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 do not have control. 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, 2018 (the “Fiscal 2018 10-K”), which we filed with the Securities and Exchange Commission (the “SEC”) on August 30, 2018, 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 are cautioned not to place undue reliance on the forward-looking statements that are contained or recent trends that are described 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 2018 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.
Overview of
the
Operating Results for the
Three and
Nine
Months Ended
March
31, 201
9
The following table sets forth comparative financial data for the three and nine months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended
March
31,
|
|
|
Nine Months Ended March 31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
Net Revenues
|
|
$
|
19,471
|
|
|
|
100.0
|
%
|
|
$
|
17,512
|
|
|
|
100.0
|
%
|
|
$
|
52,670
|
|
|
|
100.0
|
%
|
|
$
|
51,328
|
|
|
|
100.0
|
%
|
Cost of Revenues
|
|
|
7,827
|
|
|
|
40.2
|
%
|
|
|
7,818
|
|
|
|
44.6
|
%
|
|
|
21,982
|
|
|
|
41.7
|
%
|
|
|
21,745
|
|
|
|
42.4
|
%
|
Gross Profit:
|
|
|
11,644
|
|
|
|
59.8
|
%
|
|
|
9,694
|
|
|
|
55.4
|
%
|
|
|
30,688
|
|
|
|
58.3
|
%
|
|
|
29,583
|
|
|
|
57.6
|
%
|
Selling and marketing expenses
|
|
|
2,509
|
|
|
|
12.9
|
%
|
|
|
2,513
|
|
|
|
14.4
|
%
|
|
|
7,803
|
|
|
|
14.8
|
%
|
|
|
7,688
|
|
|
|
15.0
|
%
|
General & administrative expenses
|
|
|
4,370
|
|
|
|
22.4
|
%
|
|
|
5,195
|
|
|
|
29.7
|
%
|
|
|
13,079
|
|
|
|
24.9
|
%
|
|
|
15,148
|
|
|
|
29.5
|
%
|
Operating income
|
|
|
4,765
|
|
|
|
24.5
|
%
|
|
|
1,986
|
|
|
|
11.3
|
%
|
|
|
9,806
|
|
|
|
18.6
|
%
|
|
|
6,747
|
|
|
|
13.1
|
%
|
Interest and other income (expense), net
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
116
|
|
|
|
0.7
|
%
|
|
|
(146
|
)
|
|
|
(0.3
|
%)
|
|
|
107
|
|
|
|
0.3
|
%
|
Income before provision for income
taxes
|
|
|
4,761
|
|
|
|
24.5
|
%
|
|
|
2,102
|
|
|
|
12.0
|
%
|
|
|
9,660
|
|
|
|
18.3
|
%
|
|
|
6,854
|
|
|
|
13.4
|
%
|
Provision for income taxes
|
|
|
1,202
|
|
|
|
6.2
|
%
|
|
|
630
|
|
|
|
3.6
|
%
|
|
|
2,489
|
|
|
|
4.7
|
%
|
|
|
1,678
|
|
|
|
3.3
|
%
|
Income from continuing operations
|
|
|
3,559
|
|
|
|
18.3
|
%
|
|
|
1,472
|
|
|
|
8.4
|
%
|
|
|
7,171
|
|
|
|
13.6
|
%
|
|
|
5,176
|
|
|
|
10.1
|
%
|
Income from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89
|
|
|
|
0.2
|
%
|
Net income
|
|
$
|
3,559
|
|
|
|
18.3
|
%
|
|
$
|
1,474
|
|
|
|
8.4
|
%
|
|
$
|
7,171
|
|
|
|
13.6
|
%
|
|
$
|
5,265
|
|
|
|
10.3
|
%
|
Net income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.40
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.80
|
|
|
|
|
|
|
$
|
0.58
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
Net income
|
|
$
|
0.40
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.80
|
|
|
|
|
|
|
$
|
0.59
|
|
|
|
|
|
In the three months ended March 31, 2019, net revenues increased by $2.0 million, or 11%, to a third quarter record of $19.5 million as compared to net revenues of $17.5 million in the three months ended March 31, 2018. That increase was attributable to increases of approximately $1.3 million, or 24% in our cards and autographs revenues and $0.7 million, or 7% in total coin revenues.
Operating income increased by approximately $2.8 million, to a quarterly record of $4.8 million in the three months ended March 31, 2019, from $2.0 million in the three months ended March 31, 2018, due to the higher revenues, an improved gross profit margin resulting from improved average service fees on those revenues and lower general and administrative expenses (“G&A”).
In the nine months ended March 31, 2019, despite a $3.9 million reduction in China revenues, total revenues increased by $1.3 million or 3%, to record nine months revenues of $52.7 million from $51.3 million in the nine months ended March 31, 2018. Operating income increased by $3.1 million to $9.8 million, from $6.7 million, primarily due to the record operating income in this year’s third quarter.
These revenue, gross profit margin
and
G&A expense
changes, as well as other factors affecting our operating results in the three and nine months ended March 31, 2019, are discussed in more detail below. See “Results of Operations for the Three and Nine Months Ended March 31, 2019, as compared to the Three and Nine Months Ended March 31, 2018”.
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 89% and 88% of our service revenues in the three and nine months ended March 31, 2019. The amount of those fees and our gross profit margins are primarily driven by the volume and mix of coins and collectibles sales and purchase transactions by collectibles dealers and collectors, because our authentication and grading services generally facilitate sales and purchases of coins and other 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 the other high-value collectibles, that we authenticate and grade.
Our authentication and grading revenues and gross profit margins are affected by (i) the volume and mix of authentication and grading submissions between coins and trading cards, because we typically charge higher fees for coins than for trading cards, (ii) in the case of both coins and trading cards, the turnaround times requested by our customers, because we charge higher fees for faster service times; and (iii) the volume and mix of authentication and grading submissions between vintage or “classic” coins and trading cards, and modern coins and trading cards, as vintage or classic collectibles generally are of significantly higher value than modern coins and trading cards; and therefore, justify a higher average service fee. Furthermore, because a significant 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; and in China based on the level of revenue generated from the banking channel. The reduction in China revenues to $2.8 million in the nine months ended March 31, 2019, from $6.7 million in the same period of the prior year, reflects the absence of revenues from the banking channel. Non-banking channel revenues increased by 3% in this year’s nine months. As previously reported, through February 2018, we had an exclusive relationship with a banking channel customer in China. Due to changing market conditions in China, and a desire to broaden our customer base, in February 2018, we notified the customer that we had decided to terminate the exclusive relationship but were prepared to continue to authenticate and grade coins on a non-exclusive basis. It is too early to predict the longer-term effect this action will have on future coin submissions from this customer or how successful we will be in attracting submissions from other competing banking channel customers. However, at this time, we do not expect to generate revenues from the banking channel in this year’s fourth quarter.
Our revenues and gross profit margin are also affected by the number 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 show attendees typically request higher priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. 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 short-term changes in the price 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.
Our top five customers accounted, in the aggregate, for approximately 13% and 11% of our total revenues in the three and nine months ended March 31, 2019 as compared to 13% and 18% of revenues in the same periods of the prior year. During the nine months ended March 31, 2018, our banking channel customer in China accounted for approximately 8% of total net revenues, however, there were no submissions from this customer, in the current periods. 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 tables provide information regarding the respective numbers of coins and trading cards and autographs that we authenticated and graded in the three and nine months ended March 31, 2019 and 2018, and their estimated values, which are the values at which those coins and trading cards and autographs were declared for insurance purposes, by the dealers and collectors who submitted them to us for authentication and grading:
|
|
Units Processed
Three Months Ended
March
31,
|
|
|
Declared Value (000s)
Three Months Ended
March
31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
Coins
(1)
|
|
|
605,600
|
|
|
|
49.4
|
%
|
|
|
654,000
|
|
|
|
55.4
|
%
|
|
$
|
536,246
|
|
|
|
92.0
|
%
|
|
$
|
508,838
|
|
|
|
91.6
|
%
|
Trading cards and autographs
|
|
|
620,700
|
|
|
|
50.6
|
%
|
|
|
526,100
|
|
|
|
44.6
|
%
|
|
|
46,652
|
|
|
|
8.0
|
%
|
|
|
46,474
|
|
|
|
8.4
|
%
|
Total
|
|
|
1,226,300
|
|
|
|
100.0
|
%
|
|
|
1,180,100
|
|
|
|
100.0
|
%
|
|
$
|
582,898
|
|
|
|
100.0
|
%
|
|
$
|
555,312
|
|
|
|
100.0
|
%
|
|
|
Units Processed
Nine Months Ended
March
31,
|
|
|
Declared Value (000s)
Nine Months Ended
March
31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
Coins
(1)
|
|
|
1,600,000
|
|
|
|
47.3
|
%
|
|
|
2,271,200
|
|
|
|
61.7
|
%
|
|
$
|
1,531,800
|
|
|
|
90.5
|
%
|
|
$
|
1,369,107
|
|
|
|
89.0
|
%
|
Trading cards and autographs
|
|
|
1,781,300
|
|
|
|
52.7
|
%
|
|
|
1,412,600
|
|
|
|
38.3
|
%
|
|
|
160,100
|
|
|
|
9.5
|
%
|
|
|
169,890
|
|
|
|
11.0
|
%
|
Total
|
|
|
3,381,300
|
|
|
|
100.0
|
%
|
|
|
3,683,800
|
|
|
|
100.0
|
%
|
|
$
|
1,691,900
|
|
|
|
100.0
|
%
|
|
$
|
1,538,997
|
|
|
|
100.0
|
%
|
(1)
The lower number of coins authenticated and graded in this year’s third quarter and nine months as compared to the same respective periods of last year, were primarily due to the lower number of China and U.S. Modern coins authenticated in the current year periods. See
Net Revenues
below.
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 high-value collectibles are generally purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, and uncertainties regarding the strength of the economy in the United States, Western Europe and China, because conditions and uncertainties of this nature often lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; as well as an alternative to investments in government bonds and other treasury instruments; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of gold coins, as well as other hard assets if they believe that the market prices of those assets will increase. As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by increases in disposable income and the availability of lower cost borrowings, on the one hand, or increases in inflation or in gold prices, economic uncertainties and declines in business and consumer confidence or a weakening of the U.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressures, or periods of stagnation or a downward trend in the market prices of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to other investments during periods of economic growth, and growing consumer and business confidence and from other investments to gold during periods of economic uncertainties and decreases in disposable income and declines in 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 principally on internally generated cash to fund our continuing operations.
In addition to the operating performances of our businesses and, in particular, our coin and cards and autographs businesses, which accounted for approximately 94% of our total revenues in the nine months ended March 31, 2019, our overall financial position can also be affected by other factors, including the Company’s tax position and effective tax rate, our obligation to repay borrowings under our Term Loan, the dividend policy adopted by the Board of Directors from time to time, the Company’s decisions to invest in and to fund the acquisition of established and/or early stage businesses and any capital raising activities or stock repurchases. Furthermore, our domestic financial position can be impacted by delays in repatriating cash balances back 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—
Outstanding Financial Obligations
” below, the Company continues to have full availability at March 31, 2019 under a $10,000,000 three-year unsecured revolving credit line through January 2020.
We expect that internally generated cash flows, current cash and cash equivalent balances and borrowings available under the credit line will be sufficient to fund our continuing operations at least through the end of March 2020.
Critical Accounting Policies and Estimates
During the three and nine months ended March 31, 2019 there were no changes in our critical accounting policies or estimates which are described in Item 7 of our Fiscal 2018 10-K. Readers of this report are urged to read that Section of the Fiscal 2018 10-K for a more complete understanding and detailed discussion of our critical accounting policies and estimates.
Revenue Recognition
Effective, July 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations are satisfied. The Company analyzed the effect of the ASC 606 on its revenue streams and concluded that the adoption of the ASC 606 did not change the amounts and timing of revenue under previous revenue recognition guidance.
Our primary source of revenue is the authentication and grading of collectibles, which accounted for about 88% of our consolidated revenues in both fiscal 2018 and 2017. Our other sources of revenues are individually less than 5%. In accordance with ASC 606 we recognize revenue for our main revenue streams as follows:
Authentication and Grading Revenues:
As the time it takes to authenticate and grade the collectible is short, we recognize revenue at the time of shipment (i.e. point of time) of the authenticated graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our authentication and grading services and the shipment of the collectible back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue for the sale of special coin inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded shipped back to them. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend credit, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer. We provide a limited warranty covering the coins and trading cards that we authenticate and grade. See
Warranty C
osts
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 are classified as deferred revenue. In the event vouchers expire unused (i.e. there are unexercised customer rights), we consider the guidance under ASC 606 in determining when to recognize revenue.
Certified Coin Exchanges Subscription Revenues:
We recognize subscription revenues related to our CCE exchange for certified coins, ratably over the relevant subscription period. Subscriptions are typically billed and paid on a monthly basis although certain quarterly and annual subscriptions can be paid in advance. Prepaid subscriptions are classified as part of deferred revenue.
Expos Trade Show Revenue:
We recognize fees earned from promoting, managing, and operating trade shows in the periods in which the shows take place. Trade show booth fees are typically paid to us in advance of the show taking place. Certain auction fees are paid to us at the end of the show. Prepaid show fees are classified as part of deferred revenue.
Advertising and Commission Revenues:
Advertising revenues are recognized in the period when the advertisement is displayed in our publications or websites and customers typically have 30 day credit terms. Click-through commission revenues earned through our websites from third party affiliate programs are recognized in the period in which the commissions are earned, and such commissions are paid in the following month.
Coin Sales:
Coin sales consist primarily of sales of collectibles coins that we have purchased pursuant to our coin authentication and grading warranty program. We recognize revenues from coin sales when they are shipped or delivered to customers or if the coins are sold through auction, when the auction settles. However, those sales are not considered an integral part of the Company’s on-going revenue generating activities.
Contract Balances.
As discussed above, the timing of revenue recognition can differ from the timing of invoicing to customers. Contract liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We refer to these contract liabilities as “Deferred Revenue” in the accompanying condensed consolidated balance sheets. During the three and nine months ended March 31, 2019, we recognized $437,000 and $2,746,000 in revenue from the deferred revenue balance of $3,213,000 at June 30, 2018.
Shipping and Handling Costs
Shipping and handling costs incurred to process and return customer collectibles submitted to us for grading or authentication are recorded as costs of revenues, net of amounts received from customers, in accordance with the guidance for Principals versus Agents as set out in ASC 606.
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, in accordance with Accounting Standards Update No. 2011-08, 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 in determining a fair value that is used 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. However, 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 would be required.
During the first quarter ended September 30, 2018, 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, and therefore, it was not necessary to proceed to the two-step impairment test.
Stock-Based Compensation
We recognize stock-based compensation attributable to service-based equity grants over the service period based on the respective grant date fair values of the awards. For performance-based equity grants the vesting of which is dependent on the achievement of financial performance goals, we begin recognizing compensation expense based on their respective grant date fair values, when it has become probable that we will achieve the financial performance goals. Performance-based equity grants that contain a market multiplier are accounted for as awards with a performance condition.
Restricted Stock Awards
: Long Term Incentive Plan (“LTIP”)
Retention Restricted
Service
Shares
(“RSUs”)
To create incentives for the LTIP Participants to remain in the Company's service, RSUs were granted to them as follows:
Annual Grants
. A total of 54,144 and 21,090 RSUs were granted in fiscal 2019 and December 2017, respectively, with vesting in three annual installments on the last day of the fiscal years following the grants, with the vesting of each such installment contingent on the Participant remaining in the continuous service of the Company through the vesting date of that installment.
One Time Grant
. A total of 21,090 RSUs were granted in December 2017, with vesting in two equal installments of which 10,545 shares vested on June 30, 2018 and the remaining RSUs will vest on June 30, 2019, contingent on the Participant remaining in the continuous service of the Company through that vesting date.
If a Participant's continuous service with the Company ceases, for any reason whatsoever, including a termination of the Participant’s employment with or without cause, prior to any vesting date or dates, the then unvested RSUs will be forfeited.
Fiscal 2018
P
erformance Restricted Share
s
(“PSUs”)
To create incentives for the Participants to drive significant improvements in the Company’s operating results during the three fiscal years ending June 30, 2020 (the "Performance Period"), in December 2017, the Compensation Committee granted a total of 42,180 PSUs and established threshold, target and maximum CARGR (defined as compounded annual consolidated revenue growth rate) goals and Operating Margin (defined as operating income before stock-based compensation expense expressed as a percentage of consolidated revenue) goals, to be achieved over the Performance Period for vesting to occur.
To date, no stock-based compensation expense has been recognized for the 42,180 PSUs shares, as it is not considered probable, based on the level of operating income before stock-based compensation achieved through March 31, 2019, that the Company will achieve any of the performance goals by fiscal 2020.
Fiscal 2019 PSUs
To create incentives for the Participants to focus their efforts on the achievement of increases in net cash flows (defined as net cash generated by the Company’s continuing activities, minus capital expenditures and capitalized software costs), during the three years ending June 30, 2021, (the “Performance Period”), in December 2018, the Compensation Committee granted PSUs to Participants. Vesting of the PSUs is dependent upon the achievement of net cash flows on an annual basis for the fiscal years ending, June 30, 2019, 2020 and 2021, subject to possible downward or upward adjustment of 20% of the PSUs, based on a comparison of the Company’s total shareholder return (“TSR”) for the Performance Period, to the TSR of the Russell 2000 Index, for the same Performance Period. Threshold, target and maximum net cash flow goals have been established for fiscal year 2019 and a grant date has been established for that year’s PSUs for expense recognition purposes. The cash flow goals for fiscal years 2020 and 2021 will be set early in those fiscal years which will give rise to grant dates for expense recognition purposes.
For any of the PSUs to vest, a Participant must provide continuous service through June 30, 2021 and the threshold net cash flow goal must be achieved in at least one of the years in the Performance Period. Stock-based compensation expense of $35,000 and $45,000 was recognized for these PSUs in the three and nine months ended March 31, 2019, respectively.
Total stock-based compensation in the three and nine months ended March 31, 2019 was $252,000 and $720,000, respectively as compared to $501,000 and $951,000, in the three and nine months ended March 31, 2018.
Results of Operations for the Three
and
Nine
Months Ended
March
31
,
201
9
as
compared
to the Three
and
Nine
Months Ended
March
31
, 201
8
Net Revenues
Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards and autographs, and related special inserts, if applicable. To a lesser extent, we generate collectibles related service revenues (which we refer to as “other related revenues”) from advertising and commissions earned on our websites and in printed publications and collectibles price guides; subscription/membership revenues related to our CCE (dealer-to-dealer Internet bid-ask market for certified coins), and Collectors Club memberships; and fees earned from promoting, managing and operating collectibles trade shows. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we have purchased under our coin authentication and grading warranty policy. We do not consider such product sales to be the focus or an integral part of our ongoing revenue generating activities.
The following tables set forth the information regarding our net revenues for the three and nine months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended
March
31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
Authentication and grading fees
|
|
$
|
17,307
|
|
|
|
88.9
|
%
|
|
$
|
15,247
|
|
|
|
87.1
|
%
|
|
$
|
2,060
|
|
|
|
13.5
|
%
|
Other related revenues
|
|
|
2,164
|
|
|
|
11.1
|
%
|
|
|
2,265
|
|
|
|
12.9
|
%
|
|
|
(101
|
)
|
|
|
(4.5
|
%)
|
Total revenues
|
|
$
|
19,471
|
|
|
|
100.0
|
%
|
|
$
|
17,512
|
|
|
|
100.0
|
%
|
|
$
|
1,959
|
|
|
|
11.2
|
%
|
|
|
Nine Months Ended
March
31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
Authentication and grading fees
|
|
$
|
46,335
|
|
|
|
88.0
|
%
|
|
$
|
45,230
|
|
|
|
88.1
|
%
|
|
$
|
1,105
|
|
|
|
2.4
|
%
|
Other related revenues
|
|
|
6,335
|
|
|
|
12.0
|
%
|
|
|
6,098
|
|
|
|
11.9
|
%
|
|
|
237
|
|
|
|
3.9
|
%
|
Total revenues
|
|
$
|
52,670
|
|
|
|
100.0
|
%
|
|
$
|
51,328
|
|
|
|
100.0
|
%
|
|
$
|
1,342
|
|
|
|
2.6
|
%
|
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 nine months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended
March
31
,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
vs. 201
8
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
% of Net
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
%
|
|
Coins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,659
|
|
|
|
49.6
|
%
|
|
$
|
8,791
|
|
|
|
50.2
|
%
|
|
$
|
868
|
|
|
|
9.9
|
%
|
China
|
|
|
1,059
|
|
|
|
5.4
|
%
|
|
|
1,181
|
|
|
|
6.8
|
%
|
|
|
(122
|
)
|
|
|
(10.3
|
%)
|
France & Hong Kong
|
|
|
794
|
|
|
|
4.1
|
%
|
|
|
808
|
|
|
|
4.6
|
%
|
|
|
(14
|
)
|
|
|
(1.7
|
%)
|
Total Coins
|
|
|
11,512
|
|
|
|
59.1
|
%
|
|
|
10,780
|
|
|
|
61.6
|
%
|
|
|
732
|
|
|
|
6.8
|
%
|
Cards and autographs
(1)
|
|
|
6,746
|
|
|
|
34.6
|
%
|
|
|
5,449
|
|
|
|
31.1
|
%
|
|
|
1,297
|
|
|
|
23.8
|
%
|
Other
(2)
|
|
|
1,213
|
|
|
|
6.3
|
%
|
|
|
1,283
|
|
|
|
7.3
|
%
|
|
|
(70
|
)
|
|
|
(5.5
|
%)
|
|
|
$
|
19,471
|
|
|
|
100.0
|
%
|
|
$
|
17,512
|
|
|
|
100.0
|
%
|
|
$
|
1,959
|
|
|
|
11.2
|
%
|
|
|
Nine
Months Ended
March 31
,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
vs. 201
8
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
% of Net
|
|
|
Increase (Decrease)
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
%
|
|
Coins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
25,303
|
|
|
|
48.0
|
%
|
|
$
|
23,738
|
|
|
|
46.2
|
%
|
|
$
|
1,565
|
|
|
|
6.6
|
%
|
China
|
|
|
2,814
|
|
|
|
5.3
|
%
|
|
|
6,749
|
|
|
|
13.2
|
%
|
|
|
(3,935
|
)
|
|
|
(58.3
|
%)
|
France & Hong Kong
|
|
|
2,395
|
|
|
|
4.6
|
%
|
|
|
2,330
|
|
|
|
4.5
|
%
|
|
|
65
|
|
|
|
2.8
|
%
|
Total Coins
|
|
|
30,512
|
|
|
|
57.9
|
%
|
|
|
32,817
|
|
|
|
63.9
|
%
|
|
|
(2,305
|
)
|
|
|
(7.0
|
%)
|
Cards and autographs
(1)
|
|
|
18,852
|
|
|
|
35.8
|
%
|
|
|
15,192
|
|
|
|
29.6
|
%
|
|
|
3,660
|
|
|
|
24.1
|
%
|
Other
(2)
|
|
|
3,306
|
|
|
|
6.3
|
%
|
|
|
3,319
|
|
|
|
6.5
|
%
|
|
|
(13
|
)
|
|
|
(0.4
|
%)
|
|
|
$
|
52,670
|
|
|
|
100.0
|
%
|
|
$
|
51,328
|
|
|
|
100.0
|
%
|
|
$
|
1,342
|
|
|
|
2.6
|
%
|
|
(1)
|
Consists of revenues from our PSA trading card authentication and grading business and our PSA/DNA autograph authentication and grading business.
|
|
(2)
|
Includes the revenues generated by our CCE subscription business, Coinflation.com, Collectors.com, the Expos trade show and sales of product.
|
For the three months ended March 31, 2019, our total revenues increased by $1,959,000, or 11.2%, to a third quarter record of $19,471,000, from $17,512,000 in the three months ended March 31, 2018. That increase was attributable to an increase of $2,060,000, or 13.5%, in authentication and grading fees, partially offset by a decrease of $101,000 or 4.5%, in other related services. The increase in authentication and grading fees was attributable to a $1,298,000, or 25.9%, increase in cards and autographs fees and a net increase of $762,000, or 7.4% in coin fees.
In the nine months ended March 31, 2019, our total revenues increased by $1,342,000 or 2.6%, to a nine month record of $52,670,000 from $51,328,000 in the nine months ended March 31, 2018. That increase was attributable to an increase of $1,105,000, or 2.4%, in authentication and grading fees, and a $237,000, or 3.9%, increase in other related services. The increase in authentication and grading fees was attributable to an increase of $3,516,000, or 25.2%, in cards and autograph fees partially offset by a net decrease of $2,411,000 or 7.7%, in coin fees, attributable to China (see below).
Revenues from our trading cards and autographs business continued to show consistent growth. Those revenues increased by 24% in this year’s third quarter and represented record quarterly revenues for that business. Moreover, our card and autographs business has achieved quarter-over-quarter revenue growth in 34 of the last 35 quarters.
The decreased revenues from China in the nine months ended March 31, 2019, reflected an absence of revenues from the banking channel in China as compared to approximately $4,027,000 in last year’s nine month period. We generated non-banking channel revenues in China of $1,059,000 and $2,814,000 in three and nine months ended March 31, 2019, respectively, as compared to $1,181,00 and $2,722,000 in the three and nine months ended March 31, 2018, respectively. See
Factors that can Affect our Revenues and Gross Profit Margin
above, which discusses the banking channel in China in greater detail.
Changes in U.S. coin fees in this year’s third quarter and nine months as compared to the same respective periods of the prior year, primarily reflected, (i) higher show fees of $583,000 or 41% in the third quarter and $1,458,000 or 35% in the nine months, reflecting higher average fees earned per show in the fiscal 2019 periods (ii) higher modern coin fees of $375,000 or 11% in the third quarter and lower fees of $429,000 or 5.3% in the nine months, which included the Apollo program and higher average service fees earned in this year’s third quarter that partially offset lower modern fees earned in the first six months of the year and (iii) lower U.S. vintage fees of $82,000, or 3% in the third quarter and increased fees of $311,000 or 3% in the nine months.
Despite the net decrease in our coin authentication and grading revenues in the nine months ended March 31, 2019, our coin business represented approximately 58% of total revenues in that period which reflects the continued importance of our coin authentication and grading business to our overall financial performance.
For the reasons discussed above under “Factors That Can Affect our Revenues and Gross Profit Margin”, and “Impact of Economic Conditions on our Financial Performance”, the level of coin service revenues can be volatile.
As discussed in prior filings, our third fiscal quarter is typically our seasonally strongest quarter of the year in the United States for coins, due to the release of Gold and Silver Eagles by the U.S. Mint in that quarter and that trend continued in this year’s third quarter. In addition, as expected, our cards and autographs revenue continued to grow in a stable manner in this year’s third quarter and we expect that trend to continue into this year’s fourth quarter.
With respect to China, our current expectation is that we will continue to see stability in our non-banking channel revenues in China continuing in this year’s fourth quarter. However, we do not expect to generate revenues from the banking channel during the remainder of this fiscal year.
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 nine months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended
March
31,
|
|
|
Nine Months Ended March 31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amounts
|
|
|
% of Revenues
|
|
|
Amounts
|
|
|
% of Revenues
|
|
Gross profit
|
|
$
|
11,644
|
|
|
|
59.8
|
%
|
|
$
|
9,694
|
|
|
|
55.4
|
%
|
|
$
|
30,688
|
|
|
|
58.3
|
%
|
|
$
|
29,583
|
|
|
|
57.6
|
%
|
As indicated in the above table, our gross profit margin was 59.8% and 58.3% in the three and nine months ended March 31, 2019, respectively, as compared to 55.4% and 57.6%, respectively, in the same respective periods of the prior year. The higher gross profit margin earned in the three months ended March 31, 2019, reflects an improved gross profit margin earned on our coin and cards and autograph businesses, primarily due to higher average service fees in those businesses and in the case of cards and autographs a higher number of units shipped in the quarter. As previously reported, there can be variability in the gross profit margin due to the mix of revenue and the seasonality of our business. During the three years ended June 30, 2018, our quarterly gross profit varied between 54% and 65%.
Selling and Marketing Expenses
Selling and marketing expenses include advertising and promotions costs, trade-show related expenses, customer service personnel costs, business development personnel costs and incentives, depreciation and outside services. Set forth below is information regarding our selling and marketing expenses in the three and nine months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
Selling and marketing expenses
|
|
$
|
2,509
|
|
|
$
|
2,513
|
|
|
$
|
7,803
|
|
|
$
|
7,688
|
|
Percent of net revenue
|
|
|
12.9
|
%
|
|
|
14.4
|
%
|
|
|
14.8
|
%
|
|
|
15.0
|
%
|
As indicated in the above table, selling and marketing expenses were 12.9% and 14.8% of revenues in the three and nine months ended March 31, 2019, respectively, as compared to 14.4% and 15.0%, in the same periods of the prior year. In absolute dollars, selling and marketing expenses were substantially unchanged in the current year periods. There were higher selling and marketing expenses incurred in our growing cards and autograph business, including costs incurred for business development activities in Japan for the Company’s new Japanese subsidiary, which for the most part were offset by lower selling and marketing expenses in our other businesses.
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, facilities management costs, depreciation, amortization and other miscellaneous expenses. Set forth below is information regarding our G&A expenses in the three and nine months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
General and administrative expenses
|
|
$
|
4,370
|
|
|
$
|
5,195
|
|
|
$
|
13,079
|
|
|
$
|
15,148
|
|
Percent of net revenue
|
|
|
22.4
|
%
|
|
|
29.7
|
%
|
|
|
24.9
|
%
|
|
|
29.5
|
%
|
As indicated in the above table, G&A expenses decreased to 22.4% and 24.9% of revenues in the three and nine months ended March 31, 2019, respectively, from 29.7% and 29.5%, in the same periods of the prior year. In absolute dollars, G&A expenses decreased by $825,000 and $2,069,000 in this year’s third quarter and nine months and was primarily due to (i) lower payroll and related costs of $194,000 in the quarter and $949,000 in the nine months, arising from staff reductions implemented in the fourth quarter of fiscal 2018 and management changes in the Company’s coin division that occurred in the first half of fiscal 2019, (ii) the non-recurrence in this year’s three and nine months of $368,000 and $955,000, respectively, comprised of moving and lease exit costs, in connection with the Company’s new operations and headquarter facility, and a pre-litigation net settlement incurred in the prior year periods, and (iii) lower non-cash stock based compensation of $242,000 and $207,000 in the third quarter and nine months, respectively. Those reductions were partially offset by higher depreciation expense of $330,000 in the nine months ended March 31, 2019, primarily related to depreciation of tenant improvements and other assets capitalized as part of our new operations and headquarter facility and higher amortization of capitalized software projects of $63,000 and $163,000 in this year’s three and nine months periods, respectively.
Stock-Based Compensation
As discussed in Note 1, to the Company’s condensed consolidated financial statements,
and
Critical Accounting Policies
above, the Company recognized stock-based compensation expense as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
Included In:
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
Selling and marketing expenses
|
|
$
|
18
|
|
|
$
|
25
|
|
|
$
|
52
|
|
|
$
|
76
|
|
General and administrative expenses
|
|
|
234
|
|
|
|
476
|
|
|
|
668
|
|
|
|
875
|
|
|
|
$
|
252
|
|
|
$
|
501
|
|
|
$
|
720
|
|
|
$
|
951
|
|
The following table sets forth unrecognized non-cash stock-based compensation expense totaling $1,246,000 related to unvested stock-based equity awards outstanding at March 31, 2019 which represents the expense expected to be recognized through fiscal year 2022, based on the assumption that the holders of the equity awards will remain in the Company’s service through fiscal 2022. The amounts do not include the costs or effects of (i) possible grants of additional stock-based compensation awards in the future (ii) the PSUs granted in December 2017 under the 2018 LTIP and (iii) the PSUs granted in December 2018 for which the grant dates are to be established in fiscal 2020 and 2021.
Fiscal Year Ending June 30,
|
|
(In Thousands)
|
|
2019 (remaining 3 months)
|
|
$
|
252
|
|
2020
|
|
|
619
|
|
2021
|
|
|
360
|
|
2022
|
|
|
15
|
|
|
|
$
|
1,246
|
|
Income Tax Expense
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
201
9
|
|
|
201
8
|
|
|
201
9
|
|
|
201
8
|
|
|
|
(In Thousands)
|
|
Provision for income taxes
|
|
$
|
1,202
|
|
|
$
|
630
|
|
|
$
|
2,489
|
|
|
$
|
1,678
|
|
The income tax provisions in the three and nine months ended March 31, 2019 were determined based on estimated annual effective tax rates of approximately 25% and 26%, respectively as compared to 30% and 24% for the three and nine months ended March 31, 2018, respectively. The rate of 26% for the nine months ended March 31, 2019 reflects a federal tax rate of 21% as a result of the Tax Reform Act enacted into law in December 2017. The rate of 24% in the nine months ended March 31, 2018 reflected a blended federal tax rate of 28%. All periods have been adjusted for excess tax benefits or deficiencies, primarily resulting from the vesting of the 2013 LTIP shares in August 2017 and June 2018, respectively.
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.
At March 31, 2019, we had cash and cash equivalents of approximately $15,716,000, as compared to cash and cash equivalents of $10,581,000 at June 30, 2018. As discussed below, we have current borrowings of approximately $2.6 million outstanding under our Term Loan, which are repayable in equal monthly installments through September 2022. In addition, we continue to have $10 million of availability under our Revolving Line of Credit.
Cash Flows
Cash Flows from Continuing Operations
. During the nine months ended March 31, 2019 and 2018, net cash provided by continuing operating activities was $11,942,000 and $8,476,000, respectively. The higher cash provided by operating activities in the nine months ended March 31, 2019, reflects the improved operating results of our businesses in the period, as adjusted for non-cash expenses and changes in working capital.
Cash Flows of Discontinued Operations
. Discontinued operations used cash of $228,000 in the nine months ended March 31, 2018, primarily related to payments for the now expired obligation for the New York facility, formerly occupied by our discontinued jewelry business.
Cash
u
sed by
Investing
A
ctivities
. Investing activities used cash of $1,506,000 and $4,347,000 in the nine months ended March 31, 2019 and 2018, respectively. In the nine months ended March 31, 2019, we used $749,000 for capital expenditures and $787,000 for capitalized software costs. In the nine months ended March 31, 2018, we used $3,626,000 for capital expenditures, primarily related to the move of the Company’s operations and headquarters to a new facility and $720,000 for capitalized software costs.
Cash used in Financing Activities
. In the nine months ended March 31, 2019, financing activities used net cash of $5,289,000, comprised of cash dividends paid to stockholders of $4,914,000 and $375,000 of repayments under our Term Loan. In the nine months ended March 31, 2018, financing activities used net cash of $4,548,000, comprised of $7,548,000 of cash dividends paid to stockholders partially offset by borrowings of $3,000,000 under the Term Loan. The lower cash dividends paid to stockholders in the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018 was due to a reduction in the Company’s quarterly dividend, effective February 2018 (see
D
ividends
below).
Outstanding Financial Obligations
Lease Obligations
On February 3, 2017, the Company, as tenant, entered into a triple net lease pursuant to which the Company is leasing approximately 62,755 rentable square feet space for its operations and headquarters facility. The term of this lease is 10 years and 10 months, which commenced on the completion of tenant improvements, which occurred on December 1, 2017. The Company received an abatement of the monthly rent for the period January 1, 2018 through October 31, 2018. The landlord contributed approximately $2.9 million to the tenant improvements. As of March 31, 2019, the remaining aggregate minimum obligations over the term of the lease was approximately $13.6 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 remaining obligations over the term of the lease of approximately $2.2 million and three year leases for our offices in Hong Kong, which commenced in July 2018, with aggregate remaining obligations over the term of those leases of approximately $466,000.
At March 31, 2019, future minimum lease payments under the lease agreements associated with our continuing operations were as follows (in thousands):
Year Ending June 30,
|
|
Gross Amount
|
|
2019 (remaining 3 months)
|
|
$
|
603
|
|
2020
|
|
|
2,487
|
|
2021
|
|
|
2,436
|
|
2022
|
|
|
2,058
|
|
2023
|
|
|
1,665
|
|
Thereafter
|
|
|
7,998
|
|
|
|
$
|
17,247
|
|
Term Loan
.
As previously reported, on September 15, 2017 the Company obtained a five-year, $3,500,000 unsecured term loan from a commercial bank. The Company borrowed $3,000,000 under this loan to fund the Company’s share of the construction and related facility costs for its new operations and headquarter facility, as well as its moving costs, and lease exit costs for its former operations and headquarter facility. During that first year the Company was only required to make monthly payments of interest on borrowings.
In September 2018, the loan balance outstanding was automatically converted into a four-year term loan in the principal amount of the borrowings then outstanding, which was $3,000,000. In October 2018, the Company began repaying the loan in 48 equal monthly principal payments of $62,500 or $750,000 on an annual basis, through September 2022. There are no prepayment penalties on loan repayments, as the Company chose a 90-day LIBOR rate to apply to the outstanding balance upon conversion to the four-year term loan.
The agreement governing the term loan contains two financial covenants, which require the Company to maintain (a) a funded debt coverage ratio and (b) a debt service coverage ratio, respectively. The loan agreement also contains certain other covenants typical for this type of loan, including a covenant which provides that, without the bank’s consent, the Company may not incur additional indebtedness for borrowed money, except for (i) borrowings under the Company’s revolving credit line, (ii) purchase money indebtedness and (iii) capitalized lease obligations.
At March 31, 2019, the Company had $2,625,000 of outstanding borrowings under this term loan of which $750,000 is classified as a current liability and $1,875,000 is classified as a long-term liability in the consolidated condensed balance sheet at March 31, 2019. The Company was in compliance with its loan covenants at March 31, 2019.
Revolving
Credit Line
. On January 10, 2017 the Company obtained a three-year, $10 million unsecured revolving credit line (the “Credit Line”) from a commercial bank. The Company is entitled to obtain borrowings under the Credit Line at such times and in such amounts as it may request, provided that the maximum principal amount of the borrowings that may be outstanding at any one time under the Credit Line may not exceed $10 million and each year there must be a period of 30 consecutive days during which no borrowings are outstanding. The Company also may, at any time or from time to time and at its option, repay outstanding borrowings, in whole or in part, and may reborrow amounts so repaid at such times and in such amounts as it deems appropriate.
Credit Line borrowings will bear interest, at the Company’s option, at LIBOR plus 2.25% or at 0.25% below the highest prime lending rate published from time to time by the Wall Street Journal. The Company is required to pay a quarterly unused commitment fee of 0.0625% of the amount by which (if any) that the average of the borrowings outstanding under the Credit Line in any calendar quarter is less than $4 million.
The agreement contains a financial covenant that requires the Company to maintain a funded debt coverage ratio and certain other covenants typical for this type of credit line. At March 31, 2019 the Company was in compliance with those covenants. There were no borrowings outstanding under the line of credit at March 31, 2019.
Dividends.
Our current dividend policy calls 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. This compared to a quarterly dividend of $0.35 per common share, for an annual dividend of $1.40 per share of common stock through December 31, 2017.
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 (and in particular the on-going performance of the Company’s coin and trading cards and autographs businesses), 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.
Share Buyback Program
. In December 2005, our Board of Directors approved a common stock buyback program that authorized up to $10,000,000 of stock repurchases in open market or privately negotiated transactions, in accordance with applicable SEC rules, when opportunities to make such repurchases, at attractive prices, become available. At March 31, 2019, we continued to have $3.7 million available for share repurchases under this program. However, no open market repurchases of common stock have been made under this program since the fourth quarter of fiscal 2008 and there is no assurance that we will make any share repurchases under this program 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 line of credit (i) to introduce new collectibles and related services and initiatives for our existing customers and other collectibles customers (ii) to fund the international expansion of our business; (iii) to fund working capital requirements; (iv) to fund repayments under the term loan (v) to fund acquisitions; (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 to sell additional shares of our stock to finance the growth of our collectible’s businesses. However, there is no assurance that we would be able to raise additional capital on terms acceptable to us, if at all.
Recent Accounting Pronouncements
In February 2016, FASB issued Accounting Standards Update 2016-02 on
Accounting for Leases
. The core principle of this guidance is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset, not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The 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.