchases and sales of collectibles, because investors and consumers will often increase their purchases of those collectibles if they believe that the market prices of those assets will increase. As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by increases in disposable income or the availability of lower cost borrowings and increases in market price for collectibles, on the one hand, or increases in inflation or in gold prices, economic uncertainties and declines in business and consumer confidence or a weakening of the U.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by lower market prices for collectibles, economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressures, or periods of stagnation or a downward trend in the market prices of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to other investments during periods of economic growth and growing consumer and business confidence and from stocks and other investments to gold during periods of economic uncertainties and decreases in disposable income and consumer and in business confidence.

 

Additionally, although it may appear to be counterintuitive, we believe that the COVID-19 pandemic has actually contributed to the substantial increases we have experienced in trading card submissions and revenues in the three and six months ended December 31, 2020, because sports enthusiasts and other collectors have had to spend considerably more time at home and have been unable to attend live sporting events as a result of the COVID-19 pandemic and that, , in turn, appears to have led to renewed interest in collecting and in the on-line buying and selling of sports and other cards. There is no assurance that the renewed interest in collecting and in the on-line buying and selling of sports and other cards will continue after the pandemic finally subsides.

 

Factors That Can Affect our Liquidity and Financial Position. A substantial number of our authentication and grading customers pay our authentication and grading fees when they submit their collectibles to us or prior to the shipment of the collectibles back to them. As a result, historically, we have been able to rely on internally generated cash to fund our continuing operations.

 

 21 
   

 

In addition to the operating performance of our businesses, and, in particular our trading cards / autographs and coins businesses, which accounted for approximately 98% of our revenues in the three and six months ended December 31, 2020, our overall financial position can also be affected by other factors, including the Company’s tax position and effective tax rate, the dividend policy adopted by the Board of Directors from time to time, the Company’s decisions to invest in capital expenditures that may, benefit the business through operational efficiencies over time, the acquisition of established and/or early stage businesses and capital raising activities or stock repurchases. Furthermore, our domestic financial position can be impacted by delays in repatriating cash balances to the United States from China, due to exchange control regulations in China.

 

As discussed in note 1 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, and in “Liquidity and Capital Resources” below, the Company continues to have a $15,000,000 two-year unsecured revolving credit line through March 2022.

 

We expect that internally generated cash flows, current cash and cash equivalent balances and borrowings under our Credit Line, if necessary, will be sufficient to fund our operations at least through the end of December 2021.

 

Critical Accounting Policies and Estimates

 

During the three and six months ended December 31, 2020 there were no changes in our critical accounting policies or estimates which are described in Item 7 of our Fiscal 2020 10-K. Readers of this Report are urged to read that section of the Fiscal 2020 10-K for a more complete understanding and detailed discussion of our critical accounting policies and estimates.

 

Leases

 

The Company accounts for leases, which consist primarily of office and operations facilities, in accordance with Accounting Standards Codification (“ASC”) 842 Accounting for Leases. We recognize lease obligations and corresponding right-of-use (ROU) assets for non-cancelable operating leases. Therefore, the Condensed Consolidated Balance Sheets at December 31, 2020, and June 30, 2020, included elsewhere in this Report, includes the liability to make lease payments (the lease liability) and a right-of-use asset, representing our right to use the underlying asset for the lease term. We do not recognize lease assets or liabilities for leases with a term of 12 months or less and recognize lease expenses for such leases on a straight-line basis over the lease term. See Note 9-Leases to the accompanying condensed consolidated financial statements for additional information, included elsewhere in this Report. As a result of COVID-19, we reviewed our lease obligations for impairment and potential excess space reserve requirements and concluded there were no impairments or charges, required to be recognized at December 31, 2020.

 

Revenue Recognition

 

The core principle of ASC 606, Revenue from Contracts with Customers, is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations are satisfied.

 

Our primary source of revenue is the authentication and grading of collectibles, which represented about 93% of our consolidated revenues in the six months ended December 31, 2020. Our other sources of revenues represent the balance of our revenues which are small and individually account for less than 5% of total revenues.

 

 22 
   

 

In accordance with ASC 606 we recognize revenue for our main revenue streams as follows:

 

Authentication and Grading Revenues: As the time it takes to authenticate and grade the collectible is short, we recognize revenue at the time of shipment (i.e. point of time) of the authenticated and graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our authentication and grading services and the shipment of the collectible back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sale of special coin inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to the customer. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend credit, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer. We provide a limited warranty covering the coins and trading cards that we authenticate and grade.

 

Collectors Club Revenues: These revenues represent membership fees paid by customers for annual memberships in our Collectors Club. Those membership fees entitle members to access our on-line and printed publications and, depending on their membership level, to receive vouchers for authentication and grading services during the membership period. We allocate revenue between the vouchers and the membership. We recognize revenue attributable to the authentication and grading vouchers consistent with our authentication and grading services above. The balance of the membership fees is recognized ratably over the life of the membership. Memberships are paid in advance of the membership period and prepaid memberships fees are classified as deferred revenue.

 

Certified Coin Exchange Subscription Revenues: We recognize subscription revenues related to our CCE exchange for certified coins, ratably over the relevant subscription period. Subscriptions are typically billed and paid on a monthly basis, although certain quarterly and annual subscriptions can be paid in advance. Prepaid subscriptions are classified as part of deferred revenue.

 

Expos Trade Show Revenue: We recognize fees earned from promoting, managing, and operating trade shows in the periods in which the shows take place. Trade show booth fees are typically paid to us in advance. Certain fees that are paid to conduct auctions at the show are paid to us at the end of the show. Prepaid show fees are classified as part of deferred revenue.

 

Advertising and Commission Revenues: Advertising revenues are recognized in the period when an advertisement is displayed in our publications or websites and customers typically have 30 day credit terms. Click-through commission revenues earned through our websites from third party affiliate programs are recognized in the period in which the commissions are earned, and such commissions are paid in the following month.

 

Product Sales: Product sales consist primarily of sales of collectibles coins that we have purchased pursuant to our coin authentication and grading warranty program. We recognize revenues from coin sales when the coins are shipped or delivered to customers or if the coins are sold through auction, when the auction settles. However, those sales are not considered to be the focus of nor an integral part of the Company’s ongoing revenue generating activities.

 

Contract Balances. As discussed above, the timing of revenue recognition can differ from the timing of invoicing to customers. Contract liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We refer to these contract liabilities as “Deferred Revenue” in the accompanying condensed consolidated balance sheets. During the three and six months ended December 31, 2020, we recognized $1,070,000 and $3,376,000 in revenue from the deferred revenue balance of $4,968,000 at June 30, 2020.

 

Shipping and Handling Costs

 

Shipping and handling costs incurred to process and return customer collectibles submitted to us for grading or authentication are recorded as costs of revenues, net of amounts received from customers, in accordance with the guidance for Principals versus Agents as set out in ASC 606.

 

Goodwill and other Long-Lived Assets

 

We test the carrying value of goodwill and other indefinite-lived intangible assets at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist. When testing for impairment, we consider qualitative factors, and when determined necessary, we proceed to a goodwill impairment test. When applying the impairment test, we apply a discounted cash flow model or an income approach in determining a fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. However, if the fair value is less than the carrying value, then goodwill impairment exists and an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. However, the charge recognized would not exceed the total amount of goodwill.

 

 23 
   

 

During the first quarter ended September 30, 2020, we completed the annual goodwill impairment assessment with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of their fair values over the respective carrying values in prior years, and any material changes in the estimated cash flows of the reporting units, and determined that it was more likely than not that the fair values of CCE and CoinFacts were greater than their respective carrying values, including goodwill, and therefore, it was not necessary to proceed to an impairment test.

 

Stock-Based Compensation Expense

 

We recognize stock-based compensation expense attributable to service-based equity grants over the service period based on the grant date fair values of the awards. For performance-based equity grants with financial performance goals, we begin recognizing compensation expense based on their respective grant date fair values when it becomes probable that we will achieve the financial performance goals.

 

Restricted Stock Awards: 2021, 2020 and 2019 Long Term Incentive Plans (“LTIPs”)

 

Retention Restricted Service Shares (“RSUs”)

 

To create incentives for the officers and other key employees (“LTIP Participants”) to remain in the Company’s service, RSUs were granted to them as follows:

 

Annual Grants. A total, net of forfeitures, of 16,864, 25,952 and 44,763 RSUs were granted in fiscal 2021, (through December 31, 2020), 2020 and 2019, respectively, with vesting in three annual installments on the last day of each of the fiscal years following the grants, with the vesting of each such installment contingent on the LTIP Participant remaining in the continuous service of the Company through the vesting date of that installment.

 

If a Participant’s continuous service with the Company ceases, for any reason whatsoever, including a termination of the Participant’s employment with or without cause, prior to any vesting date or dates, the then unvested RSUs will be forfeited. As discussed above, at the Effective time of the Merger, (1) any vesting conditions applicable to RSUs were automatically accelerated in full, and (2) such RSUs were cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such RSU award by (B) the Offer Price, less applicable taxes required to be withheld with respect to such payment.

 

Fiscal 2021, 2020 and 2019 Performance Restricted Shares (“PSUs”)

 

To create incentives for the LTIP Participants to focus their efforts on the achievement of increases in net cash flows (defined as net cash generated by the Company’s operating activities, minus capital expenditures and capitalized software costs), during the three years ending June 30, 2021, 2022 and 2023, (each a “Performance Period”), in fiscal 2021 (through December 31, 2020), 2020 and 2019, the Compensation Committee of the Board of Directors, granted 33,728, 51,905 and 89,542 PSUs (at maximum) respectively, to the LTIP Participants. Vesting of the PSUs was made dependent upon the achievement of net cash flow goals on an annual basis during each Performance Period, subject to possible downward or upward adjustment of 20% of the preliminary vested PSUs, based on a comparison of the Company’s annualized total shareholder return (“TSR”) for each Performance Period, to the annualized TSR of the Russell 2000 Index, for the same Performance Period. As the Compensation Committee establishes performance goals on an annual basis, threshold, target and maximum net cash flow goals were established for fiscal years 2021, 2020 and 2019 which give rise to a grant date for expense recognition purposes, assuming it is probable that the goals will be achieved. In the normal course, grant dates will be established for future year’s PSUs early in those fiscal years which will give rise to grant dates for expense recognition purposes.

 

 24 
   

 

For any of the PSUs to vest, an LTIP Participant must remain in the continuous service of the Company through June 30, 2021 for the fiscal 2019 PSUs, June 30, 2022 for the fiscal 2020 PSUs, and June 30, 2023 for fiscal 2021 PSUs and the threshold net cash flows goal must be achieved in at least one of the years, during the three year Performance Period. PSUs that fail to vest will be forfeited. As discussed above, at the Effective time of the Merger, (1) any vesting conditions applicable to PSUs were automatically accelerated in full, and (2) such PSUs were cancelled and the holder thereof became entitled to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of common stock subject to such PSU award by (B) the Offer Price, less applicable taxes required to be withheld with respect to such payment.

 

Non LTIP Stock Awards

 

In the first quarter of fiscal 2021, 10,812 fully vested shares were granted to certain management employees and to five new outside directors appointed during the quarter, for an expense of approximately $503,000 in the six months ended December 31, 2020.

 

Accelerated Vesting

 

In the three and six months ended December 31, 2020, the vesting of a total of 43,792 LTIP equity awards (of which 41,450 had been granted to the Company’s CEO, Mr. Orlando), was accelerated in order to mitigate against potential adverse tax consequences under Section 280(g) of the Tax Code. Stock-based compensation expense of approximately $617,000 was recognized for the acceleration of these equity awards in the three and six months ended December 31, 2020.

 

Total stock-based compensation expense recognized in the three and six months ended December 31, 2020 was $1,816,000 and $2,956,000, respectively, as compared to $341,000 and $605,000 in the three and six months ended December 31, 2019.

 

Results of Operations for the Three and Six Months Ended December 31, 2020 as compared to the Three and Six Months Ended December 31, 2019

 

Net Revenues

 

See Recent Developments: COVID-19 in conjunction with the following discussion.

 

Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including trading cards and autographs, coins, and related special inserts, if applicable. To a lesser extent, we generate collectibles related service revenues (which we refer to as “other related revenues”) from advertising and commissions earned on our websites and in printed publications and collectibles price guides; subscription/membership revenues related to our CCE (dealer-to-dealer Internet bid-ask market for certified coins), and Collectors Club memberships; and fees earned from promoting, managing and operating collectibles trade shows. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we have purchased under our coin authentication and grading warranty policy. We do not consider such product sales to be the focus or an integral part of our ongoing revenue generating activities.

 

 25 
   

 

The following tables set forth the information regarding our net revenues for the three and six months ended December 31, 2020 and 2019 (in thousands):

 

   Three Months Ended December 31, 
   2020   2019   Increase (Decrease) 
   Amount  

% of Net

Revenues

  Amount  

% of Net

Revenues

   Amount  

%

 
Authentication and grading fees  $32,877    92.8%  $17,766    91.3%  $15,111    85.1%
Other related revenues   2,563    7.2%   1,690    8.7%   873    51.7%
Total service revenues  $35,440    100.0%  $19,456    100.0%  $15,984    82.2%

 

   Six Months Ended December 31, 
   2020   2019   Increase (Decrease) 
   Amount  

% of Net

Revenues

   Amount  

% of Net

Revenues

   Amount  

%

 
Authentication and grading fees  $61,574    93.0%  $35,866    90.4%  $25,708    71.6%
Other related revenues   4,651    7.0%   3,800    9.6%   851    22.4%
Total service revenues  $66,225    100.0%  $39,666    100.0%  $26,559    67.0%

 

The following tables set forth certain information regarding the increases (decreases) in net revenues in our larger markets (which are inclusive of revenues from our other related services) in the three and six months ended December 31, 2020 and 2019 (in thousands):

 

   Three Months Ended December 31, 
   2020   2019   2020 vs. 2019 
       % of Net       % of Net   Increase (Decrease) 
   Amount   Revenues   Amount   Revenues   Amounts   % 
Cards / autographs (1)  $23,066    65.1%  $8,079    41.5%  $14,987    185.5%
Coins:                              
United States   8,734    24.7%   8,026    41.2%   708    8.8%
China   2,019    5.7%   1,957    10.1%   62    3.2%
France & Hong Kong   856    2.4%   717    3.7%   139    19.4%
Total Coins   11,609    32.8%   10,700    55.0%   909    8.5%
Other (2)   765    2.1%   677    3.5%   88    13.0%
   $35,440    100.0%  $19,456    100.0%  $15,984    82.2%

 

   Six Months Ended December 31, 
   2020   2019   2020 vs. 2019 
       % of Net       % of Net   Increase (Decrease) 
   Amount   Revenues   Amount   Revenues   Amounts   % 
Cards / autographs (1)  $41,678    62.9%  $16,172    40.8%  $25,506    157.7%
Coins:                              
United States   17,900    27.0%   16,717    42.1%   1,183    7.1%
China   3,589    5.4%   3,264    8.3%   325    10.0%
France & Hong Kong   1,570    2.4%   1,701    4.3%   (131)   (7.7%)
Total Coins   23,059    34.8%   21,682    54.7%   1,377    6.4%
Other (2)   1,488    2.3%   1,812    4.5%   (324)   (17.9%)
   $66,225    100.0%  $39,666    100.0%  $26,559    67.0%

 

 

  (1) Consists of revenues from our PSA trading card authentication and grading business and our PSA/DNA autograph authentication and grading business.
     
  (2) Includes the revenues generated by our CCE subscription business, Coinflation.com, Collectors.com, the Expos trade shows and sales of products.

 

In the three months ended December 31, 2020, our total revenues increased by $15,984,000, or 82.2% to a quarterly record of $35,440,000, from $19,456,000 in the three months ended December 31, 2019. That increase was attributable to increases of $15,111,000, or 85.1%, in authentication and grading fees and $873,000, or 51.7%, in other related services.

 

In the six months ended December 31, 2020, our total revenues increased by $26,559,000, or 67.0%, to a first half-year record of $66,225,000 from $39,666,000 in the six months ended December 31, 2019. That increase was attributable to an increase of $25,708,000, or 71.6%, in authentication and grading fees and $851,000, or 22.4%, in other related services.

 

 26 
   

 

Revenues from other related services included increased collectors club revenues (for both our cards / autographs and coin businesses) and higher third-party affiliate revenue programs, partially offset by a reduction in Expos trade show revenues, due to COVID-19.

 

Cards/Autographs Revenues

 

Revenues from our trading cards / autographs business showed accelerated growth over prior year periods in the three and six months ended December 31, 2020 and revenues increased in the second quarter by 185.5% to a quarterly record of $23,066,000, due to record demand for our services over recent quarters. We have been increasing capacity, which has allowed us to increase the number of cards authenticated and graded over prior year periods, which combined with significantly higher ASPs earned from customers requiring faster turnaround times for their cards / autographs, resulted in the significant revenues increase in both the second quarter and the first-half of the year. Our card / autographs business has achieved quarter-over-quarter revenue growth in 41 of our last 42 quarters, although earlier period increases were not at current year levels.

 

The increases in volume of trading cards and autographs we were able to authenticate and grade during the first six months of this year comprised a higher mix of higher priced top-tier services which was reflected in a higher ASP as compared to the prior year six months. Our remaining backlog at December 31, 2020 was comprised, to a greater extent, of submissions for lower priced services. Consequently, we expect that the rate of growth of trading cards / autographs revenues will slow somewhat over time; but revenues in this year’s second half will nevertheless substantially exceed the trading cards / autographs revenues generated in the second half of last year.

 

Coin Revenues

 

U.S. coin revenues increased by 8.8% and 7.1% in this year’s second quarter and six months, respectively, as compared to the same respective periods of last year, and primarily reflected (i) higher modern fees of $968,000, or 48.6%, and $1,240,000, or 26.2% respectively, due to higher number of modern coins authenticated and graded from recent releases of coins by the Mint, and (ii) higher revenues of $286,000 and $503,000, primarily reflecting a higher number of world coins authenticated and graded in the current year periods in the U.S. Those increases were partially offset by lower coin show revenues of $395,000, or 29.6%, and $614,000, or 20.3%, respectively, due to the effects of COVID-19, as discussed above under the Recent Developments: COVID-19 and lower vintage coin revenues of $201,000 in this year’s second quarter, due to the absence of a large customer collection that was authenticated and graded in last year’s second quarter.

 

Our China operation continued to generate improved revenues, despite the impact of COVID-19 on the three and six months ended December 31, 2020. We generated revenues of about the same level as the second quarter of fiscal 2020, which was prior to COVID-19. In the current year periods, we added local authentication and grading capacity in China to help offset the effect of travel restrictions that continue to prevent our U.S. coin experts from travelling to China in support of authentication and grading events.

 

Revenue generation at our Hong Kong and France offices continued to suffer in the current year periods, due to the international travel restrictions. As a result, all coins submissions comprising the Hong Kong and France revenues need to be authenticated and graded in the U.S. and returned to those local offices, which delays turnaround times to customers and revenue generation at those offices.

 

Our cards / autographs and coin authentication and grading revenues represented approximately 98% of total revenues in the current quarter and reflects the continued importance of those two businesses to our overall financial performance.

 

For the reasons discussed above under “Factors That Can Affect our Revenues and Gross Profit Margin”, and “Impact of Economic Conditions on our Financial Performance”, the level of coin revenues can be volatile.

 

With respect to our cards and autographs business, we plan on continuing to increase mainly operations and grading personnel capacity to address the continued record backlog in that business, and we will further utilize the additional space we began leasing in October 2020, in support of the growth of the business.

 

As previously disclosed, our third fiscal quarter ending March 31, 2021, is typically our seasonally strongest quarter of the year for coins in the United States due to the release of Gold and Silver Eagles by the Mint that occur in that quarter, and we are hopeful that this will continue this year’s third quarter. However, COVID-19 may adversely affect Mint production. See Recent Developments: COVID-19 above.

 

 27 
   

  

With respect to China, we will continue to focus on increasing local capacity to offset the travel restrictions discussed above which we expect will facilitate revenue growth over time. In addition, when travel restrictions are lifted, we will resume sending our U.S. experts to support that business.

 

Gross Profit

 

Gross profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percent of net revenues. The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense and occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of generating our non-grading related services revenues and the costs of product revenues, which represent the carrying value of the inventory of products (primarily collectible coins) that we sold and any inventory related reserves, considered necessary.

 

Set forth below is information regarding our gross profit in the three and six months ended December 31, 2020 and 2019 (in thousands):

 

   Three Months Ended December 31,   Six Months Ended December 31, 
   2020   2019   2020   2019 
  

Amount

  

% of

Revenues

  

Amount

  

% of

Revenues

  

Amounts

  

% of

Revenues

  

Amounts

  

% of

Revenues

 
Gross profit  $22,703    64.1%  $10,923    56.1%  $42,014    63.4%  $23,032    58.1%

 

As indicated in the above table, our gross profit margin was 64.1% and 63.4%, respectively, for the three and six months ended December 31, 2020 as compared to 56.1% and 58.1% in the same periods of the prior year. The higher gross profit in the current year periods was, primarily, due to the higher ASP earned in our cards and autographs business, resulting from customers paying higher fees to obtain faster turnaround times of their trading card submissions and a higher number of cards authenticated and graded in the current year periods, due to increased capacity. As discussed in prior filings, there can be variability in the gross profit margin due to the mix of revenues within our businesses, and seasonality. During the three years ended June 30, 2020, our quarterly gross profit margins varied between 53% and 62%.

 

Selling and Marketing Expenses

 

Selling and marketing expenses include advertising and promotions costs, trade-show related expenses, customer service personnel costs, business development incentives, depreciation and outside services. Set forth below is information regarding our selling and marketing expenses in the three and six months ended December 31, 2020 and 2019 (in thousands):

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2020   2019   2020   2019 
Selling and marketing expenses  $2,414   $2,489   $4,683   $5,122 
Percent of net revenue   6.8%   12.8%   7.1%   12.9%

 

As indicated in the above table, selling and marketing expenses decreased to 6.8% and 7.1% of net revenues in the three and six months ended December 31, 2020, respectively, as compared to 12.8% and 12.9% in the same periods of the prior year. We benefited from having a record backlog in our cards / autographs business which did not require investment in sales and marketing programs. In absolute dollars, selling and marketing expenses were substantially unchanged in this year’s second quarter and decreased by $439,000 in this year’s six months ended December 31, 2020, primarily due to the cancellation of trade shows as a consequence of COVID-19. Those cost savings were partially offset by higher business development and customer service personnel costs incurred, due to the growth of our cards and autographs business.

 

 28 
   

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses are comprised primarily of compensation paid to general and administrative personnel, including executive management, finance and accounting and information technology personnel, non-cash stock-based compensation expense, facilities management costs, depreciation, amortization and other miscellaneous expenses. Set forth below is information regarding our G&A expenses in the three and six months ended December 31, 2020 and 2019, (in thousands):

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2020   2019   2020   2019 
General and administrative expenses  $10,284   $5,160   $19,517   $9,999 
Percent of net revenue   29.1%   26.5%   29.4%   25.3%

 

As indicated in the above table, G&A expenses increased to 29.1% and 29.4% of revenues in the three and six months ended December 31, 2020, respectively, as compared to 26.5% and 25.3% in the same periods of the prior year. In absolute dollars, G&A expenses increased by $5,124,000 in this year’s second quarter and by $9,518,000 in the six months ended December 31, 2020 as compared to same periods of the prior year and primarily included (i) higher professional fees of $3,071,000 and $5,307,000 in the three and six months ended December 31, 2020, respectively, incurred in connection with the Tender Offer which was negotiated in this year’s second quarter and the resolution of the activist issue in this year’s first quarter and (ii) higher non-cash stock based compensation costs of $1,463,000 and $2,349,000, respectively, in the three and six months ended December 31, 2020 (see below).

 

Stock-Based Compensation

 

As discussed in Note 1, to the Company’s condensed consolidated financial statements, included elsewhere in this report, and Critical Accounting Policies and Estimates: Stock-Based Compensation Expense above, the Company recognized stock-based compensation expense as follows (in thousands):

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
Included In:  2020   2019   2020   2019 
Selling and marketing expenses  $24   $12   $31   $29 
General and administrative expenses   1,792    329    2,925    576 
   $1,816   $341   $2,956   $605 

 

The increases in non-cash stock based compensation expense to $1,816,000 and $2,956,000 in the three and six months ended December 31, 2020 as compared to the $341,000 and $605,000 in the three and six months ended December 31, 2019, were primarily attributable to (i) the grant of fully vested shares, with grant date fair values of $503,000 to certain management employees and five new outside directors during the first quarter and (ii) increased expense recognized under the Company’s multi-year LTIPs and (iii) approximately $617,000 of expense attributable to the accelerated vesting of shares that occurred in December 2020, in connection with the Tender Offer.

 

The following table sets forth unrecognized non-cash stock-based compensation expense totaling $3,742,000 related to unvested stock-based equity awards outstanding at December 31, 2020, which represents the expense currently expected to be recognized through June 30, 2023, on the assumption that the holders of the equity awards will remain in the Company’s service through that date. The amounts in the table do not include the costs of (i) possible grants of additional stock-based compensation awards in the future, (ii) PSUs granted in fiscal 2021 and 2020, for which goals are to be established in fiscal 2022 and 2023 and (iii) the effect of the change of control that will occur if the Tender Offer is consummated, as discussed in under Recent Developments: Tender Offer above.

 

Fiscal Year Ending June 30, 

Amount

 (in thousands)

 
2021 (remaining 6 months)  $2,050 
2022   1,289 
2023   403 
   $3,742 

 

 29 
   

 

Income Tax Expense

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2020   2019   2020   2019 
   (In Thousands) 
Provision for income taxes  $2,787   $664   $4,652   $1,759 

 

The income tax provisions in the three and six months ended December 31, 2020 and 2019, were determined based on estimated annual effective tax rates (“ETR”) of approximately 27%, and 26%, respectively, as compared to 20% and 22% in the same periods of the prior year. All periods were adjusted for excess tax benefits or deficiencies. The ETRs in the three and six months ended December 31, 2020, reflect limitations on the deductibility of (i) Tender Offer transaction costs, that were incurred in this year’s second quarter and (ii) compensation costs in accordance with Section 162(m) of the Federal Tax Code.

 

Liquidity and Capital Resources

 

Cash and Cash Equivalent Balances

 

Historically, we have been able to rely on internally generated funds, rather than borrowings, as our primary source of funds to support our operations, because many of our authentication and grading customers pay our fees at the time they submit their collectibles to us for authentication and grading or prior to the shipment of their collectibles back to them. In addition, as discussed below, we have borrowings of $1.3 million at December 31, 2020 under our Term Loan and we have $15 million of availability, but no borrowings, under our Revolving Line of Credit.

 

At December 31, 2020, we had cash and cash equivalents of approximately $42,646,000, as compared to cash and cash equivalents of $28,640,000 at June 30, 2020.

 

Cash Flows

 

Cash Provided by Operating Activities. During the six months ended December 31, 2020 and 2019, net cash provided by continuing operating activities was $22,817,000 and $7,917,000, respectively. The increase in cash provided by operating activities in the six months ended December 31, 2020, reflects the significantly higher operating results of our businesses in that period, as adjusted for non-cash expenses and changes in working capital. The higher level of accounts payable and accrued expenses at December 31, 2020 as compared to June 30, 2020, reflects approximately $3.0 million of accrued professional fees incurred in connection with the Tender Offer. In addition, the increase in deferred revenues of $2.6 million at December 31, 2020 as compared to June 30, 2020, reflects higher Collector Club memberships, resulting from an increase in the number of Collectors Club members and higher customer advance payments for services and subscriptions.

 

Cash used in Investing Activities. Investing activities used cash of $3,288,000 and $1,424,000 in the six months ended December 31, 2020 and 2019, respectively. In the six months ended December 31, 2020, we used $2,570,000 for capital expenditures (comprised IT and infrastructure costs incurred due to the addition of operations personnel to increase capacity, combined with on-going tooling requirements to support the growth of the business) and $718,000 for capitalized software costs. In the six months ended December 31, 2019, we used $803,000 for capital expenditures and $621,000 for capitalized software costs.

 

Cash used in Financing Activities. In the six months ended December 31, 2020 and 2019, financing activities used net cash of $5,523,000 and $3,529,000, respectively. The cash dividends paid to stockholders were $3,169,000 in six months ended December 31, 2020, as compared to $3,154,000 in the six months ended December 31, 2019. In both six months periods, we repaid $375,000 under our Term Loan (see “Term Loan” below) and in the six months ended December 31, 2020, we used cash of $1,979,000 to satisfy tax withholdings for employee vested awards under our equity incentive programs.

 

 30 
   

 

Outstanding Financial Obligations

 

Lease Obligations

 

The Company has various operating lease commitments for facilities and equipment some of which contain renewal options. On February 3, 2017, the Company, as tenant, entered into a triple net lease pursuant to which the Company is leasing approximately 62,755 rentable square feet space, through September 2028, for its operations and headquarters facility in Santa Ana, California. On October 1, 2020, the Company signed an amendment to this lease to increase the rentable square feet by 62,870, to a total of 125,625 square feet of space occupied. As of December 31, 2020, the remaining aggregate minimum obligations over the term of the expanded lease was approximately $18.2 million.

 

We also lease smaller offices for our overseas operations including a five year lease for our Shanghai office that commenced in November 2017, with aggregate minimum obligations over the term of the lease of approximately $3.0 million and a three year lease for our offices in Hong Kong, which commenced in July 2018, with aggregate minimum obligations over the term of that lease of approximately $625,000.

 

At December 31, 2020, future minimum lease payments under the lease agreements associated with our operations were as follows (in thousands):

 

Year Ending June 30,

  Gross Amount 
2021 (remaining 6 months)  $1,287 
2022   2,262 
2023   1,680 
2024   1,798 
2025   2,940 
Thereafter   10,155 
   $20,122 

 

Term Loan. As previously reported, on September 15, 2017 the Company obtained a five-year, $3,500,000 unsecured term loan. In October 2018, the Company began repaying the then term loan balance of $3,000,000 in 48 equal monthly principal payments of $62,500, or $750,000, on an annual basis, through September 2022. There are no prepayment penalties on loan repayments.

 

The agreement governing the term loan contains two financial covenants, which require the Company to maintain (a) a funded debt coverage ratio and (b) a debt service coverage ratio, respectively. The loan agreement also contains certain other covenants typical for this type of loan, including a covenant which provides that, without the lender’s consent, the Company may not incur additional indebtedness for borrowed money, except for (i) borrowings under the Company’s revolving credit line, (ii) purchase money indebtedness and (iii) capitalized lease obligations. The Company was in compliance with those loan covenants at December 31, 2020.

 

At December 31, 2020, the Company had $1,313,000 of outstanding borrowings under this Term Loan of which $750,000 is classified as a current liability and $563,000 is classified as a long-term liability in the condensed consolidated balance sheet at December 31, 2020, included elsewhere in this Report.

 

Revolving Credit Line. On March 10, 2020 the Company amended and increased its $10 million unsecured revolving credit line (the “Credit Line”) to $15 million and extended the term for two years through March 2022. The Company is entitled to obtain borrowings under the Credit Line at such times and in amounts as it may request, as supported by an EBITDA (earnings before interest, taxes, depreciation and amortization) calculation for the last four quarters, provided that the maximum principal amount of the borrowings that may be outstanding at any one time under the Credit Line may not exceed $15 million and each year there must be a period of 30 consecutive days during which no borrowings are outstanding. The Company also may, at any time or from time to time and at its option, repay outstanding borrowings, in whole or in part, and may reborrow amounts so repaid at such times and in such amounts as it deems appropriate.

 

Credit Line borrowings bear interest, at the Company’s option, either at LIBOR plus 2.25% or at 0.25% below the highest prime lending rate published from time to time by the Wall Street Journal. The Company is required to pay a quarterly unused commitment fee of 0.0625% of the amount by which (if any) that the average of the borrowings outstanding under the Credit Line in any calendar quarter is less than $6 million.

 

 31 
   

 

The Credit Line agreement contains a financial covenant that requires the Company to maintain a funded debt coverage ratio, similar to the debt coverage ratio that is applicable to the term loan (see above) and certain other covenants typical for this type of credit. At December 31, 2020 the Company was in compliance with those covenants. Availability to borrow under the line of credit was $15,000,000 at December 31, 2020 as there were no borrowings outstanding under the line of credit as of that date.

 

Dividends. Our dividend policy during the period called for us to pay quarterly cash dividends of $0.175 per share of common stock to our stockholders, for an expected total annual cash dividend of $0.70 per common share.

 

The declaration of cash dividends in the future, pursuant to our current dividend policy, is subject to determination each quarter by the Board of Directors based on a number of factors, including the Company’s financial performance, its available cash resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company. For these reasons, as well as others, there can be no assurance that the Board of Directors will not decide to reduce the amount, or suspend or discontinue the payment, of cash dividends in the future.

 

Future Uses of Cash.

 

We plan to use our cash resources, consisting of available cash and cash equivalent balances, internally generated cash flows, and borrowings under our Credit Line (i) to introduce new collectibles related services and initiatives for our existing and new customers (ii) to fund the expansion of our business (domestically and internationally); (iii) to fund capital expenditures and working capital requirements; (iv) to fund possible start-ups or acquisitions of businesses (v) to fund repayments under the term loan; (vi) to fund the payment of cash dividends; and (vii) for other general corporate purposes.

 

Although we have no current plans to do so, we also may seek additional borrowings and we may issue additional shares of our stock to finance the growth and international expansion of our businesses. However, there is no assurance that we would be able to raise additional borrowings or capital on terms acceptable to us, if at all.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. Subsequent to the issuance of ASU 2016-13, the FASB clarified the guidance through several ASUs. The collective new guidance (ASC 326) generally requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts. ASC 326 is effective for annual and interim fiscal reporting periods beginning after December 15, 2022, with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is continuing to evaluate the expected impact of this ASC 326 but does not expect it to have a material impact on its consolidated financial statements upon adoption.

 

 32 
   

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk and other relevant market rate or price risks.

 

Due to the cash and cash equivalent balances that we maintain, we are exposed to risk of changes in short-term interest rates. At December 31, 2020, we had $42,646,000 in cash and cash equivalents, of which, $37,460,000 was invested in money market accounts, and the balance of $5,186,000 (which is inclusive of cash in overseas bank accounts) was held in non-interest bearing bank accounts. Changes in short-term interest rates could result in changes in the amount of income we are able to generate on available cash. However, due to prevailing lower interest rates, any adverse impact on our operating results from reductions in interest rates is not expected to be material.

 

We do not engage in any activities that would expose us to significant foreign currency exchange rate risk or commodity price risks. When considered appropriate, we repatriate excess cash from foreign operations. Overseas cash balances were approximately $3,101,000 at December 31, 2020, of which $2,163,000 was in China. Due to the evolving exchange control rules in China, delays can be experienced in transferring funds from China to Hong Kong or the United States.

 

Item 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of December 31, 2020, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020, that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 33 
   

 

PART II – OTHER INFORMATION

 

ITEM 1A. Risk Factors

 

There have been no material changes in the risk factors previously disclosed in Item 1A of Part 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 that we filed with the SEC on August 26, 2020; except as follows:

 

The increase in the rate of growth of our revenues from the authentication and grading of trading cards and autographs experienced in the six months ended December 31, 2020 is likely to slow over time. The lifting of restrictions on outdoor activities imposed in response to the COVID-19 pandemic could also lead to a decline in trading cards and autographs revenues in the longer term.

 

The substantial increase in the rate of growth of the revenues we generated from the authentication and grading of sports and other cards and autographs during the first half of fiscal 2021 may decline in the future. As we have reported, that record was achieved primarily as a result of (i) record demand for the authentication and grading of sports and other cards and autographs, which we believe is at least attributable in part to the COVID-19 lockdown and restrictions on attending sporting events, which have led sports enthusiasts and card collectors to increase their online purchases and sales and trading of sports and other cards, (ii) a substantial increase in ASPs earned, because more customers were willing to pay higher prices for top-tier services, including faster authentication and grading turnaround times, and (iii) an increase in volume of trading cards and autographs we were able to authenticate and grade during the six months ended December 31, 2020. However, the remaining backlog of trading cards and autograph submissions at December 31, 2020 was comprised, to a greater extent, of submissions for lower priced services. In addition, the prices that customers are prepared to pay for our card grading and authentication services are driven by the values realized (or realizable) in the collectibles market, and we have no control over those values such that if values realized decline, then collectors may not submit cards for authentication and grading, or submissions may qualify for lower-tier services, with resulting reductions to us in average selling price, gross profit margins and operating income. Therefore, we expect that the rate of growth of trading cards / autographs revenues will slow somewhat over time. Also, when restrictions on outdoor activity imposed in response to the COVID-19 pandemic are lifted and sports fans are again able to attend sporting events, there is no assurance that demand for our cards / autographs authentication and grading services experienced during the first half of fiscal 2021 will not decrease and cause a decline in those revenues over the longer term.

 

ITEM 6. Exhibits

  

Exhibit 31.1   Certification of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
     
Exhibit 31.2   Certification of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
     
Exhibit 32.1**   Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002
     
Exhibit 32.2**   Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002
     
Exhibit 101.INS   XBRL Instance Document
     
Exhibit 101.SCH   XBRL Taxonomy Extension Schema Document
     
Exhibit 101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
Exhibit 101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
Exhibit 101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
     
Exhibit 101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

* Management contract or compensatory plan or arrangement.

** Furnished, but not filed, herewith.

 

 34 
   

 

SIGNATURES

 

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    COLLECTORS UNIVERSE, INC.
       
Date: February 12, 2021 By: /s/ JOSEPH J. ORLANDO
      Joseph J. Orlando
      President and Chief Executive Officer

 

    COLLECTORS UNIVERSE, INC.
       
Date: February 12, 2021 By: /s/ JOSEPH J. WALLACE
      Joseph J. Wallace
      Senior Vice President and Chief Financial Officer

 

 S-1 
   

 

INDEX TO EXHIBITS

 

Exhibit No.   Description
     
Exhibit 31.1   Certification of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
     
Exhibit 31.2   Certification of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
     
Exhibit 32.1**   Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002
     
Exhibit 32.2**   Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002
     
Exhibit 101.INS   XBRL Instance Document
     
Exhibit 101.SCH   XBRL Taxonomy Extension Schema Document
     
Exhibit 101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
Exhibit 101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
Exhibit 101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
     
Exhibit 101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

* Management contract or compensatory plan or arrangement.

** Furnished, but not filed, herewith

 

 E-1