ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Consolidated Financial Data” and our Consolidated Financial Statements and related notes, included elsewhere in Part II of this Annual Report. This discussion also should be read in conjunction with the information in Item IA of Part I of this Report, entitled “Risk Factors,” which contains information about certain risks and uncertainties that can affect our business and our financial performance in the future.
Introduction and Overview
Our Business
Collectors Universe, Inc. (“we”, “us” “management” “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 by our customers for our authentication and grading services. To a much lesser extent, we generate revenues from other related services which consist of: (i) the sale of advertising and commissions earned on our websites
;
(ii) the sale of printed publications, collectibles price guides and advertising in our publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins and to our CoinFacts website, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from sales of our collectibles inventory, which is primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.
Factors That Can Affect Operating Results and our Financial Position
Factors
T
hat
C
an Affect our Revenue
. Our authentication and grading fees accounted for approximately 86% of our total net revenues in the year ended June 30, 2016. The amounts of those fees are primarily driven by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our collectibles authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and other high-value collectibles.
The amounts of our authentication and grading revenues are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards, on the one hand, and other collectibles on the other hand; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards, on the one hand, and modern coins and trading cards, on the other hand, because dealers generally request faster turnaround times for vintage or classic coins and trading cards than they do for modern submissions, as vintage or classic collectibles are of significantly higher value and are more saleable by dealers than modern coins and trading cards.
In addition, our coin authentication and grading revenues are impacted by the number of modern coin submissions and the related average service fee earned on those submissions, both of which can be volatile and depend on the timing and popularity of modern coin programs released by the United States Mint and by customers or dealers who specialize in sales of such coins. As previously discussed in our Quarterly Report on Form 10-Q filed with the SEC for the three months ended December 31, 2015 and March 31, 2016, respectively, effective January 1, 2016, the Company implemented more competitive and focused marketing programs for our modern coin business, which we believe, contributed to the increase in the submission of modern coins in the third and fourth quarters of fiscal 2016.
Our revenues are also affected by the volume of coin authentication and grading submissions we receive at collectibles trade shows where we provide on-site authentication and grading services to show attendees, because they typically request higher-priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. The level of trade show submissions varies from period to period depending upon a number of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by short-term changes in the prices of gold should they occur around the time of the shows, because gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows.
Furthermore, our revenues can also fluctuate due to the number of authentication and grading events we conduct at our overseas operations on a quarterly basis and the fact that those overseas businesses are less mature than our US coin business.
Five of our customers accounted, in the aggregate, for approximately 16%
of our total net revenues in the year ended June 30, 2016. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.
The following table provides information regarding the respective numbers of coins, trading cards and autographs that we authenticated or graded in the fiscal years ended June 30, 2016, 2015, and 2014:
|
|
Units Processed
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Coins
|
|
|
2,371,800
|
|
|
|
58
|
%
|
|
|
2,067,300
|
|
|
|
55
|
%
|
|
|
2,075,300
|
|
|
|
55
|
%
|
Trading cards
|
|
|
1,278,900
|
|
|
|
31
|
%
|
|
|
1,269,800
|
|
|
|
34
|
%
|
|
|
1,259,100
|
|
|
|
33
|
%
|
Autographs
|
|
|
448,000
|
|
|
|
11
|
%
|
|
|
434,900
|
|
|
|
11
|
%
|
|
|
431,800
|
|
|
|
12
|
%
|
Total
|
|
|
4,098,700
|
|
|
|
100
|
%
|
|
|
3,772,000
|
|
|
|
100
|
%
|
|
|
3,766,200
|
|
|
|
100
|
%
|
The following table sets forth the estimated values at which our customers insured the coins, trading cards, and autographs that they submitted to us for grading or authentication:
|
|
Declared Values (000’s)
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Coins
|
|
$
|
1,935,400
|
|
|
|
91
|
%
|
|
$
|
2,093,900
|
|
|
|
93
|
%
|
|
$
|
1,887,000
|
|
|
|
93
|
%
|
Trading cards
|
|
|
177,800
|
|
|
|
8
|
%
|
|
|
109,800
|
|
|
|
5
|
%
|
|
|
99,000
|
|
|
|
5
|
%
|
Autographs
|
|
|
25,700
|
|
|
|
1
|
%
|
|
|
35,800
|
|
|
|
2
|
%
|
|
|
38,000
|
|
|
|
2
|
%
|
Total
|
|
$
|
2,138,900
|
|
|
|
100
|
%
|
|
$
|
2,239,500
|
|
|
|
100
|
%
|
|
$
|
2,024,000
|
|
|
|
100
|
%
|
______________________
Factors Affecting our
Gross Profit Margins
. The gross profit margins we earn on collectibles authentication and grading submissions are impacted by many of the same factors that impact our revenues, as the average service fee and the resulting gross profit margin earned is affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards, on the one hand, and modern coins and trading cards, on the other hand, because dealers generally request faster turnaround times for vintage or classic coins and trading cards than they do for modern submissions. In addition, because a significant proportion of our costs of sales are fixed in nature in the short-term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period. Furthermore, the level of other related services in any period can impact our overall gross profit margin.
Impact of Economic Conditions on our Financial Performance.
As discussed above, our operating results are affected by the volume of collectibles transactions by dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, and more recently worries about sovereign debt obligations and credit ratings in the United States and Europe, because conditions 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; and as an alternative to investments in government bonds and other treasury instruments; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of gold coins, as well as other hard assets if they believe that the market prices of those assets will increase. As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by increases in disposable income and the availability of lower cost borrowings, on the one hand, or increases in inflation or in gold prices, economic uncertainties and declines in business and consumer confidence or a weakening of the U.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressures, or periods of stagnation or a downward trend in the market prices of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to 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 business confidence.
Fact
ors That Can Affect our
Liquidity and
Financial Position
. A substantial number of our authentication and grading customers pay our authentication and grading fees when they submit their collectibles to us for authentication and grading or prior to the shipment of the collectible back to them. As a result, historically, we have been able to rely on internally generated cash and have never incurred borrowings to fund our continuing operations. We currently expect that internally generated cash flows and current cash and cash equivalent balances will be sufficient to fund our continuing operations at least through the end of fiscal 2017.
In addition to the day-to-day operating performance of our business, our overall financial position can also be affected by the dividend policy adopted by the Board of Directors, the Company’s decisions to invest in and to fund the acquisition of established and/or early stage businesses and any capital raising activities, stock repurchases or the exercise of stock options by employees or our non-employee directors. In addition, our financial position is impacted by the Company’s tax position. As previously disclosed, the Company has fully utilized all of its federal net operating loss carry forwards and other tax attributes, and therefore we pay federal income taxes on taxable income on an annual basis. The Company continues to have net operating losses and other tax credits available for state income tax purposes in California, which should allow us to pay taxes at minimum levels in California for the foreseeable future.
Trends in our Businesses
Our overall financial performance is largely dependent on the performance of our coin authentication and grading business which can be impacted by volatility in that business. In fiscal years 2016, 2015 and 2014, revenues from coin authentication and grading and related services represented 66%, 68%, and 69%, respectively, of our total consolidated revenues. Our quarterly results can be significantly impacted by the timing of revenues from modern coin programs that are dependent of new issuances of coins from the US Mint. In addition, the recent expansion into overseas markets to provide coin authentication and grading services, may increase our dependence on our coin business, and make our financial performance more vulnerable to volatility in the coin markets. See “Results of Operations:
Net Revenues”
below.
Overview of Fiscal 2016 Operating Results
The following table sets forth comparative financial data for the years ended June 30, 2016 and 2015:
|
|
Year Ended June 30, 2016
|
|
|
Year Ended June 30, 2015
|
|
|
|
Amount
|
|
|
Percent of
Revenues
|
|
|
Amount
|
|
|
Percent of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
60,954
|
|
|
|
100.0
|
%
|
|
$
|
61,684
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
22,902
|
|
|
|
37.6
|
%
|
|
|
23,053
|
|
|
|
37.4
|
%
|
Gross profit
|
|
|
38,052
|
|
|
|
62.4
|
%
|
|
|
38,631
|
|
|
|
62.6
|
%
|
Selling and marketing expenses
|
|
|
8,635
|
|
|
|
14.2
|
%
|
|
|
8,896
|
|
|
|
14.4
|
%
|
General and administrative expenses
|
|
|
17,047
|
|
|
|
27.9
|
%
|
|
|
17,627
|
|
|
|
28.6
|
%
|
Operating income
|
|
|
12,370
|
|
|
|
20.3
|
%
|
|
|
12,108
|
|
|
|
19.6
|
%
|
Interest income, net
|
|
|
22
|
|
|
|
-
|
|
|
|
38
|
|
|
|
0.1
|
%
|
Other expense
|
|
|
(73
|
)
|
|
|
(0.01
|
)%
|
|
|
(80
|
)
|
|
|
(0.1
|
%)
|
Income before provision for income taxes
|
|
|
12,319
|
|
|
|
20.2
|
%
|
|
|
12,066
|
|
|
|
19.6
|
%
|
Provision for income taxes
|
|
|
4,720
|
|
|
|
7.7
|
%
|
|
|
4,682
|
|
|
|
7.6
|
%
|
Income from continuing operations
|
|
|
7,599
|
|
|
|
12.5
|
%
|
|
|
7,384
|
|
|
|
12.0
|
%
|
Income from discontinued operations
|
|
|
41
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
Net income
|
|
$
|
7,640
|
|
|
|
12.5
|
%
|
|
$
|
7,401
|
|
|
|
12.0
|
%
|
Net income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.89
|
|
|
|
|
|
|
$
|
0.87
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Net income
|
|
$
|
0.89
|
|
|
|
|
|
|
$
|
0.87
|
|
|
|
|
|
Service revenues in fiscal 2016 were essentially flat at $60.9 million, as compared to $61.6 million in fiscal 2015, representing a 1% decline in services revenues for the year. That decline, reflected decreased service revenues of approximately $3.4 million from the Baseball Hall of Fame and 50
th
Anniversary Kennedy modern coin programs in fiscal 2016 as compared to fiscal 2015, which was substantially offset by increased revenues generated in other areas of the business, including higher coin show revenues of approximately $1.2 million, coin world revenues (including China) of $0.8 million and cards and autograph revenues of $1.0 million. See
Results of Operations
: Revenue
below which discusses the changes in revenues in more detail.
Operating income increased to $12.4 million in fiscal 2016 from $12.1 million in fiscal 2015. Operating income in fiscal 2016 benefited from (i) lower non-cash stock based compensation expense of $1.6 million due to lower LTIP expense and (ii) lower warranty expense of $0.7 million due to a reduction in the company’s warranty reserves in in each case as compared to fiscal 2015. Partially offsetting those benefits, we incurred increased losses of $1.3 million in Collectors.com in fiscal 2016 as compared to fiscal 2015.
Critical Accounting Policies and Estimates
General.
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record our assets at the lower of cost, net realizable value or fair value. In determining the fair value of certain of our assets, principally accounts receivable, inventories, goodwill, capitalized software and intangible assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or trends that could impact, e.g., our ability to fully collect our accounts receivable or realize the value of our inventories in future periods. Those judgments, estimates, and assumptions are based on current information available to us at that time. Many of these conditions, trends and circumstances on which our judgments or estimates are based; however, are outside of our control and, if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates. Changes in such estimates may require that we reduce the carrying values of the affected assets on our balance sheet (which are commonly referred to as “write-downs” of the assets involved).
It is our practice to establish reserves, allowances, charges or losses to record such downward adjustments or write-downs in the carrying value of assets, such as, for example, accounts receivable and inventory. Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the period when those reserves, allowances, charges or losses are established or increased to take account of changed conditions or events. As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations.
The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments and judgments about the effects and duration of events or changes in circumstances. For example, it is difficult to predict whether events or conditions, such as increases in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for their full effects to be recognized. Therefore, management makes such estimates based upon the information available at that time and reevaluates and adjusts its reserves, allowances, charges or losses for potential write-downs on a quarterly basis.
In addition, we also make estimates with respect to the (i) valuation of stock-based compensation awards and the timing and recognition of related stock-based compensation expense and in particular, the timing and recognition of stock-based compensation expense associated with the Company’s Long-Term Incentive Plan, (ii) the amount and adequacy of warranty reserves, (iii) the provision for income taxes and related valuation allowances, (iv) the carrying value of capitalized software costs and (v) the impairment of goodwill and other intangible assets.
In making our estimates and assumptions, we follow GAAP in order to make fair and consistent estimates of the fair value of assets and to establish adequate reserves, allowances, charges or losses for possible write-downs in the carrying values of our assets.
Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.
Revenue Recognition Policies
. We generally record revenue at the time of shipment of the authenticated and graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our grading and authentication services and the shipment of the collectible or other high-value asset back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sales of special 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 our customers. 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 open account privileges, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer.
A portion of our net revenues is comprised of subscription fees paid by customers for memberships in our Collectors Club. Those memberships entitle members access to our on-line and printed publications and, in some cases, include vouchers for free grading services. We recognize revenue attributable to free grading vouchers on a specific basis and classify such revenues as part of grading and authentication fees. The balance of the membership fee is recognized over the life of the membership.
In the case of our Expos trade show business, we recognize revenue generated by the promotion, management and operation of each of its collectibles conventions or trade shows in the fiscal period in which the convention or show takes place.
We recognize Certified Coin Exchange’s subscription revenues ratably over the relevant subscription period.
We also recognize the revenue from the sales of coins when they are shipped to the customer and all the requirements for revenue recognition have been satisfied. Such sales consist primarily of collectible coins that we have purchased pursuant to our coin authentication and grading warranty program and those sales are not the focus, and are not considered to be an integral part, of our ongoing revenue generating activities.
Accounts Receivable and the Allowance for Doubtful Accounts.
In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an ongoing basis. We regularly review our accounts receivable and exercise judgment in estimating the amounts of, and establish an allowance for, uncollectible accounts in each quarterly period. The amount of that allowance is based on several factors, including the age and extent of significant past due accounts and known conditions or trends that may affect the ability of account debtors to pay their accounts receivable balances. Each quarter we review our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of our specific account debtors to pay their accounts in full. Since the allowance is increased by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause an increase in such expenses. At June 30, 2016 and 2015, the allowance for doubtful accounts was $35,000, and $33,000, respectively.
Inventory Valuation Reserves.
Our collectibles inventories, which consist of collectible coins that we have purchased pursuant to our coin warranty program and other consumable inventory related to our authentication and grading activities, are valued at the lower of cost or estimated fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories below their carrying values. The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sales value of the collectibles inventories. Additionally, due to the relative uniqueness and special features of some of the collectible coins included in our collectibles inventory and the volatility in the prices of precious metals, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products. As a result, we review the estimated market values of the collectibles in our inventory on a quarterly basis and make adjustments to the valuation reserve that we believe are necessary or prudent based on our judgments regarding these matters. In the event that a collectible is sold for a price below its carrying value, we record a charge to cost of services. In addition, we review our other consumable inventory on a regular basis for recoverability and, if considered necessary, establish reserves for those items that have no future value to us. At June 30, 2016 and 2015, inventories were $2,574,000 and $2,232,000, respectively, and inventory reserves were $739,000 and $613,000, respectively. See Note 5 to the Consolidated Financial Statements. If we liquidate collectible coins at amounts below their carrying values, we may incur losses in excess of our recorded inventory reserves.
Grading Warranty Costs
. We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if such a collectible that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible for a price equal to the value of collectible at its original grade, or, at the customer’s option, pay the difference between the value of the collectible at its original grade as compared with the value at its lower grade. However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item or if we otherwise determine that the collectible had been altered after we had authenticated and graded it. If we purchase an item under a warranty claim, we recognize the difference in the value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve. We include the purchased item in our inventory at the estimated value of the re-graded collectible, which will be lower than the price we paid to purchase the item. We accrue for estimated warranty costs based on historical trends and related experience, and we monitor the adequacy of our warranty reserve on an ongoing basis. There also are a number of factors that can cause the estimated values of the collectibles purchased under our warranty program to change over time and, as a result, we review the market values of those collectibles on a quarterly basis (see
Inventory Valuation Reserves
above). However, once we have classified such items as inventory and they have been held in inventory beyond the end of the fiscal quarter in which we purchased them, we classify any further losses in the estimated fair value of the items on a quarterly basis or the subsequent disposal of such items as part of the gain or loss on product sales and not as an adjustment to our warranty reserves.
Effective July 1, 2014, the Company reduced its warranty accrual rate on coins and cards based upon a review of the overall level of warranty reserves and trends in warranty payments over an extended period of time. In the third quarter fiscal 2016, the Company performed a more detailed analysis of our coin warranty payments and related reserve requirements made possible by improved operational systems, which enabled us to better match warranty payments to the periods in which the coins were originally authenticated and graded by us. We concluded that, although there is no time limitation on our warranty obligation, the majority of our warranty claims arise within five years following the coin being authenticated and graded by us. Therefore, we deemed it appropriate to reduce our warranty reserve to $869,000 at March 31, 2016, which reduced the warranty expense recognized in the nine months ended March 31, 2016 by $656,000 as compared to the nine months ended March 31, 2015. Furthermore, our improved systems allow us to accrue for estimated warranty costs for coins more precisely and we now accrue warranty costs, at a rate per coin that reflects the nature of the coin (i.e. vintage or modern). As a result of this change in estimate, in fiscal 2016 we recognized a warranty credit of $145,000 as compared to a warranty expense of $535,000 in fiscal 2015. See Note 8 to the consolidated financial statements for activity in our warranty reserves. Our warranty reserves were $892,000 and $1,492,000 at June 30, 2016 and 2015, respectively.
Goodwill.
We test the carrying value of goodwill and other indefinite-lived intangible assets at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist. When testing for impairment, we consider qualitative factors, and where determined necessary, we proceed to the two-step goodwill impairment test. When applying the two-step impairment test, we apply a discounted cash flow model or an income approach to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.
During the first quarter of fiscal 2016, ended September 30, 2015, we completed the annual impairment evaluations with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair values over carrying values in prior years, and any material changes in the estimated cash flows of those reporting units, and determined that it was more likely than not that the respective fair values of CCE and CoinFacts exceeded their respective carrying values, including goodwill, and therefore, as a result, it was not necessary to proceed to the two-step impairment test.
We completed our annual goodwill impairment evaluation with respect to Expos at June 30, 2016 and concluded that no impairment had occurred.
Long-Lived Assets Other Than Goodwill
. We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment. Such reviews occur annually, or more frequently, if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full. In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred. If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write-down the asset to its estimated fair value.
Stock-Based Compensation.
Stock-based compensation expense is measured at the grant date fair value of the equity award, and is recognized as expense over the employee’s or non-employee director’s requisite service period, which is generally the vesting period of the award. However, if the vesting of a stock-based compensation award is subject to satisfaction of a performance requirement or condition, stock-based compensation expense is recognized if, and when, management determines that the achievement of the performance requirement or condition (and therefore the vesting of the award) has become probable. If stock-based compensation is recognized due to a determination that a performance condition is probable, and it is subsequently determined that the performance condition was not met in the expected vesting period, then if the shares can vest in future periods, management will refine the period over which the remaining expense would be recognized. If the shares fail to vest, or managements concludes that it is not probable the shares will vest, then all expense previously recognized with respect to the performance condition would be reversed.
We recognized stock-based compensation expense for service-based stock option awards using the Black-Scholes option pricing model. No options were granted in fiscal years 2014 through 2016, and all options previously granted had become fully vested, and had been fully expensed, by June 30, 2012.
Annual Director Grants.
In each of fiscal years 2016, 2015, and 2014 each of our six outside directors was granted restricted service-based stock with a grant date fair value of $45,000, $40,000, and $40,000, respectively for a total of fair value of $270,000 in fiscal 2016 and $240,000 in each of fiscal 2015 and 2014.
Other
Service-
B
ased
A
wards.
There was no grants of restricted stocks in fiscal 2016. In fiscal 2015 and 2014, the Company granted, 4,000, and 11,300 service-based restricted shares, respectively, with grant date fair values of $86,000, and $224,000 respectively, and with vesting periods ranging from three to four years. Stock based compensation expense for those shares is being recognized over the respective vesting period.
Fiscal 2013 Long-Term Performance-Based Equity Incentive Program
. As previously disclosed, on December 28, 2012, the Compensation Committee of the Board of Directors adopted a Long-Term Performance-Based Equity Incentive Program (“LTIP”) for the Company’s executive officers (including the Company’s Chief Executive Officer, Mr. Deuster, and the Chief Financial Officer, Mr. Wallace) and certain other key management employees (collectively, “Participants”). As of June 30, 2014 there were 523,378 restricted shares outstanding under the LTIP, (including 200,000 shares for Mr. Deuster and 75,000 for Mr. Wallace), with a total grant date fair value of approximately $6,700,000.
The vesting of the restricted shares is conditioned on the Company’s achievement of increasing annual operating income before stock-based compensation (“OI”) levels during any fiscal year within a six-year period through the fiscal year ending June 30, 2018, as indicated in the following table:
|
|
Cumulative
Percent of
Shares Vested
|
|
If in any fiscal year during the term of the Program:
|
|
|
|
|
The Threshold Performance Goal is Achieved
|
|
|
10
|
%
|
Intermediate Performance Goal #1 is Achieved
|
|
|
25
|
%
|
Intermediate Performance Goal #2 is Achieved
|
|
|
45
|
%
|
Intermediate Performance Goal #3 is Achieved
|
|
|
70
|
%
|
The Maximum Performance Goal is Achieved
|
|
|
100
|
%
|
Upon a determination that a performance goal or goals have been achieved for a fiscal year, 50% of the shares related to achieving that performance goal or goals will vest immediately and the remaining 50% will vest on June 30 of the following fiscal year, provided that the Participant is still in the service of the Company.
If performance goals are not achieved during the term of the Program, all of the restricted shares attributed to those performance goals that have not been achieved, will be forfeited effective June 30, 2018.
Based on the level of OI achieved in fiscal 2014, a determination was made that the Company had achieved the Threshold Performance Goal and the Intermediate Performance Goal #1 and therefore in accordance with the terms of the LTIP, 25% of the LTIP shares were fully vested at June 30, 2015.
In November 2014, an additional 18,957 performance-based restricted shares with similar terms as the other LTIP shares and a grant date fair value of $400,000 were issued to a new participant, with a service inception date of November 19, 2014. The vesting of those shares is conditioned on the Company’s achievement of the same levels of OI before stock based compensation as the LTIP participants through June 30, 2018, as indicated in the following table:
|
|
Cumulative
Percent of Shares
Vesting
|
|
If in any fiscal year during the term of the Program:
|
|
|
|
|
Intermediate Performance Goal #2 is Achieved
|
|
|
20
|
%
|
Intermediate Performance Goal #3 is Achieved
|
|
|
45
|
%
|
The Maximum Performance Goal is Achieved
|
|
|
100
|
%
|
At September 30, 2014, based on the significantly improved level of OI in the first quarter of fiscal 2015 as compared to the first quarter of fiscal 2014, we concluded that it was probable that the Company would achieve Intermediate Performance Goal #2 by June 30, 2015 and therefore the Company began accruing stock-based compensation expense for that performance goal in the first and subsequent quarters of fiscal 2015. However, based on the actual OI achieved in fiscal 2015, we did not achieve Intermediate Performance Goal #2 in fiscal 2015. Nevertheless, we still consider it probable that we will achieve that goal prior to the expiration of the Company’s LTIP in fiscal 2018 and therefore in fiscal 2016 we accrued the remaining stock-based compensation expense for Performance Goal #2, through the expected updated vesting date.
At this time, it is considered too early to determine if it is probable that the Company will achieve additional Performance Goals beyond Performance Goal #2 in fiscals 2017 or 2018. Management will continue to reassess at each reporting date whether it has become probable that any additional shares will vest and if so, additional stock-based compensation expense will be recognized based on the expected vesting period.
The Company recognized total stock-based compensation related to both service-based and performance-based restricted shares of $596,000, $2,239,000, and $1,946,000, in fiscal years ended June 30, 2016, 2015, and 2014, respectively. See
Results of Operations: Stock-Based Compensation Expense
below for additional information on stock-based compensation expense.
Capitalized Software
. In fiscal years 2016, 2015 and 2014, we capitalized approximately $752,000, $441,000, and $191,000, respectively, of software development costs related to a number of in-house software development projects. GAAP requires that certain software development costs incurred, either from internal or external sources, be capitalized as part of intangible assets and amortized on a straight-line basis over the useful life of the software, which we have estimated at three years. On the other hand, planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software development project are recognized as expense in the periods in which they are incurred. During the fiscal years ended June 30, 2016, 2015 and 2014, we recorded approximately $272,000, $122,000, and $115,000, respectively, as amortization expense related to such capitalized software projects.
We evaluate the carrying values of capitalized software to determine whether those values are impaired and, if necessary, we record an impairment charge in the period in which we determine that an impairment has occurred.
Income Ta
xes,
Deferred Tax Assets
and Valuation Allowances
. We account for income taxes in accordance with GAAP, which requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns or uncertain tax positions. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, GAAP requires that we evaluate the probability of realizing the future income tax benefits comprising that asset based on a number of factors, which include projections of future taxable income and the nature of the tax benefits and the respective expiration dates of tax credits and net operating losses.
In fiscal 2016, 2015 and 2014, the Company recognized income tax provisions of $4.7 million, $4.7 million, and $5.1 million, respectively.
At June 30, 2016, in accordance with Accounting Standard Update (“ASU”) 2015-17 the Company classified all deferred tax assets as non-current assets and reclassified deferred tax assets at June 30, 2015 on a consistent basis.
Accru
al
for
L
oss
es on Discontinued F
acility
L
eases
. As a result of the discontinuance of and our exit from the jewelry authentication and grading businesses in fiscal 2009, we ceased the occupancy of facilities we had leased for their operations and established estimated loss accruals for liabilities under those leases. At December 31, 2015 one of the facility obligations, related to our discontinued jewelry business had expired. At June 30, 2016, our remaining obligation in respect of the remaining facility totaled $687,000.
Results of Operations
The following table sets forth certain financial data, expressed as a percentage of net revenues, derived from our Consolidated Statements of Operations for the respective periods indicated below:
|
|
Fiscal Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
37.6
|
%
|
|
|
37.4
|
%
|
|
|
37.4
|
%
|
Gross profit
|
|
|
62.4
|
%
|
|
|
62.6
|
%
|
|
|
62.6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
14.2
|
%
|
|
|
14.4
|
%
|
|
|
15.0
|
%
|
General & administrative expenses
|
|
|
27.9
|
%
|
|
|
28.6
|
%
|
|
|
27.0
|
%
|
Total operating expenses
|
|
|
42.1
|
%
|
|
|
43.0
|
%
|
|
|
42.0
|
%
|
Operating income
|
|
|
20.3
|
%
|
|
|
19.6
|
%
|
|
|
20.6
|
%
|
Interest and other income, net
|
|
|
(0.1
|
)%
|
|
|
-
|
|
|
|
0.1
|
%
|
Income before provision for income taxes
|
|
|
20.2
|
%
|
|
|
19.6
|
%
|
|
|
20.7
|
%
|
Provision for income taxes
|
|
|
7.7
|
%
|
|
|
7.6
|
%
|
|
|
8.4
|
%
|
Income from continuing operations
|
|
|
12.5
|
%
|
|
|
12.0
|
%
|
|
|
12.3
|
%
|
Income (loss) from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.2
|
)%
|
Net income
|
|
|
12.5
|
%
|
|
|
12.0
|
%
|
|
|
12.1
|
%
|
Net Revenues
. Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, consisting of coins, trading cards and autographs and including 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; and fees generated from promoting, managing and operating collectibles conventions. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we purchase under our warranty policy. We do not consider such product sales to be an integral part of our ongoing revenue generating activities.
The following tables set forth the total net revenues for the fiscal years ended June 30, 2016, 2015 and 2014 between authentication and grading services revenues, other related services and product sales revenues:
|
|
2016
|
|
|
2015
|
|
|
2016 vs. 2015
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
Percent
|
|
Authentication and grading fees
|
|
$
|
52,650
|
|
|
|
86.4
|
%
|
|
$
|
53,132
|
|
|
|
86.1
|
%
|
|
$
|
(482
|
)
|
|
|
(0.9
|
%)
|
Other related services
|
|
|
8,236
|
|
|
|
13.5
|
%
|
|
|
8,420
|
|
|
|
13.7
|
%
|
|
|
(184
|
)
|
|
|
(2.2
|
%)
|
Total service revenues
|
|
|
60,886
|
|
|
|
99.9
|
%
|
|
|
61,552
|
|
|
|
99.8
|
%
|
|
$
|
(666
|
)
|
|
|
(1.1
|
%)
|
Coin sales
|
|
|
68
|
|
|
|
0.1
|
%
|
|
|
132
|
|
|
|
0.2
|
%
|
|
|
(64
|
)
|
|
|
(48.5
|
%)
|
Total net revenues
|
|
$
|
60,954
|
|
|
|
100.0
|
%
|
|
$
|
61,684
|
|
|
|
100.0
|
%
|
|
$
|
(730
|
)
|
|
|
(1.2
|
%)
|
|
|
2015
|
|
|
2014
|
|
|
2015 vs. 2014
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Net Revenues
|
|
|
Amount
|
|
|
% of Net Revenues
|
|
|
Amount
|
|
|
Percent
|
|
Authentication and grading fees
|
|
$
|
53,132
|
|
|
|
86.1
|
%
|
|
$
|
51,903
|
|
|
|
85.7
|
%
|
|
$
|
1,229
|
|
|
|
2.4
|
%
|
Other related services
|
|
|
8,420
|
|
|
|
13.7
|
%
|
|
|
8,565
|
|
|
|
14.1
|
%
|
|
|
(145
|
)
|
|
|
(1.7
|
%)
|
Total service revenues
|
|
|
61,552
|
|
|
|
99.8
|
%
|
|
|
60,468
|
|
|
|
99.8
|
%
|
|
|
1,084
|
|
|
|
1.8
|
%
|
Coin sales
|
|
|
132
|
|
|
|
0.2
|
%
|
|
|
103
|
|
|
|
0.2
|
%
|
|
|
29
|
|
|
|
28.2
|
%
|
Total net revenues
|
|
$
|
61,684
|
|
|
|
100.0
|
%
|
|
$
|
60,571
|
|
|
|
100.0
|
%
|
|
$
|
1,113
|
|
|
|
1.8
|
%
|
_______________
The following tables set forth certain information regarding the increases or decreases in net revenues from our larger markets (which are inclusive of revenues from our other related services) and in the number of units authenticated and graded (in thousands) in each of the periods presented below:
|
|
2016
|
|
|
2015
|
|
|
2016 vs. 2015
Increase (Decrease)
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
% of Net
|
|
|
Revenues
|
|
|
Units Processed
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
Coins
|
|
$
|
40,205
|
|
|
|
66.0
|
%
|
|
$
|
42,060
|
|
|
|
68.2
|
%
|
|
$
|
(1,855
|
)
|
|
|
(4.4
|
%)
|
|
|
304,500
|
|
|
|
14.7
|
%
|
Cards and Autographs
(1)
|
|
|
15,911
|
|
|
|
26.1
|
%
|
|
|
14,925
|
|
|
|
24.2
|
%
|
|
|
986
|
|
|
|
6.6
|
%
|
|
|
22,200
|
|
|
|
1.3
|
%
|
Other
(2)
|
|
|
4,770
|
|
|
|
7.8
|
%
|
|
|
4,567
|
|
|
|
7.4
|
%
|
|
|
203
|
|
|
|
4.4
|
%
|
|
|
-
|
|
|
|
-
|
|
Coin Sales
|
|
|
68
|
|
|
|
0.1
|
%
|
|
|
132
|
|
|
|
0.2
|
%
|
|
|
(64
|
)
|
|
|
(48.5
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
60,954
|
|
|
|
100.0
|
%
|
|
$
|
61,684
|
|
|
|
100.0
|
%
|
|
$
|
(730
|
)
|
|
|
(1.2
|
)%
|
|
|
326,700
|
|
|
|
8.7
|
%
|
|
|
2015
|
|
|
2014
|
|
|
2015 vs. 2014
Increase (Decrease)
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
% of Net
|
|
|
Revenues
|
|
|
Units Processed
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
Coins
|
|
$
|
42,060
|
|
|
|
68.2
|
%
|
|
$
|
41,997
|
|
|
|
69.3
|
%
|
|
$
|
63
|
|
|
|
0.2
|
%
|
|
|
(8,000
|
)
|
|
|
(0.4
|
%)
|
Cards and Autographs
(1)
|
|
|
14,925
|
|
|
|
24.2
|
%
|
|
|
14,090
|
|
|
|
23.3
|
%
|
|
|
835
|
|
|
|
5.9
|
%
|
|
|
13,800
|
|
|
|
0.8
|
%
|
Other
(2)
|
|
|
4,567
|
|
|
|
7.4
|
%
|
|
|
4,381
|
|
|
|
7.2
|
%
|
|
|
186
|
|
|
|
4.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Coin sales
|
|
|
132
|
|
|
|
0.2
|
%
|
|
|
103
|
|
|
|
0.2
|
%
|
|
|
29
|
|
|
|
28.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
61,684
|
|
|
|
100.0
|
%
|
|
$
|
60,571
|
|
|
|
100.0
|
%
|
|
$
|
1,113
|
|
|
|
1.8
|
%
|
|
|
5,800
|
|
|
|
0.2
|
%
|
_____________
|
(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 of our CCE subscription business, Coinflation.com and the Expos trade show and convention business.
|
Fiscal 2016 vs. 2015.
In fiscal 2016, our total service revenues were essentially flat, with services revenues of $60,886,000 as compared to $61,552,000 in fiscal 2015. However, in the second half of fiscal 2016, we generated record second half service revenues, which increased by $2,403,000, or 7.7%, as compared to our service revenues in the second half of fiscal 2015.
In fiscal 2016, authentication and grading fees decreased by $482,000, or 0.9%, and other related service revenues decreased by $184,000 or 2.2%. The decrease in authentication and grading fees was attributable due to a $1,378,000, or 3.5% decrease in coin fees that were partially offset by an increase of $896,000, or 6.5%, increase in cards and autograph fees.
The net decrease in coin authentication and grading fees of $1,378,000 in fiscal 2016 as compared to fiscal 2015 reflected (i) lower modern fees of approximately $3,000,000 or 19.9%, primarily due to the absence of significant revenues from the Baseball Hall of Fame and 50
th
Anniversary Kennedy (“HOF”) modern coin programs that benefited fiscal 2015 and (ii) lower vintage coin fees of $328,000 or 2.6% due to the absence of revenues earned in fiscal 2015 from the authentication and grading of a customer’s coin collection that did not recur in fiscal 2016. These decreases were partially offset by increases in (i) coin trade show revenues of $1,170,000 or 18.5%, reflecting higher average service fees earned per coin authenticated and graded at shows and increased coin submissions per show and (ii) world coin revenues of $780,000 or 14.6%, which is inclusive of a $864,000 or 46% increase in coins fees earned from our China operation.
In the second half of the year, our coin authentication and grading fees increased by $1,809,000 or 9.1%, as compared to a decrease of $3,187,000 or 16.3%, in the first half of the year, in both instances as compared to same periods of fiscal 2015. The second half increase included increases in trade show and world coin fees for the reasons as discussed above. As previously disclosed, to stimulate increased demand for our services, effective January 1, 2016, the Company implemented more competitive and focused marketing programs for our modern coin business, which, we believe, contributed to offsetting most of the approximate $1,000,000 of HOF revenues that benefited the second half of fiscal 2015.
As 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 modern coin and trade show revenues can be volatile.
Revenues from our trading cards and autographs business increased by 15.1% in the fourth quarter of fiscal 2016, and by 6.6% for the entirety of fiscal 2016 and these increases represented record quarterly and annual revenues for that business. Moreover, our cards and autographs business has achieved quarter-on-quarter revenue growth in 23 out of the last 24 quarters.
We have entered fiscal 2017 with stronger momentum than we entered fiscal 2016, although we expect the seasonality of the coin business (in that, the third fiscal quarter is typically our seasonally strongest quarter of the year, due to the release of Gold and Silver Eagles by the US Mint in that quarter whereas the second quarter is typically the slowest quarter of the year, due to the holidays in that quarter), will continue to impact our quarterly results. In addition, we are seeing continued momentum in our China coin business and consistent growth in our trading cards and autographs business. Therefore, we are optimistic about the Company’s prospects for fiscal 2017, although it remains uncertain as to the level of growth the Company may achieve in any quarter and in fiscal 2017.
Despite the reduction in our coin authentication and grading revenues in fiscal 2016, our coin business represented approximately 66% of total service revenues in the current year, as compared to 68% of total service revenues for the prior year, and indicates the continued importance of our coin authentication and grading business to our overall financial performance.
The reduction in other related services in fiscal 2016, primarily reflects the Company’s decision to eliminate, effective January 2016, the subscriptions fees that we had previously charged customers to access our CoinFacts website thereby allowing all dealers and collectors to have free access to this numismatic and value added content. We believe that allowing free access to this information will generate more knowledgeable dealers and collectors over time, which should benefit our business and, we expect, will more than offset the short-term reduction in revenues, arising from this decision.
Fiscal 2015 vs. 2014
.
Total service revenues of $61,552,000 in fiscal 2015, represented a record for the Company and increased by $1,084,000 or 1.8% over total service revenues of $60,468,000 in fiscal 2014.
Authentication and grading fees increased by $1,229,000 or 2.4% in fiscal 2015 as compared to fiscal 2014 and comprised increases of $892,000 or 7.0% in cards and autographs and $337,000 or 0.9% in coins. Other related services declined by $145,000, or 1.7%, due to lower advertising and affiliate program revenues in fiscal 2015 as compared to fiscal 2014.
The $337,000 increase in our coin authentication and grading fees in fiscal 2015, was comprised of increases in (i) vintage fees of $1,015,000 or 8.7% (ii) modern fees of $286,000 or 1.9% and (iii) world fees of $173,000 or 3.3% substantially but not entirely offset by a decrease in show fees of $1,137,000 or 15.2%. The decrease in show fees in fiscal 2015 was due to us earning lower average authentication and grading fees on a per show basis, primarily, due to two larger customers submitting fewer coins at shows in fiscal 2015 as compared to fiscal 2014.
Coin fees in fiscal 2015 benefited from revenues of approximately $3,500,000 earned from the Baseball Hall of Fame (“HOF”) and Kennedy anniversary coins programs as compared to approximately $1,400,000 in fiscal 2014, as the HOF program only began generating revenue in the fourth quarter of fiscal 2014.
Despite the increase of $337,000 in coin authentication fees in fiscal 2015 discussed above, in the fourth quarter of fiscal 2015, coin authentication and grading fees declined by $1,458,000 or 13.3% as compared to the same quarter of fiscal 2014. That decline in the fourth quarter of fiscal 2015 was due to reductions, in modern coin fees of $1,010,000, primarily due to less revenue earned from the HOF coin program and vintage fees of $400,000, in part due to the absence of submissions from one larger customer.
Cards and autographs service revenues increased $835,000 or 5.9% to $14,925,000 in fiscal 2015 which included a fourth quarter revenue increase of 4.0%, representing the twentieth quarter of quarter-over-quarter revenue growth in that business.
Through the first two quarters of fiscal 2015, the Company had generated eight quarters of quarter-over-quarter consolidated revenue growth. Although, we experienced declines in revenues in the third and fourth quarters of fiscal 2015, as compared to the record revenues generated in the corresponding periods of fiscal 2014, revenues generated in the third and fourth quarter of fiscal 2015 represented the second highest revenues generated by the Company in any previous third and fourth quarter periods. We generated record first and second quarter revenues, in the first half of fiscal 2015.
Gross Profit
Gross profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percent of net revenues. The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense, occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of the revenues generated by our other non-grading related services and the costs of product revenues (which represent the carrying value of the inventory of products, which are primarily collectible coins that we sold and any inventory-related reserves, considered necessary).
Set forth below is information regarding our gross profits in the fiscal years ended June 30, 2016, 2015 and 2014:
|
|
Fiscal Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gross profit services
|
|
|
62.5
|
%
|
|
|
62.8
|
%
|
|
|
62.7
|
%
|
Gross profit product sales
|
|
|
(30.9
|
%)
|
|
|
(15.2
|
%)
|
|
|
(18.4
|
)%
|
Total
|
|
|
62.4
|
%
|
|
|
62.6
|
%
|
|
|
62.6
|
%
|
Fiscal 2016 vs. 2015.
As indicated in the above table, our services gross profit margin was 62.5% for fiscal 2016, as compared to 62.8% for fiscal 2015. As discussed under our
Critical Accounting Policies and Estimates: Warranty Costs
, in the third quarter of fiscal 2016, the Company reduced its warranty reserve which reduced our cost of revenues by $658,000 in fiscal 2016 as compared to fiscal 2015. Excluding the warranty benefit, our services gross profit would have been approximately 60.4% for the second half of fiscal 2016, which reflects in the more competitive programs we introduced, effective January 1, 2016, for modern coins, as discussed under
Net Revenues
above. In addition, as discussed in prior reports, there can be variability in the services gross profit margin due to the mix of revenues in any period. During the three years ended June 30, 2016, our quarterly services gross profit varied between 59% and 65%.
Fiscal 2015 vs. 2014
.
Our services gross profit margin at 62.8% in fiscal 2015 was consistent with the 62.7% earned in fiscal 2014.
In the fourth quarter of fiscal 2015, our services gross profit margin was 59.3% as compared to 63.7% in the fourth quarter of fiscal 2014, reflecting lower margins on special HOF coin inserts and lower average service fees earned for coins in the fourth quarter of fiscal 2015.
Selling and Marketing Expenses
Selling and marketing expenses are comprised primarily of advertising and promotions costs, trade-show expenses, customer service personnel costs, business development incentive compensation costs, depreciation and third-party consulting costs.
The following table sets forth selling and marketing expenses that we incurred in fiscals 2016, 2015 and 2014 (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Selling and marketing expenses
|
|
|
8,635
|
|
|
$
|
8,896
|
|
|
$
|
9,106
|
|
As a percentage of net revenues
|
|
|
14.2
|
%
|
|
|
14.4
|
%
|
|
|
15.0
|
%
|
Fiscal 2016 vs. 2015.
Selling and marketing expenses represented 14.2% of net revenues in fiscal 2016 as compared to 14.4% in fiscal 2015. The $261,000 reduction in selling and marketing expenses in fiscal 2016, as compared to fiscal 2015, primarily, included decreased business development costs of $846,000 in the fiscal 2016, reflecting lower incentives due to the resignation of our Vice President of Business Development partially offset by increased selling and marketing expenses of $621,000 for our Collectors.com launch and roll-out.
Fiscal 2015 vs. 2014
.
Sales and marketing expenses represented 14.4% of net revenues, in fiscal 2015 as compared to 15.0% of net revenues in fiscal 2014. The $210,000 reduction in selling and marketing expenses in fiscal 2015, primarily reflects reductions in sales and marketing personnel at our overseas offices and travel related costs, incurred for our overseas grading events in fiscal 2015 as compared to fiscal 2014.
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 personnel and information technology personnel, facilities management costs, depreciation, amortization and other miscellaneous expenses. G&A expenses also include stock-based compensation costs, arising from the grant of stock awards to general and administrative personnel and outside directors.
The following table sets forth G&A expenses that we incurred in fiscals 2016, 2015 and 2014 (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
General & administrative expenses
|
|
$
|
17,047
|
|
|
$
|
17,627
|
|
|
$
|
16,326
|
|
As a percentage of net revenues
|
|
|
27.9
|
%
|
|
|
28.6
|
%
|
|
|
27.0
|
%
|
Fiscal 2016 vs. 2015.
G&A expenses represented 27.9% of net revenues in fiscal 2016 as compared to 28.6% of net revenues in fiscal 2015. The decrease in G&A expenses of $580,000 in fiscal 2016, as compared to fiscal 2015, was primarily due to lower G&A non-cash stock based compensation of $1,617,000, as discussed below
,
partially offset by higher G&A costs for Collectors.com of $837,000.
Fiscal 2015 vs. 2014.
G&A expenses represented 28.6% of net revenues in fiscal 2015 and 27.0% of net revenues in fiscal 2014, respectively, The increase of $1,301,000 in G&A expenses in fiscal 2015, as compared to fiscal 2014, included increased (i) legal costs of $435,000 primarily attributable to two litigation related matters that commenced in prior years and which went to trial in fiscal 2015 (ii) G&A stock-based compensation expense of $256,000 due to the timing of LTIP costs recognized as discussed below, (iii) IT and general payroll costs of $169,000 (net of capitalized software development costs), incurred to support the growth of our businesses and (iv) consulting and third party service fees $257,000 to support content and other management initiatives.
Stock-Based Compensation Expense
We recognize non-cash stock-based compensation expense, arising from grants of restricted stock and stock option awards. Stock-based compensation expense is recorded as part of (i) costs of revenues, in the case of stock awards granted to employees whose costs are classified as cost of revenues; (ii) sales and marketing expenses, in the case of stock granted to employees whose costs are classified as sales and marketing personnel and (iii) general and administrative expenses, in the case of stock awards granted to directors, executive and financial management and administrative personnel.
The following table sets forth the stock-based compensation expenses we incurred in fiscals 2016, 2015 and 2014 (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
Included In:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of grading, authentication and related services
|
|
$
|
36
|
|
|
$
|
45
|
|
|
$
|
45
|
|
Sales and Marketing
|
|
|
31
|
|
|
|
48
|
|
|
|
11
|
|
General and administrative expenses
|
|
|
529
|
|
|
|
2,146
|
|
|
|
1,890
|
|
|
|
$
|
596
|
|
|
$
|
2,239
|
|
|
$
|
1,946
|
|
For those shares that have performance conditions, the amount of stock-based compensation recognized in any period can vary depending upon management’s assessment as to whether it has become probable that the Company will achieve performance goals under the LTIP and the time periods in which those goals are expected to be achieved. When it becomes probable that a performance goal will be achieved, there is a catch-up of stock-based compensation expense in that period reflecting the expense required to be recognized from the service inception date through the period when it became probable that the goal will be achieved, resulting in higher expense in that period. Thereafter, stock-based compensation expense is recognized over the expected remaining service period to vesting
In fiscal 2016, t
he reduction of $1,643,000 in stock-based compensation as compared to fiscal 2015, primarily related to lower stock-based compensation expense recognized for LTIP related shares due to (i) the Threshold and Performance Goal #1 shares being fully vested at June 30, 2015 whereas in fiscal 2015, expense of $450,000, was required to be recognized and (ii) lower expense $1,075,000 in fiscal 2016, required to be recognized for the Performance Goal #2 shares, as it was originally expected that Performance Goal #2 would be achieved in fiscal 2015.
In fiscal 2015, the increase in stock-based compensation of $293,000 as compared to fiscal 2014, related to increased costs recognized in connection with the Company’s LTIP and included (i) the remaining costs associated with the Threshold Performance and Performance Goal #1, which were achieved in fiscal 2014 and were fully vested by June 30, 2015 and (ii) costs associated with Performance Goal #2, which management concluded in the first quarter of fiscal 2015 was probable of being achieved in fiscal 2015. In the first quarter of fiscal 2015, due to us concluding that Performance Goal #2 would be achieved in fiscal 2015, we recognized a catch-up expense of $513,000, related to prior service periods as discussed in the preceding paragraph.
See Critical Accounting Policies and Estimates: Fiscal 2013 Long-Term Performance-based Equity Incentive Program.
A total of $409,000 of stock-based compensation expense related to unvested equity awards remained unrecognized as of June 30, 2016, based on the assumption that the holders of those awards will remain in the Company’s service through 2019 and it will not become probable that the Company will achieve any additional performance goals under the Company’s LTIP. This expense will be recognized as compensation expense in future periods, as follows (in thousands):
Year Ending June 30,
|
|
|
|
|
2017
|
|
$
|
254
|
|
2018
|
|
|
135
|
|
2019
|
|
|
20
|
|
Total
|
|
$
|
409
|
|
The $409,000 of unrecognized compensation expense does not include expense that would result from the grant of any additional equity awards that may be granted in future periods.
Interest Income, Net
Interest income is generated on cash balances that we have invested, primarily in highly liquid money market accounts and funds. The following table compares the interest income we earned on our cash balances in the fiscal years ended June 30, 2016, 2015 and 2014 (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Interest income, net
|
|
$
|
22
|
|
|
$
|
38
|
|
|
$
|
36
|
|
Due to the continued low interest rates prevailing in all periods, interest income, net, was $22,000, $38,000, and $36,000, in fiscal 2016, 2015 and 2014, respectively.
Provision for Income Taxes
|
|
Fiscal Year Ended June 30,
(in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Provision for income taxes
|
|
$
|
4,720
|
|
|
$
|
4,682
|
|
|
$
|
5,081
|
|
The income tax provisions of $4,720,000, $4,682,000, and $5,081,000, in fiscals 2016, 2015 and 2014, respectively, represented estimated annual effective tax rates, as adjusted for valuation allowances for foreign losses, of approximately 38%, 39%, and 41%, respectively.
Discontinued Operations
|
|
Fiscal Year Ended June 30,
(in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income (losses) from discontinued operations, (net of income taxes)
|
|
$
|
41
|
|
|
$
|
17
|
|
|
$
|
(75
|
)
|
The income (losses) from discontinued operations (net of income taxes), reflects ongoing pre-tax accretion expenses of $47,000, $77,000, and $106,000, in fiscal years 2016, 2015 and 2014, respectively, recognized in connection with the Company’s ongoing obligations for the New York City facilities, formerly occupied by its discontinued jewelry businesses. One of the leases expired in fiscal 2016 and upon the expiration of that lease we recognized a pre-tax credit of approximately $84,000 for excess lease accruals. In addition, we realized pre-tax trademark license income of $38,000, and $118,000, in fiscal 2016 and 2015, respectively, arising from the disposal of the Company’s former currency authentication and grading business. See “
Critical Accounting Policies and Estimates
—
Accrual for Losses on Facility Leases.”
Quarterly Results of Operations and Seasonality
The following tables present unaudited selected quarterly financial data for each of the eight quarters beginning September 30, 2014 and ending on June 30, 2016. The information has been derived from our unaudited quarterly condensed consolidated financial statements, which have been prepared on a basis consistent with our audited Consolidated Financial Statements appearing in Item 8 in this Annual Report. The consolidated financial information set forth below includes all adjustments (consisting of normal adjustments and accruals) that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the Consolidated Financial Statements and the notes thereto appearing elsewhere in Item 8 this Annual Report. These quarterly operating results are not necessarily indicative of results that may be expected for any subsequent fiscal periods.
Generally, the revenues generated by our collectibles grading and authentication businesses are lower during our second quarter, which ends on December 31, than in other quarterly periods, because collectibles commerce generally decreases during the holiday season. As discussed under “Net Revenues” there can be volatility in coin revenues due to general market conditions that will impact the level of coin revenues in a given quarter.
Our collectibles trade show business adds to the variability in our quarter-to-quarter operating results, as its revenues vary based on the timing of the collectibles trade shows it conducts. Generally, the revenues of this business are higher in the first, third and fourth quarters of our fiscal years, compared to the second quarter, because the Long Beach, California Collectibles Shows take place during the first, third and fourth quarters.
Quarterly Results of Operations
|
|
Quarter Ended
(In thousands, except per share data)
|
|
|
|
Sept. 30,
2014
|
|
|
Dec. 31,
2014
|
|
|
Mar. 31,
2015
|
|
|
June 30,
2015
|
|
|
Sept. 30,
2015
|
|
|
Dec.31,
2015
|
|
|
Mar.31,
2016
|
|
|
June 31,
2016
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
16,178
|
|
|
$
|
14,148
|
|
|
$
|
15,987
|
|
|
$
|
15,371
|
|
|
$
|
14,618
|
|
|
$
|
12,636
|
|
|
$
|
17,329
|
|
|
$
|
16,371
|
|
Cost of revenues*
|
|
|
5,796
|
|
|
|
5,067
|
|
|
|
5,875
|
|
|
|
6,315
|
|
|
|
5,147
|
|
|
|
5,010
|
|
|
|
6,288
|
|
|
|
6,457
|
|
Gross profit
|
|
|
10,382
|
|
|
|
9,081
|
|
|
|
10,112
|
|
|
|
9,056
|
|
|
|
9,471
|
|
|
|
7,626
|
|
|
|
11,041
|
|
|
|
9,914
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
7,357
|
|
|
|
6,435
|
|
|
|
6,440
|
|
|
|
6,291
|
|
|
|
6,276
|
|
|
|
5,937
|
|
|
|
6,636
|
|
|
|
6,833
|
|
Operating income
|
|
|
3,025
|
|
|
|
2,646
|
|
|
|
3,672
|
|
|
|
2,765
|
|
|
|
3,195
|
|
|
|
1,689
|
|
|
|
4,405
|
|
|
|
3,081
|
|
Interest and other income, net
|
|
|
6
|
|
|
|
(7
|
)
|
|
|
(40
|
)
|
|
|
(1
|
)
|
|
|
(26
|
)
|
|
|
(15
|
)
|
|
|
3
|
|
|
|
(13
|
)
|
Income before provision for income taxes
|
|
|
3,031
|
|
|
|
2,639
|
|
|
|
3,632
|
|
|
|
2,764
|
|
|
|
3,169
|
|
|
|
1,674
|
|
|
|
4,408
|
|
|
|
3,068
|
|
Provision for income taxes
|
|
|
1,249
|
|
|
|
971
|
|
|
|
1,450
|
|
|
|
1,012
|
|
|
|
1,226
|
|
|
|
679
|
|
|
|
1,695
|
|
|
|
1,120
|
|
Income from continuing operations
|
|
|
1,782
|
|
|
|
1,668
|
|
|
|
2,182
|
|
|
|
1,752
|
|
|
|
1,943
|
|
|
|
995
|
|
|
|
2,713
|
|
|
|
1,948
|
|
Income (loss) from discontinued operations, (net of income taxes)
|
|
|
22
|
|
|
|
(13
|
)
|
|
|
(12
|
)
|
|
|
20
|
|
|
|
(12
|
)
|
|
|
(6
|
)
|
|
|
65
|
|
|
|
(6
|
)
|
Net income
|
|
$
|
1,804
|
|
|
$
|
1,655
|
|
|
$
|
2,170
|
|
|
$
|
1,772
|
|
|
$
|
1,931
|
|
|
$
|
989
|
|
|
$
|
2,778
|
|
|
$
|
1,942
|
|
Net income per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.23
|
|
From discontinued operations,
(net of income taxes)
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
|
|
-
|
|
Net income per share
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
0.12
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
Net income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.23
|
|
From discontinued operations, (net of income taxes)
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income per share
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.23
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,326
|
|
|
|
8,339
|
|
|
|
8,353
|
|
|
|
8,361
|
|
|
|
8,434
|
|
|
|
8,441
|
|
|
|
8,447
|
|
|
|
8,459
|
|
Diluted
|
|
|
8,502
|
|
|
|
8,519
|
|
|
|
8,531
|
|
|
|
8,519
|
|
|
|
8,534
|
|
|
|
8,549
|
|
|
|
8,549
|
|
|
|
8,548
|
|
|
|
Quarter Ended
(In thousands)
|
|
|
|
Sept. 30,
2014
|
|
|
Dec. 31,
2014
|
|
|
Mar. 31,
2015
|
|
|
June 30, 2015
|
|
|
Sept. 30,
2015
|
|
|
Dec. 31,
2015
|
|
|
Mar. 31,
2016
|
|
|
June 30,
2016
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units authenticated or graded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
|
516
|
|
|
|
458
|
|
|
|
559
|
|
|
|
534
|
|
|
|
433
|
|
|
|
444
|
|
|
|
815
|
|
|
|
680
|
|
Trading cards and autographs
|
|
|
425
|
|
|
|
438
|
|
|
|
418
|
|
|
|
424
|
|
|
|
441
|
|
|
|
390
|
|
|
|
437
|
|
|
|
459
|
|
Total
|
|
|
941
|
|
|
|
896
|
|
|
|
977
|
|
|
|
958
|
|
|
|
874
|
|
|
|
834
|
|
|
|
1,252
|
|
|
|
1,139
|
|
*Cost of revenues in the third quarter of fiscal 2016, benefited by approximately $656,000 from a reduction in the Company’s warranty reserves at March 31, 2016. See
Critical Accounting Policies and Estimates: Grading Warranty Costs.
Liquidity and Capital Resources
Cash and Cash Equivalent Balances
. At June 30, 2016, we had cash and cash equivalents of $11,967,000 as compared to $17,254,000 at June 30, 2015 and $19,909,000 at June 30, 2014.
Historically, we have been able to rely on internally generated funds, rather than borrowings, as our primary source of funds to support our continuing grading operations, because many of our authentication and grading customers prepay our fees at the time they submit their collectibles to us for authentication and grading.
Cash Flows
.
Cash Flows from Continuing Operations
. In fiscal years ended June 30, 2016, 2015, and 2014, our operating activities from continuing operations generated cash of $9,172,000, $11,219,000, and $12,685,000, respectively. The decrease in cash provided by operating activities in fiscal 2016 as compared to fiscal 2015, reflects lower operating income before non-cash stock based compensation of $12,966,000 in fiscal 2016, as compared to $14,347,000 in fiscal 2015 and working capital changes, primarily an increase in accounts receivable due to the timing of receipts in fiscal 2016. Cash provided by operating activities in fiscal 2015 decreased as compared to fiscal 2014, despite the operating income being about the same level in each year and reflects a cash benefit realized in fiscal 2014, arising from the timing of the payment of increased annual incentives, as a result of the significant growth and increased profitability of the business in fiscal 2014 compared to fiscal 2013. As the business did not grow significantly in fiscal 2015 as compared to fiscal 2014, there was no such cash benefit in fiscal 2015.
Cash Flows of Discontinued Operations
. Discontinued operations used cash of $440,000, $615,000, and $569,000, in fiscal years ended June 30, 2016, 2015, and 2014, respectively, related primarily to the payment of ongoing obligations for the New York facilities. As discussed under
Outstanding Financial Obligations: Discontinued
Operations
below, one of the lease obligations expired during fiscal 2016.
Cash from or Used in Investing Activities
. In fiscal years ended June 30, 2016, 2015, and 2014, investing activities used net cash of $2,011,000, $1,340,000, and $1,355,000, respectively, primarily reflecting capital expenditures for IT and authentication and grading equipment and capitalized software costs for Collectors.com.
Cash Used in Financing Activities
. In the fiscal years ended June 30, 2016, 2015 and 2014, financing activities used net cash of $12,008,000, $11,919,000, and $9,563,000, respectively. In fiscal 2016 we used $12,008,000 for the payment of dividends to stockholders. In fiscal 2015, we used $11,361,000 to pay cash dividends to stockholders and $558,000 to buyback shares to satisfy tax withholding obligations for employee vested shares. In fiscal 2014, we received $1,354,000 from the exercise of stock options offset by $10,731,000 of cash used to pay dividends to stockholders and $186,000 used to buyback shares to satisfy tax withholdings obligations for employee vested stock.
Overall, the Company used cash of $5,287,000 in fiscal 2016 as compared to cash usage of $2,655,000 in fiscal 2015 and cash generation of $1,198,000 in fiscal 2014.
Outstanding Financial Obligations
Continuing Operati
on
s
At June 30, 2016, we did not have any material financial obligations in connection with our continuing operations, except for the operating lease payments for our corporate headquarters and for offices in New Jersey, Paris, Hong Kong and Shanghai.
At June 30, 2016, future minimum lease payments under the lease agreements associated with our continuing operations were as follows (in thousands):
Year Ending June 30,
|
|
Gross
Payment
|
|
|
Sublease
Income
|
|
|
Net
|
|
2017
|
|
$
|
1,846
|
|
|
$
|
84
|
|
|
$
|
1,762
|
|
2018
|
|
|
1,856
|
|
|
|
87
|
|
|
|
1,769
|
|
2019
|
|
|
1,243
|
|
|
|
67
|
|
|
|
1,176
|
|
2020
|
|
|
193
|
|
|
|
-
|
|
|
|
193
|
|
2021
|
|
|
95
|
|
|
|
-
|
|
|
|
95
|
|
Thereafter
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
|
|
$
|
5,245
|
|
|
$
|
238
|
|
|
$
|
5,007
|
|
Discontinued Operations
At December 31, 2015, one of the facility obligations, related to our discontinued jewelry business expired. At June 30, 2016, the remaining financial obligation for the second facility in New York City, that had been occupied by our discontinued jewelry authentication and grading businesses that expires on December 31, 2017, is as follows (in thousands):
Year Ending June 30,
|
|
Remaining Obligation
|
|
2017
|
|
$
|
470
|
|
2018
|
|
|
245
|
|
|
|
$
|
715
|
|
Less: Discounted estimated fair value of minimum lease payments
|
|
|
(687
|
)
|
Accretion expense to be recognized in future years
|
|
$
|
28
|
|
These cash payment obligations are to be paid on a monthly basis in accordance with the above schedule.
With the exception of these lease obligations for continuing and discontinued operations, we do not have any material financial obligations, such as long-term debt or capital lease or purchase obligations.
Dividends
. Since the third quarter of fiscal 2015, our dividend policy has been to pay $0.35 per share per quarter up from $0.325 in prior quarters. As a result, we paid dividends of $12,008,000, $11,361,000, and $10,731,000, in fiscals 2016, 2015 and 2014, respectively.
The declaration and payment of cash dividends in the future, pursuant to the Company’s dividend policy, is subject to final determination each quarter by the Board of Directors based on a number of factors, including the Company’s financial performance and its available cash resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company and its stockholders. Accordingly, there is no assurance that, in the future, the amount of the quarterly cash dividend will not be reduced or that the payment of dividends will not be suspended or altogether discontinued.
Share Buyback Program
. In December 2005, our Board of Directors approved a stock buyback program that authorized us to make up to $10,000,000 of stock repurchases in the open market or privately negotiated transactions, in accordance with applicable Securities Exchange Commission (“SEC”) rules, when opportunities to make such repurchases, at attractive prices, become available. There were no share repurchases under this program in fiscals 2016, 2015 and 2014. At June 30, 2016, we have a total of $3.7 million available for share purchases under the share buyback program.
Future Uses and Sources of Cash
. We plan to use our cash resources, consisting of available cash and cash equivalent balances, together with internally generated cash flows, to (i) introduce new collectibles related services for our customers, including providing services at our overseas operations and investing in Collectors.com; (ii) fund working capital requirements; (iii) fund acquisitions; (iv) fund obligations associated with our discontinued businesses; (v) fund the payment of cash dividends and (vi) for other general corporate purposes which may include additional repurchases of common stock.
Although we have no current plans to do so, we also may seek borrowings and we may issue additional shares of our stock to finance the growth of our collectibles businesses. However, there is no assurance that we would be able to obtain such borrowings or generate additional capital on terms acceptable to us, if at all.
Recent Accounting Pronouncements
In May 2014, FASB issued ASU 2014-09, on Revenue from Contracts with Customers. The updated guidance modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. In July 2015, the FASB approved a one year deferral of the effective date. Accordingly, the update is effective for us in the first quarter of fiscal 2019 with retrospective application to prior periods presented or as a cumulative effect adjustment in the period of adoption. Early adoption is permitted in the first quarter of 2018. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." This new guidance provides additional implementation guidance on how an entity should identify the unit of accounting for the principal versus agent evaluations. In May 2016, the FASB issued 2016 ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients." This new ASU provides more specific guidance on certain aspects of Topic 606. We are currently evaluating the impact these updates will have on our consolidated financial statements.
In September 2015, FASB issued Accounting Standards Update 2015-16, on Business Combinations and Simplifying the Accounting for measurement-period adjustments. Under this guidance an acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, the guidance requires an entity to present separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements and related disclosures. The guidance is effective for fiscal years beginning after December 15, 2015 and interim periods thereafter.
In November 2015, FASB issued Accounting Standards Update 2015-17, on Income Taxes and the Balance Sheet Classification of Deferred Taxes. Under this updated guidance, deferred tax assets and liabilities are required to be classified as noncurrent asset or liabilities in the Company’s balance sheet. The guidance is effective for financial years beginning after December 15, 2016 and interim periods within those annual periods. The Company implemented this guidance at June 30, 2016 and retrospectively restated its comparable balance sheet at June 30, 2015. Deferred tax assets of $1,599,000 classified as part of current assets at June 30, 2015 were reclassified to noncurrent deferred tax assets, such that noncurrent deferred tax assets increased from $1,945,000 to $3,544,000 June 30, 2015. There was no change to total assets at June 30, 2015 arising from this guidance.
In February 2016, FASB issued Accounting Standards Update 2016-02 on Accounting for Leases. The core principle of this guidance is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The adoption of this guidance is expected to have a material effect on the Company’s consolidated financial statement and related disclosures. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods thereafter. Early adoption is permitted.
In March 2016, FASB issued Accounting Standards Update 2016-09 Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Under this updated guidance all excess tax benefits and tax deficiencies, should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements. The guidance is effective for annual periods beginning after December 5, 2016 and interim periods within those annual periods. Early adoption is permitted.