Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-Q, Received: 02/07/2013 16:07:16)
       
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, 2012
   
 
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 February 4, 2013
 
Common Stock $.001 Par Value
 
8,489,844
       

 
 

 

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2012
TABLE OF CONTENTS
Page
   
       
   
1
       
   
2
       
   
3
       
   
5
       
 
16
   
16
   
17
   
17
   
18
   
20
   
22
   
27
       
 
29
       
 
29
       
 
       
 
31
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds    
31
 
31
     
 
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,
 
   
2012
   
2012
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 17,456     $ 21,214  
Accounts receivable, net of allowance of $34 at December 31, 2012 and $70 at June 30, 2012
    1,832       1,794  
Inventories, net
    1,892       2,273  
Prepaid expenses and other current assets
    958       813  
Deferred income tax assets
    1,177       1,177  
Notes receivable from sale of net assets of discontinued operations
    153       148  
Current assets of discontinued operations
    27       27  
Total current assets
    23,495       27,446  
                 
Property and equipment, net
    1,837       1,795  
Goodwill
    2,083       2,083  
Intangible assets, net
    1,674       1,788  
Deferred income tax assets
    2,982       2,982  
Other assets
    280       169  
Non-current assets of discontinued operations
    182       182  
    $ 32,533     $ 36,445  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,344     $ 1,625  
Accrued liabilities
    1,944       1,917  
Accrued compensation and benefits
    1,505       2,463  
Income taxes payable
    368       191  
Deferred revenue
    3,143       2,322  
Current liabilities of discontinued operations
    783       804  
Total current liabilities
    9,087       9,322  
                 
Deferred rent
    462       447  
Non-current liabilities of discontinued operations
    1,915       2,145  
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; 8,490 and 8,107 issued and outstanding at December 31, 2012
and June 30, 2012, respectively
      8         8  
Additional paid-in capital
    74,136       73,683  
Accumulated deficit
    (53,075 )     (49,160 )
Total stockholders’ equity
    21,069       24,531  
    $ 32,533     $ 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
December 31,
   
Six Months Ended
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Net revenues
  $ 9,595     $ 11,472     $ 20,825     $ 23,544  
Cost of revenues
    3,964       4,717       8,854       9,441  
Gross profit
    5,631       6,755       11,971       14,103  
Operating Expenses:
                               
Selling and marketing expenses
    1,552       1,567       3,368       3,218  
General and administrative expenses
    3,108       3,294       6,342       6,498  
Total operating expenses
    4,660       4,861       9,710       9,716  
Operating income
    971       1,894       2,261       4,387  
Interest and other income, net
    9       18       71       38  
Income before provision for income taxes
    980       1,912       2,332       4,425  
Provision for income taxes
    399       795       934       1,814  
Income from continuing operations
    581       1,117       1,398       2,611  
Loss from discontinued operations, net of income taxes
    (20 )     (32 )     (31 )     (50 )
Net income
  $ 561     $ 1,085     $ 1,367     $ 2,561  
                                 
Net income per basic share:
                               
Income from continuing operations
  $ 0.07     $ 0.14     $ 0.17     $ 0.33  
Loss from discontinued operations
    -       -       -       (0.01 )
Net income
  $ 0.07     $ 0.14     $ 0.17     $ 0.32  
                                 
Net income per diluted share:
                               
Income from continuing operations
  $ 0.07     $ 0.14     $ 0.17     $ 0.33  
Loss from discontinued operations
    -       -       -       (0.01 )
Net income
  $ 0.07     $ 0.14     $ 0.17     $ 0.32  
                                 
Weighted average shares outstanding:
                               
Basic
    8,052       7,904       8,038       7,880  
Diluted
    8,113       7,999       8,099       7,982  
Dividends declared per common share
  $ 0.325     $ 0.325     $ 0.65     $ 0.65  

See accompanying notes to condensed consolidated financial statements.

 
2

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(In Thousands)
(Unaudited)


   
Six Months Ended
December 31,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,367     $ 2,561  
Discontinued operations
    31       50  
Income from continuing operations
    1,398       2,611  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation and amortization expense
    504       361  
Stock-based compensation expense
    433       677  
Provision for bad debts
    3       2  
Provision for inventory write-down
    2       131  
Provision for warranty
    266       339  
Loss (gain) on sale of property and equipment
    (22 )     2  
Interest on notes receivable
    (5 )     (7 )
Provision for deferred income taxes
    -       1,547  
Change in operating assets and liabilities:
               
Accounts receivable
    (42 )     176  
Inventories
    379       (253 )
Prepaid expenses and other
    (145 )     (246 )
Other assets
    (110 )     12  
Accounts payable and accrued liabilities
    (254 )     (345 )
Accrued compensation and benefits
    (958 )     (419 )
Income taxes payable
    177       (7 )
Deferred revenue
    821       (7 )
Deferred rent
    15       33  
Net cash provided by operating activities of continuing operations
    2,462       4,607  
Net cash used in operating activities of discontinued businesses
    (282 )     (223 )
Net cash provided by operating activities
    2,180       4,384  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of property and equipment
    33       8  
Capital expenditures
    (356 )     (512 )
Capitalized software
    (28 )     (207 )
Purchase of Coinflation.com, net of cash acquired
    -       (550 )
Patents and other intangibles
    (59 )     -  
Net cash used in  investing activities
    (410 )     (1,261 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from exercise of stock options
    28       454  
Dividends paid to common stockholders
    (5,548 )     (5,203 )
Payments for retirement of common stock
    (8 )     -  
Net cash used in financing activities
    (5,528 )     (4,749 )
                 
Net decrease in cash and cash equivalents
    (3,758 )     (1,626 )
Cash and cash equivalents at beginning of period
    21,214       21,926  
Cash and cash equivalents at end of period
  $ 17,456     $ 20,300  
                 

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,
 
   
2012
   
2011
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Income taxes paid during the period
  $ 737     $ 240  
                 
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 December 31, 2012, such operating subsidiaries were 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 significant intercompany transactions and accounts have been eliminated in consolidation.

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, 2012 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 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 in the period in which the show takes place.

A portion of our net revenues are comprised of subscription fees paid by customers for 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. Through December 31, 2011, we 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, which can range from one to two years.  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 ended March 31, 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 free grading vouchers on a specific basis and to classify those revenues as part of grading and authentication fees rather than other related service revenues.  The balance of the membership fees continue to be recognized over the life of the membership.  This refinement of the Company’s Collectors Club revenue recognition policy resulted in approximately $240,000 of revenue being deferred that otherwise would have been recognized in the six months ended December 31, 2012.

 
 
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.  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 discontinued jewelry businesses.  These estimates are discussed in more detail in these notes to 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 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, 2012.

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.
 
 
 
6

 
 
Stock-Based Compensation Expense
 
Stock-based compensation expense is measured at the grant date of an equity-incentive 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 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 six months ended December 31, 2012 and 2011 (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
Included In:
 
2012
   
2011
   
2012
   
2011
 
Sales and marketing expenses
  $ 5     $ -     $ 5     $ -  
General and administrative expenses
    142       440       428       677  
    $ 147     $ 440     $ 433     $ 677  

Of the stock-based compensation recognized in the six months ended December 31, 2012, 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 six months ended December 31, 2012 and 2011.  The following table presents information relative to the stock options outstanding under all equity incentive plans as of December 31, 2012 and stock option activity during the six months ended December 31, 2012.  The closing prices of our common stock as of December 31, 2012 and June 30, 2012 were $10.03 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 December 31, 2012
    195     $ 13.23       1.71     $ 154  
Exercisable at December 31, 2012
    195     $ 13.23       1.71     $ 154  

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, pursuant to the Company’s stockholder-approved 2006 Equity Incentive Plan (the “2006 Plan”).

 
7

 

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, 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 those 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.

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.

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 December 31, 2012, 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, will recognize 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.  Management will reassess at each reporting date whether any additional compensation expense is to be recognized.

Other Fiscal 2013 Grants

During the six months ended December 31, 2012, the Company granted 60,000 service-based 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 the awards respective service period.

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.  The Company estimated the fair value of those shares to be approximately $240,000, and such expense is being recognized over the one-year service period.

 
8

 

The following table presents the non-vested status of the restricted shares for the six months ended December 31, 2012 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, 2012
    93     $ 15.28  
Granted
    384       10.45  
Vested
    (38 )     15.28  
Cancelled
    (9 )     15.65  
Non-vested at December 31, 2012
    430     $ 10.96  

The following table sets forth total unrecognized compensation cost in the amount of $1,678,000 related to non-vested restricted stock awards expected to be recognized through fiscal year 2016, on the assumption that the Participants remain in the Company’s employment throughout the applicable vesting periods and the Company will achieve the Threshold Performance Goal for the LTIP.  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)
 
2013 (remaining 6 months)
  $ 408  
2014
    566  
2015
    427  
2016
    277  
    $ 1,678  

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 December 31, 2012, we had cash and cash equivalents totaling approximately $17,456,000, of which approximately $15,344,000 was invested in money market accounts.  At December 31, 2012, the Company had approximately $2,112,000 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 due from banks in excess of the banks’ FDIC insured deposit limits of approximately $14,800,000 at December 31, 2012.

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 December 31, 2012; 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 $34,000 at December 31, 2012 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.

Coin Revenues . The authentication, grading and sale of collectible coins, related services and product sales accounted for approximately 62% of our net revenues for the three and six months ended December 31, 2012, and 67% of our net revenues for the three and six months ended December 31, 2011.
 
 
 
9

 
 
Customers.   Five of our coin authentication and grading customers represented, in the aggregate, approximately 12% and 11% of our total net revenues in the six months ended December 31, 2012 and 2011, respectively.

Inventories

Our inventories consist primarily of (i) our 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 December 31, 2012 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 December 31, 2012 and June 30, 2012 was $201,000 and $224,000, respectively.  During the six months ended December 31, 2012 and 2011, we capitalized costs of $28,000 and $207,000, respectively.  During the three and six months ended December 31, 2012, approximately $26,000 and $51,000 was recognized as amortization expense for capitalized software, respectively, and for the three and six months ended December 31, 2011, we amortized $13,000 and $34,000, 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.  We accrue for estimated warranty costs based on historical trends and related experience.  We monitor the adequacy of our warranty reserves on an ongoing basis and significant claims resulting from resubmissions receiving lower grades, or deemed not to be authentic, could result in a material adverse impact on our results of operations.

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 second 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.
 
 

 
 
10

 
 
2.           INVENTORIES

Inventories consist of the following (in thousands):
 
   
December 31,
   
June 30,
 
   
2012
   
2012
 
Coins                                                                
  $ 504     $ 1,166  
Other collectibles                                                                
    138       110  
Grading raw materials consumable inventory
    1,430       1,375  
      2,072       2,651  
Less inventory reserve                                                                
    (180 )     (378 )
Inventories, net
  $ 1,892     $ 2,273  

The reduction in coin inventory at December 31, 2012 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.

3.     PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):
 
             
   
December 31,
   
June 30,
 
   
2012
   
2012
 
Coins and stamp grading reference sets                                                                 
  $ 294     $ 294  
Computer hardware and equipment                                                                 
    1,797       1,760  
Computer software                                                                 
    1,051       1,051  
Equipment                                                                 
    3,029       2,999  
Furniture and office equipment                                                                 
    953       950  
Leasehold improvements                                                                 
    827       732  
Trading card reference library                                                                 
    52       52  
      8,003       7,838  
Less accumulated depreciation and amortization
    (6,166 )     (6,043 )
Property and equipment, net
  $ 1,837     $ 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 six months ended December 31, 2011.


 
11

 
 
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 $131,000 of Coinflation.com revenue was included in net revenues for the three and six months ended December 31, 2011, representing the revenues earned from the date of acquisition through December 31, 2011.

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
December 31,
   
Six Months Ended
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
Actual
   
Actual
   
Actual
   
Proforma
 
Revenue
  $ 9,595     $ 11,472     $ 20,825     $ 23,679  
                                 
Income from continuing operations
  $ 581     $ 1,117     $ 1,398     $ 2,660  
Loss from discontinued operations, net of income taxes
    (20 )     (32 )     (31 )     (50 )
Net income
  $ 561     $ 1,085     $ 1,367     $ 2,610  
                                 
Net income per basic share:
                               
Income from continuing operations
  $ 0.07     $ 0.14     $ 0.17     $ 0.34  
Loss from discontinued operations
    -       -       -       (0.01 )
Net income per basic shares
  $ 0.07     $ 0.14     $ 0.17     $ 0.33  
                                 
Net income per diluted share:
                               
Income from continuing operations
  $ 0.07     $ 0.14     $ 0.17     $ 0.33  
Loss from discontinued operations
    -       -       -       (0.01 )
Net income per diluted shares
  $ 0.07     $ 0.14     $ 0.17     $ 0.32  

5.            
ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
             
   
December 31,
   
June 30,
 
   
2012
   
2012
 
Warranty reserves                                                                
  $ 1,088     $ 998  
Professional fees                                                                
    46       70  
Other                                                                
    810       849  
    $ 1,944     $ 1,917  
 

 
 
12

 

The following table presents the changes in the Company’s warranty reserve during the six months ended December 31, 2012 and 2011 (in thousands):

   
Six Months Ended
December 31,
 
   
2012
   
2011
 
Warranty reserve beginning of period                                                                
  $ 998     $ 641  
Provision charged to cost of revenues                                                                
    266       339  
Payments                                                                
    (176 )     (229 )
Warranty reserve, end of period                                                                
  $ 1,088     $ 751  

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 December 31, 2012 and June 30, 2012.

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,
 
   
2012
   
2011
   
2012
   
2011
 
Net revenues
  $ -     $ -     $ -     $ -  
                                 
Loss before income tax benefit
  $ (32 )   $ (53 )   $ (51 )   $ (83 )
Income tax benefit
    12       21       20       33  
Loss from discontinued operations
  $ (20 )   $ (32 )   $ (31 )   $ (50 )

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, 2012 and June 30, 2012 (in thousands):

   
December 31,
   
June 30,
 
Balance Sheet Data of Discontinued Operations
 
2012
   
2012
 
Current Assets:
           
Assets held for sale
  $ 27     $ 27  
                 
Non-current assets:
               
Other assets
  $ 182     $ 182  
                 
Current liabilities:
               
Accounts payable
  $ 8     $ 7  
Lease obligations
    615       637  
Other accrued expenses
    160       160  
    $ 783     $ 804  
Non-current liabilities:
               
Lease obligations
  $ 1,915     $ 2,145  

The remaining note receivable balances related to the fiscal 2009 disposal of our currency grading business were $153,000 and $148,000 at December 31, 2012 and June 30, 2012, respectively, and are classified as other assets.

 
13

 


The remaining balance of our lease obligations related to the fiscal 2009 disposal of our jewelry businesses was $2,530,000 at December 31, 2012 , of which $615,000 was classified as a current liability, and $1,915,000 was classified as a non-current liability in the accompanying consolidated balance sheet at December 31, 2012.  We will continue to review and, if necessary, make adjustments to the lease obligation accruals on a quarterly basis.

7.            
INCOME TAXES

In the six months ended December 31, 2012 and 2011, we recognized provisions for income taxes based upon estimated annual effective tax rates with discrete items of approximately 40% and 41%, respectively.

8.            
NET INCOME PER SHARE

Options to purchase shares of common stock and non-vested restricted shares of common stock in the aggregate of 168,000 and 126,000 for the three months ended December 31, 2012 and 2011, 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 140,000 and 104,000 for the six months ended December 31, 2012 and 2011, respectively, and approximately 300,000 Performance-Based restricted shares were excluded from the computation of diluted earnings per share for both the three and six months ended December 31, 2012, because we had not reached any of the Performance Goals at December 31, 2012.

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.


 
14

 

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 six months ended December 31, 2012 and 2011.  Net identifiable assets are provided by business segment as of December 31, 2012 and June 30, 2012 (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Net revenues from external customers
                       
Coins
  $ 5,927     $ 7,962     $ 12,884     $ 16,038  
Trading cards and autographs
    2,921       2,663       6,000       5,495  
Other
    747       847       1,941       2,011  
Total revenue
  $ 9,595     $ 11,472     $ 20,825     $ 23,544  
Amortization and depreciation
                               
Coins
  $ 100     $ 62     $ 193     $ 125  
Trading cards and autographs
    17       20       34       42  
Other
    82       83       162       130  
Total
    199       165       389       297  
Unallocated amortization and depreciation
    59       35       115       64  
Consolidated amortization and depreciation
  $ 258     $ 200     $ 504     $ 361  
Stock-based compensation
                               
Coins
  $ 28     $ 109     $ 55     $ 162  
Trading cards and autographs
    11       33       22       43  
Other
    10       35       20       47  
Total
    49       177       97       252  
Unallocated stock-based compensation
    98       263       336       425  
Consolidated stock-based compensation
  $ 147     $ 440     $ 433     $ 677  
Operating income before unallocated expenses
                               
Coins
  $ 1,273     $ 2,629     $ 2,773     $ 5,512  
Trading cards and autographs
    439       273       931       644  
Other
    238       94       672       423  
Total
    1,950       2,996       4,376       6,579  
Unallocated operating expenses
    (979 )     (1,102 )     (2,115 )     (2,192 )
Consolidated operating income
  $ 971     $ 1,894     $ 2,261     $ 4,387  


   
December 31,
   
June 30,
 
   
2012
   
2012
 
Identifiable Assets:
           
Coins                                    
  $ 5,659     $ 5,878  
Trading cards and autographs
    1,224       1,171  
Other                                    
    2,605       2,669  
Total                                    
    9,488       9,718  
Unallocated assets                                    
    23,045       26,727  
Consolidated assets                                    
  $ 32,533     $ 36,445  
Goodwill:
               
Coins                                    
  $ 515     $ 515  
Other                                    
    1,568       1,568  
Consolidated goodwill
  $ 2,083     $ 2,083  



 
15

 


10.          
RELATED-PARTY TRANSACTIONS

During the three and six months ended December 31, 2012, an adult member of the immediate family of Mr. David Hall, the President of the Company, paid grading and authentication fees to PCGS of $154,000 and $323,000, respectively, compared with $6,000 and $69,000 for the three and six months ended December 31, 2011.  Those fees were charged and paid at the same rates that we charge for comparable services to unaffiliated customers.  At December 31, 2012, the amount owed to the Company for these services was approximately $158,000, 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 January 29, 2013, 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 1, 2013 to stockholders of record on February 15, 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.

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.


 
16

 
 
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 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) 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.


The following table sets forth comparative financial data for the three and six months ended December 31, 2012 and 2011 (in thousands):

   
Three Months Ended December 31,
   
Six Months Ended December 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
 
Net Revenues:
                                               
Grading authentication and  related services
  $ 9,595       100.0 %   $ 11,307       98.6 %   $ 20,275       97.4 %   $ 23,207       98.6 %
Product sales
    -       0.0 %     165       1.4 %     550       2.6 %     337       1.4 %
      9,595       100.0 %     11,472       100.0 %     20,825       100.0 %     23,544       100.0 %
Cost of Revenues:
                                                               
Grading authentication and related services
     3,962       41.3 %      4,492       39.7 %      8,302       40.9 %      9,030       38.9 %
Product sales
    2       -       225       136.4 %     552       100.4 %     411       122.0 %
      3,964       41.3 %     4,717       41.1 %     8,854       42.5 %     9,441       40.1 %
                                                                 
Gross Profit:
                                                               
Services
    5,633       58.7 %     6,815       60.3 %     11,973       59.1 %   $ 14,177       61.1 %
Product sales
    (2 )     -       (60 )     (36.4 )%     (2 )     (0.4 )%     (74 )     (22.0 )%
      5,631       58.7 %     6,755       58.9 %     11,971       57.5 %     14,103       59.9 %
                                                                 
Selling and marketing expenses
    1,552       16.2 %     1,567       13.7 %     3,368       16.2 %     3,218       13.7 %
General & administrative expenses
    3,108       32.4 %     3,294       28.7 %     6,342       30.4 %     6,498       27.6 %
Operating income
    971       10.1 %     1,894       16.5 %     2,261       10.9 %     4,387       18.6 %
Interest and other income, net
    9       0.1 %     18       0.2 %     71       0.3 %     38       0.2 %
Income before provision for income taxes
     980       10.2 %      1,912       16.7 %      2,332       11.2 %      4,425       18.8 %
Provision for income taxes
    399       4.1 %     795       7.0 %     934       4.5 %     1,814       7.7 %
Income from continuing operations
    581       6.1 %     1,117       9.7 %     1,398       6.7 %     2,611       11.1 %
Loss from discontinued operations, net of income taxes
    (20 )     (0.3 )%     (32 )     (0.2 )%     (31 )     (0.1 )%     (50 )     (0.2 )%
Net income
  $ 561       5.8 %   $ 1,085       9.5 %   $ 1,367       6.6 %   $ 2,561       10.9 %
Net income per diluted share:
                                                               
Income from continuing operations
  $ 0.07             $ 0.14             $ 0.17             $ 0.33          
Loss from discontinued operations
    -               -               -               (0.01 )        
Net income
  $ 0.07             $ 0.14             $ 0.17             $ 0.32          
 
 
 
 
 
17

 
 
Operating income decreased by $923,000 or 49% to $971,000 and by $2,126,000 or 48% to $2,261,000 in the three and six months ended December 31, 2012, respectively, from $1,894,000 and $4,387,000 in the same periods of the prior years, respectively.  Those decreases resulted primarily from a $1.7 million or 15% and $2.9 million or 13% decrease in total service revenues in the three and six months ended December 31, 2012, compared to the same periods of the prior year.  The reductions in service revenues included reductions of $1.9 million and $3.4 million in the revenues from our coin authentication and grading business in the three and six months ended December 31, 2012, respectively.

In response to this general market decline, we reduced our coin authentication and grading costs in the first quarter of fiscal 2013 by approximately $1.1 million on an annualized basis, to more closely align our authentication and grading capacity to current market conditions.  Moreover, we will continue to closely monitor our short-term revenue trends and cost structure to improve the profitability of the business.

These, as well as other factors affecting our operating results in the three and six months ended December 31, 2012, 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 Six Months Ended December 31, 2012, Compared to the Three and Six Months Ended December 31, 2011,” below.

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 79% of our total net revenues for the six months ended December 31, 2012.  The amount of those fees and our gross profit margins 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 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 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 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.

 
 
18

 
 
Five of our coin authentication and grading customers represented, in the aggregate, approximately 12% of our total net revenues in the three and six months ended December 31, 2012, 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.

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, 2012 and 2011, 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:

   
Units Processed
Three Months Ended December 31,
   
Declared Value (000)
Three Months Ended December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Coins
    359,500       49.5 %     428,900       54.8 %   $ 293,491       90.9 %   $ 298,057       91.9 %
Trading cards and autographs (1)
    366,400       50.5 %     349,500       44.7 %     29,224       9.1 %     24,723       7.6 %
Stamps (2)
    -       -       4,100       0.5 %     -       -       1,513       0.5 %
Total
    725,900       100.0 %     782,500       100.0 %   $ 322,715       100.0 %   $ 324,293       100.0 %

   
Units Processed
Six Months Ended December 31,
   
Declared Value (000)
Six Months Ended December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Coins
    702,500       48.4 %     907,700       56.1 %   $ 592,235       90.4 %   $ 634,616       91.2 %
Trading cards and autographs (1)
    748,900       51.6 %     703,000       43.4 %     63,002       9.6 %     57,450       8.3 %
Stamps
    -       -       7,600       0.5 %     -       -       3,404       0.5 %
Total
    1,451,400       100.0 %     1,618,300       100.0 %   $ 655,237       100.0 %   $ 695,470       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.
(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 at least through the end of fiscal 2013.
 
 
 
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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 will pay federal income taxes at 34% of taxable income on an annual basis in future periods.  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.
 
Critical Acc ounting Policies and Estimates

Except as discussed below, during the six months ended December 31, 2012, 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 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 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 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 six months ended December 31, 2012.

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 equity grants with a financial performance goal, we begin to recognize compensation expense based on the grant date fair value when it becomes probable that we will achieve the financial performance goal.

(i)             Fiscal 2013 Expense.   Stock-based compensation in the three and six months ended December 31, 2012, 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 six months ended December 31, 2012 (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, required recognition of stock-based compensation for those awards from the respective grant dates; and (iii) $103,000 in connection with accelerated vesting of restricted shares for the Company’s former CEO.

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.


 
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(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, pursuant to 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, 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 those 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.

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 December 31, 2012, 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, will recognize 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.  Management will reassess at each reporting date whether any additional compensation expense is to be recognized.


 
21

 
Results of Operations for the Three and Six Months Ended December 31, 2012, Compared to the Three and Six Months Ended December 31, 2011

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 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 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 an integral part of our ongoing revenue generating activities.

The following table sets forth the total net revenues for the three and six months ended December 31, 2012 and 2011 between grading and authentication services revenues, other related services revenues and product sales (in thousands):

   
Three Months Ended December 30,
 
   
2012
   
2011
   
Increase
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
 
Grading and authentication fees
  $ 7,848       81.8 %   $ 9,645       84.1 %   $ (1,797 )     (18.6 )%
Other related services
    1,747       18.2 %     1,662       14.5 %     85       5.1 %
Total service revenues
    9,595       100.0 %     11,307       98.6 %     (1,712 )     (15.1 )%
Product sales
    -