Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-Q, Received: 02/09/2012 16:03:46)
       
 
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 December 31, 2011
   
 
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 1-34240
 
 
 
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
 
Not Applicable
(Former name, former address and former fiscal year, if changed, since last year)

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 has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES    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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

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

Indicate by check mark whether the Registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2).   YES   o    NO   x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding as of February 6, 2012
Common Stock $.001 Par Value
 
8,097,156
     

 
 

 

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2011
TABLE OF CONTENTS
 
 
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      S-1  
           
INDEX TO EXHIBITS                                                                                                                                                    
    E-1  
         
       
           
       
           
       
           
       
           
Exhibit 101.INS
XBRL Instance Document
       
           
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document
       
           
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
       
           
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
       
           
Exhibit 101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
       
           
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
       


(i)

 
 

 

PART 1 – FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(In Thousands, except per share data)
(unaudited)
 
   
December 31,
   
June 30,
 
ASSETS
 
2011
   
2011
 
Current assets:
           
Cash and cash equivalents
  $ 20,300     $ 21,926  
Accounts receivable, net of allowance of $68 at December 31, 2011 and $66 at June 30, 2011
    1,357       1,534  
Refundable income taxes
    60       60  
Inventories, net
    2,314       1,442  
Prepaid expenses and other current assets
    1,205       959  
Deferred income tax assets
    220       1,769  
Notes receivable from sale of net assets of discontinued operations
    50       50  
Current assets of discontinued operations
    27       27  
Total current assets
    25,533       27,767  
                 
Property and equipment, net
    1,588       1,301  
Goodwill
    2,083       2,083  
Intangible assets, net
    1,945       1,145  
Deferred income tax assets
    2,956       2,956  
Notes receivable from sale of net assets of discontinued operations, less current portion
    142       135  
Other assets, including coin inventory of $750 at June 30, 2011
    181       942  
Non-current assets of discontinued operations
    182       182  
    $ 34,610     $ 36,511  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,250     $ 1,390  
Accrued liabilities
    1,487       1,415  
Accrued compensation and benefits
    1,964       2,383  
Income taxes payable
    118       125  
Deferred revenue
    2,410       2,417  
Current liabilities of discontinued operations
    769       743  
Total current liabilities
    7,998       8,473  
                 
Deferred rent
    430       396  
Non-current liabilities of discontinued operations
    2,372       2,572  
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $.001 par value; 3,000 shares authorized; no shares issued or outstanding
    -       -  
Common stock, $.001 par value; 20,000 shares authorized; 8,097 and 7,943 issued and outstanding at December 31, 2011
and June 30, 2011, respectively
      8         8  
Additional paid-in capital
    71,723       70,402  
Accumulated deficit
    (47,921 )     (45,340 )
Total stockholders’ equity
    23,810       25,070  
    $ 34,610     $ 36,511  

See accompanying notes to condensed consolidated financial statements.

 
1

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(In Thousands, except per share data)
(unaudited)


   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net revenues
  $ 11,472     $ 9,600     $ 23,544     $ 19,355  
Cost of revenues
    4,717       3,895       9,441       7,669  
Gross profit
    6,755       5,705       14,103       11,686  
Operating expenses:
                               
Selling and marketing expenses
    1,567       1,317       3,218       2,841  
General and administrative expenses
    3,294       2,837       6,498       5,456  
Total operating expenses:
    4,861       4,154       9,716       8,297  
Operating income
    1,894       1,551       4,387       3,389  
Interest income and other expense, net
    18       28       38       52  
Income before provision for income taxes
    1,912       1,579       4,425       3,441  
Provision for income taxes
    795       609       1,814       1,354  
Income from continuing operations
    1,117       970       2,611       2,087  
Loss from discontinued operations, net of income taxes
    (32 )     (22 )     (50 )     (35 )
Net income
  $ 1,085     $ 948       2,561     $ 2,052  
                                 
Net income per basic share:
                               
    Income from continuing operations
  $ 0.14     $ 0.13     $ 0.33     $ 0.27  
    Loss from discontinued operations
    -       (0.01 )     (0.01 )     -  
Net income per basic share
  $ 0.14     $ 0.12     $ 0.32     $ 0.27  
                                 
Net income per diluted share:
                               
Income from continuing operations
  $ 0.14     $ 0.12     $ 0.33     $ 0.27  
Loss from discontinued operations
    -       -       (0.01 )     (0.01 )
Net income per diluted share
  $ 0.14     $ 0.12     $ 0.32     $ 0.26  
                                 
Weighted average shares outstanding:
                               
Basic
    7,904       7,732       7,880       7,650  
Diluted
    7,999       7,820       7,982       7,772  
Dividends declared per common share
  $ 0.325     $ 0.325     $ 0.65     $ 0.625  

See accompanying notes to condensed consolidated financial statements.

 
2

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(In Thousands)
(unaudited)
   
Six Months Ended
December 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 2,561     $ 2,052  
Discontinued operations
    50       35  
Income from continuing operations
    2,611       2,087  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation and amortization expense
    361       409  
Stock-based compensation expense
    677       580  
Provision for bad debts
    2       13  
Provision for inventory write-down
    131       1  
Provision for warranty
    339       337  
Loss (gain) on sale of property and equipment
    2       (2 )
Interest on notes receivable
    (7 )     (8 )
Provision for deferred income taxes
    1,547       1,329  
Change in operating assets and liabilities:
               
Accounts receivable
    176       (258 )
Inventories
    (253 )     (621 )
Prepaid expenses and other
    (246 )     66  
Refundable income taxes
    -       270  
Other assets
    12       9  
Accounts payable and accrued liabilities
    (345 )     (526 )
Accrued compensation and benefits
    (419 )     (486 )
Income taxes payable
    (7 )     (13 )
Deferred revenue
    (7 )     55  
Deferred rent
    33       43  
Net cash provided by operating activities of continuing operations
    4,607       3,285  
Net cash used in operating activities of discontinued businesses
    (223 )     (376 )
Net cash provided by operating activities
    4,384       2,909  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of property and equipment
    8       44  
Capital expenditures
    (512 )     (285 )
Capitalized software
    (207 )     (9 )
Purchase of Coinflation.com, net of cash acquired
    (550 )     -  
Cash received from sale of net assets of discontinued operations
    -       46  
Net cash used in  investing activities
    (1,261 )     (204 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from exercise of stock options
    454       871  
Dividends paid to common stockholders
    (5,203 )     (4,942 )
Net cash used in financing activities
    (4,749 )     (4,071 )
                 
Net decrease in cash and cash equivalents
    (1,626 )     (1,366 )
Cash and cash equivalents at beginning of period
    21,926       20,321  
Cash and cash equivalents at end of period
  $ 20,300     $ 18,955  
                 

See accompanying notes to condensed consolidated financial statements.

 
3

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(unaudited)


   
Six Months Ended
December 31,
 
   
2011
   
2010
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Income taxes paid during the period
  $ 240     $ 13  
                 
Effective September 13, 2011, the Company acquired Coinflation.com, as follows:
               
Intangible Assets:  Website
  $ 740     $ -  
Common Stock Issued at Fair Value
    (190 )     -  
Cash Paid
  $ 550     $ -  



 
4

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(UNAUDITED)

1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Collectors Universe, Inc. and its operating subsidiaries (the “Company”, “we”, “management”, “us”, “our”).  At December 31, 2011, such subsidiaries were Collectors Finance Corporation (“CFC”), Certified Asset Exchange, Inc. (“CAE”), Collectors Universe (Hong Kong) Limited, and Expos Unlimited, Inc. (“Expos”), all of which are 100% owned by Collectors Universe, Inc.  All intercompany transactions and accounts have been eliminated.

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 generally accepted accounting principles in the United States of America (“GAAP”).  Operating results for the three and six months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012 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, 2011, as filed with the SEC.  Amounts related to disclosure of June 30, 2011 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.

Revenue Recognition Policies

We record revenue at the time of shipment of the authenticated and graded collectible to the customer, net of any taxes collected.  Due to the insignificant delay between the completion of our grading and authentication services and the shipment of the collectible or high-value asset back to the customer, the time of shipment corresponds to the completion of our services.  Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading.  We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to them.  At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue.  For certain dealers to whom we extend open account privileges, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer.  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 event takes place.

A portion of our net revenues are comprised of subscription fees paid by customers for memberships in our Collectors Club.  Those memberships entitle members access to our on-line and printed publications and, in some cases, vouchers for free grading services.  We record revenue for this multi-element service arrangement   by recognizing approximately 65% of the subscription fee in the month following the membership purchase.  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 fees between the grading services and the other services provided to members.
 
 
 
5

 

 
Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results from continuing and discontinued operations could differ from results expected on the basis of those estimates, and such differences could be material to our future results of operations and financial condition.  Examples of such estimates that could be material include determinations made with respect to the capitalization and recovery of software development costs, the valuation of stock-based compensation awards and the timing of the related stock-based compensation expense, the valuation of coin inventory, the amount of goodwill and the existence or non-existence of goodwill impairment, the amount of warranty reserves, the provision or benefit for income taxes and related valuation allowances against deferred tax assets, and adjustments to the fair value of remaining lease obligations for our former jewelry businesses.  Each of these estimates is discussed in more detail in these notes to Condensed Consolidated Financial Statements, in the section entitled “Critical Accounting Policies and Estimates” of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Report or in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

Goodwill and Other Long-Lived Assets

We evaluate the carrying value of goodwill and indefinite-lived intangible assets at least annually, or more frequently if facts and circumstances indicate that impairment has occurred.  Qualitative factors are considered in performing our goodwill impairment assessment, including the significant excess of fair value over carrying value in prior years, and any material changes in the estimated cash flows of the reporting unit.  We also evaluate the carrying values of all other tangible and intangible assets for impairment if circumstances arise in which the carrying values of these assets may not be recoverable on the basis of future undiscounted cash flows.  Management has determined that no impairment of goodwill or other long-lived assets occurred as of December 31, 2011.

As a result of the impairment of the Expos tradename recorded at June 30, 2011 and management’s expectations as to the period over which the tradename will contribute to and generate future cash flows of the Company, the tradename was determined to have a finite life.  Effective July 1, 2011, the tradename is being amortized over a period of 10 years.

Foreign Currency
 
    The Company has determined that the U.S. Dollar is the functional currency for its French branch office, which maintains its accounting records in Euros.  Based on this determination, the Company’s foreign operations are re-measured by reflecting the financial results of such operations as if they had taken place within a U.S. dollar-based economic environment.  Fixed assets and other non-monetary assets and liabilities are re-measured from foreign currencies to U.S. dollars at historical exchange rates; whereas cash, accounts receivable and other monetary assets and liabilities are re-measured at current exchange rates.  Gains and losses resulting from those re-measurements, which are included in income in the three and six month periods ended December 31, 2011 and 2010, were not material.
 
Stock-Based Compensation Expense

Stock-based compensation expense is measured at the grant date of an award based on its estimated fair value, and is recognized as expense over the employee or non-employee director’s requisite service period, which is generally the vesting period.  However, if the vesting of a stock-based compensation award is subject to satisfaction of a performance requirement or condition, the stock-based compensation expense is recognized if, and when, management determines that the achievement of the performance requirement or condition (and therefore the vesting of the award) has become probable.  In the event that stock-based compensation is recognized on the basis that the performance condition is probable, and management subsequently determines that the performance condition is not met, then all expense previously recognized with respect to the performance condition would be reversed.
 
 
 
6

 

Stock-based compensation expense included in general and administrative expenses in the Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2011 were $440,000 and $677,000, respectively, as compared to $385,000 and $580,000, respectively, for the same respective periods of the prior year.
 
No stock options were granted during the six months ended December 31, 2011 and 2010.  The following table presents information relative to the stock options outstanding under all equity incentive plans as of December 31, 2011 and stock option activity during the six months ended December 31, 2011.  The closing prices of our common stock as of December 31, 2011 and June 30, 2011 were $14.57 and $14.82, respectively.
 
   
 
 
 
Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term
   
 
Aggregate
Intrinsic
Value
 
Options:
 
(In Thousands)
         
(yrs.)
   
(In Thousands)
 
Outstanding at June 30, 2011
    252     $ 12.64       3.22     $ 796  
Exercised
    (39 )     11.67       -       -  
Outstanding at December 31, 2011
    213     $ 12.82       2.67     $ 641  
Exercisable at December 31, 2011
    213     $ 12.82       2.67     $ 641  

During the six months ended December 31, 2011 and 2010, 2,750 options to purchase common stock were vested with aggregate fair values of $42,000 and $38,000, respectively.

Fiscal 2012 Equity Incentive Grants .
 
On July 19, 2011, the Compensation Committee awarded 92,000 restricted shares to executive officers and senior management (“Participant”), pursuant to the Company’s stockholder approved 2006 Equity Incentive Plan (the “2006 Plan”).  Those restricted shares are subject to certain risks of forfeiture, which are summarized below.
 
    (1)     Service-Contingent Shares .  The vesting of 50% of the restricted shares is contingent on the Participants remaining in continuous service with the Company (the “Service-Based Shares”) and will vest in sixteen equal quarterly installments through June, 2015, with the exception of one executive officer’s grant, for which the service contingent shares vest over eight quarters through June 30, 2013.
 
                (2)     Performance Contingent Shares .  The remaining 50% of restricted shares (the “Performance-Based Shares”) are subject to forfeiture in their entirety if the Company does not achieve a minimum financial performance goal, measured on the basis of the Company’s fiscal 2012 operating income.  Depending on the financial performance achieved, a number of shares will be determined, and those shares will vest as follows: (i) one third of the shares will become vested if the Participant is still in the Company’s service on June 30, 2012; (ii) another one third of the shares will become vested on June 30, 2013 if the Participant is still in the Company’s service as of that date; and (iii) the final one third will vest on June 30, 2014 if the Participant is still in the Company’s service on such date.
 
Participants may also earn a maximum 10% more shares if the Company exceeds the fiscal 2012 financial performance goal by at least 10%.
 

 
7

 

Management estimated the fair value of the 92,000 shares of restricted stock to be $1,440,000 based on the closing price per share of the Company’s common stock of $15.65 on the grant date, of which $720,000 relates to the service-based awards and $720,000 relates to the performance-based awards.  For service-based awards, we record stock-based compensation expense over the requisite service periods that commenced on July 19, 2011 and that will continue through June 30, 2015.

No compensation expense was recognized in the first quarter for the performance-based shares, as it was too early in the year for management to determine if it was probable that the financial performance goal for fiscal 2012 would be achieved.  As of December 31, 2011, management determined that achieving the performance condition for the full fiscal year 2012 was probable based upon financial results achieved as of that date and the expected results for the remainder of 2012.  As a result, the Company recognized approximately $220,000 of expenses for those performance grants in the quarter ended December 31, 2011, including $110,000 as a catch-up adjustment for the three months ended September 30, 2011.

Other Fiscal 2012 Grants

In the second quarter of fiscal 2012, the Company granted approximately 11,000 restricted shares with a one-year service vesting to the non-employee directors.  The Company estimated the fair value of those shares to be approximately $175,000, and such expense will be recognized over the service period of one year.

The following table presents the non-vested status of the restricted shares for the six months ended December 31, 2011 and the weighted average grant-date fair values:

 
 
 
Non-Vested Restricted Shares:
 
 
Shares
(In Thousands)
   
Weighted
Average
Grant-Date
Fair Values
 
Non-vested at June 30, 2011
    133     $ 8.64  
Granted
    103       15.60  
Vested
    (37 )     13.64  
Non-vested at December 31, 2011
    199     $ 11.32  

The following table sets forth total unrecognized compensation cost in the amount of $1,521,000 related to non-vested restricted stock-based awards expected to be recognized through fiscal year 2013, on the assumption that (i) the performance condition described above is met; and (ii) the grant of an additional 10% of shares that may occur should the Company exceed the required fiscal 2012 financial performance by at least 10% is not met, (iii) the Participants remain in the Company’s employment throughout the applicable vesting periods.  The amount does 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
(In Thousands)
 
2012 (remaining 6 months)
  $ 642  
2013
    536  
2014
    212  
2015
    131  
    $ 1,521  


 
8

 

Concentrations

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

Financial Instruments and Cash Balances.   At December 31, 2011, we had cash and cash equivalents totaling approximately $20,300,000, of which approximately $19,100,000 was invested in money market accounts.  At December 31, 2011, the Company had approximately $1,200,000 in non-interest bearing bank accounts for general day-to-day operations.

Substantially all of our cash is deposited at two financial institutions.  We maintained cash due from banks in excess of the banks’ FDIC insured deposit limits of approximately $18,600,000 at December 31, 2011.

Accounts Receivable.   A substantial portion of accounts receivable are due from collectibles dealers.  At December 31, 2011, one individual customer accounted for 10% of the total net accounts receivable balance of $1,357,000; whereas at June 30, 2011, two individual customers collectively accounted for 10% of the total net accounts receivable balance of $1,534,000.  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 debtors to pay their account receivable balances.  Based on that review, management establishes an allowance for doubtful accounts, when deemed necessary.  The allowance for doubtful accounts receivable was $68,000 at December 31, 2011 and $66,000 at June 30, 2011. Ultimately, management will write-off account receivable balances when it is determined that there is no possibility of collection.

Coin Revenues . The authentication, grading and sales of collectible coins, related services and product sales accounted for approximately 68% and 67% of our net revenues for the three and six months ended December 31, 2011, and 68% and 65% of our net revenues for the three and six months ended December 31, 2010, respectively.

Customers.    Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 11% and 13% of our total net revenues in the six months ended December 31, 2011 and 2010, respectively.

Capitalized Software

We capitalize certain software development costs that we incur, either from internal or external sources, as part of intangible assets and amortize these costs on a straight-line basis over the estimated useful life of the software of three years.  At December 31, 2011 and June 30, 2011, capitalized software before amortization amounted to $2,842,000 and $2,634,000, respectively.  The related net book value of capitalized software at December 31, 2011 and June 30, 2011 was $232,000 and $59,000, respectively.  During the six months ended December 31, 2011 and 2010, we capitalized costs of $207,000 and $9,000, respectively, related to the design, coding, testing and enhancement of internal-use software.  During the three and six months ended December 31, 2011, approximately $13,000 and $34,000 was recorded as amortization expense for capitalized software, respectively, and for the three and six months ended December 31, 2010, we amortized $80,000 and $162,000, respectively.  Planning, training, support and maintenance costs incurred either prior to or following the implementation phase are recognized as expense in the period in which they occur.  Management evaluates the carrying value of capitalized software to determine if the carrying value is impaired, and, if necessary, an impairment loss is recorded in the period in which any impairment is determined to have occurred.

Warranty Costs

We offer a limited warranty covering the coins, trading cards and stamps 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 the customer’s 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 a reduction in our warranty reserve for the difference in value of the item at its original grade and its re-graded estimated value.  We include in our collectibles inventory the estimated value of the re-graded 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.
 
 
 
9

 

 
Dividends

The Company paid a quarterly cash dividend to its shareholders of $0.30 per share of common stock in the quarter ended September 30, 2010.  On October 6, 2010, the Board of Directors approved an increase in the amount of the quarterly cash dividend to $0.325 per share and we have paid quarterly dividends in that amount in each fiscal quarter that ended during the period from October 2010 to December 31, 2011.  However, the declaration of cash dividends in the future is subject to final determination each quarter by the Board of Directors based on a number of factors, including the Company’s financial performance and its available cash resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company.

Recent Accounting Pronouncements

In August 2010, the Financial Accounting Standards Board (“FASB”), as result of a joint project with the International Accounting Standards Board to improve the quality of and comparability of financial information for users, published a proposal that would change the accounting and financial reporting for both lessee and lessor as described under current guidance. The proposal would effectively eliminate off-balance sheet accounting for most of the operating leases of lessees and would apply one of two methods to lease accounting for lessors, depending on whether the lessor retains exposure to significant risks or benefits of the underlying assets. The date of issuance of the final standards by the FASB and the effective date are to be determined.  Management believes that the final standards, if issued in substantially the same form as the published proposal, would have a material effect on the presentation of its consolidated financial position and results of operations.

In May 2011, the FASB issued amended fair value disclosure guidance.  The new guidance requires additional disclosures about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any relationships between those unobservable inputs.  Additional requirements of the amendment include the categorization by level of the fair value hierarchy for items not measured at fair value in the statement of financial position, but for which fair value is required to be disclosed.  The Company will adopt this guidance effective January 1, 2012.  Management does not believe that the adoption of this pronouncement will have a material impact on the Company’s Consolidated Financial Statements.

In September 2011, the FASB issued an Accounting Standards Update which modifies the way in which a Company may conduct the annual goodwill impairment test of a reporting unit.  Under the revised accounting standard, management of a reporting unit has the option to first assess qualitative factors to determine whether events or circumstances exist that imply it is more likely than not an impairment of goodwill has occurred.  If, after performing this qualitative assessment, management determines that it is more likely than not that a goodwill impairment has not occurred, then performing the two-step impairment test is not necessary. Under the amendments in this accounting update, management of a reporting unit may also elect to proceed directly to the two-step goodwill impairment test  and, if such election is made, may resume performing the qualitative assessment in any subsequent period. The Company adopted this guidance on September 30, 2011. The adoption of this pronouncement did not have a material effect on the Company’s Consolidated Financial Statements.


 
10

 

2.           INVENTORIES

Inventories consist of the following (in thousands):
 
   
December 31,
   
June 30,
 
   
2011
   
2011
 
Coins                                                                
  $ 1,250     $ 1,468  
Other collectibles                                                                
    84       76  
Grading raw materials consumable inventory
    1,235       774  
      2,569       2,318  
Less inventory reserve                                                                
    (255 )     (126 )
      2,314       2,192  
Classified as long term                                                         
    -       (750 )
Inventories, net
  $ 2,314     $ 1,442  

The $750,000 classified as long-term assets at June 30, 2011, represents a coin purchased under our warranty policy, which the Company expects to sell prior to September 30, 2012.  At December 31, 2011, the value of this coin was reduced to $637,000 to reflect recent transactions for similar coins, and the write-down expense of $113,000 was recorded in cost of sales.

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

3.           PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):
 
   
December 31,
   
June 30,
 
   
2011
   
2011
 
Coins and stamp grading reference sets
  $ 321     $ 331  
Computer hardware and equipment                                                          
    1,706       1,467  
Purchased computer software                                                          
    1,023       1,023  
Equipment                                                          
    2,666       2,509  
Furniture and office equipment                                                          
    954       912  
Leasehold improvements                                                          
    736       704  
Trading card reference library                                                          
    52       52  
      7,458       6,998  
Less accumulated depreciation and amortization
    (5,870 )     (5,697 )
Property and equipment, net
  $ 1,588     $ 1,301  


 
11

 

4.            
BUSINESS COMBINATION

 
     In September 2011, we acquired the websites, website-related assets and domain names of Coinflation.com , which owned and operated websites, providing information on precious metal values and the intrinsic values of individual coins. As a result of the acquisition, the Company intends to drive incremental web traffic, generate incremental advertising dollars and add to the Company’s position as a leading service provider of valuable information and content to coin market participants.  Acquisition related costs of $27,000 were incurred and have been included in general and administrative expenses for the six months ended December 31, 2011.

The following table summarizes the consideration paid and the assets acquired in the transaction (in thousands):

Cash
  $ 550  
12,500 common shares of Collectors Universe, Inc.
    190  
         Total Consideration
  $ 740  
Allocated to:
       
Websites, website-related assets, domain names
  $ 740  

The fair value of the common shares issued as part of the consideration paid was determined based on the closing market price of $15.17 on the acquisition date of September 13, 2011.

The website and related assets are being amortized over an estimated useful life of five years.

Approximately $110,000 and $131,000 of Coinflation.com revenue is included in net revenues for the three and six months ended December 31, 2011, respectively, representing the revenues earned since the date of acquisition.

The operating results of Coinflation.com were consolidated into the Company's operating results from the date of its acquisition.

The following unaudited pro forma information set forth in the following table was prepared assuming that Coinflation.com’s acquisitions had occurred on July 1, 2011 and July 1, 2010.  The following pro forma results of operations do not indicate either what our operating results would have been had the Coinflation.com acquisition been consummated on July 1, 2011 or July 1, 2010, or what our results of operations will be in the future (in thousands).

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue
  $ 11,472     $ 9,728     $ 23,679     $ 19,822  
                                 
Income from continuing operations
  $ 1,117     $ 1,006     $ 2,660     $ 2,093  
Loss from discontinued operations, net of income taxes
    (32 )     (22 )     (50 )     (35 )
Net income
  $ 1,085     $ 984     $ 2,610     $ 2,058  
                                 
Net income per basic share:
                               
Income from continuing operations
  $ 0.14     $ 0.13     $ 0.34     $ 0.27  
Loss from discontinued operations
  $ -     $ (0.01 )   $ (0.01 )   $ -  
Net income per basic shares
  $ 0.14     $ 0.12     $ 0.33     $ 0.27  
                                 
Net income per diluted share:
                               
Income from continuing operations
  $ 0.14     $ 0.13     $ 0.33     $ 0.27  
      Loss from discontinued operations
  $ -     $ -     $ (0.01 )   $ (0.01 )
Net income per diluted shares
  $ 0.14     $ 0.13     $ 0.32     $ 0.26  
 
 
 
 
 
12

 
 

 
5.            
ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
   
December 31,
   
June 30,
 
   
2011
   
2011
 
Warranty reserves                                                                
  $ 751     $ 641  
Professional fees                                                                
    90       122  
Other                                                                
    646       652  
    $ 1,487     $ 1,415  

The following table presents the changes in the Company’s warranty reserve during the six months ended December 31, 2011 and 2010 (in thousands):

   
Six Months
Ended
December 31,
   
Six Months
Ended
December 31,
 
   
2011
   
2010
 
Warranty reserve, beginning of period                                                                
  $ 641     $ 669  
Charged to cost of revenue                                                                
    339       337  
Payments                                                                
    (229 )     (372 )
Warranty reserve, end of period                                                                
  $ 751     $ 634  

6.            
DISCONTINUED OPERATIONS

During fiscal 2009, the Board of Directors authorized the divesture and sale of GCAL, Gemprint and AGL (the “Jewelry Businesses”) and the currency grading business, the remaining assets and liabilities of which have been reclassified as assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets as of December 31, 2011 and June 30, 2011.  As previously reported, discontinued operations also include the remaining activities related to the disposal of our collectibles sales businesses that we discontinued in fiscal 2004.

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

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net revenues
  $ -     $ 9     $ -     $ 14  
Loss before income tax benefit
  $ (53 )   $ (37 )   $ (83 )   $ (59 )
Income tax benefit
    21       15       33       24  
Loss from discontinued operations
  $ (32 )   $ (22 )   $ (50 )   $ (35 )


 
13

 

The following table contains summary balance sheet information 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 December 31, 2011 and June 30, 2011 (in thousands):

   
December 31,
   
June 30
 
Balance Sheet Data of Discontinued Operations
 
2011
   
2011
 
Current Assets:
           
Assets held for sale
  $ 27     27  
    $ 27     $ 27  
Non-current assets:
               
Other assets
    182       182  
    $ 182     $ 182  
Current liabilities:
               
Accounts payable
  $ 3     $ 10  
Lease obligations
    605       565  
Other accrued expenses
    161       168  
    $ 769     $ 743  
Non-current liabilities:
               
Lease obligations
    2,372       2,572  
    $ 2,372     $ 2,572  

In fiscal 2009, we disposed of our currency grading business and licensed the business name for consideration of approximately $354,000 and license fees to be determined based on future annual revenues of the business.  The consideration of $351,000 was payable through a cash payment to us of $50,000 and a promissory note (the “Note”) with a face value of $304,000.  The Note provided for three annual payments of $50,000 due on the anniversary dates in each year between February 2010 to February 2012 and a $154,000 payment due in February 2013.  The Note was discounted using an imputed rate of 7.25% and is carried on the Condensed Consolidated Balance Sheets as of December 31, 2011 and June 30, 2011 in the amount of $192,000 and $185,000, respectively, as part of notes receivable from sale of net assets of discontinued operations, of which $50,000 is classified as a current asset and the balance is classified as long term.

In connection with our exiting the Jewelry Businesses, we recognized facility obligations (including operating costs and other estimated costs associated with subletting the spaces) of approximately $2,977,000 and $3,137,000 at December 31, 2011 and  June 30, 2011, respectively, of which $605,000 and $565,000, respectively, are classified as part of current liabilities of discontinued operations on the Condensed Consolidated Balance Sheets.

7.           
INCOME TAXES

In the six months ended December 31, 2011 and 2010, we recognized provisions for income taxes based upon estimated annual effective tax rates of approximately 41% and 39%, respectively.

Due to the availability of net operating losses and other tax attributes to offset current year taxable income, the provision for income taxes for the six months ended December 31, 2011, primarily represents the non-cash realization of deferred tax assets; however, due to our expectation that we will have utilized all of our net operating losses and other tax attributes for federal tax purposes sometime in the second half of the year, we made estimated tax payments of approximately $240,000 for federal tax purposes in the second quarter of fiscal 2012.


 
14

 

8.            
NET INCOME PER SHARE

For the three months ended December 31, 2011 and 2010, we excluded 126,000 and 83,000 shares, respectively, from the computation of diluted income per share for stock options that were anti-dilutive, and for performance-based restricted shares, because we had not reached the performance threshold at the end of the respective quarters.  The aggregate number of anti-dilutive shares excluded from diluted income per share totaled approximately 104,000 and 90,750 for the six months ended December 31, 2011 and 2010, respectively.

9.            
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.

For our continuing operations, we operate principally in three reportable service segments: coins, trading cards and autographs and other high-end collectibles.  Services provided by these segments include authentication, grading, publication and web advertising and subscription-based revenues.  The other collectibles segment is comprised of stamps, the CCE subscription business, our CFC dealer financing business and our collectibles conventions business.


 
15

 

We allocate operating expenses to each service segment based upon each segment’s activity level.  The following tables set forth on a segment basis, including reconciliation with the condensed consolidated financial statements, (i) external revenues, (ii) amortization and depreciation, (iii) stock-based compensation expense, and (iv) operating income for the three and six months ended December 31, 2011 and 2010.  Net identifiable assets are provided by business segment as of December 31, 2011 and June 30, 2011 (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net revenues from external customers
                       
Coins
  $ 7,962     $ 6,487     $ 16,038     $ 12,531  
Trading cards and autographs
    2,663       2,384       5,495       4,976  
Other
    847       729       2,011       1,848  
Total revenue
  $ 11,472     $ 9,600     $ 23,544     $ 19,355  
Amortization and depreciation
                               
Coins
  $ 62     $ 53     $ 125     $ 105  
Trading cards and autographs
    20       52       42       104  
Other
    83       72       130       144  
Total
    165       177       297       353  
Unallocated amortization and depreciation
    35       27       64       56  
Consolidated amortization and depreciation
  $ 200     $ 204     $ 361     $ 409  
Stock-based compensation
                               
Coins
  $ 109     $ 68     $ 162     $ 84  
Trading cards and autographs
    33       12       43       15  
Other
    35       18       47       23  
Total
    177       98       252       122  
Unallocated stock-based compensation
    263       287       425       458  
Consolidated stock-based compensation
  $ 440     $ 385     $ 677     $ 580  
Operating income before unallocated expenses
                               
Coins
  $ 2,629     $ 2,289     $ 5,512     $ 4,353  
Trading cards and autographs
    273       176       644       521  
Other
    94       53       423       417  
Total
    2,996       2,518       6,579       5,291  
Unallocated operating expenses
    (1,102 )     (967 )     (2,192 )     (1,902 )
Consolidated operating income
  $ 1,894     $ 1,551     $ 4,387     $ 3,389  


   
At December 31,
   
At June 30,
 
   
2011
   
2011
 
Identifiable Assets:
           
Coins                                    
  $ 4,892     $ 4,892  
Trading cards and autographs
    1,148       982  
Other                                    
    3,470       2,862  
Total                                    
    9,510       8,736  
Unallocated assets                                    
    25,100       27,775  
Consolidated assets                                    
  $ 34,610     $ 36,511  
Goodwill:
               
Coins                                    
  $ 515     $ 515  
Other                                    
    1,568       1,568  
Consolidated goodwill
  $ 2,083     $ 2,083  


 
16

 

10.           
RELATED-PARTY TRANSACTIONS

During the three and six months ended December 31, 2011, a member of the immediate family of Mr. David Hall, the President of the Company, paid grading and authentication fees to PCGS of $6,000 and $69,000, respectively, compared with $126,000 and $213,000 for the three and six months ended December 31, 2010, respectively.  Those fees were charged and paid at the same rates that we charge for comparable services to unaffiliated customers.  At December 31, 2011, the amount owed to the Company for these services was approximately $13,000, compared with $54,000 at June 30, 2011.

11.          
SUBSEQUENT EVENTS

On January 26, 2012, the Company announced that in accordance with its dividend policy, the Board of Directors had approved a third quarter cash dividend of $0.325 per share of common stock, and such dividend will be paid on March 2, 2012 to stockholders of record on February 17, 2012. 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The discussion in this Item 2 of this Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”).  Those Sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their expected future financial performance so long as they provide cautionary statements identifying important factors that could cause their actual results to differ from projected or anticipated results.  Other than statements of historical fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking statements.  Forward-looking statements often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may."  Our actual financial performance in future periods may differ significantly from the currently expected financial performance set forth in the forward-looking statements contained in this Report due to the risks to which our business is subject and other circumstances or occurrences which are not presently predictable and over which we do not have control.  Consequently, the forward-looking statements and information contained in this Report are qualified in their entirety by, and readers of this Report are urged to read the risk factors that are described in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 (the “Fiscal 2011 10-K”), which we filed with the Securities and Exchange Commission (the “SEC”) on August 26, 2011, and the section, entitled “Factors that Can affect our Results of Operations or Financial Position,” below in this Item 2.

Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained or recent trends that we describe in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on our historical financial performance.  We also disclaim any obligation to update or revise any forward-looking statements contained in this Report or in our Fiscal 2011 10-K or any other prior filings with the SEC, except as may be required by applicable law or applicable Nasdaq rules.

Our Business

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



 
17

 

We principally generate revenues from the fees paid for our authentication and grading services.  To a lesser extent, we generate revenues from other related services which consist of: (i) the sales of advertising and commissions earned on our websites, including Coinflation.com, which we acquired in September 2011 (see note 4 to the condensed consolidated financial statements); (ii) the sales of printed publications and collectibles price guides and advertising in our publications and on our websites; (iii) the sales of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) the sales of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins and to our CoinFacts website, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) the management and operation of collectibles trade shows and conventions.  We also generate revenues and recognize costs associated with the sale of our collectibles inventory, which are primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.

Factors That Can Affect our Operating Results and Financial Position

Factors That Can Affect our Revenues and Gross Profit Margins .  Collectibles authentication and grading fees accounted for approximately 82% and 81% of our total net revenues in the three and six months ended December 31, 2011, respectively.  The fees we generated from authentication and grading services and the gross profit margins we realize on those services are driven primarily by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our collectibles authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy.  Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and other high-value collectibles.
 
In addition, our coin grading and authentication revenues are impacted by the level of modern coin submissions, which can be volatile, primarily depending on the timing and size of modern coin marketing programs by the United States Mint and by customers or dealers who specialize in sales of such coins.

Our authentication and grading revenues and gross profit margins are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards on the one hand, and other collectibles on the other hand; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards on the one hand, and modern coins and trading cards on the other hand, because dealers generally request faster turnaround times for vintage or classic coins and trading cards than they do for modern submissions, as vintage or classic collectibles are of significantly higher value and are more saleable by dealers than modern coins and trading cards; and (iv) as discussed above, the timing of marketing programs for modern coins.  Furthermore, because a significant proportion of our costs of sales are fixed in nature in the short term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.

Our revenues and gross profit margins are also affected by the volume of submissions we receive at collectibles trade shows for on-site authentication and grading services that we provide to show attendees, because they typically request higher priced same-day turnaround for the coins they submit to us for authentication and grading at those shows.  The level of trade show submissions varies from period to period depending upon a number of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought and sold at those shows by dealers and collectors.  In addition, the number of such submissions and, therefore, the revenues and gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by short-term changes in the prices of gold that sometimes occur around the time of the shows, because gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows.

Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 11% of our total net revenues in the three and six months ended December 31, 2011.  As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.



 
18

 

The following tables provide information regarding the respective numbers of coins, trading cards, autographs, and stamps that were authenticated and graded by us in the three and six months ended December 31, 2011 and 2010, respectively, and their estimated values, which are the amounts at which those coins, trading cards and stamps are declared for insurance purposes by the dealers and collectors who submitted them to us for grading and authentication (in thousands):

   
Units Processed
Three Months Ended December 31,
   
Declared Value (000)
Three Months Ended December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Coins
    428,900       54.8 %     403,600       56.9 %   $ 298,057       91.9 %   $ 287,155       91.6 %
Trading cards and autographs (1)
    349,500       44.7 %     301,900       42.6 %     24,723       7.6 %     24,120       7.7 %
Stamps
    4,100       0.5 %     3,900       0.5 %     1,513       0.5 %     2,163       0.7 %
Total
    782,500       100.0 %     709,400       100.0 %   $ 324,293       100.0 %   $ 313,438       100.0 %

   
Units Processed
Six Months Ended December 31,
   
Declared Value (000)
Six Months Ended December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Coins
    907,700       56.1 %     851,500       56.6 %   $ 634,616       91.2 %   $ 616,132       91.6 %
Trading cards and autographs (1)
    703,000       43.4 %     646,400       42.9 %     57,450       8.3 %     51,714       7.7 %
Stamps
    7,600       0.5 %     7,800       0.5 %     3,404       0.5 %     4,730       0.7 %
Total
    1,618,300       100.0 %     1,505,700       100.0 %   $ 695,470       100.0 %   $ 672,576       100.0 %
 
 
(1)    
Consists of trading cards units graded by our PSA trading card authentication and grading business and autographs certified by our PSA/DNA autograph authentication and grading business.

Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the volume of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally viewed as luxury goods and are purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, and worries about sovereign debt obligations and ratings in the United States and Europe, because the threat of increased inflation and concerns about the weakening of the U.S. dollar and about the creditworthiness of governments often lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; and as an alternative to investments in government bonds and other treasury instruments; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of hard assets, including gold coins if they believe that the market prices of hard assets will increase.  As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by economic growth, the availability of lower cost borrowings, or increases in inflation or in gold prices or a weakening of the U.S. dollar.  By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressure, or declines in the market prices of gold.  However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to other investments during periods of economic growth and growing consumer and business confidence.

We believe that these economic uncertainties and conditions, which led to an increase in coin transactions, not only by collectibles dealers and collectors, but also by investors, contributed to the 28% increase in total revenue from the authentication and grading of collectible coins (which is our largest authentication and grading market) in the first half of fiscal 2012.  We believe those increases are primarily the result of continued high prices of gold, concerns among collectors and investors about inflation, the continued weakness of the U.S. dollar and, more recently, about the ability of governments to meet their sovereign debt obligations, as well as customer-specific marketing initiatives that drive the grading of modern coins.  Our revenues are discussed in more detail below under the caption Results of Operations: “ Net Revenues.”
 


 
19

 

Factors That Can Affect our Liquidity and Financial Position .  A substantial number of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading.  As a result, we have historically been able to rely on internally generated cash and have never incurred borrowings to fund our continuing operations.  We currently expect that internally generated cash flows and current cash and cash equivalent balances will be sufficient to fund our continuing operations at least through the end of fiscal 2012.

In addition to the day-to-day operating performance of our business, our overall financial position can also be affected by the dividend policy adopted by the Board of Directors from time to time, the Company’s decisions to invest in and to fund the acquisition of established and/or early stage businesses and any capital raising activities or stock repurchases.  In the first half of fiscal 2012, our dividend policy provided for the payment of cash dividends of $0.325 per share per quarter.  In addition, our liquidity and financial position are affected by our tax position, because we have had net operating losses and other tax attributes available to offset or reduce taxes payable by us.  However, it is our expectation that we will have utilized all of our federal net operating losses and other tax attributes sometime in the second half of fiscal 2012, depending upon the financial performance in the second half of fiscal 2012.  Therefore, beginning with the second quarter ended December 31, 2011, we began making estimated tax payments for federal income tax purposes at an estimated tax rate of approximately 34%.
 
Critical Accounting Policies and Estimates

Except as discussed below, during the three and six months ended December 31, 2011, there were no changes in our critical accounting policies or estimates which are described in Item 7 of our Annual Report on Form 10-K, filed with the SEC, for the fiscal year ended June 30, 2011.  Readers of this report are urged to read that Section of that Annual Report for a more complete understanding and detailed discussion of our critical accounting policies and estimates.

Goodwill.   We test the carrying value of goodwill and other indefinite-lived intangible assets at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist.  When testing for impairment, in accordance with Accounting Standards Update No. 2011-08, we consider qualitative factors, and where determined necessary by management, we proceed to the two-step goodwill impairment test.  When applying the two-step impairment test, we apply a discounted cash flow model or an income approach in determining a fair value that is used to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit.  If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date.  If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.

During the first quarter ended September 30, 2011, we completed the annual goodwill impairment evaluations with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair value over carrying value in prior years, and any material changes in the estimated cash flows of the reporting unit and determined that it was more likely than not that the fair value of CCE and CoinFacts exceeded its carrying value, including goodwill, and therefore it was not necessary to proceed to the two-step impairment test.

With respect to our Expos trade show business, as previously reported in our Form 10-K for the year ended June 30, 2011, based on our impairment testing of that business at June 30, 2011, we recognized an impairment loss of approximately $1.4 million in the fourth quarter of that fiscal year.  We have determined that no further impairments existed at December 31, 2011.
 
Stock-Based Compensation.  We recognize share-based compensation attributable to service-based equity grants over the service period based on the grant date fair value.  For performance-based share grants with a financial performance goal, we begin to recognize compensation expense when it becomes probable that we will achieve the financial performance goal based on the grant date fair value.  Stock-based compensation in the three and six months ended December 31, 2011, represents expenses attributable to (i) prior year grants of restricted stock and stock options, recognized over the remaining service periods of those grants; (ii) grants of 92,000 shares that were granted in July 2011 to executive officers and senior management (the “Fiscal 2012 Equity Incentive Grants”); and (iii) 11,000 restricted shares awarded to non-employee directors.  The Fiscal 2012 Equity Incentive Grants included both service-based shares and performance-based shares.  In the first and second quarters, we recognized stock-based compensation for the service-based shares.  No compensation expense was recognized in the first quarter for the performance-based shares, as it was too early in the year for management to determine that it was probable that the financial performance goal for fiscal 2012 would be achieved.  In the second quarter of fiscal 2012, we began recognizing stock-based compensation expense for the Performance-Based Shares, and the expense recognized included $110,000 as a catch-up adjustment related to the first quarter of fiscal 2012.
 

 
 
20

 
 

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
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net revenues
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of revenues
    41.1 %     40.6 %     40.1 %     39.6 %
Gross profit
    58.9 %     59.4 %     59.9 %     60.4 %
Operating expenses:
                               
Selling and marketing expenses
    13.7 %     13.7 %     13.7 %     14.7 %
General and administrative expenses
    28.7 %     29.6 %     27.6 %     28.2 %
Total operating expenses
    42.4 %     43.3 %     41.3 %     42.9 %
Operating income
    16.5 %     16.1 %     18.6 %     17.5 %
Interest income and other expense, net
    0.2 %     0.3 %     0.2 %     0.3 %
Income before provision for income taxes
    16.7 %     16.4 %     18.8 %     17.8 %
Provision for income taxes
    7.0 %     6.3 %     7.7 %     7.0 %
Income from continuing operations
    9.7 %     10.1 %     11.1 %     10.8 %
Loss from discontinued operations,  net of income taxes
    (0.2 )%     (0.2 )%     (0.2 )%     (0.2 )%
Net income
    9.5 %     9.9 %     10.9 %     10.6 %

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 Collectors Club memberships and advertising and commissions earned on our websites (including Coinflation.com which we acquired in September 2011-see note 4 to the condensed consolidated financial statements), and in printed publications and collectibles price guides; subscription-based revenues primarily related to our CCE dealer-to-dealer Internet bid-ask market for certified coins and CoinFacts; 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, which consist primarily of coins that we purchase under our authentication and grading warranty policy.  We do not consider such product sales to be the focus of or an integral part of our ongoing revenue generating activities.


 
21

 

The following tables set forth the total net revenues for the three and six months ended December 31, 2011 and 2010 between grading and authentication services revenues, other related services revenues and product sales (in thousands):

   
Three Months Ended December 30,
 
   
2011
   
2010
   
Increase
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
 
Grading and authentication fees
  $ 9,389       81.9 %   $ 7,808       81.3 %   $ 1,581       20.2 %
Other related services
    1,918       16.7 %     1,580       16.5 %     338       21.4 %
Product sales
    165       1.4 %     212       2.2 %     (47 )     (22.2 )%
Total net revenues
  $ 11,472       100.0 %   $ 9,600       100.0 %   $ 1,872       19.5 %

   
Six Months Ended December 30,
 
   
2011
   
2010
   
Increase
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
 
Grading and authentication fees
  $ 19,056       80.9 %   $ 15,580       80.5 %   $ 3,476       22.3 %
Other related services
    4,151       17.6 %     3,495       18.1 %     656       18.8 %
Product sales
    337       1.5 %     280       1.4 %     57       20.4 %
Total net revenues
  $ 23,544       100.0 %   $ 19,355       100.0 %   $ 4,189       21.6 %
 
The following tables set forth certain information regarding the increases (decreases) in net revenues in our larger markets (which are inclusive of revenues from our other related services) and in the number of units graded and authenticated  in the three and six months ended December 31, 2011 and 2010.
 
   
Three Months Ended December 31,
 
               
2011 vs. 2010
 
   
2011
   
2010
   
Increase (Decrease)
 
         
% of Net
         
% of Net
   
Revenues
   
Units Processed
 
   
Amount
   
Revenues
   
Amount
   
Revenues
   
Amounts
   
%
   
Number
   
%
 
Coins  (1)
  $ 7,797       68.0 %   $ 6,276       65.4 %   $ 1,521       24.2 %     25,300       6.3 %
Cards and autographs  (2)
    2,663       23.2 %     2,384       24.8 %     279       11.7 %     47,600       15.8 %
Other (3)
    1,012       8.8 %     940       9.8 %     72       7.7 %     200 (4)     5.1 %
 
  $ 11,472       100.0 %   $ 9,600       100.0 %   $ 1,872       19.5 %     73,100       10.3 %

   
Six Months Ended December 31,
 
               
2011 vs. 2010
 
   
2011
   
2010
   
Increase (Decrease)
 
         
% of Net
         
% of Net
   
Revenues
   
Units Processed
 
   
Amount
   
Revenues
   
Amount
   
Revenues
   
Amounts
   
%
   
Number
   
%
 
Coins  (1)
  $ 15,702       66.7 %   $ 12,252       63.3 %   $ 3,450       28.2 %     56,200       6.6 %
Cards and autographs  (2)
    5,495       23.3 %     4,976       25.7 %     519       10.4 %     56,600       8.8 %
Other (3)
    2,347       10.0 %     2,127       11.0 %     220       10.3 %     (200 ) (4)     (2.6 )%
 
  $ 23,544       100.0 %   $ 19,355       100.0 %   $ 4,189       21.6 %     112,600       7.5 %
 

(1)           
Includes coin authentication and grading fees and related revenues, but excludes coin product sales revenues (see 3 below).
(2)           
Consists of revenues from our trading card and our autograph authentication and grading businesses.
(3)           
Includes the revenues of our stamp authentication and grading business, CCE subscription fees, the revenues of our Expos convention business, revenues earned from
     our Coinflation.com website (which we acquired in September 2011) and coin product sales revenues.
(4)           
Consists of the change in the number of stamps graded and authenticated.

For the three months ended December 31, 2011, our total net revenues increased by $1,872,000 or 19.5%, compared to the three months ended December 31, 2010 and included increases of $1,581,000 or 20.2% in grading and authentication fees and $338,000 or 21.4% in other related services.  For the six months ended December 31, 2011, our total revenues increased by $4,189,000 or 21.6%, compared to the six months ended December 31, 2010 and included increases of $3,476,000 or 22.3% in grading and authentication fees and $656,000 or 18.8% in other related services.
 
 
 
22

 
 
The increased grading and authentication fees in the three and six months ended December 31, 2011 was primarily attributable to an increase in coin authentication and grading fees of $1,350,000 or 24% and $3,089,000 or 28% in the three and six months ended December 31, 2011, respectively.  In addition, our cards and autographs grading fees increased by $254,000 or 12% and $441,000 or 10% for the three and six months ended December 31, 2011, respectively.  These increases were partially offset by a decrease of $23,000 and $54,000 in our stamp authentication and grading fees in the three and six months ended December 31, 2011, respectively.

The 24% and 28% increase in our coin authentication and grading fees, compared to a 6% and 7% increase in the number of coins authenticated and graded in the three and six months ended December 31, 2011, relates to an increase in the average service fee earned on coins in the quarter and was primarily driven by increases in the average service fees earned for the grading and authentication of modern and world coins, due to the mix of services provided and due to pricing initiatives on certain of our modern coin programs.
 
Our modern coin grading and authentication fees increased by approximately $533,000 or 26% and $1,311,000 or 34% in the three and six months ended December 31, 2011, compared to the same periods of the prior year, reflecting marketing programs by the U.S. Mint and by our dealers and customers.  World coin grading and authentication revenues grew by approximately $624,000 or 131% and $1,439,000 or 187% in the three and six month periods, compared to the same periods of the prior year, reflecting increased submissions of world coins, including grading at our Paris, France facility.  Show grading and authentication revenues increased by approximately $52,000 or 7% and $150,000 or 8% for the three and six months ended December 31, 2011, reflecting higher average grading fees earned per show in the current year periods. Vintage grading and authentication fees increased by $141,000 or 6% and $189,000 or 4% for the three and six months ended December 31, 2011.

As discussed under “Factors That Can Affect our Revenues and Gross Profit Margin”, the level of modern coin and trade show revenues can be volatile, and therefore it is uncertain what level of growth in those revenues, if any, will be achieved in future quarters.  In addition, the increase in our authentication and grading fees earned, also reflects increased submissions of world coins from overseas, particularly Asia, and authentication and grading at our Paris, France facility, and it is uncertain whether the increased fees earned from the authentication and grading of world coins can continue at the levels achieved in the first quarter or whether we can expect continued future growth.  However, management plans to continue to focus attention on world coins as a growth opportunity for us, and in January 2012, the Company announced that it planned to expand operations to Asia.

Due to the strong performance of our coin authentication and grading business relative to our other businesses in the first half of the year, our coin business represented approximately 67% of total revenues, compared to 63% of total revenues in the first half of last year, which reflects the continued importance of our coin authentication and grading business to our overall financial performance.

The increases in revenues from other related services of $338,000 or 21% and $656,000 or 19%, respectively, in the three and six months ended December 31, 2011 included increases in advertising and commission revenues (including revenues earned by Coinflation.com, which we acquired in September 2011), revenues from web-based subscriptions and Collector Club memberships, partially offset by a reduction in the revenues of our Expos collectibles trade show management business.

Gross Profit

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


 
23

 

Set forth below is information regarding our gross profit in the three and six months ended December 31, 2011 and 2010 (in thousands):

   
Three Months Ended December 31,
   
Six Months Ended December 31,
 
   
2011
   
2010
   
2011
   
2010
 
         
Gross
Profit
         
Gross
Profit
         
Gross Profit
         
Gross Profit
 
   
Amount
   
Margin
   
Amount
   
Margin
   
Amounts
   
Margin
   
Amount
   
Margin
 
Gross profit services
  $ 6,815       60.3 %   $ 5,532       58.9 %   $ 14,176       61.1 %   $ 11,513       60.4 %
Gross profit–product sales
    (60 )     (36.4 )%     173       81.6