Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-Q, Received: 05/08/2013 16:07:58)


 
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, 2013
   
 
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.E. 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                                                       x
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
 
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 May 3, 2013
 
Common Stock $.001 Par Value
 
8,489,844
       

 
 

 

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013
TABLE OF CONTENTS
Page
   
       
   
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32
     
 
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)
   
March 31,
   
June 30,
 
ASSETS
 
2013
   
2012
 
Current assets:
           
Cash and cash equivalents
  $ 18,732     $ 21,214  
Accounts receivable, net of allowance of $31 at March 31, 2013 and $70 at June 30, 2012
    2,502       1,794  
Inventories, net
    1,735       2,273  
Prepaid expenses and other current assets
    1,023       813  
Deferred income tax assets
    1,177       1,177  
Notes receivable from sale of net assets of discontinued operations
    -       148  
Current assets of discontinued operations
    -       27  
Total current assets
    25,169       27,446  
                 
Property and equipment, net
    1,834       1,795  
Goodwill
    2,083       2,083  
Intangible assets, net
    1,577       1,788  
Deferred income tax assets
    2,982       2,982  
Other assets
    335       169  
Non-current assets of discontinued operations
    182       182  
    $ 34,162     $ 36,445  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,693     $ 1,625  
Accrued liabilities
    1,910       1,917  
Accrued compensation and benefits
    2,082       2,463  
Income taxes payable
    1,738       191  
Deferred revenue
    2,678       2,322  
Current liabilities of discontinued operations
    788       804  
Total current liabilities
    10,889       9,322  
                 
Deferred rent
    466       447  
Non-current liabilities of discontinued operations
    1,791       2,145  
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $.001 par value; 3,000 shares authorized, none issued or outstanding
    -       -  
Common stock, $.001 par value; 20,000 shares authorized; 8,490 and 8,107 issued and outstanding at March 31, 2013 and at June 30, 2012,
respectively
      8         8  
Additional paid-in capital
    74,328       73,683  
Accumulated deficit
    (53,320 )     (49,160 )
Total stockholders’ equity
    21,016       24,531  
    $ 34,162     $ 36,445  

See accompanying notes to condensed consolidated financial statements.

 
1

 

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


   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Net revenues
  $ 14,488     $ 13,082     $ 35,313     $ 36,626  
Cost of revenues
    5,180       5,064       14,034       14,505  
Gross profit
    9,308       8,018       21,279       22,121  
Operating expenses:
                               
Selling and marketing expenses
    2,174       1,869       5,542       5,087  
General and administrative expenses
    3,214       3,235       9,556       9,732  
Total operating expenses:
    5,388       5,104       15,098       14,819  
Operating income
    3,920       2,914       6,181       7,302  
Interest income and other expense, net
    8       26       79       63  
Income before provision for income taxes
    3,928       2,940       6,260       7,365  
Provision for income taxes
    1,541       1,209       2,475       3,024  
Income from continuing operations
    2,387       1,731       3,785       4,341  
Income (loss) from discontinued operations, net of income taxes
    (7 )     7       (38 )     (43 )
Net income
  $ 2,380     $ 1,738     $ 3,747     $ 4,298  
                                 
Net income per basic share:
                               
Income from continuing operations
  $ 0.30     $ 0.22     $ 0.47     $ 0.55  
Income (loss) from discontinued operations
    -       -       -       (0.01 )
Net income per basic share
  $ 0.30     $ 0.22     $ 0.47     $ 0.54  
                                 
Net income per diluted share:
                               
Income from continuing operations
  $ 0.29     $ 0.22     $ 0.47     $ 0.54  
Income (loss) from discontinued operations
    -       -       (0.01 )     -  
Net income per diluted share
  $ 0.29     $ 0.22     $ 0.46     $ 0.54  
                                 
Weighted average shares outstanding:
                               
Basic
    8,066       7,922       8,047       7,893  
Diluted
    8,101       8,020       8,099       7,993  
Dividends declared per common share
  $ 0.325     $ 0.325     $ 0.975     $ 0.975  
                                 


See accompanying notes to condensed consolidated financial statements.

 
2

 



COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(In Thousands)
(unaudited)
   
Nine Months Ended
March 31,
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 3,747     $ 4,298  
Discontinued operations
    38       43  
Income from continuing operations
    3,785       4,341  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation and amortization expense
    769       582  
Stock-based compensation expense
    625       999  
Provision for bad debts
    10       2  
Provision for inventory write-down
    37       134  
Provision for warranty
    479       552  
(Gain) loss on sale of property and equipment
    (14 )     5  
Interest on notes receivable
    (6 )     (10 )
Provision for deferred income taxes
    -       2,538  
Change in operating assets and liabilities:
               
Accounts receivable
    (718 )     (1,018 )
Inventories
    501       (232 )
Prepaid expenses and other
    (210 )     (291 )
Other assets
    (167 )     25  
Accounts payable and accrued liabilities
    (154 )     (148 )
Accrued compensation and benefits
    (381 )     (71 )
Income taxes payable
    1,547       (14 )
Deferred revenue
    356       255  
Deferred rent
    18       44  
Net cash provided by operating activities of continuing operations
    6,477       7,693  
Net cash used in operating activities of discontinued operations
    (380 )     (314 )
Net cash provided by operating activities
    6,097       7,379  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of property and equipment
    37       16  
Capital expenditures
    (529 )     (922 )
Capitalized software
    (28 )     (248 )
Purchase of CoinFlation.com , net of cash acquired
    -       (550 )
Patents and other intangibles
    (62 )     -  
Collection of notes receivable from discontinued operations
    154       58  
Net cash used in investing activities
    (428 )     (1,646 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from exercise of stock options
    28       573  
Dividends paid to common stockholders
    (8,171 )     (7,776 )
Payments for retirement of common stock
    (8 )     -  
Net cash used in financing activities
    (8,151 )     (7,203 )
                 
Net decrease in cash and cash equivalents
    (2,482 )     (1,470 )
Cash and cash equivalents at beginning of period
    21,214       21,926  
Cash and cash equivalents at end of period
  $ 18,732     $ 20,456  

See accompanying notes to condensed consolidated financial statements.

 
3

 

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



   
Nine Months Ended
March 31,
 
   
2013
   
2012
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Income taxes paid during the period
  $ 904     $ 472  
                 
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  





See accompanying notes to condensed consolidated financial statements.

 
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 March 31, 2013, such operating subsidiaries were Certified Asset Exchange, Inc. (“CAE”), Collectors Universe (Hong Kong) Limited, Collectors Universe (Shanghai) Limited and Expos Unlimited, Inc. (“Expos”), all of which are ultimately 100% owned by Collectors Universe, Inc.  All significant intercompany transactions and accounts have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying unaudited 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.  In the opinion of management, these interim condensed consolidated financial statements 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 nine months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2013 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, 2012, as filed with the SEC.  Amounts related to disclosure of June 30, 2012 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

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 authentication and grading 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 in the period in which the show takes place.

A portion of our net revenues are comprised of subscription fees paid by customers for annual memberships in our Collectors Club.  Those membership subscription fees entitle members to access our on-line and printed publications and, in some cases, to receive vouchers for free grading services during the membership period. Through December 31, 2011, we had recorded revenue for this multi-element service arrangement   by recognizing approximately 65% of the subscription fees as revenue in the month following the membership purchase.  The balance of the membership fee was recognized as revenue over the life of the membership.  We evaluated, 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.  In the third quarter of fiscal 2012, arising from the upgrading of the Company’s accounting systems, which enables us to track separately the issuance and redemption of individual Collectors Club free grading vouchers, the Company began recognizing revenue attributed to the vouchers on a specific basis, to classify those revenues as part of authentication and grading fees rather than other related service revenues and to classify unredeemed vouchers as deferred revenue.  The balance of the membership fees continue to be recognized over the life of the membership.  During the three months ended March 31, 2013, the Company began to recognize revenue attributable to expired vouchers that had not been redeemed during the membership period. The amount of such revenue was immaterial for the three and nine months ended March 31, 2013.
 
 
 
5

 

 
We recognize product sales when items are shipped to customers.  Product revenues consist primarily of collectible coins that we purchase pursuant to our coin authentication and grading warranty program.  However, those sales are not considered an integral part of the Company’s ongoing revenue generating activities.

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.  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 impairments, the amount of warranty reserves, the provision or benefit for income taxes and related valuation allowances against deferred tax assets, the timing and recognition of revenue for expired Collectors Club vouchers and adjustments to the fair value of remaining lease obligations for our discontinued jewelry businesses.  These estimates are discussed in more detail in these notes to the Condensed Consolidated Financial Statements, in the Critical Accounting Policies and Estimates section 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, 2012.

Goodwill and Other Long-Lived Assets

We evaluate the carrying value of goodwill and indefinite-lived intangible assets at least annually, or more frequently if facts and circumstances indicate that impairment may have occurred.  Qualitative factors are considered in performing our goodwill impairment assessments, including the significant excess of fair value over carrying values 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 March 31, 2013, as there have been no triggering events since our last annual assessment.

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, and its Hong Kong subsidiary, which maintains its accounting records in U.S. dollars.  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 for the respective periods, were not material.  The Company’s China subsidiary has not yet commenced operations.
 

 
 
6

 
Stock-Based Compensation Expense

Stock-based compensation expense is measured at the grant date of an equity-incentive award, based on its then 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 of the award.  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.  If stock-based compensation is recognized on the basis that the performance condition is probable, and management subsequently determines that the performance condition was not met, then all expense previously recognized with respect to the performance condition would be reversed.

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, 2013 and 2012 (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
Included In:
 
2013
   
2012
   
2013
   
2012
 
Sales and marketing expenses
  $ (5 )   $ -     $ -     $ -  
General and administrative expenses
    197       321       625       999  
    $ 192     $ 321     $ 625     $ 999  

Of the stock-based compensation recognized in the nine months ended March 31, 2013, approximately $103,000 was attributable to the accelerated vesting of restricted shares held by the Company’s former CEO.
 
Stock Options
 
No stock options were granted during the nine months ended March 31, 2013 and 2012.  The following table presents information relative to the stock options outstanding under all equity incentive plans as of March 31, 2013 and stock option activity during the nine months ended March 31, 2013.  The closing prices of our common stock as of March 31, 2013 and June 30, 2012 were $11.77 and $14.68, respectively.
 
   
 
 
 
Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term
   
 
Aggregate
Intrinsic
Value
 
Options:
 
(In Thousands)
         
(yrs.)
   
(In Thousands)
 
Outstanding at June 30, 2012
    203     $ 12.83       2.17     $ 635  
Exercised
    (8 )   $ 3.45       -     $ -  
Outstanding at March 31, 2013
    195     $ 13.23       1.46     $ 136  
Exercisable at March 31, 2013
    195     $ 13.23       1.46     $ 136  

Fiscal 2013 Long-Term Performance-Based Equity Incentive Program

On December 28, 2012, the Compensation Committee of the Board of Directors adopted a Long-Term Performance-Based Equity Incentive Program (“LTIP”) for the Company’s executive officers (including the Company’s Chief Executive Officer, Mr. Deuster, and the Chief Financial Officer, Mr. Wallace) and certain management employees (“Participants”) and granted approximately 300,000 shares of restricted stock (the “restricted shares”), including 108,880 shares to Mr. Deuster and 40,830 shares to Mr. Wallace, from the Company’s stockholder-approved 2006 Equity Incentive Plan (the “2006 Plan”).

 
7

 

The primary purposes of this program are (i) to focus executive management on achieving substantial increases in the Company’s operating income, and thereby increase internally generated cash flows, and (ii) to align the longer-term financial interests of executive management with the longer-term interests of the Company’s stockholders.  For purposes of this program, operating income is defined as the Company’s operating income before non-cash stock-based compensation expense.

The Compensation Committee had intended to grant a total of approximately 550,000 restricted shares to the Participants (including 200,000 restricted shares to Mr. Deuster and 75,000 restricted shares to Mr. Wallace) under the LTIP.  However, it was not able to do so, because there were not a sufficient number of shares available for such grants under the 2006 Plan.  As a result, the Compensation Committee expects to approve grants of additional shares to the Participants under this LTIP, if the Board of Directors adopts a new equity incentive plan and that plan is approved by the Company’s stockholders at the next annual meeting of stockholders, which is scheduled to be held in December, 2013.  The additional number of restricted shares to be granted at that time has not yet been determined, but could be as many as 250,000 additional shares, including 91,120 to Mr. Deuster and 34,170 to Mr. Wallace.

The vesting of the restricted shares is conditioned on the Company’s achievement of increasing annual operating income during any fiscal year within a six-year period commencing with fiscal 2013 and continuing through the fiscal year ending June 30, 2018, as indicated in the following table:

   
Cumulative Percent of
Shares Vested
 
If in any fiscal year during the term of the Program:
     
The Threshold Performance Goal is Achieved
    10 %
Intermediate Performance Goal #1 is Achieved
    25 %
Intermediate Performance Goal #2 is Achieved
    45 %
Intermediate Performance Goal #3 is Achieved
    70 %
The Maximum Performance Goal is Achieved
    100 %

Upon the determination that a milestone has been achieved for a fiscal year, 50% of the shares related to achieving that milestone will vest immediately and the remaining 50% will vest at June 30 of the following fiscal year, provided that the Participant is still in the service of the Company.

If the Company never achieves the Threshold Performance Goal during the term of the Program, all of the restricted shares will be forfeited effective June 30, 2018.  If, instead, the Threshold Performance Goal is achieved or exceeded, but the Maximum Performance Goal is not achieved during the term of the Program, then the unvested shares will be forfeited effective June 30, 2018.

As an additional incentive, the Participants may also earn a maximum 25% more shares if the Maximum Performance Goal is achieved in any fiscal year ending on or before June 30, 2015 and such shares would vest 50% upon the determination that the milestone has been achieved and the remaining 50% on June 30 of the following fiscal year.

As of January 1, 2013, management estimated that it was probable that the Company would achieve the Threshold Performance Goal by June 30, 2016 (representing the midpoint in the term of the LTIP) and, therefore, began recognizing stock-based compensation expense of $300,000, based on the closing price of the Company’s common stock at the grant date of $10.01, over the period beginning January 1, 2013 through June 30, 2016, of which $21,000 was recognized in the three and nine-months ended March 31, 2013.  Management will reassess at each reporting date whether any additional compensation expense is required, and the period over which such expense should be recognized.

Other Fiscal 2013 Grants

During the nine months ended March 31, 2013, the Company granted 60,000 service-based restricted shares with service periods ranging from three to four years to employees, including 40,000 shares to the Company’s Chief Executive Officer and 12,500 shares to the Company’s Chief Financial Officer.  Management estimated the fair value of those shares to be approximately $775,000, and such expense is being recognized over respective service periods of the awards.
 
 
 
8

 

 
In the second quarter of fiscal 2013, the Company granted approximately 24,000 restricted shares with a one-year service vesting period to the non-employee directors.  Management estimated the fair value of those shares to be approximately $240,000, and such expense is being recognized over the one-year service period.

The following table presents the unvested status of the restricted shares for the nine months ended March 31, 2013 and the weighted average grant-date fair values:

 
 
 
Unvested Restricted Shares:
 
 
Shares
(In Thousands)
   
Weighted
Average
Grant-Date
Fair Values
 
Unvested at June 30, 2012
    93     $ 15.28  
Granted
    384       10.45  
Vested
    (46 )     14.58  
Cancelled
    (17 )     13.75  
Unvested at March 31, 2013
    414     $ 10.94  

The following table sets forth unrecognized stock-based compensation costs totaling $1,401,000 related to unvested stock-based awards expected to be recognized through fiscal year 2016 assuming that the holders of the equity awards will remain in the Company’s service through 2016.  In addition, the $1,401,000 includes $279,000 of stock-based compensation expense arising under the Company’s LTIP through fiscal 2016, on the assumption that the Company will achieve the Threshold Performance Goal, as discussed above.  The following amounts and time periods do not include the costs or effects of possible grants of additional stock-based compensation awards in the future or any change that may occur in the Company’s forfeiture rate:
 
 
Fiscal Year Ending June 30,
 
Amount
(In Thousands)
 
2013 (remaining 3 months)
  $ 197  
2014
    537  
2015
    399  
2016
    268  
    $ 1,401  

Concentrations

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

Financial Instruments and Cash Balances.   At March 31, 2013, we had cash and cash equivalents totaling approximately $18,732,000, of which approximately $16,108,000 was invested in money market accounts.  At March 31, 2013, the Company had approximately $2,624,000 in non-interest bearing bank accounts for general day-to-day operations.

Substantially all of our cash is deposited at two FDIC insured financial institutions.  We maintained cash deposits in banks in excess of the banks’ FDIC insured deposit limits of approximately $17,500,000 at March 31, 2013.  Cash in overseas bank accounts was approximately $275,000 at March 31, 2013.

Accounts Receivable.   A substantial portion of accounts receivable are due from collectibles dealers.   One individual customer’s accounts receivable represented 10% of the Company’s total gross accounts receivable balance at March 31, 2013; whereas at June 30, 2012, no individual customer accounts receivable represented 10% of the Company’s total gross accounts receivable balance.  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 $31,000 at March 31, 2013 and $70,000 at June 30, 2012. Ultimately, management will write-off account receivable balances when it is determined that there is no possibility of collection.
 
 
 
9

 

 
Coin Revenues . The authentication, grading and sale of collectible coins, related services and product sales accounted for approximately 69% and 65% of our net revenues for the three and nine months ended March 31, 2013, respectively, and 69% and 68% of our net revenues for the three and nine months ended March 31, 2012.

Customers.   Five of our coin authentication and grading customers represented, in the aggregate, approximately 15% and 11% of our total net revenues in the nine months ended March 31, 2013 and 2012, respectively.

Inventories

Our inventories consist primarily of (i) collectible coin inventories, and (ii) consumable supplies that we use in our authentication and grading businesses.  Collectible coin inventories are recorded at estimated market value using the specific identification method.  Consumable supplies are recorded at the lower of cost (using the first-in first-out method) or market.  Inventories are periodically reviewed to identify slow-moving items, and an allowance for inventory loss is recognized, as necessary.  It is possible that our estimates of market value could change in the near term due to market conditions in the various collectibles markets served by the Company, which could require us to increase that allowance.

Capitalized Software

We capitalize certain costs incurred in the development and upgrading of our software, either from internal or external sources, as part of intangible assets and amortize these costs on a straight-line basis over the estimated useful life of the software of three years.  At March 31, 2013 and June 30, 2012, we had capitalized approximately $2,910,000 and $2,882,000, respectively, as capitalized software.  The related net book value of capitalized software at March 31, 2013 and June 30, 2012 was $174,000 and $224,000, respectively.  During the nine months ended March 31, 2013 and 2012, we capitalized costs of $28,000 and $248,000, respectively.  During the three and nine months ended March 31, 2013, approximately $27,000 and $78,000 was recognized as amortization expense for capitalized software, respectively, and for the three and nine months ended March 31, 2012, we amortized $24,000 and $59,000, 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 and trading cards 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 and either (i) receives a lower grade upon that re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible or, in the alternative, at the customer’s option, pay the difference in value of the item at its original grade, as compared 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 or there is evidence that the holder was tampered with.  We accrue for estimated warranty costs based on historical trends and related experience.  We monitor the adequacy of our warranty reserves and our warranty accrual rates on an ongoing basis and significant claims resulting from resubmissions receiving lower grades, or deemed not to be authentic, could have a material adverse impact on our results of operations.


 
10

 

Dividends

In accordance with the Company’s current quarterly dividend policy, the Company paid quarterly cash dividends of $0.325 per share of common stock in the third quarter of fiscal 2013.  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 July 2012, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update on the testing of indefinite-lived intangible assets for impairment. Under the guidance, management of a reporting unit has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If, after assessing the totality of events and circumstances, management concludes that it is more likely than not that the indefinite-lived intangible asset is not impaired, then performing a quantitative impairment test is not necessary.  Management of a reporting unit also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing a quantitative 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, 2012.  The adoption of this pronouncement did not have a material effect on the Company’s Consolidated Financial Statements.

2.           INVENTORIES

Inventories consist of the following (in thousands):
 
   
March 31,
   
June 30,
 
   
2013
   
2012
 
Coins                                                                
  $ 517     $ 1,166  
Other collectibles                                                                
    97       110  
Grading raw materials consumable inventory
    1,336       1,375  
      1,950       2,651  
Less inventory reserve                                                                
    (215 )     (378 )
Inventories, net
  $ 1,735     $ 2,273  

The reduction in coin inventory at March 31, 2013 reflects the sale of a coin for $550,000 in August 2012.  The carrying value of the coin at June 30, 2012 was $550,000.

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.


 
11

 


3.    PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):
 
             
   
March 31,
   
June 30,
 
   
2013
   
2012
 
Coins and stamp grading reference sets                                                                 
  $ 282     $ 294  
Computer hardware and equipment                                                                 
    1,820       1,760  
Computer software                                                                 
    1,051       1,051  
Equipment                                                                 
    3,106       2,999  
Furniture and office equipment                                                                 
    964       950  
Leasehold improvements                                                                 
    885       732  
Trading card reference library                                                                 
    52       52  
      8,160       7,838  
Less accumulated depreciation and amortization
    (6,326 )     (6,043 )
Property and equipment, net
  $ 1,834     $ 1,795  

4.            
ASSET ACQUISITION

 
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.  Acquisition related costs of $27,000 were incurred and have been included in general and administrative expenses for the nine months ended March 31, 2012.

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 our 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 cost of the website and related assets is being amortized over an estimated useful life of five years.

Approximately $110,000 and $242,000 of Coinflation.com revenue was included in net revenues for the three and nine months ended March 31, 2012, representing the revenues earned from the date of acquisition through March 31, 2012.


 
12

 

The following unaudited pro forma financial information set forth in the following table was prepared assuming that the acquisition of Coinflation.com had occurred on July 1, 2011, rather than the actual date of acquisition.  The following unaudited pro forma results of operations are not indicative of what our operating results would have been had the Coinflation.com acquisition been consummated on July 1, 2011 or what our results of operations will be in the future (in thousands):

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
Actual
   
Actual
   
Actual
   
Proforma
 
Revenue
  $ 14,488     $ 13,082     $ 35,313     $ 36,761  
                                 
Income from continuing operations
  $ 2,387     $ 1,731     $ 3,785     $ 4,390  
Income (loss) from discontinued operations, net of income taxes
    (7 )     7       (38 )     (43 )
Net income
  $ 2,380     $ 1,738     $ 3,747     $ 4,347  
                                 
Net income per basic share:
                               
Income from continuing operations
  $ 0.30     $ 0.22     $ 0.47     $ 0.56  
Income (loss) from discontinued operations
    -       -       -       (0.01 )
Net income per basic share
  $ 0.30     $ 0.22     $ 0.47     $ (0.55 )
                                 
Net income per diluted share:
                               
Income from continuing operations
  $ 0.29     $ 0.22     $ 0.47     $ 0.55  
  Income (loss) from discontinued operations
    -       -       (0.01 )     (0.01 )
Net income per diluted share
  $ 0.29     $ 0.22     $ 0.46     $ 0.54  

5.        
ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
   
March 31,
   
June 30,
 
   
2013
   
2012
 
Warranty reserves                                                                
  $ 1,103     $ 998  
Professional fees                                                                
    24       70  
Other                                                                
    783       849  
    $ 1,910     $ 1,917  

The following table presents the changes in the Company’s warranty reserve during the nine months ended March 31, 2013 and 2012 (in thousands):

   
Nine Months
Ended
March 31,
   
Nine Months
Ended
March 31,
 
   
2013
   
2012
 
Warranty reserve, beginning of period                                                                
  $ 998     $ 641  
Provision charged to cost of revenues                                                                
    479       552  
Payments                                                                
    (374 )     (297 )
Warranty reserve, end of period                                                                
  $ 1,103     $ 896  

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 in the Condensed Consolidated Balance Sheets as of March 31, 2013 and June 30, 2012.

 
 
13

 
 
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
March 31,
   
Nine Months Ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Revenues, net
  $ -     $ (1 )   $ (1 )   $ (1 )
Income (loss) before income tax
  $ (11 )   $ 13     $ (62 )   $ (70 )
Income tax (expense) benefit
    4       (6 )     24       27  
Income (loss) from discontinued operations
  $ (7 )   $ 7     $ (38 )   $ (43 )

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 March 31, 2013 and June 30, 2012 (in thousands):

   
March 31,
   
June 30,
 
Balance Sheet Data of Discontinued Operations
 
2013
   
2012
 
Current Assets:
           
Assets held for sale
  $ -     $ 27  
                 
Non-current assets:
               
Other assets
  $ 182     $ 182  
                 
Current liabilities:
               
Accounts payable
  $ 11     $ 7  
Lease obligations
    618       637  
Other accrued expenses
    159       160  
    $ 788     $ 804  
Non-current liabilities:
               
Lease obligations
  $ 1,791     $ 2,145  

A remaining note receivable of $148,000 at June 30, 2012 related to the fiscal 2009 disposal of our currency grading business.  The note receivable, plus accretion, was fully collected during the third quarter of fiscal 2013.

The remaining balance of our lease obligations related to the fiscal 2009 disposal of our jewelry businesses was $2,409,000 at March 31, 2013 , of which $618,000 was classified as a current liability, and $1,791,000 was classified as a non-current liability in the accompanying consolidated balance sheet at March 31, 2013.  We will continue to review and, if necessary, make adjustments to the lease obligation accruals on a quarterly basis.

7.            
INCOME TAXES

In the nine months ended March 31, 2013 and 2012, we recognized provisions for income taxes based upon estimated annual effective tax rates of approximately 40% and 41%, respectively, including discrete items.

8.            
NET INCOME PER SHARE

Options to purchase shares of common stock and unvested restricted shares of common stock in the aggregate of 206,000 and 118,000 for the three months ended March 31, 2013 and 2012, respectively, were excluded from the computation of diluted income per share as they would have been anti-dilutive. The aggregate number of anti-dilutive restrictive shares excluded from diluted income per share totaled approximately 162,000 and 109,000 for the nine months ended March 31, 2013 and 2012, respectively.  In addition, approximately 300,000 Performance-Based restricted shares were excluded from the computation of diluted earnings per share for both the three and nine months ended March 31, 2013, because we had not reached any of the Performance Goals at March 31, 2013.
 
 
 
14

 

 
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 Company’s operating segments are organized based on the respective services that they offer to customers.  Similar operating segments have been aggregated to reportable operating segments based on having similar services, types of customers, and other criteria.

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, subscription-based revenues and product sales.  The other collectibles segment is comprised of CCE, Coinflation.com and our collectibles convention business.

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 a 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 nine months ended March 31, 2013 and 2012.  Net identifiable assets are provided by business segment as of March 31, 2013 and June 30, 2012 (in thousands):

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
Net revenues from external customers:
 
2013
   
2012
   
2013
   
2012
 
Coins (including product sales)
  $ 10,051     $ 8,962     $ 22,935     $ 25,001  
Trading cards and autographs
    3,144       2,812       9,145       8,307  
Other
    1,293       1,308       3,233       3,318  
Total revenue
  $ 14,488     $ 13,082     $ 35,313     $ 36,626  
                                 
Amortization and depreciation:
                               
Coins
  $ 105     $ 68     $ 298     $ 193  
Trading cards and autographs
    18       17       52       59  
Other
    82       79       244       209  
Total
    205       164       594       461  
Unallocated amortization and depreciation
    60       57       175       121  
Consolidated amortization and depreciation
  $ 265     $ 221     $ 769     $ 582  
                                 
Stock-based compensation:
                               
Coins
  $ 33     $ 68     $ 89     $ 230  
Trading cards and autographs
    14       21       35       64  
Other
    12       23       32       70  
Total
    59       112       156       364  
Unallocated stock-based compensation
    133       209       469       635  
Consolidated stock-based compensation
  $ 192     $ 321     $ 625     $ 999  
                                 
Operating income:
                               
Coins
  $ 3,948     $ 3,045     $ 6,720     $ 8,557  
Trading cards and autographs
    542       391       1,474       1,036  
Other
    416       401       1,087       824  
Total
    4,906       3,837       9,281       10,417  
Unallocated operating expenses
    (986 )     (923 )     (3,100 )     (3,115 )
    $ 3,920     $ 2,914     $ 6,181     $ 7,302  
 
 
 
15

 

 
   
March 31,
   
June 30,
 
Identifiable Assets:
 
2013
   
2012
 
Coins                                                
  $ 6,185     $ 5,878  
Trading cards and autographs                                                
    1,266       1,171  
Other                                                
    2,527       2,669  
Total                                                
    9,978       9,718  
Unallocated assets                                                
    24,184       26,727  
Consolidated assets                                                
  $ 34,162     $ 36,445  
Goodwill:
               
Coins                                                
  $ 515     $ 515  
Other                                                
    1,568       1,568  
Consolidated goodwill                                                
  $ 2,083     $ 2,083  

10.          
RELATED-PARTY TRANSACTIONS

During the three and nine months ended March 31, 2013, an adult member of the immediate family of Mr. David Hall, the President of the Company, paid authentication and grading fees to PCGS of $262,000 and $585,000, respectively, compared with $92,000 and $160,000 for the three and nine months ended March 31, 2012, respectively.  Those fees were charged and paid at the same rates that we charge for comparable services to unaffiliated customers.  At March 31, 2013, the amount owed to the Company for these services was approximately $91,000, compared with $106,000 at June 30, 2012.

11.          
CONTINGENCIES

From time to time, the Company is named as a defendant in lawsuits and disputes that arise in the ordinary course of its business.  Management believes that none of the lawsuits or disputes currently pending against the Company is likely to have a material adverse effect on the Company’s financial position or results of operations.

12.          
SUBSEQUENT EVENTS

On April 29, 2013, the Company announced that in accordance with its dividend policy, the Board of Directors had approved and declared a fourth quarter cash dividend of $0.325 per share of common stock, and such dividend will be paid on May 31, 2013 to stockholders of record on May 17, 2013. 
 
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 with respect to 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, 2012 (the “Fiscal 2012 10-K”), which we filed with the Securities and Exchange Commission (the “SEC”) on August 30, 2012, and the section, entitled “Factors that Can affect our Results of Operations or Financial Position,” below in this Item 2.
 

 
 
16

 
 
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 2012 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.  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.

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


 
17

 
Overview of the Operating Results for the Three and Nine Months Ended March 31, 2013

The following table sets forth comparative financial data for the three and nine months ended March 31, 2013 and 2012 (in thousands):

   
Three Months Ended March 31,
   
Nine Months Ended March 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
 
Net Revenues:
                                               
Grading authentication and  related services
  $ 14,488       100.0 %   $ 13,003       99.4 %   $ 34,763       98.4 %   $ 36,210       98.9 %
Product sales
    -       -       79       0.6 %     550       1.6 %     416       1.1 %
      14,488       100.0 %     13,082       100.0 %     35,313       100.0 %     36,626       100.0 %
Cost of Revenues:
                                                               
Grading authentication and related services
     5,178       35.7 %      4,989       38.4 %     13,480       38.8 %     14,019       38.7 %
Product sales
    2       -       75       94.9 %     554       100.7 %     486       116.8 %
      5,180       35.8 %     5,064       38.7 %     14,034       39.7 %     14,505       39.6 %
                                                                 
Gross Profit:
                                                               
Services
    9,310       64.3 %     8,014       61.6 %     21,283       61.2 %     22,191       61.3 %
Product sales
    (2 )     -       4       5.1 %     (4 )     (0.7 )%     (70 )     (16.8 )%
      9,308       64.2 %     8,018       61.3 %     21,279       60.3 %     22,121       60.4 %
                                                                 
Selling and marketing expenses
    2,174       15.0 %     1,869       14.3 %     5,542       15.7 %     5,087       13.9 %
General & administrative expenses
    3,214       22.2 %     3,235       24.7 %     9,556       27.1 %     9,732       26.6 %
Operating income
    3,920       27.0 %     2,914       22.3 %     6,181       17.5 %     7,302       19.9 %
Interest and other income, net
    8       0.1 %     26       0.2 %     79       0.2 %     63       0.2 %
Income before provision for income taxes
     3,928       27.1 %      2,940       22.5 %      6,260       17.7 %      7,365       20.1 %
Provision for income taxes
    1,541       10.6 %     1,209       9.3 %     2,475       7.0 %     3,024       8.3 %
Income from continuing operations
    2,387       16.5 %     1,731       13.2 %     3,785       10.7 %     4,341       11.8 %
Loss from discontinued operations, net of income taxes
    (7 )     (0.1 )%      7       0.1 %     (38 )     (0.1 )%     (43 )     (0.1 )%
Net income
  $ 2,380       16.4 %   $ 1,738       13.3 %   $ 3,747       10.6 %   $ 4,298       11.7 %
Net income per diluted share:
                                                               
Income from continuing operations
  $ 0.29             $ 0.22             $ 0.47             $ 0.54          
Loss from discontinued operations
    -               -               (0.01 )             -          
Net income
  $ 0.29             $ 0.22             $ 0.46             $ 0.54          

Operating income increased by $1,006,000, or 35%, to $3,920,000 in the third quarter ended March 31, 2013 from $2,914,000 in the same period of the prior year. That increase was driven primarily by an 11% increase in total services revenues to $14,488,000 in the third quarter, and included a 13% increase in the revenues of our coin business (which is our largest operating business, representing 69% of total service revenues in the quarter) and a 12% increase in our trading card revenues. Operating income represented 27% of revenues in the third quarter of fiscal 2013, compared to 22% for the same period of the prior year.
 
For the nine months ended March 31, 2013, operating income declined by $1,121,000 or 15% to $6,181,000 from $7,302,000 for the same period of the prior year. That decline in operating income was attributable primarily to a 9% decline in service revenues from our coin business in the nine months ended March 31, 2013, which included a 21% decline in coin revenues in the first six months of the year, partially offset by the improved revenue performance in this year’s third quarter, as discussed above.

These, as well as other factors affecting our operating results in the three and nine months ended March 31, 2013, are described in more detail below. See “Factors that Can Affect our Operating Results and Financial Condition” and “Results of Operations for the Three and Nine Months Ended March 31, 2013, Compared to the Three and Nine Months Ended March 31, 2012,” below.


 
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Factors That Can Affect our Operating Results and Financial Position

Factors That Can Affect our Revenues and Gross Profit Margins .  Authentication and grading fees accounted for approximately 82% of our total service revenues for the nine months ended March 31, 2013.  The amount of those fees and our gross profit margins on the authentication and grading of collectibles are primarily driven by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our collectibles authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy.  Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and other high-value collectibles.

In addition, our coin authentication and grading revenues are impacted by the number of modern coins submitted to us for authentication and grading, 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 generally of significantly higher value and are more saleable by dealers than modern coins and trading cards; and (iv) as discussed above, the volume and timing of marketing programs for modern coins.  Furthermore, because a significant portion of our costs of sales are relatively fixed in nature in the short term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.

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

Five of our coin authentication and grading customers represented, in the aggregate, approximately 22% and 15% of our total net revenues in the three and nine months ended March 31, 2013, respectively.  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.


 
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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 nine months ended March 31, 2013 and 2012, 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 authentication and grading:

   
Units Processed
Three Months Ended March 31,
   
Declared Value (000)
Three Months Ended March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Coins
    569,400       59.4 %     570,400       60.7 %   $ 501,904       93.5 %   $ 328,256       91.7 %
Trading cards and autographs (1)
    389,800       40.6 %     366,200       39.0 %     34,849       6.5 %     26,074       7.3 %
Stamps (2)
    -       -       3,300       0.3 %     -       -       3,586       1.0 %
Total
    959,200       100.0 %     939,900       100.0 %   $ 536,753       100.0 %   $ 357,916       100.0 %

   
Units Processed
Nine Months Ended March 31,
   
Declared Value (000)
Nine Months Ended March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Coins
    1,271,900       52.8 %     1,478,100       57.8 %   $ 1,094,139       91.8 %   $ 962,872       91.4 %
Trading cards and autographs (1)
    1,138,700       47.2 %     1,069,200       41.8 %     97,851       8.2 %     83,524       7.9 %
Stamps (2)
    -       -       10,900       0.4 %     -       -       6,990       0.7 %
Total
    2,410,600       100.0 %     2,558,200       100.0 %   $ 1,191,990       100.0 %   $ 1,053,386       100.0 %
 
 

(1)   
Consists of trading cards units authenticated and graded by our PSA trading card business and autographs certified by our PSA/DNA autograph authentication and grading business.
(2)     
We sold our stamp authentication and grading business in June 2012 .

Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are primarily 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 ability and willingness 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, because the threat of increased inflation or concerns about the weakening of the U.S. dollar often lead investors and consumers to purchase gold and silver coins as hedges against inflation and reductions in the purchasing power of the U.S. currency; 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.  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 or stagnation in the market price 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.

Factors That Can Affect our 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, historically, we have been able to rely on internally generated cash and have never incurred borrowings to fund our continuing operations.  We currently expect that internally generated cash flows and current cash and cash equivalent balances will be sufficient to fund our continuing operations for at least through the next twelve months.

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 addition, our financial position is impacted by the Company’s tax position.  Through June 30, 2012, the Company had fully utilized all of its federal net operating losses and other tax attributes, and therefore we have begun paying federal income taxes at 34% of taxable income on an annual basis.  The Company continues to have net operating losses and other tax credits available for state income tax purposes in California, which should allow us to pay taxes at minimum levels in California for the foreseeable future.
 
 
 
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Critical Accounting Policies and Estimates

Except as discussed below, during the nine months ended March 31, 2013, 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, 2012.  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 a two-step goodwill impairment test.  When conducting the two-step impairment test, we apply a discounted cash flow model or an income approach to determine the fair value of the reporting unit on a total basis and then compare that fair value to the carrying value of the reporting unit.  If the fair value of the reporting unit, as of the measurement date, exceeds the carrying value of the reporting unit, no impairment of goodwill exists.  If, however, the fair value is less than the carrying value, then there is the possibility of goodwill impairment, and the second step of the test, which involves further testing and re-measurement of goodwill, is required.

During the first quarter ended September 30, 2012, we completed the annual goodwill impairment assessment with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of 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 was greater than the carrying value, including goodwill, and therefore it was not necessary to proceed to the second-step of the impairment test.

With respect to our Expos trade show business, as previously disclosed in our Form 10-K for the year ended June 30, 2012, we determined that no further impairment existed at both June 30, 2012 and there were no triggering events in the nine months ended March 31, 2013.

Revenue Recognition

A portion of our net revenues are comprised of subscription fees paid by customers for annual memberships in our Collectors Club.  Those membership subscription fees entitle members to access our on-line and printed publications and, in some cases, to receive vouchers for free grading services during the membership period. Through December 31, 2011, we recorded revenue for this multi-element service arrangement   by recognizing approximately 65% of the membership fees as revenue in the month following the membership purchase.  The balance of the membership fee was recognized as revenue over the life of the membership.  We evaluated, 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.  In the third quarter of fiscal 2012, arising from the upgrading of the Company’s accounting systems, which enables us to track separately the issuance and redemption of individual Collectors Club free grading vouchers, the Company began recognizing revenue attributed to the vouchers on a specific basis, to classify those revenues as part of authentication and grading fees rather than other related service revenues and to classify unredeemed vouchers as deferred revenue.  The balance of the membership fees continue to be recognized over the life of the membership.  During the three months ended March 31, 2013, the Company began to recognize revenue attributable to expired vouchers that had not been redeemed during the membership period. The amount of such revenue was immaterial for the three and nine months ended March 31, 2013.

Stock-Based Compensation .  We recognize stock-based compensation attributable to service-based equity grants over the service period based on the grant date fair value.  For performance-based equity grants with a financial performance goal, we begin to recognize compensation expense based on the grant date fair value when it has become probable that we will achieve the financial performance goal.


 
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(i)             Fiscal 2013 Expense.   Stock-based compensation in the three and nine months ended March 31, 2013, represents expenses attributable to (i) prior year grants of restricted stock for which compensation is being recognized over the remaining service periods of those grants; (ii) grants of 84,000 shares of restricted stock granted in the nine months ended March 31, 2013 (including 40,000 shares granted to the Company’s new Chief Executive Officer, 12,500 shares granted the Company’s Chief Financial Officer and 24,000 shares granted to the Company’s outside directors), all of which are service-based grants and, therefore, require recognition of stock-based compensation from the respective grant dates; (iii) $103,000 in connection with accelerated vesting of prior year grants of restricted shares for the Company’s former CEO; and (iv) grants of restricted stock under the Company’s Long-Term Performance-Based Equity Incentive Plan (see below).

The accelerated vesting of restricted shares held by our former CEO was in exchange for his early termination, effective October 15, 2012, of his employment agreement, which would otherwise have continued in effect until June 30, 2013.

(ii)           Fiscal 2013 Long-Term Performance-Based Equity Incentive Program

On December 28, 2012, the Compensation Committee of the Board of Directors adopted a Long-Term Performance-Based Equity Incentive Program (“LTIP”) for the Company’s executive officers (including the Company’s Chief Executive Officer, Mr. Deuster, and the Chief Financial Officer, Mr. Wallace) and certain management employees (“Participants”) and granted approximately 300,000 shares of restricted stock (the “restricted shares”), including 108,880 shares to Mr. Deuster and 40,830 shares to Mr. Wallace, from the Company’s stockholder-approved 2006 Equity Incentive Plan (the “2006 Plan”).

The primary purposes of this program are (i) to focus executive management on achieving substantial increases in the Company’s operating income, and thereby increase internally generated cash flows, and (ii) to align the longer-term financial interests of executive management with the longer-term interests of the Company’s stockholders.  For purposes of this program, operating income is defined as the Company’s operating income before non-cash stock-based compensation expense.

The Compensation Committee had intended to grant a total of approximately 550,000 restricted shares to the Participants (including 200,000 restricted shares to Mr. Deuster and 75,000 restricted shares to Mr. Wallace) under the LTIP.  However, it was not able to do so, because there were not a sufficient number of shares available for such grants under the 2006 Plan.  As a result, the Compensation Committee expects to approve grants of additional shares to the Participants under this LTIP, if the Board of Directors adopts a new equity incentive plan and that plan is approved by the Company’s stockholders at the next annual meeting of stockholders, which is scheduled to be held in December, 2013.  The additional number of restricted shares to be granted at that time has not yet been determined, but could be as many as 250,000 additional shares, including 91,120 to Mr. Deuster and 34,170 to Mr. Wallace.

The vesting of the restricted shares granted under the LTIP is conditioned on the Company’s achievement of increasing annual operating income during any fiscal year within a six-year period commencing with fiscal 2013 and continuing through the fiscal year ending June 30, 2018, as indicated in the following table:

   
Cumulative Percent of
Shares Vested
 
If in any fiscal year during the term of the Program:
     
The Threshold Performance Goal is Achieved
    10 %
Intermediate Performance Goal #1 is Achieved
    25 %
Intermediate Performance Goal #2 is Achieved
    45 %
Intermediate Performance Goal #3 is Achieved
    70 %
The Maximum Performance Goal is Achieved
    100 %

Upon the determination that a milestone has been achieved for a fiscal year, 50% of the shares related to achieving that milestone will vest immediately and the remaining 50% will vest at June 30 of the following fiscal year, provided that the Participant is still in the service of the Company.

 
 
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If the Company never achieves the Threshold Performance Goal during the term of the Program, all of the restricted shares will be forfeited effective June 30, 2018.  If, instead, the Threshold Performance Goal is achieved or exceeded, but the Maximum Performance Goal is not achieved during the term of the Program, then the unvested shares will be forfeited effective June 30, 2018.

As an additional incentive, the Participants may also earn a maximum 25% more shares if the Maximum Performance Goal is achieved in any fiscal year ending on or before June 30, 2015 and such shares would vest 50% upon the determination that the milestone has been achieved and the remaining 50% on June 30 of the following fiscal year.

As of January 1, 2013, management estimated that it was probable that the Company would achieve the Threshold Performance Goal by June 30, 2016 (representing the midpoint in the term of the LTIP) and, therefore, began recognizing stock-based compensation expense of $300,000, based on the closing price of the Company’s common stock at the grant date of $10.01, over the period beginning January 1, 2013 through June 30, 2016, of which $21,000 was recognized in the three and nine months ended March 31, 2013.  Management will reassess at each reporting date whether any additional compensation expense is required, and the period over which such expense should be recognized.

Results of Operations for the Three and Nine Months Ended March 31, 2013, Compared to the Three and Nine Months Ended March 31, 2012

Net Revenues

Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards and autographs.  We also generated fees from the authentication and grading of stamps through June 2012 (when we sold our stamp authentication and grading business).  To a lesser extent, we generate collectibles related service revenues (referred to in this report as “other related revenues”) from sales of Collectors Club memberships and advertising fees and commissions earned from our websites (including Coinflation.com, which we acquired in September 2011) 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 trade shows.  Net revenues also include, to a significantly lesser extent, revenue 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 an integral part of our ongoing revenue generating activities.

The following table sets forth the total net revenues for the three and nine months ended March 31, 2013 and 2012 between authentication and grading services fees, other related services revenues and product sales (in thousands):

   
Three Months Ended March 31,
 
   
2013
   
2012
   
Increase (Decrease)
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Authentication and grading fees
  $ 12,122       83.7 %   $ 10,871       83.1 %   $ 1,251       11.5 %
Other related services
    2,366       16.3 %     2,132       16.3 %     234       11.0 %
Total service revenues
    14,488       100.0 %     13,003   </