Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-Q, Received: 05/11/2009 16:05:03)
 
 

 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarter ended March 31, 2009
   
 
OR
   
q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
   
 
For the transition period from _______ to _____
Commission file number 0-27887
 
 
 
 
COLLECTORS UNIVERSE, INC.
(Exact name of Registrant as specified in its charter)

Delaware
33-0846191
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or organization)
 
 
1921 E. Alton Avenue, Santa Ana, California 92705
(address of principal executive offices and zip code )
 
 
Registrant's telephone number, including area code: (949) 567-1234

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ý    No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a “smaller reporting company”.  See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2).
YES   o    NO   x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
Outstanding at  April 28, 2009
 
Common Stock $.001 Par Value
9,158,343
 
       


 

 

COLLECTORS UNIVERSE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2009

TABLE OF CONTENTS

PART I
Financial Information
Page
       
   
       
   
1
       
   
2
       
   
3
       
   
4
       
 
19
   
19
   
19
   
20
   
21
        Trends and Challenges in our Businesses
 22
   
23
   
25
   
31
   
33
       
 
36
       
 
36
       
 
       
 
36
 
37
 
37
     
 
S-1
     
E-1
     
EXHIBITS
   
     
 
     
 
     
 
     
 
     
 


 
i

 

PART 1 – FINANCIAL INFORMATION
ITEM 1.                                                                 FINANCIAL STATEMENTS
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(in thousands, except per share data)
(unaudited)
   
March 31,
   
June 30,
 
   
2009
   
2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 20,771     $ 23,345  
Accounts receivable, net of allowance of $24 at March 31, 2009 and $ 29 at June 30, 2008
    1,325       1,214  
Refundable income taxes
    142       575  
Inventories, net
    533       961  
Prepaid expenses and other current assets
    1,054       803  
Customer n otes receivable , net of allowance of $31 at March 31, 2009 and at June 30, 2008
    3,015       2,062  
Net deferred income tax asset
    63       486  
Customer notes receivables held for sale
    -       3,579  
Receivables from sale of net assets of discontinued operations
    142       92  
Current assets from discontinued operations held for sale
    800       448  
Total current assets
    27,845       33,565  
                 
Property and equipment, net
    1,224       1,628  
Goodwill
    2,626       2,626  
Intangible assets, net
    3,676       5,732  
Net deferred income tax assets
    -       909  
Customer note receivable, net of current portion
    175       -  
Note receivable from sale of discontinued operations
    323       138  
Other assets
    65       126  
Non-current assets of discontinued operations held for sale
    152       7,294  
    $ 36,086     $ 52,018  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,147     $ 1,349  
Accrued liabilities
    1,431       1,546  
Accrued compensation and benefits
    1,297       1,269  
Income taxes payable
    347       368  
Deferred revenue
    2,195       2,002  
Current liabilities of discontinued operations held for sale
    1,923       1,034  
Total current liabilities
    8,340       7,568  
Deferred rent
    193       195  
Net deferred income tax liability
    305       -  
Long-term liabilities of discontinued operations held for sale
    2,632       425  
Commitments and contingencies
               
Preferred stock, $.001 par value; 3,000 shares authorized at March 31, 2009; 5,000 at June 30, 2008; no shares issued or outstanding
    -       -  
Common stock, $.001 par value; 20,000 shares authorized at March 31, 2009 and 45,000 at June 30, 2008; outstanding 9,158
   at March 31, 2009 and 8,361 at June 30, 2008
    9       8  
Additional paid-in capital
    75,881       75,996  
Accumulated deficit
    (51,274 )     (32,174 )
Total stockholders' equity
    24,616       43,830  
    $ 36,086     $ 52,018  

See accompanying notes to condensed consolidated financial statements.

 
1

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(in thousands, except per share data)
(unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2009
   
2008
   
2009
   
2008
 
Net Revenues:
                       
Grading, authentication and related services
  $ 9,119     $ 10,326     $ 25,875     $ 28,958  
Product sales
    196       21       299       913  
      9,315       10,347       26,174       29,871  
Cost of Revenues:
                               
Grading, authentication and related services
    3,910       4,908       11,770       14,218  
Product sales
    200       20       506       827  
      4,110       4,928       12,276       15,045  
Gross profit
    5,205       5,419       13,898       14,826  
Operating expenses:
                               
Selling and marketing expenses
    1,058       1,514       3,304       3,980  
General and administrative expenses
    3,086       3,287       9,552       9,900  
Impairment loss
    -       -       1,516       -  
Amortization of intangible assets
    253       202       717       543  
Total operating expenses
    4,397       5,003       15,089       14,423  
Operating income (loss)
    808       416       (1,191 )     403  
Interest income, net
    53       238       252       978  
Other income
    2       1       14       4  
Income (loss) before income taxes
    863       655       (925 )     1,385  
Provision for income taxes
    109       384       1,319       662  
Income (loss) from continuing operations
    754       271       (2,244 )     723  
Loss from discontinued operations, net of loss on sales of discontinued businesses
   (net of income taxes)
    (5,542 )     (1,237 )     (14,765 )     (3,242 )
Net loss
  $ (4,788 )   $ (966 )   $ (17,009 )   $ (2,519 )
                                 
Net income (loss) per basic share:
                               
Income (loss) from continuing operations
  $ 0.08     $ 0.03     $ (0.25 )   $ 0.08  
   Loss from discontinued operations, net of loss on sales of discontinued businesses
       (net of income taxes)
    (0.61 )     (0.13 )     (1.62 )     (0.35 )
   Net loss
  $ (0.53 )   $ (0.10 )   $ (1.87 )   $ (0.27 )
                                 
Net income (loss) per diluted share:
                               
Income (loss) from continuing operations
  $ 0.08     $ 0.03     $ (0.25 )   $ 0.08  
Loss from discontinued operations, net of loss on sales of discontinued
      businesses (net of income taxes)
    (0.61 )     (0.13 )     (1.62 )     (0.35 )
Net loss
  $ (0.53 )   $ (0.10 )   $ (1.87 )   $ (0.27 )
                                 
Weighted average shares outstanding:
                               
Basic
    9,083       9,317       9,103       9,322  
Diluted
    9,110       9,406       9,103       9,468  
Dividends declared per common share
  $ -     $ 0.25     $ 0.25     $ 0.75  


See accompanying notes to condensed consolidated financial statements.

 
2

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(in thousands)
(unaudited)
   
Nine Months Ended
March 31,
 
   
2009
   
2008
 
OPERATING ACTIVITIES:
           
Net loss
  $ (17,009 )   $ (2,519 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    1,136       999  
Interest on note receivable
    (1 )     (7 )
Impairment loss
    1,516       -  
Stock-based compensation expense
    632       802  
Gain on sale of note receivable
    (9 )     -  
Provision (recovery) for bad debts and credits
    (1 )     4  
Provision for inventory write down
    172       10  
Discontinued operations
    14,765       3,242  
Deferred income taxes
    1,205       (1,434 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (110 )     (405 )
Inventories
    255       (665 )
Prepaid expenses and other current assets
    (205 )     (126 )
Refundable income taxes
    434       120  
Income taxes payable
    (21 )     2  
Other assets
    51       13  
Accounts payable
    (202 )     (220 )
Accrued liabilities
    (90 )     (49 )
Deferred rent and other long-term liabilities
    (3 )     (72 )
Accrued compensation and benefits
    28       (604 )
Deferred revenue
    193       283  
Net cash provided by (used in) operating activities
    2,736       (626 )
Net cash used in operating activities of discontinued businesses
    (5,523 )     (3,035 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (50 )     (809 )
Proceeds from sale of property and equipment
    -       63  
Advances on customer notes receivable
    (2,446 )     (5,343 )
Proceeds from collection of customer notes receivable
    4,882       3,896  
Capitalized software
    (249 )     (943 )
Cash received on sales of discontinued businesses
    489       69  
Net cash provided by (used in) investing activities
    2,626       (3,067 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from exercise of stock options
    1       242  
Proceeds from sale of common stock
    161       -  
Repurchase of common stock
    (484 )     (1,329 )
Dividends paid to common stockholders
    (2,091 )     (6,404 )
Net cash used in financing activities
    (2,413 )     (7,491 )
                 
Net decrease in cash and cash equivalents
    (2,574 )     (14,219 )
Cash and cash equivalents at beginning of period
    23,345       42,386  
Cash and cash equivalents at end of period
  $ 20,771     $ 28,167  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Interest paid
    10     $ 15  
Income taxes paid (refund)
    (331 )   $ 18  
See accompanying notes to condensed consolidated financial statements.

 
3

 

  COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Collectors Universe, Inc. and its subsidiaries (the “Company” “we”, “us”, “our”).  At March 31, 2009, such subsidiaries were Collectors Finance Corporation (“CFC”), Certified Asset Exchange, Inc. (“CAE”), Expos Unlimited, Inc. (“Expos”), and American Gemological Laboratories, Inc. (“AGL”), all of which are 100% owned by Collectors Universe, Inc.  All intercompany transactions and accounts have been eliminated.  On March 27, we sold certain assets including the trade name of Gem Certification and Assurance Lab, Inc. (“GCAL”), which was 100% owned by us (see note 7).

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting.   These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Operating results for the three and nine months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending June 30, 2009 or for any other interim period during such year.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC.  These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2008, as filed with the SEC.  Amounts related to disclosure of June 30, 2008 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in that Annual Report on Form 10-K.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.  At March 31, 2009, we classified our paper currency, diamond and colored gemstone grading businesses as discontinued operations held for sale, and, accordingly, all periods presented in the Condensed Consolidated Financial Statements have been restated to reflect the results of operations, loss per share, cash flows and financial position of these businesses as discontinued operations (see notes 7 and 10). During the second fiscal quarter of 2009, we distributed a 10% stock dividend to our common stockholders, and, as such, we restated the number of shares outstanding and the loss per share for continuing and discontinued operations to give retroactive effect of the stock dividend for those shares shown in the Consolidated Statements of Operations prior to the stock dividend date of November 3, 2008.

Revenue Recognition

Net revenues consist primarily of fees generated from the authentication and grading of coins, trading cards, autographs, and stamps.  Authentication and grading revenues are recognized when those services have been performed by us and the item is shipped back to the customer.  Authentication and grading fees generally are prepaid, although we offer open account privileges to larger dealers.  Advance payments received for grading services are deferred until the service is performed and the graded item is shipped to the customer.  In the case of dealers to whom we have extended credit, we record revenues at the time the item is shipped to the customer.  With respect to our Expos trade show business, we recognize revenue generated by the promotion, management and operation of collectibles conventions and trade shows in the periods in which the shows take place.
 
 
4


 
A portion of our net revenues are comprised of subscription fees paid by customers for a membership in our Collectors Club.  Those memberships entitle members access to our on-line and printed publications, and sometimes also to vouchers for free grading services.  We record revenue for this multi-element service arrangement in accordance with EITF   00-21 , Accounting for Revenue Arrangements With Multiple Deliverables, by recognizing approximately 60% of the subscription fee in the month following the membership purchase, on the basis that Collectors Club members typically utilize their vouchers for free grading services within 30 days of subscribing for memberships.  The balance of the membership fee is recognized as revenue over the life of the membership, which can range from one to two years.  We evaluate, at least semi-annually, the relative fair values of the deliverables and the percentage factors used to allocate the membership fee between the grading and the publication services provided under this membership service.

We recognize product sales when items are shipped and the requirements of Staff Accounting Bulletin No. 104, Revenue Recognition, issued by the Securities and Exchange Commission (“SEC”), have been satisfied.  Product sales consist primarily of collectible coins that we purchased pursuant to our coin authentication and grading warranty program and are not considered an integral part of the Company’s on-going revenue generating activities.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates, and such differences could be material to the Condensed Consolidated Financial Statements.  Examples of such estimates that could be material to the Condensed Consolidated Financial Statements include capitalized software, the valuation of stock-based compensation awards, the amount of goodwill and the existence or non-existence of goodwill and other long-lived assets impairments, warranty reserves, accrual for remaining lease obligations of discontinued operations and income tax provisions.  Each of these estimates, and the material impairment adjustments we made to our goodwill and certain long-lived assets of our jewelry reporting units as of June 30, 2008 is discussed in more detail in the Annual Report on Form 10-K for the fiscal year ended June 30, 2008 included herein in this Interim Report on Form 10-Q for the three and nine months ended March 31, 2009, respectively.

Goodwill and Other Long-Lived   Assets.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , the Company is required to evaluate the carrying value of its goodwill and indefinite-lived intangible assets at least annually, or more frequently if facts and circumstances indicate that impairment has occurred. Under SFAS No. 144, Accounting For the Impairment and Disposal of Long-Lived Assets , we are required to evaluate the carrying values of all other tangible and intangible assets for impairment as circumstances arise in which the carrying values of these assets may not be recoverable on the basis of future undiscounted cash flows. During the three and six months ended December 31, 2008, we recorded an impairment loss of approximately $1,516,000 in connection with our Gemprint business on the basis that the Gemprint technology and patents, trade name, capitalized software and property and equipment were fully impaired.  The $1,516,000 was recorded as impairment loss as part of the loss from continuing operations on the Condensed Consolidated Statements of Operations for the nine months ended March 31, 2009, since the Gemprint technology and related operations will be retained by the Company, while the diamond grading operations of GCAL have been sold. The amounts that were impaired by asset class were approximately $1,307,000 for the Gemprint technology and patents, $131,000 for trade name, $65,000 for software applications previously accounted for under SOP 98-1 (see Capitalized Software section in this note), $11,000 for a patent application and $2,000 in property and equipment.  See also note 7 for information on impairments of goodwill and other long-term assets associated with our discontinued operations during the three and nine months ended March 31, 2009.


 
5

 

Stock-Based Compensation Expense

In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, stock-based compensation cost is measured at the grant date of an award, based on its fair value, and is recognized as expense over the employee’s requisite service period, which is generally the vesting period.  The following table shows total stock-based compensation expense included as part of continuing operations in the Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2009 and 2008:

   
Three Months Ended
March 31,
(in thousands)
   
Nine Months Ended
March 31,
(in thousands)
 
Included in :
 
2009
   
2008
   
2009
   
2008
 
Cost of revenues
  $ 78     $ 91     $ 230     $ 195  
Selling and marketing expenses
    -       -       -       (7 )
General and administrative expenses (1)
    29       217       402       614  
Pre-tax stock-based compensation expense
  $ 107     $ 308     $ 632     $ 802  

(1)  
Includes $15,000 and $199,000 in the three and nine months ended March 31, 2009, respectively, and $88,000 and $255,000 in the three and nine months ended March 31, 2008, respectively, for amortization of compensation expense related to issuances of restricted stock.

For the nine months ended March 31, 2009 and 2008, the Company estimated the rates of forfeiture of outstanding non-vested stock-based compensation awards to be 5% and 9%, respectively.

No options were granted during the three and nine months ended March 31, 2009.  The following table presents information relative to the stock options outstanding under all equity incentive plans as of March 31, 2009 and stock option activity during the nine months ended March 31, 2009, as adjusted to give retroactive effect to the 10% stock dividend that was declared on September 26, 2008 and distributed on November 3, 2008 to all stockholders of record as of October 21, 2008.  The closing per share prices of our common stock as of June 30, 2008 and March 31, 2009 were $8.11 and $3.89, respectively.

   
 
 
 
Shares
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
 
Aggregate Intrinsic
Value
 
Options:
                   
    Outstanding at June 30, 2008
    927,200     $ 12.54  
5.5 yrs.
  $ 314,000  
Granted
    -       -            
Exercised
    (100 )     2.80            
Expired
    (14,000 )     9.49            
Forfeited or cancelled
    (246,500 )     13.47            
Outstanding at March 31, 2009
    666,600     $ 12.25  
4.4 yrs.
  $ 49,600  
Exercisable at March 31, 2009
    554,500     $ 12.20  
4.1 yrs.
  $ 49,600  
Unvested at March 31, 2009
    112,100     $ 12.51  
5.9 yrs.
  $ -  
Expect to vest at March 31, 2009
    107,900     $ 12.51  
5.9 yrs.
  $ -  

The aggregate intrinsic values of the options exercised during the nine months ended March 31, 2009 and 2008 were $465 and $649,000, respectively.

The 107,900 options that were expected to vest at March 31, 2009 are based on the current forfeiture rate of 5% and the remaining vesting terms of the 112,100 unvested options at March 31, 2009.

During the nine months ended March 31, 2009, approximately 52,300 options were vested with an aggregate fair value of approximately $394,000.  During the nine months ended March 31, 2008, approximately 53,900 options were vested with an aggregate fair value of $401,000.
 
 
6


 
The following table presents information regarding the numbers of non-vested restricted shares that were granted or became vested during the nine months ended March 31, 2009 and their weighted average grant-date fair values.

 
 
 
Non-Vested Shares:
 
 
 
Shares
   
Weighted
Average
Grant-Date
Fair Value
 
Non-vested at June 30, 2008
    50,359     $ 12.60  
Granted
    77,778       2.70  
Vested
    (36,419 )     7.94  
Forfeited or Cancelled
    (28,847 )     11.72  
Non-vested at March 31, 2009
    62,871     $ 3.46  

The following table sets forth total unrecognized compensation cost in the amount of $288,000 related to non-vested stock-based awards expected to be recognized through fiscal year 2012.  That amount and time periods do not include the cost or effect of the possible grant of any additional stock-based compensation awards in the future or any change that may occur in the Company’s forfeiture percentage.

Fiscal Year Ending June 30,
 
Amount
 
2009
  $ 100,000  
2010
    149,000  
2011
    29,000  
2012
    10,000  
    $ 288,000  

 
Concentrations

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

Financial Instruments and Cash Balances.   At March 31, 2009, we had cash and cash equivalents, totaling approximately $20,771,000, of which approximately $19,312,000 were invested in U.S. government-secured money market funds.  At March 31, 2009, the Company had approximately $1,459,000 in non-interest bearing bank accounts for general day-to-day operations.

Accounts Receivable.   A substantial portion of accounts receivable are due from collectibles dealers.  At March 31, 2009, one customer accounted for approximately 12% of the total net accounts receivable balances of $1,325,000; whereas, at June 30, 2008, three customers accounted for approximately 36% of total net accounts receivable balances of $1,214,000 outstanding on that date.  The Company performs an analysis of the expected collectability of accounts receivable based on several factors, including the age and extent of significant past due accounts and economic conditions or trends that may adversely affect the ability of account debtors to pay their account receivable balances.  Based on that review, the Company establishes an allowance for doubtful accounts, when necessary.  The allowance for doubtful accounts receivable was $24,000 at March 31, 2009 and $29,000 at June 30, 2008.

Customer Notes Receivables .  At March 31, 2009, the outstanding principal amount of customer notes receivable, which evidenced advances made to customers, totaled $3,190,000, net of a $31,000 allowance for uncollectible amounts, of which $175,000 was classified as non-current customer notes receivable and $3,015,000 was classified as current customer notes receivable.  At March 31, 2009, the unpaid principal balance of one of those notes receivable was greater than 10% of the aggregate of the unpaid principal balances of all of the notes receivable that were outstanding at March 31, 2009 and represented 92% of the total principal amounts outstanding.  At June 30, 2008, three customers’ loan balances, each greater than 10% of the total notes receivable balances, represented 49% of the total principal balances outstanding.
 
 
7

 
During the nine months ended March 31, 2009, the Company sold, without recourse, $3,554,000 of the aggregate principal amount of $3,579,000 classified as loans held for sale at June 30, 2008 for an amount that was about 0.7% over the aggregate principal amount of the loans. The proceeds from the sales are included in the Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2009 as part of proceeds from collection of customer notes receivable. As of March 31, 2009, approximately $25,000 of the $3,579,000 held for sale at June 30, 2008 was no longer held for sale.
 
Sources of Revenues.   The authentication, grading and sales of collectible coins accounted for approximately 61% and 58% of our net revenues for the three and nine months ended March 31, 2009.  For the three and nine months ended March 31, 2008, collectible coin revenues accounted for approximately 59% and 59% of our net revenues, respectively.

Capitalized Software

    Through March 31, 2009, the Company had capitalized, in connection with continuing operations, an aggregate of approximately $1,605,000 of software development costs, net of accumulated amortization and impairment loss of approximately $992,000 and $65,000, respectively, in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, and EITF 00-02, Accounting for Website Development Costs. In the three and nine months ended March 31, 2009, $0 and $249,000 of such costs were capitalized, and approximately $213,000 and $504,000 were recognized as amortization expense, respectively.  During the three and nine months ended March 31, 2008, approximately $328,000 and $943,000 of such costs were capitalized, and $95,000 and $230,000 were recorded as amortization expense, respectively.  Planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software project are recognized as expense in the period in which they are incurred.  The Company evaluates the carrying values of capitalized software to determine if those values are impaired, and, if necessary, an impairment loss is recorded in the period in which an impairment occurs.

Warranty Costs

    We offer a limited warranty covering the coins, trading cards, stamps and currency that we authenticate and grade.  Under the warranty, if any collectible that was previously authenticated and graded by us is later submitted to us for re-grading at any time and either (i) receives a lower grade upon that re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible or, at our option, pay the difference in value of the item at its original grade as compared with its lower grade.  However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper resistant holder in which it was placed at the time we last graded it.  To the extent that we purchase an item under a warranty claim, we recognize as a reduction in our warranty reserve the difference in value of the item at its original grade and its re-graded estimated value.  We include in our inventory the re-graded estimated value of the item.  We accrue for estimated warranty costs based on historical trends and related experience.  Increased future claims experience under our warranty program could increase to levels higher than in the past which could result in additional warranty accruals in anticipation of these claims, and our ongoing warranty accrual rate could increase to cover potential higher claims in the future, both of which could have a material adverse impact on our future results of operations.

Dividends

    On September 26, 2008, the Board of Directors determined that, due to market and economic conditions, including the liquidity crisis in the United States, the prudent course of action would be to suspend the payment of cash dividends in order to preserve the Company's cash resources.  At the same time, the Board of Directors declared a 10% stock dividend on the Company's outstanding shares distributed on November 3, 2008 to all stockholders of record as of October 20, 2008.  The 10% stock dividend was recorded in the accompanying Condensed Consolidated Balance Sheet as of the declaration date of September 26, 2008 and all shares outstanding, stock option grants outstanding and the weighted average number of shares used in the computation of the income or loss per share for the three and nine months ended March 31, 2009 and 2008 were retroactively adjusted for the stock dividend as of the record date of October 20, 2008.
 
 
8


 
Stock Buyback Program

    On October 8, 2008, the Company acquired from its CEO approximately 120,000 shares of the Company’s common stock, and the Company paid approximately $484,000 in cash for these shares, or approximately $4.03 per share.  The selling price of $4.03 was determined based on a 10% discount from the volume weighted average price of the Company’s common stock on October 8, 2008 of $4.48.  On October 9, 2008, two directors purchased an aggregate of 40,000 shares from the Company for a selling price of $4.03, or approximately $161,000.

Stockholder Rights Plan

    On January 9, 2009, the Company’s Board of Directors unanimously adopted a limited duration stockholder rights plan. In accordance with ISS guidelines, the Plan has an initial term of one year ending in January 2010, but may be extended for two additional years if the Plan is approved by our stockholders on or prior to the end of that initial one year term.

    In connection with the adoption of the stockholder rights plan, the Board of Directors declared a non-taxable distribution of rights to purchase shares of a new series of preferred stock to all stockholders of record as of January 23, 2009. Under the Plan, if anyone becomes the beneficial owner of 20 percent or more of the Company’s outstanding shares, then, subject to limited exceptions, each right (other than those held by that person) will become exercisable and entitle its holder to purchase, at the exercise price of the right, a number of the Company’s shares having a market value of twice the right’s exercise price. If anyone announces or commences a tender offer or exchange offer for the Company’s shares, then, subject to limited exceptions, each right will entitle its holder (other than the offeror) to purchase, at the exercise price of the right, a number of the acquiring party’s shares having a market value at that time of twice the right’s exercise price. Unless and until either of those events occurs, the rights will not be exercisable, will trade with the Company’s common stock and no rights certificates will be issued.

Recent Accounting Pronouncements

    In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly . Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements . This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its fiscal year ending June 30, 2009. There is no expected impact on the Consolidated Financial Statements.
 
    In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments . The guidance applies to investments in debt securities for which other-than-temporary impairments may be recorded. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings), and 2) all other amounts (recorded in other comprehensive income). This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its fiscal year ending June 30, 2009. There is no expected impact on the Consolidated Financial Statements.
 
    In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1 Interim Disclosures about Fair Value of Financial Instruments . The FSP amends SFAS No. 107 Disclosures about Fair Value of Financial Instruments to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will include the required disclosures, if any, in its interim period reporting following June 30, 2009.
 
 
9

 
    In December 2007, the FASB issued SFAS No. 141(R), Business Combinations , which became effective January 1, 2009 via prospective application to business combinations. This Statement requires that the acquisition method of accounting be applied to a broader set of business combinations, amends the definition of a business combination, provides a definition of a business, requires an acquirer to recognize an acquired business at its fair value at the acquisition date and requires the assets and liabilities assumed in a business combination to be measured and recognized at their fair values as of the acquisition date (with limited exceptions). The company will adopt this Statement on July 1, 2009. The impact upon adoption and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.
 
    In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies . This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If  fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, Accounting for Contingencies and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss . Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R). The requirements of this FSP carry forward without significant revision the guidance on contingencies of SFAS No. 141, Business Combinations , which was superseded by SFAS No. 141(R) (see previous paragraph). The FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. This FSP will be adopted effective July 1, 2009. The impact upon adoption and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.

    In April 2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of Intangible Assets” . The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors.  In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the Consolidated Financial Statements.
 
 2.          CASH AND CASH EQUIVALENTS

    At March 31, 2009 and June 30, 2008, cash and cash equivalents consisted of approximately $20,771,000 and $23,345,000, respectively, which was invested primarily in money-market funds, which comprised of investments in government-guaranteed securities.

3.            
FAIR VALUE MEASUREMENTS

 
                    In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements.   SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements, SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB issued SFAS No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company has adopted the provisions of SFAS 157 as of July 1, 2008 for financial assets, including cash and cash equivalents, and SFAS 157-2 will be adopted as of July 1, 2009 for nonfinancial assets and nonfinancial liabilities.

 
                    SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include:
 
 
10


 
    Level 1-defined as observable inputs such as quoted prices in active markets;

    Level 2-defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
 
    Level 3-defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

    As of March 31, 2009, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis.  The fair value of operating lease obligations of $3,740,000 is in connection with the exiting of our jewelry grading businesses during the third quarter of fiscal year 2009 (see note 7) and was recognized initially in our Condensed Consolidated Balance Sheets at March 31, 2009. The fair value of these financial assets and liabilities were determined using the following inputs at March 31, 2009:

   
(in thousands)
 
   
 
 
Total
As of
March 31, 2009
   
Quoted
Prices in
Active
Markets
or Identical
Assets
(Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
Significant
Unobservable
Inputs
(Level 3)
 
 Assets:                                
Cash and cash equivalents
  $ 20,771     $ 20,771     $ -     $ -  
Liabilities:                                
    Operating lease obligations   3,740     $     $ -     $ 3,740  

    In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure at fair value certain financial instruments and other items that are not currently required to be measured at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company adopted SFAS No. 159 on July 1, 2008 and elected not to measure any additional financial instruments or other items at fair value.

4.            
INVENTORIES

Inventories consist of the following:
 
   
(in thousands)
 
   
March 31,
   
June 30,
 
   
2009
   
2008
 
Coins                                                                
  $ 377     $ 750  
Other collectibles                                                                
    55       28  
Grading raw materials consumable inventory
    212       274  
      644       1,052  
Less inventory reserve                                                                
    (111 )     (91 )
Inventories, net
  $ 533     $ 961  


 
11

 

 
5.           PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
 
   
(in thousands)
 
   
March 31,
   
June 30,
 
   
2009
   
2008
 
Coins, and stamp grading reference sets
  $ 513     $ 506  
Computer hardware and equipment                                                                  
    1,338       1,579  
Computer software                                                                  
    990       990  
Equipment                                                                  
    1,769       1,932  
Furniture and office equipment                                                                  
    894       886  
Leasehold improvements                                                                  
    680       670  
Trading card reference library                                                                  
    52       52  
      6,236       6,615  
Less accumulated depreciation and amortization
    (5,012 )     (4,987 )
Property and equipment, net
  $ 1,224     $ 1,628  

6.           ACCRUED LIABILITIES

Accrued liabilities consist of the following:
 
(in thousands)
 
   
March 31,
   
June 30,
 
   
2009
   
2008
 
Warranty costs                                                                
  $ 665     $ 665  
Professional fees                                                                
    180       132  
Other                                                                
    586       749  
    $ 1,431     $ 1,546  

    The following table presents the changes in the Company’s warranty reserve during the nine months ended March 31, 2009 and 2008:

   
(in thousands)
 
   
Nine Months
Ended
March 31,
   
Nine Months
Ended
March 31,
 
   
2009
   
2008
 
Warranty reserve, beginning of period                                                                
  $ 665     $ 725  
Charged to cost of revenues                                                                
    403       1,184  
Payments                                                                
    (403 )     (1,239 )
Warranty reserve, end of period                                                                
  $ 665     $ 670  

7.            
DISCONTINUED OPERATIONS

    In December 2008 and February 2009, the Company’s Board of Directors authorized the sale of the paper currency grading business and the exiting of the jewelry grading businesses, respectively; therefore, the balance sheet amounts related to these businesses have been classified as assets and liabilities of discontinued operations held for sale in the Condensed Consolidated Balance Sheets for all periods shown. The jewelry grading businesses consisted of the brand names GCAL, which consisted of the diamond grading business, and AGL, which consisted of the colored gemstone grading business. The patented Gemprint technology, which the Company acquired from Gemprint Corporation in 2005, was not reclassified as part of discontinued operations, and, accordingly, its results of operations continue to be shown as part of continuing operations, along with our collectibles grading and authentication business, our CCE subscription business, our CFC dealer-financing business and our collectibles convention business in the Condensed Consolidated Financial Statements for all periods shown. The results of operations, losses per share, and the cash flows for the discontinued businesses are classified as loss from discontinued operations in the Condensed Consolidated Statements of Operations and segregated from other cash flows in the Condensed Consolidated Statements of Cash Flows.
 
 
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Jewelry Grading Businesses

    As previously reported in our Annual Report on Form 10-K for fiscal year 2008 and in our Quarterly Report on Form 10-Q for the three and six months ended December 31, 2008, we recorded impairment losses in the Consolidated Statements of Operations during those periods of $11,233,000 and $7,695,000, respectively, in connection with our jewelry businesses, which also comprised our jewelry operating segment (see note 10).  Those impairment losses were the result of management’s assessment that the fair values of goodwill, other intangible assets and property and equipment were determined to be less than the then carrying values of those assets based upon future discounted and undiscounted cash flows and, as a result, the carrying values of the goodwill and intangible assets were fully impaired and were written down to zero.  Additionally, the impairment loss of $7,695,000 recorded during the three and six months ended December 31, 2008 included $1,516,000 of impairment of the Gemprint technology, which has been presented in the nine months ended March 31, 2009 as part of continuing operations as described in note 1. At December 31, 2008, on the basis of an outside appraisal, the carrying value of property and equipment were written down to their fair values of approximately $1,568,000 and were classified as held and used at December 31, 2008.

    During March 2009, the Company ceased operations in GCAL and AGL and announced the Company’s plan to sell the assets of those businesses in an orderly manner. During March, the Company sold the GCAL diamond grading business to GCAL’s current president and former owner and received $370,000 in cash as full payment for certain GCAL tangible and intangible assets including the rights to use the GCAL trade name.  We recognized a loss on the disposal of GCAL and AGL property and equipment of approximately $701,000, and recorded at the lower of cost or market value the remaining unsold property and equipment of approximately $630,000 as part of current assets of discontinued operations held for sale at March 31, 2009.

    At March 31, 2009, in accordance with SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No.146”) the Company recognized the aggregate cost of the remaining lease obligations of approximately $3,740,000 for the two leased laboratory facilities for GCAL and AGL that we continue to rent through December 31, 2015 and 2017, respectively.  Of that liability of $3,740,000, approximately $3,110,000 was recorded as an expense in the three and nine months ended March 31, 2009 and the balance of $630,000 had previously been accrued as rent expense in accordance with GAAP.  This liability, of which approximately $1,144,000 is estimated to be payable monthly during the next 12 months and therefore is classified as part of current liabilities of discontinued operations held for sale in the Condensed Consolidated Balance Sheets as of March 31, 2009, is based on discounted cash flows arising from future cash payments reduced by anticipated sublease payments. During March 2009 in accordance with SFAS No.146, we also accrued an aggregate expense of approximately $339,000 in connection with severances of terminated employees.  In the three months ended March 31, 2009, we recorded aggregate losses of approximately $4,150,000 in connection with the closure of GCAL and AGL.

Currency Grading Business

    As reported on Form 10-Q for the three and six months ended December 31, 2008, we classified our currency grading business as a discontinued operation held for sale. In February 2009, we sold the assets of this business to Lyn Knight Associates for approximately $354,000 in consideration of an initial cash payment of $50,000 and a promissory note (the “Note”) with a face value of $304,000 with annual payments of $50,000 due on the annual anniversary dates in each year between February 2010 to February 2012 and a $154,000 payment due in February 2013. The amounts due under the Note are classified as part of notes receivable from sale of discontinued operations on the Condensed Consolidated Balance Sheets as of March 31, 2009.  The present value of the Note at March 31, 2009, net of discount of $59,000 based on an imputed interest rate of 7.25%, was approximately $245,000 and was recorded along with the $50,000 initial cash payment as net proceeds on the sale of this business. The discount of $59,000 was recorded as an interest receivable and was classified as part of other assets on the Condensed Consolidated Balance Sheet at March 31, 2009. A net loss of $31,000 was recognized during the third quarter of fiscal 2009 as a loss on the disposal of the currency grading business.
 
 
13


 
Collectibles Sales Businesses

    The operating results of the discontinued collectibles businesses that we disposed of in fiscal 2004 and which are included in the accompanying Consolidated Financial Statements are deemed to be immaterial to warrant further disclosure.

    The following table summarizes the losses recognized during the nine months ended March 31, 2009 in connection with these discontinued businesses, of which approximately $4,181,000 of those losses were recorded in the three months ended March 31, 2009.

   
(in thousands)
 
Property and Equipment :
 
Jewelry
   
Currency
   
Total
 
Cash Proceeds from sale of assets of discontinued businesses
  $ 370     $ 50     $ 420  
Note receivable issued, net of discount of $59                                                                                           
    -       245       245  
Total cash received and note receivable issued                                                                                           
    370       295       665  
                         
Less:
                       
Net book value of property and equipment and all other assets disposed of
    (381 )     (326 )     (707 )
     Adjustments of net book values of property and equipment to reflect estimated market values
         at March 31, 2009                                                   
    (692 )     -       (692 )
Loss on disposal of property and equipment and all other assets during the nine months
    ended March 31, 2009                                                                                   
  $ (703 )   $ (31 )   $ (734 )
                         
Employee and Operating Lease Termination Costs:
                       
Employee termination costs                                                                                           
    (339 )     -       (339 )
Operating leases termination costs for facilities                                                                                           
    (3,110 )     -       (3,110 )
Loss on disposal of discontinued businesses during the nine months ended March 31, 2009                                                                                       
  $ (4,152 )   $ (31 )   $ (4,183 )

 
The operating results of the discontinued businesses that are included in the accompanying Condensed Consolidated Statements of Operations are as follows:

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2009
   
2008
   
2009
   
2008
 
Net revenues                                                     
  $ 192     $ 551     $ 1,433     $ 1,836  
                                 
Loss from operations of discontinued businesses
    (1,361 )     (1,957 )     (4,403 )     (5,270 )
Impairment losses                                                     
    -       -       (6,179 )     -  
Loss on sale of discontinued businesses
    (4,181 )     -       (4,183 )     -  
Loss before income tax benefit                                                     
    (5,542 )     (1,957 )     (14,765 )     (5,270 )
Income tax benefit                                                     
    -       720       -       2,028  
Loss from discontinued operations
  $ (5,542 )   $ (1,237 )   $ (14,765 )   $ (3,242 )


 
14

 

    The following table contains summary balance sheet information (in thousands) with respect to the net assets and liabilities of the discontinued operations held for sale that is included in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2009 and June 30, 2008.

   
March 31,
2009
   
June
30, 2008
 
Current Assets:
           
Accounts receivable, net
  $ 141     $ 199  
Assets held for sale
    630       -  
Inventories
    -       21  
Prepaid expenses
    29       228  
    $ 800     $ 448  
Non-Current Assets:
               
Property and equipment
  $ -     $ 2,854  
Goodwill
    -       1,348  
Intangible asset, net
    -       2,763  
Other assets
    152       329  
    $ 152     $ 7,294  
                 
Current Liabilities:
               
Accounts payable
  $ 169     $ 522  
Other accrued expenses
    1,754       430  
Deferred revenue
    -       82  
    $ 1,923     $ 1,034  
                 
Non-Current Liabilities:
               
Lease obligations
  $ 2,596     $ -  
Deferred rent
    -       389  
Other liabilities
    36       36  
    $ 2,632     $ 425  

8.        
INCOME TAXES

The effective tax rates were a tax provision of 143% and a 48% tax benefit in the nine months ended March 31, 2009 and 2008, respectively. The tax provision of $1,319,000 for the nine months ended March 31, 2009 is primarily the result of a valuation allowance of $1,204,000 recorded in the second quarter of fiscal 2009 as a result of the Company recognizing in that same quarter impairment losses of $7,695,000 for its jewelry businesses. Although all but $1,516,000 of the impairment loss, which was related to Gemprint, is classified in the Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2009 as part of loss from discontinued operations, the applicable accounting rules require that tax provisions or benefits that follow the establishment of or adjustments to a valuation allowance against net deferred tax assets be recorded as part of continuing operations. The tax provision of $109,000 recorded in the third quarter of fiscal 2009 is related to certain changes in estimates used to prepare our June 30, 2008 income tax provision that changed when our income tax returns were prepared in the third quarter of fiscal year 2009.

During the three months ended March 31, 2009, approximately $433,000 of the $496,000 in current net deferred tax asset as of December 31, 2008 was written off to additional paid in capital leaving $63,000 in current net deferred tax assets in the Condensed Consolidated Balance Sheet at March 31, 2009. These assets were established for compensation expense recognized for non-employee supplier stock options in 1999, and these options are expected to expire in the three months ended June 30, 2009. It is expected that these options will expire unexercised due to the exercise price of the options relative to the Company’s current share price, and in accordance with SFAS 123R and related interpretations, the $63,000 will be recognized as a reduction to additional-paid-in capital upon expiration. Deferred income tax liabilities of $305,000 are associated with timing differences related to indefinite-lived intangible assets including goodwill that are amortizable for income tax purposes but not for financial reporting purposes under GAAP.
 
 
15


 
  9           NET INCOME (LOSS) PER SHARE

The number of shares used in the computation of net income (loss) per share gives retroactive effect to a 10% stock dividend that was distributed on November 3, 2008 to stockholders of record as of October 20, 2008.

The aggregate numbers of shares subject to options and warrants that were excluded from the computation of diluted loss per share, because they would have been anti-dilutive in the calculation of diluted earnings per share, totaled approximately 1,001,000 and 994,000 for the three months ended March 31, 2009 and 2008, respectively.  The aggregate numbers of options, warrants and restricted shares excluded for the nine month periods ended March 31, 2009 and 2008 were 1,117,000 and 816,000, respectively.

10.
BUSINESS SEGMENTS

Operating segments are defined as the components or “segments” of an enterprise for which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker, or decision-making group, in deciding how to allocate resources to and in assessing performance of those components or “segments.”  The Company’s chief operating decision-maker is its Chief Executive Officer.  The operating segments of the Company are organized based on the respective services that they offer to customers of the Company.  Similar operating segments have been aggregated to reportable operating segments based on having similar services, types of customers, and other criteria that are set forth in SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information.

For our continuing operations, we operate principally in four reportable service segments: coins, trading cards, Gemprint and other high-end collectibles.  Services provided by these segments include authentication, grading, publication advertising, technology that provides for non-invasive identification of diamonds and subscription-based revenues.  The other collectibles segment is comprised of autographs, stamps, the CCE subscription business, our CFC dealer financing business and our collectibles conventions business.  During the third quarter of fiscal 2009, we excluded the paper currency grading business and our jewelry grading businesses as part of continuing operations for all periods presented and classified the operating results of this business as discontinued operations in the Condensed Consolidated Statements of Operations (see note 7).

During the second quarter of fiscal 2009, we recorded impairment losses related to Gemprint in the amount of $1,516,000 (see note 1).  Goodwill in the Condensed Consolidated Balance Sheets at June 30, 2008 and March 31, 2009 of $2,626,000 consists of $515,000 related to the coins operating segment and $2,111,000 related to the other operating segment; namely, Expos, our collectibles convention business, and CCE, our dealer-to-dealer exchange business.

We allocate operating expenses to each service segment based upon each segment’s activity level.  The following tables set forth on a business segment basis, including reconciliation with the Condensed Consolidated Financial Statements, (i) external revenues, (ii) amortization and depreciation, (iii) stock-based compensation expense and impairment losses as significant other non-cash transactions, and (iv) operating income (loss) for the three and nine months ended March 31, 2009 and 2008. Net identifiable assets are provided by business segment as of March 31, 2009 and June 30, 2008. All of our sales and identifiable assets are located in the United States.

 
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Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
Net revenues from external customers:
 
2009
   
2008
   
2009
   
2008
 
Coins
  $ 5,686     $ 6,154     $ 15,051     $ 17,720  
Trading cards
    1,863       2,226       6,059       6,710  
Gemprint
    -       1       13       3  
Other
    1,766       1,966       5,051       5,438  
Total revenue
  $ 9,315     $ 10,347     $ 26,174     $ 29,871  
                                 
Amortization and depreciation:
                               
Coins
  $ 77     $ 62     $ 229     $ 182  
Trading cards
    46       37       140       84  
Gemprint
    -       73       102       212  
Other
    179       99       415       267  
Total
    302       271       886       745  
Unallocated amortization and depreciation
    79       87       250       254  
Consolidated amortization and depreciation
  $ 381     $ 358     $ 1,136     $ 999  
                                 
Impairment losses:
                               
Coins
  $ -     $ -     $ -     $ -  
Trading cards
    -       -       -       -  
Gemprint
    -       -       1,516       -  
Other
    -       -       -       -  
Total
    -       -       1,516       -  
Unallocated
    -       -       -       -  
Consolidated impairment losses
  $ -     $ -     $ 1,516     $ -  
                                 
Stock-based compensation:
                               
Coins
  $ 57     $ 63     $ 153     $ 131  
Trading cards
    -       9       -       18  
Gemprint
    4       -       4       -  
Other
    21       33       84       78  
Total
    82       105       241       227  
Unallocated stock-based compensation
    25       203       391       575  
Consolidated stock-based compensation
  $ 107     $ 308     $ 632     $ 802  
                                 
Operating income (loss) before unallocated expenses:
                               
Coins
  $ 2,018     $ 1,984     $ 4,628     $ 4,925  
Trading cards
    187       374       790       1,317  
Gemprint
    (136 )     (139 )     (2,051 )     (406 )
Other
    171       226       303       753  
Total
    2,240       2,445       3,670       6,589  
Unallocated operating expenses
    (1,432 )     (2,029 )     (4,861 )     (6,186 )
Consolidated operating income (loss)
  $ 808     $ 416     $ (1,191 )   $ 403  


 
17

 


   
March 31,
   
June 30,
 
Identifiable Assets:
 
2009
   
2008
 
Coins
  $ 2,706     $ 3,346  
Trading cards
    907       1,035  
Gemprint
    8       1,613  
Other
    8,909       11,055  
Total
    12,530       17,049  
Unallocated assets
    22,604       27,521  
Discontinued operations
    952       7,448  
Consolidated assets
  $ 36,086     $ 52,018  


 
18

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The discussion in this Item 2 and in Item 3 of this Quarterly Report (“Report”) on Form 10-Q 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” for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause 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.  The sections below entitled “Factors That Can Affect our Financial Position and Operating Results” and “Risks and Uncertainties That Could Affect our Future Financial Performance” describe some, but not all, of the factors and the risks and uncertainties that could cause these differences, and readers of this Report are urged to read those sections of this Report in their entirety and to review certain additional risk factors that are described in Item 1A of our Annual Report on Form 10-K, as filed by us with the Securities and Exchange Commission (the “SEC”), for the fiscal year ended June 30, 2008.

Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance.  We also disclaim any obligation to update forward-looking statements contained in this Report or in our Annual Report on Form 10-K or any other prior filings with the SEC.

Our Business

Collectors Universe, Inc. (“we”, “us” or the “Company”) provides grading and authentication services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, memorabilia and stamps.  We believe that our authentication and grading services add value to these collectibles by enhancing their marketability and thereby providing increased liquidity to the dealers, collectors and consumers that own, buy and sell them.

We principally generate revenues from the fees paid for our authentication and grading services.  To a much lesser extent, we generate revenues from other related services consisting of:  (i) the sale of advertising on our websites; (ii) the sale of printed publications and collectibles price guides and advertising in such publications and on our website; (iii) the sale of membership subscriptions; in our Collectors Club which is designed to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins; and (v) the collectibles trade show conventions that we conduct. 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, these activities are not the focus of or an integral part of our business.

Recent Developments:

Discontinued Operations .  In the three months ended March 31, 2009, our Board of Directors approved a plan to discontinue and dispose of the Company’s diamond and colored gemstone (“jewelry”) authentication and grading businesses, which we closed effective March 2, 2009.  We are in the process of disposing of the assets of those businesses and have established certain accruals, primarily related to real estate lease obligations at March 31, 2009.  We are evaluating our patented Gemprint identification technology (“Gemprint”) for the use in a licensing business.  In addition, in the three months ended December 31, 2008, our Board of Directors approved a plan to dispose of our currency grading and authentication business, which was sold in February 2009.
 
 
19

 
Accordingly, the assets and liabilities of the jewelry and currency authentication and grading businesses have been classified as held for sale at March 31 2009, and the operations of these businesses have been reclassified as discontinued operations for all periods presented.  Our “Gemprint” business continues to be part of continuing operations.  In addition, we continue to classify as discontinued operations the remaining activities, consisting of the disposition of our remaining collectibles inventories, of our collectibles auctions and sales businesses which we disposed of in fiscal 2004.

For the three and nine months ended March 31, 2009, we recorded losses from discontinued operations, before taxes, of $5.5 million and $14.8 million, respectively, as compared to losses from discontinued operations, before taxes, of $2.0 million, and $5.3 million in the same three and nine month period of 2008.  The increased loss in the three months ended March 31, 2009 was primarily attributable to the cost and losses recognized as a result of the closure of our jewelry authentication and grading businesses effective March 2, 2009.  The loss in the nine months ended March 31, 2009 also includes an impairment loss of $6.2 million in the carrying value of the remaining goodwill and intangible assets recognized in the second quarter of 2009.  However, we expect such losses to decline substantially during fiscal 2010, which will begin on July 1, 2009.  See “Results of Continuing Operations and Discontinued Operations—Three and Nine Months ended March 31, 2009 and 2008— Discontinued Operations ”.

Departure of Chief Executive Officer . On March 16, 2009, the Company announced the departure of the Company’s Chief Executive Officer, effective April 1, 2009 and the hiring of Michael McConnell, a director of the Company, as its interim Chief Executive Officer.  As a result of his service on the Board, Mr. McConnell is familiar with the Company’s businesses and has worked with our executive officers and other key management employees.

Overview of Results of Operations for the Three and Nine Months Ended March 31, 2009 and 2008

The following table sets forth certain financial data, expressed as a percentage of net revenues, derived from our interim Condensed Consolidated Statements of Operations (included earlier in this Report) for the respective periods indicated below:

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2009
   
2008
   
2009
   
2008
 
Net revenues
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of revenues
    44.1 %     47.6 %     46.9 %     50.4 %
Gross profit
    55.9 %     52.4 %     53.1 %     49.6 %
Operating expenses:
                               
Selling and marketing expenses
    11.4 %     14.6 %     12.6 %     13.3 %
General and administrative expenses
    33.1 %     31.8 %     36.5 %     33.1 %
Amortization of intangible assets
    2.7 %     2.0 %     2.7 %     1.9 %
Impairment loss
    -       -       5.8 %     -  
Total operating expenses
    47.2 %     48.4 %     57.6 %     48.3 %
Operating income (loss)
    8.7 %     4.0 %     (4.5 )%     1.3 %
Interest income, net
    0.5 %     2.3 %     0.9 %     3.3 %
Other income
    0.1 %     -       0.1 %     -  
Income (loss) before provision for income taxes
    9.3 %     6.3 %     (3.5 )%     4.6 %
Provision (benefit) for income taxes
    1.2 %     3.7 %     5.1 %     2.2 %
Income (loss) from continuing operations after income taxes
    8.1 %     2.6 %     (8.6 )%     2.4 %
Loss from discontinued operations, net of gain on sales
Of discontinued businesses (net of income taxes)
    (59.5 )%     (11.9 )%     (56.4 )%     (10.8 )%
Net income (loss)
    (51.4 )%     (9.3 )%     (65.0 )%     (8.4 %)


These, as well as other factors affecting our operating results in the third quarter and nine months ended March 31, 2009, are described in more detail below.


 
20

 

Factors That Can Affect our Financial Position and Operating Results

Factors that Can Affect our Revenues .  Our authentication and grading fees, which accounted for approximately 80% of our total net revenues in the nine months ended March 31, 2009, are primarily affected by (i) the volume and mix, among coins, trading cards and other collectibles of authentication and grading submissions, because we typically charge higher fees for coin grading than we do for the grading of other collectibles; (ii) in the case of coins and trading cards, the “turn-around” 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 turn-around 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.

Our revenues are also impacted by the level of grading submissions and revenue earned from such coin grading submissions at collectibles trade shows where we provide on-site grading and authentication services to show attendees who typically request same-day turn-around.  The level of such revenues can vary depending upon a number of factors, including the number and timing of the shows held during each reporting period, the number of dealers attending and the volume of their coin transactions at such shows, which affect the volume of submissions to us for on-site grading and same-day turn-around at the shows.  Dealer show attendance and the volume of coin transactions at the shows are, in turn, affected by economic and market conditions, such as those we are experiencing currently, and are sometimes also affected by short-term changes in the price of gold that may occur around the time shows are held.

Six of our coin authentication and grading customers accounted for, in the aggregate, approximately 13% of our total net revenues in the nine months ended March 31, 2009, as compared to 11% in the year ended June 30, 2008.  As a result, the loss of one or more of those customers, or a decrease in the volume of grading submissions from any of them to us, would cause our net revenues to decline and, therefore, could adversely affect the profitability of our grading and authentication operations.

   Factors Affecting our Gross Profit Margins .  The gross profit margins on authentication and grading submissions also are primarily affected by the same factors, described above, that have the greatest effect on our net revenues, because we generally realize higher margins on coin submissions than on submissions of other collectibles and we charge higher fees for faster service times.  In addition, our margins are affected, to a lesser extent, by the stage of development and the seasonality of certain of our smaller businesses.  Furthermore, because a significant proportion of our direct costs are generally fixed in nature (at least in the short term), our gross profit also can be affected by the overall volume of collectibles authenticated and graded in any period.  We expect our consolidated gross profit margin to increase in fiscal 2010, due to the discontinuance of the jewelry grading businesses on March 2, 2009, because the costs of revenues of those businesses exceeded their net revenues, resulting in a negative gross margin.
 
Impact of Economic Conditions on Financial Performance .  We generate all of our revenues from the collectibles markets.  Moreover, the demand for our services and, therefore, our revenues, depend to a great extent on the volume of purchases and sales of the high-value collectibles that we authenticate, because dealers and collectors most often submit collectibles to us for authenticating and grading in anticipation of or in connection with their sales and purchases of those collectibles.   The volume of collectibles purchase and sale transactions is primarily affected by (i) the disposable income available to collectibles dealers and collectors, because high-value collectibles are generally viewed as luxury goods and the confidence that collectibles dealers and collectors have in the economy, which affects their ability and their willingness to use their funds to purchase collectibles and to use our services; (ii) the availability and cost of borrowings because collectibles dealers and consumers often fund their purchases of collectibles with borrowings, (iii) prevailing and anticipated rates of inflation, because the threat of and actual increases in inflation lead investors and consumers to purchase gold and silver coins as a hedge against inflation, which results in an increase in collectibles commerce and, as a result, in the demand for our services, and (iv) the performance and volatility of the gold and other precious metals markets and the stock markets, which affects the level of purchases and sales of collectible coins and, therefore the need and demand for our services.  Accordingly, factors such as improving economic conditions which usually result in increases in disposable income and consumer confidence, volatility in and declines in the prices of stocks, a weakening in the value of the U.S. Dollar and concerns about inflation, often lead investors to increase their purchases of precious metals, such as gold bullion and other coins and collectibles, which often results in increases in submissions of collectibles to us for authentication and grading.  By contrast, the volume of collectibles sales and purchases and, therefore, the volume of authentication and grading submissions to us, usually declines during periods characterized by recessionary economic conditions, declines in disposable income and consumer confidence, reductions in the availability or increases in the costs of financing, or increasing stock prices and relative stability in the stock markets, which sometimes leads investors to move their funds from the gold and precious metals markets to the stock market.
 
 
21

 
The severity of the current economic recession in the United States, continued uncertainty and worries about the ultimate severity and duration of the recession, and the significant decreases as a result of the credit crisis in the availability of borrowings on which collectibles dealers and collectors often rely on to help them to fund purchases and, in the case of dealers, the carrying costs in maintaining an inventory of high-value collectibles, have combined to reduce disposable income, erode the confidence of consumers and small businesses, such as those operated by collectibles dealers, and hence their willingness and ability to purchase and sell collectibles and other high-value assets.  As a result, in the three and nine months ended March 31, 2009, we experienced declines in the demand for our services in all of our grading and authentication markets.
 
In addition, these economic and market conditions created increased uncertainties for us with respect to the future financial performance of our jewelry authentication and grading businesses, significantly diminishing their prospects for generating increases in their revenues and achieving profitability.  During the second fiscal quarter ended December 31, 2008, the revenues of those businesses declined by approximately 25% and, in the early part of the third fiscal quarter, revenues continued to decline.  As a result, the Board of Directors decided that the Company should discontinue the jewelry businesses and, on March 2, 2009, we ceased operating those businesses and began the process of disposing their assets.  As a result of this decision, the operating results of the jewelry businesses for the three and nine months ended March 31, 2009 and 2008 are reflected in our loss from discontinued operations in the Condensed Consolidated Statement of Operations included in this Report.
 
The following tables provide information regarding the respective numbers of coins, trading cards, autographs, and stamps that were graded or authenticated by us in the three and nine months ended March 31, 2009 and 2008 and their estimated values, which are the amounts at which those coins, trading cards and stamps were insured by the dealers and collectors who submitted them to us for grading and authentication.

   
Units Processed
Three Months Ended March 31,
   
Declared Value (000)
Three Months Ended March 31,
 
   
2009
   
2008
   
2009
   
2008
 
Coins
    404,600       55.8 %     484,100       55.5 %   $ 286,943       91.9 %   $ 336,683       90.4 %
Trading cards
    273,000       37.7 %     327,000       37.5 %     16,100       5.2 %     25,865       7.0 %
Autographs
    40,600       5.6 %     49,000       5.6 %     3,616       1.2 %     4,514       1.2 %
Stamps
    6,200       0.9 %     12,400       1.4 %     5,427       1.7 %     5,321       1.4 %
Total
    724,400       100.0 %     872,500       100.0 %   $ 312,086       100.0 %   $ 372,383       100.0 %

   
Units Processed
Nine Months Ended March 31,
   
Declared Value (000)
Nine Months Ended March 31,
 
   
2009
   
2008
   
2009
   
2008
 
Coins
    1,024,200       50.2 %     1,144,000       49.6 %   $ 839,717       90.3 %   $ 1,048,444       90.8 %
Trading cards
    866,900       42.5 %     975,500       42.3 %     60,209       6.5 %     67,863       5.9 %
Autographs
    129,900       6.3 %     143,800       6.2 %     12,155       1.3 %     21,148       1.8 %
Stamps
    20,100       1.0 %     43,800       1.9 %     17,627       1.9 %     17,308       1.5 %
Total
    2,041,100       100.0 %     2,307,100       100.0 %   $ 929,708       100.0 %   $ 1,154,763       100.0 %


Trends and Challenges in our Businesses
 
During the past three years, our costs of revenue and selling, general and administrative expenses increased significantly due in large part to the costs we were incurring to grow our jewelry businesses.  Those costs and expenses substantially exceeded their revenue contributions and was the principal cause of the increased operating losses that we incurred in the first nine months of the current fiscal year.
 
During the first quarter of 2009, we began implementing a cost reduction program in order to reduce our costs of revenue and our operating expenses and, thereby, bring those costs and expenses more in line with our revenues and, increase our gross profits and operating income.  During the three months ended March 31, 2009, we realized reductions in both our costs of revenues and operating expenses and increased our cash flows due, in part, to this program.
 
 
22

 
The discontinuance of the operations of our jewelry businesses provides us with the opportunity to realize even greater costs savings, which we believe will be reflected in improved results of operation in future periods.
 
Critical Accounting Policies and Estimates

During the nine months ended March 31, 2009, except as discussed below, there were no changes in the critical accounting policies or estimates that were described in Item 7 of our Annual Report on Form 10-K, filed with the SEC, for the fiscal year ended June 30, 2008.  Readers of this report are urged to read that Section of that Annual Report for a more complete understanding of our critical accounting policies and estimates.

Accru al for L oss es on F acility L eases . At March 31, 2009, the Company established accruals for the facility leases associated with the Company’s discontinued grading and authentication jewelry businesses.  Those lease accruals were based on estimates on a discounted basis, of (i) market rental rates; (ii) the time required to sublet the facility; and (iii) other direct costs associated with the leases.  Such estimates are uncertain due to the current market conditions and will need to be reviewed on a quarterly basis.

Grading Warranty Costs .  We offer a limited warranty covering the coins, trading cards, stamps and currency that we authenticate and grade.  Under the warranty, if any such 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 resubmittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible or, at our option, pay the difference in value of the item at its original grade as compared with its lower grade.  However this warranty is voided if the collectible, upon resubmittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item.  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 re-graded estimated value of the item.  We accrue for estimated warranty costs based on historical trends and related experience.  Certain warranty claims were received by us in the second quarter and early in third quarter of fiscal 2008 that were significant in relation to our historical claims experience and, as a result, we recognized, in the second quarter of 2008, an additional expense of $822,000 for those claims.  We also decided to increase our warranty accrual rate, effective January 1, 2008, to reflect this higher warranty claims experience, and we continue to monitor the adequacy of our warranty reserves on an on-going basis. We include the collectibles we purchase pursuant to our warranty policy in inventory at the re-graded estimated value (as discussed under Inventory Valuation Reserves below).    There are a number of factors that can cause the estimated values of such collectibles to change during the period from the respective dates we purchase them and the respective dates on which we sell them.  However, once we have classified such items as inventory and they have been held in inventory beyond the end of a fiscal quarter in which we purchased them, we classify any gains or losses on the disposal of such inventory as part of the gain or loss on product sales and not as an adjustment to our warranty reserves.
 
Inventory Valuation Reserve .  Our collectibles inventories are valued at the lower of cost or fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories.  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 sale value of the collectibles inventories.  Additionally, due to the relative uniqueness of some of the collectibles included in our collectibles inventory, 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 due to volatility in the price of precious metal, the condition of the collectible and any specific features of the individual collectible.  We review the market values of the collectible on a quarterly basis.  Ultimately, we recognize a profit or loss on the actual sale of the collectible relative to its most recent inventory carrying value. 

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.  The Company incurred significant operating losses in its jewelry reporting units since the acquisitions of those businesses and the Company recognized initial impairment losses for those businesses of $11.2 million in the three months and year ended June 30, 2008 because those businesses had failed to meet management’s revenue expectations for them.  In the three months ended December 31, 2008, we recognized additional impairment losses of $4.8 million in the jewelry grading and authentication businesses and $1.5 million to the long-lived assets of our Gemprint business, due to continued uncertainties as to the level of revenues we could expect those businesses to generate in the future, worse than expected financial performance during the first six months of fiscal 2009 and the increasing severity of the economic recession and credit crisis which have adversely affected the future prospects of those businesses.  In the three months ended March 31, 2009, we decided to exit the jewelry grading and authentication businesses other than our Gemprint business.  As a result, the impairment losses that were attributable to those jewelry businesses in the nine months ended March 31, 2009 have been classified as part of discontinued operations; whereas, the impairment losses attributable to our Gemprint business in the nine months ended March 31, 2009 have been classified as part of our continuing operations.
 
 
23

 
Goodwill.   We test the carrying value of goodwill and other indefinite-lived intangible assets on a formal basis at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist.  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.  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.  In accordance with GAAP, we considered the diamond and colored gemstone grading businesses as separate reporting units for the purpose of testing separately for the impairment of goodwill.  The Company had incurred significant operating losses in those jewelry reporting units since the respective dates of their acquisition and the Company recognized impairment losses for these businesses in the three months and year ended June 30, 2008 because these businesses had failed to meet management’s revenue expectations for them.  In the three months ended December 31, 2008, due to continued uncertainties as to the future revenues of these businesses, worse than expected financial performance during the first half of fiscal 2009 and the effects on those businesses of the increasing severity of the economic recession and credit crisis, we recognized additional goodwill impairment losses of $1.4 million for these businesses at December 31, 2008.  Those impairment losses have been classified as part of discontinued operations for the nine months ended March 31, 2009, as a result of our decision to exit these jewelry grading and authentication businesses.
 
Income Taxes and Deferred Tax Assets .  We account for income taxes in accordance with SFAS No. 109 , Accounting for Income Taxes and FASB Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN48”).   SFAS No. 109 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.  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, SFAS No. 109 requires that we evaluate the probability of realizing the future benefits comprising that asset and we review the nature and expected timing of the realization of these assets and the expiration dates for net operating losses or credits, when determining the likelihood of realization.  In the fourth quarter of fiscal 2008, due to the length of time and the extent of the taxable income required to fully realize the deferred tax assets related to impairment losses recognized in the fourth quarter of fiscal 2008, and certain California Enterprise Zone Credits, the Company recorded a valuation allowance of approximately $4.6 million against deferred tax assets of $6.0 million at June 30, 2008.  At that time we determined that it was more likely than not that we would realize the tax benefits comprising the remaining $1.4 million net deferred tax asset at June 30, 2008.  At December 31, 2008, due to the Company recognizing additional impairment losses for its jewelry businesses, and the Company’s core profitable operations not meeting short-term expectations, combined with uncertainty as to the performance of those businesses due to the severe economic conditions currently prevailing, management did not recognize any deferred tax assets for the impairment losses recognized in the three months ended December 31, 2008 and, at March 31, 2009, had established valuation allowances against $1,313,000 of the $1,504,000 of deferred tax assets.

At December 31, 2008, our current assets included a deferred tax asset of $496,000 arising out of the tax deductions that were recognized by reason of the compensation expense recorded in connection with the grant of non-employee supplier stock options in 1999.  Certain of those options expired unexercised during the three months ended March 31, 2009 and, as a result, the amount of that deferred tax asset was written down by $433,000 to $63,000 at March 31, 2009.  In accordance with SFAS 123R and related interpretations, that write-down has been recognized as a reduction to additional-paid-in capital at March 31, 2009.   It is expected that the remainder of these options will expire unexercised because their exercise prices are higher than the Company’s current share price.  As a result, the remaining $63,000 deferred tax asset is expected to be written off as a reduction in additional-paid-in capital in the three months ending June 30, 2009.
 
 
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The deferred income tax liability of $305,000 recorded on our balance sheet at March 31, 2009 results from timing differences related to goodwill and other indefinite-lived intangible assets that are amortizable for income tax purposes but not for financial reporting purposes under GAAP.
 
 

Net Revenues

Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards, autographs and stamps.  To a lesser extent, we generate collectibles related service revenues (referred to as “other related revenues”) from sales of collectibles club memberships and advertising on our websites and in printed publications and collectibles price guides; subscription-based revenues primarily related to our CCE dealer-to-dealer Internet bid-ask market for coins authenticated and graded by us; and fees earned from promoting, managing and operating collectibles conventions.  Net revenues also include, to a significantly lesser extent, revenues from the sales of products, consisting primarily of coins that we purchase under our warranty policy and are not considered to be an integral part of our on-going revenue generating activities.

The following tables breakout total net revenues for the three and nine months ended March 31, 2009 and 2008 by product revenues, grading and authentication services revenues, and other related services revenues:

   
Three Months Ended March 31,
 
   
2009
   
2008
   
Increase (Decrease)
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Product revenues
  $ 196       2.1 %   $ 21       0.2 %   $ 175       833.3 %
Grading and authentication fees
    7,284       78.2 %     8,497       82.1 %     (1,213 )     (14.3 )%
Other related services
    1,835       19.7 %     1,829       17.7 %     6       0.3 %
Total services
    9,119       97.9 %     10,326       99.8 %     (1,207 )     (11.7 )%
Total net revenues
  $ 9,315       100.0 %   $ 10,347       100.0 %   $ (1,032 )     (10.0 )%

   
Nine Months Ended March 31,
 
   
2009
   
2008
   
Increase (Decrease)
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Product revenues
  $ 299       1.1 %   $ 913       3.1 %   $ (614 )     (67.2 )%
Grading and authentication fees
    21,015       80.3 %     23,961       80.2 %     (2,946 )     (12.3 )%
Other related services
    4,860       18.6 %     4,997       16.7 %     (137 )     (2.7 )%
Total services