Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-Q, Received: 05/06/2015 16:11:09)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
 

For the quarter ended March 31, 2015

   
 

OR

   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

   
 

For the transition period from _______ to _____

Commission file number 1-34240

 

COLLECTORS UNIVERSE, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

33-0846191

(State or other jurisdiction of

(I.R . S. Employer Identification No.)

Incorporation or organization)

 
 

1921 E. Alton Avenue, Santa Ana, California 92705

(address of principal executive offices and zip code)

 

Registrant's telephone number, including area code: (949) 567-1234

 

Not Applicable

(Former name, former address and former fiscal year, if changed, since last year)

 

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

 

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☐

 

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  ☐

Accelerated filer 

Non-accelerated filer  ☐

Smaller reporting company  ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2). YES ☐   NO ☒

 

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 April 30, 2015

Common Stock $.001 Par Value

 

8,878,476

     

 

 
 

 

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS

 

PART I

Financial Information

Page

 

Item 1.

Financial Statements (unaudited):

 
       
   

Condensed Consolidated Balance Sheets as of March 31, 2015 and June 30, 2014

1

       
   

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2015 and 2014

2

       
   

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2015 and 2014

3

       
   

Notes to Condensed Consolidated Financial Statements

5

       
 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

15

   

Forward-Looking Statements

15

   

Our Business

15

   

Overview of the Three and Nine Months Ended March 31, 2015 Operating Results

16

   

Factors That Can Affect Our Operating Results and Financial Position

17

   

Critical Accounting Policies and Estimates

19

   

Results of Operations for the Three and Nine Months Ended March 31, 2015 Compared to the Three and Nine Months Ended March 31, 2014

20
   

Liquidity and Capital Resources

25

       
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

Item 4.

Controls and Procedures

28

       

PART II

Other Information

 
 

Item 1A.

Risk Factors

29

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

Item 6.

Exhibits

29

     

S ignatures

 

S-1

Index to Exhibits

E-1

E xhibits

   

Exhibit 31.1

Certification of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002

 
     

Exhibit 31.2

Certification of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002

 
     

Exhibit 32.1

Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002

 
     

Exhibit 32.2

Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002

 
     

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

 

 

 

 

   

PART 1 – FINANCIAL INFORMATION

Item 1.     Financial Statements

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share data)

(Unaudited)  

 

ASSETS

 

March 31, 2015

   

June 30, 2014

 

Current assets:

               

Cash and cash equivalents

  $ 17,329     $ 19,909  

Accounts receivable, net of allowance of $29 and $26 at March 31, 2015 and June 30, 2014, respectively

    2,370       2,118  

Inventories, net

    2,239       1,888  

Prepaid expenses and other current assets

    904       1,367  

Deferred income tax assets

    1,719       1,719  

Total current assets

    24,561       27,001  
                 

Property and equipment, net

    2,428       2,466  

Goodwill

    2,083       2,083  

Intangible assets, net

    1,448       1,272  

Deferred income tax assets

    2,205       2,204  

Other assets

    256       380  

Non-current assets of discontinued operations

    182       182  

Total Assets

  $ 33,163     $ 35,588  
                 

LIABILITIES AND STOCKHOLDERS’ E QUITY

               

Current liabilities:

               

Accounts payable

  $ 1,570     $ 2,062  

Accrued liabilities

    2,738       2,817  

Accrued compensation and benefits

    3,534       4,139  

Income taxes payable

    1,255       851  

Deferred revenue

    2,848       2,645  

Current liabilities of discontinued operations

    842       849  

Total current liabilities

    12,787       13,363  
                 

Deferred rent

    436       461  

Non-current liabilities of discontinued operations

    741       1,124  
                 

Commitments and contingencies (Note 11)

               
                 

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; 8,880 and 8,861 issued and outstanding at March 31, 2015 and June 30, 2014, respectively.

    9       9  

Additional paid-in capital

    79,310       78,011  

Accumulated deficit

    (60,120 )     (57,380 )

Total stockholders’ equity

    19,199       20,640  

Total liability and stockholders’ equity

  $ 33,163     $ 35,588  

 

See accompanying notes to condensed consolidated financial statements.

 

 
1

 

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except per share data)

(Unaudited)

 

   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 
   

2015

   

2014

   

2015

   

2014

 

Net revenues

  $ 15,987     $ 16,308     $ 46,313     $ 44,024  

Cost of revenues

    5,875       6,084       16,738       16,620  

Gross profit

    10,112       10,224       29,575       27,404  

Operating expenses:

                               

Selling and marketing expenses

    2,285       2,465       6,799       6,779  

General and administrative expense

    4,155       4,046       13,433       11,958  

Total operating expenses

    6,440       6,511       20,232       18,737  

Operating income

    3,672       3,713       9,343       8,667  

Interest income and other Income (expense), net

    (40 )     3       (42 )     27  

Income before provision for income taxes

    3,632       3,716       9,301       8,694  

Provision for income taxes

    1,450       1,581       3,670       3,663  

Income from continuing operations

    2,182       2,135       5,631       5,031  

Loss from discontinued operations, net of income taxes

    (12 )     (16 )     (3 )     (61 )

Net income

  $ 2,170     $ 2,119     $ 5,628     $ 4,970  
                                 

Net income per basic share:

                               

Income from continuing operations

  $ 0.26     $ 0.26     $ 0.68     $ 0.62  

Loss from discontinued operations

    -       -       (0.01 )     (0.01 )

Net income per basic share

  $ 0.26     $ 0.26     $ 0.67     $ 0.61  
                                 

Net income per diluted share:

                               

Income from continuing operations

  $ 0.26     $ 0.26     $ 0.66     $ 0.61  

Loss from discontinued operations

    (0.01 )     -       -       (0.01 )
                                 

Net income per diluted share

  $ 0.25     $ 0.26     $ 0.66     $ 0.60  
                                 

Weighted average shares outstanding:

                               

Basic

    8,353       8,186       8,339       8,149  

Diluted

    8,531       8,274       8,517       8,219  

Dividends declared per common share

  $ 0.35     $ 0.325     $ 1.00     $ 0.975  

 

See accompanying notes to condensed consolidated financial statements.

 

 
2

 

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

   

Nine Months Ended

March 31,

 
   

2015

   

201 4

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 5,628     $ 4,970  

Discontinued operations

    3       61  

Income from continuing operations

    5,631       5,031  

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

               

Depreciation and amortization expense

    974       907  

Stock-based compensation expense

    1,803       1,398  

Provision for bad debts

    5       19  

Provision for inventory write-down

    184       53  

Provision for warranty

    380       587  

Gain on sale of property and equipment

    (1 )     (2 )

Loss on sale of business

    1       -  

Change in operating assets and liabilities:

               

Accounts receivable

    (261 )     (493 )

Inventories

    (536 )     (218 )

Prepaid expenses and other

    463       (220 )

Other assets

    125       (4 )

Accounts payable and accrued liabilities

    (904 )     300  

Accrued compensation and benefits

    (605 )     647  

Income taxes payable

    404       148  

Deferred revenue

    204       390  

Deferred rent

    (25 )     (5 )

Net cash provided by operating activities of continuing operations

    7,842       8,538  

Net cash used in operating activities of discontinued businesses

    (471 )     (429 )

Net cash provided by operating activities

    7,371       8,109  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from sale of business

    80       15  

Purchase of business

    (200 )     -  

Capital expenditures

    (624 )     (1,125 )

Capitalized software

    (250 )     (110 )

Patents and other intangibles

    (40 )     (14 )

Proceeds from sale of property and equipment

    2       7  

Net cash used in investing activities

    (1,032 )     (1,227 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Dividends paid to common stockholders

    (8,415 )     (8,046 )

Payments for retirement of common stock

    (504 )     (156 )

Proceeds from exercise of stock options

    -       292  

Net cash used in financing activities

    (8,919 )     (7,910 )
                 

Net decrease in cash and cash equivalents

    (2,580 )     (1,028 )

Cash and cash equivalents at beginning of period

    19,909       18,711  

Cash and cash equivalents at end of period

  $ 17,329     $ 17,683  

 

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,

 
   

201 5

   

201 4

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Interest paid during the period

  $ -     $ -  

Income taxes paid during the period

  $ 3,264     $ 3,479  

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

 

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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, 2015, our 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 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 nine months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015 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, 2014, as filed with the SEC (our “Fiscal 2014 10-K”). Amounts related to disclosure of June 30, 2014 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and the notes thereto.

 

Reclassification s

 

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 authentication and grading services. We recognize revenue for the sale of special coin inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded 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 from each show in the period in which it takes place.

 

A portion of our net revenues are comprised of subscription fees paid by customers for one year 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 limited life vouchers for free grading services. We recognize revenue attributable to free grading vouchers on a specific basis and classify those revenues as part of grading and authentication fees. The balance of the membership fee is recognized over the life of the membership on a time-apportioned basis.

 

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.

 

 
5

 

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results from continuing and discontinued operations could differ from results expected on the basis of those estimates, and such differences could be material to our future results of operations and financial condition. Examples of such estimates that could be material include determinations made with respect to the capitalization and recovery of software development costs, the valuation of stock-based compensation awards and the timing of the recognition of related stock-based compensation expense, the valuation of coin inventory, the amount and assessment of goodwill for impairment, the sufficiency of warranty reserves, the provision or benefit for income taxes and related valuation allowances, 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 and 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 and in our Fiscal 2014 10-K.

 

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 had occurred as of March 31, 2015.

 

Foreign Currency

 

The Company has determined that the U.S. Dollar is the functional currency for its French branch office and its Hong Kong and China subsidiaries. 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 current periods, were not material.

 

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 due to such a determination, and management subsequently determines that the performance condition was not met and will not be met in future periods, then all expense previously recognized with respect to the performance condition would be reversed.

 

Stock Options

 

No stock options were granted during the three and nine months ended March 31, 2015 and 2014 and all remaining outstanding options were exercised in the three months ended December 31, 2014. The following table presents information relative to the stock options outstanding under all equity incentive plans as of June 30, 2014 and stock option activity during the nine months ended March 31, 2015. The closing price of our common stock as of June 30, 2014 was $19.59.

 

   

Shares

   

Weighted Average Exercise Price

   

Weighted Average Remaining Contractual Term

   

Aggregate

Intrinsic

Value

 

Options:

 

(In T housands)

           

(yrs.)

   

(In Thousands)

 

Outstanding at June 30, 2014

    50     $ 17.82       0.43     $ 88  

Exercised

    (38)     $ 17.82       -       -  

Cancelled

    (12)     $ 17.82       -       -  

Outstanding at March 31, 2015

    -                          

 

 
6

 

 

Restricted Stock Awards  

 

As previously reported, through June 30, 2014 the Company had issued 523,378 shares (net of forfeitures) under the Company’s Long-Term Incentive Plan (“LTIP”) with a grant date fair value of approximately $6,700,000. Based on the level of operating income before stock-based compensation ("OI") achieved in fiscal 2014, a determination was made that the Company had achieved the Threshold Performance Goal and the Intermediate Goal #1 and therefore in accordance with the terms of the LTIP up to 25% of the LTIP shares will vest, of which 12.5% vested upon the determination that the goals had been achieved and 12.5% will vest on June 30, 2015, assuming continuous service by the LTIP participants. Through March 31, 2015, $1,557,000 of expense has been recognized related to the Threshold Performance Goal and Intermediate Goal #1 and an additional $113,000 will be recognized through June 30, 2015 assuming continuous service, such that by June 30, 2015, $1,670,000 of expense will have been recognized related to those performance goals.

 

At September 30, 2014, based on the significantly improved level of operating income before stock based compensation in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, we concluded that it was probable that the Company will achieve the Performance Goal #2 by June 30, 2015.

 

In the three months ended December 31, 2014, an additional 18,957 restricted shares with a grant date fair value of $400,000 were issued, with a service inception date of November 19, 2014. The vesting of those shares is conditioned on the Company’s achievement of the same levels of OI as the LTIP participants through June 30, 2018, as indicated in the following table:

 

   

Percent of LTIP

Shares Vesting

 

If in any fiscal year during the term of the Program:

       

Intermediate Performance Goal #2 is Achieved

    20%  

Intermediate Performance Goal #3 is Achieved

    25%  

The Maximum Performance Goal is Achieved

    55%  

 

In the third quarter of fiscal 2015, the Company continued to recognize expense on the assumption it was probable that the Company will achieve Performance Goal #2 by June 30, 2015. Therefore, the Company recognized stock-based compensation expense of approximately $169,000 and $991,000 in three and nine months ended March 31, 2015, respectively, related to that performance goal, representing the expense required to be recognized from the respective service inception dates through March 31, 2015.

 

Through March 31, 2015 total stock based compensation recognized for the LTIP shares, since inception of the LTIP program, was approximately $2,549,000.

 

At this time it is not considered probable that the Company will achieve additional Performance Goals beyond Performance Goal #2 in fiscal 2015 or future periods. Management will continue to reassess at each reporting date whether any additional stock-based compensation expense should be recognized based on the probability of achieving additional milestones under the LTIP, and the period over which such stock-based compensation expense should be recognized.

 

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, 2015, we had cash and cash equivalents totaling approximately $17,329,000, of which approximately $14,048,000 was invested in money market accounts, and the balance of $3,281,000 was in non-interest bearing bank accounts for general day-to-day operations. Cash in overseas bank accounts was approximately $883,000.

 

Substantially all of our cash is deposited at two FDIC insured financial institutions. We maintained cash due from banks, inclusive of cash in overseas accounts, in excess of the banks’ FDIC insured deposit limits of approximately $16,820,000 at March 31, 2015.

 

 
7

 

 

Accounts Receivable.  A substantial portion of accounts receivable are due from collectibles dealers. Two individual customers accounts receivable balances accounted for 10% of the Company’s total gross accounts receivable balances at March 31, 2015, whereas one customer receivable exceeded 10% of the Company’s total gross amounts receivable balance at June 30, 2014. Management 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 $29,000 and $26,000 at both March 31, 2015 and June 30, 2014, respectively. Ultimately, management will write-off accounts receivable balances when it is determined that there is no possibility of collection.

 

Coin Revenues . The authentication, grading and sales of collectible coins, related services and product sales accounted for approximately 69% of our net revenues for both the three and nine months ended March 31, 2015, and 71% and 69% of our net revenues for the three and nine months ended March 31, 2014.

 

Customers. Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 17% and 13% of our total net revenues in the nine months ended March 31, 2015 and 2014, respectively.

 

Inventories

 

Our inventories consist primarily of (i) our coin collectibles inventories primarily consisting of coins which we purchased pursuant to our coin authentication and grading program and (ii) consumable supplies and special inserts that we use in our continuing authentication and grading businesses. Coin collectibles inventories are recorded at the lower of cost or 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 considered necessary. It is possible that our estimates of market value of collectible coins in inventory could change 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. In the three and nine months ended March 31, 2015 we capitalized approximately $217,000 and $250,000, respectively, of software development cost compared with $53,000 and $110,000 in the three and nine months ended March 31, 2014, respectively. In the three and nine months ended March 31, 2015, approximately $20,000 and $98,000, respectively, was recorded as amortization expense for capitalized software compared to $29,000 and $81,000 in the three and nine months ended March 31, 2014, 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 coin or trading card 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. Effective July 1, 2014, the Company reduced its warranty accrual rate on coins and cards based upon a review of the overall level of warranty reserve and the trend in warranty payments over an extended period of time.

 

 
8

 

 

Dividends

 

In accordance with the Company’s then quarterly dividend policy, we paid quarterly cash dividends of $0.325 per share of common stock in the first and second quarters of fiscal 2015. In the third quarter of fiscal 2015, the Board of Directors approved an increase in the Company’s quarterly cash dividend to $0.35 per share of common stock, effective in the third quarter of fiscal 2015. 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 May 2014, FASB issued an Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 that affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should: identify the contract(s) with a customer, i dentify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation.

 

For public companies, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is evaluating the potential impact of adoption of this ASU on its consolidated financial statements.

 

In May 2014, FASB issued an Accounting Standards Update No, 2014-12 on the Accounting for Share-Based Payments when the term of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award, if the performance target is achieved. The updated guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s Condensed Consolidated Financial Statements.

 

In August 2014, FASB issued an Accounting Standards Update No. 2014-15 which addresses management’s responsibility in connection with preparing financial statements for each annual and interim reporting period, and requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The update provides guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosure. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements and related disclosures.

 

 
9

 

 

2.

INVENTORIES

 

Inventories consist of the following (in thousands):

   

March 31,

   

June 30,

 
   

2015

   

201 4

 

Coins

  $ 600     $ 552  

Other collectibles

    120       230  

Grading raw materials consumable inventory

    1,990       1,392  
      2,710       2,174  

Less inventory reserve

    (471 )     (286 )

Inventories, net

  $ 2,239     $ 1,888  

 

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):

 

   

March 31,

   

June 30,

 
   

2015

   

2014

 

Coins and stamp grading reference sets

  $ 281     $ 282  

Computer hardware and equipment

    2,254       2,307  

Computer software

    1,105       1,098  

Equipment

    4,452       3,943  

Furniture and office equipment

    1,064       1,015  

Leasehold improvements

    1,007       999  

Trading card reference library

    52       52  
      10,215       9,696  

Less accumulated depreciation and amortization

    (7,787 )     (7,230 )

Property and equipment, net

  $ 2,428     $ 2,466  

 

4.

BUSINESS COMBINATION

 

In November 2014, we acquired the tradename, software and related assets (historical data and a non-compete with the previous owner) of Intelliquote (“IQ”), a brand name for pricing for the numismatic community, for cash of $200,000. The acquisition of IQ will enhance the Company’s CCE Quickprice offering and add to the Company’s positon as a leading service provider of valuable information and content to coin market participants.

 

Due to the immateriality of the consideration paid, no formal purchase price allocation was conducted although we attribute most of the value to the IQ tradename. Based on this preliminary evaluation, the amount of $200,000 has been classified as intangible assets in the accompanying condensed consolidated balance sheet at March 31, 2015.

 

Acquisition related costs of $3,000 were incurred and have been included in general and administrative expenses in the nine months ended March 31, 2015.

 

Approximately $21,000 and $26,000 in IQ revenue is included in net revenues for the three and nine months ended March 31, 2015, representing the revenues earned since the date of acquisition.

 

 
10

 

 

5.

ACCRUED LIABILITIES

 

Accrued liabilities consist of the following (in thousands):

 

   

March 31,

   

June 30,

 
   

2015

   

2014

 

Warranty reserves

  $ 1,550     $ 1,569  

Other

    1,188       1,248  
    $ 2,738     $ 2,817  

 

 

The following table presents the changes in the Company’s warranty reserve during the nine months ended March 31, 2015 and 2014 (in thousands):

 

   

Nine Months Ended

March 31,

 
   

2015

   

2014

 

Warranty reserve beginning of period

  $ 1,569     $ 1,155  

Provision charged to cost of revenues

    380       587  

Payments

    (399 )     (298 )

Warranty reserve, end of period

  $ 1,550     $ 1,444  

   

6.

DISCONTINUED OPERATIONS

 

During fiscal 2009, the Board of Directors authorized the divesture and sale of the jewelry businesses and the currency grading business, the remaining assets and liabilities of which have been reclassified as assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets as of March 31, 2015 and June 30, 2014.

 

The operating results of the discontinued businesses that are included in the accompanying Condensed Consolidated Statements of Operations were not material.

 

The remaining balance of our lease related obligations in connection with the fiscal 2009 disposal of our jewelry business was $1,380,000 at March 31, 2015, of which $639,000 was classified as a current liability, and $741,000 was classified as a non-current liability in the accompanying condensed consolidated balance sheet at March 31, 2015. 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, 2015 and 2014, we recognized provisions for income taxes based upon estimated annual effective tax rates of approximately 39% and 42%, respectively and such provisions include valuation allowances established against losses of foreign subsidiaries and in the nine month ended March 31, 2014, a discrete amount of $42,000 related to prior year estimated taxes.

 

 
11

 

 

8.

NET INCOME PER SHARE

 

The following table presents the changes in the Company’s weighted average shares outstanding for the three and nine months ended March 31, 2015 and 2014 (in thousands):

 

   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 
   

2015

   

20 14

   

2015

   

2014

 

Weighted average shares outstanding: Basic

    8,353       8,186       8,339       8,149  

Dilutive effect of stock options

    -       19       2       19  

Dilutive effect of restricted shares

    178       69       176       51  

Weighted average shares outstanding: Diluted

    8,531       8,274       8,517       8,219  

 

A total of 75,000 options to purchase shares of common stock and unvested restricted shares of common stock for the nine months ended March 31, 2014 were excluded from the computation of diluted income per share as they would have been anti-dilutive. There were no anti-dilutive options or restricted shares of common stock for the three and nine months ended March 31, 2015.

 

In addition, approximately 262,000 and 473,000 unvested performance-based restricted shares of common stock were excluded from the computation of diluted earnings per share for the three months ended March 31, 2015 and 2014, respectively, because we had not achieved the related performance goals at those dates.

 

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 collectibles. Services provided by these segments include authentication, grading, publications, advertising and commission earned subscription-based revenues and product sales. The other collectibles segment is comprised of CCE, Coinflation.com and our collectibles conventions business.

 

 
12

 

 

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, 2015 and 2014, respectively. Net identifiable assets are provided by business segment as of March 31, 2015 and June 30, 2014 (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31,

   

March 31,

 
   

20 15

   

20 14

   

2015

   

2014

 

Net revenues from external customers:

                               

Coins (including product sales)

  $ 11,008     $ 11,659     $ 31,891     $ 30,420  

Trading cards and autographs

    3,671       3,505       11,154       10,464  

Other

    1,308       1,144       3,268       3,140  

Consolidated total revenue

  $ 15,987     $ 16,308     $ 46,313     $ 44,024  

Amortization and depreciation:

                               

Coins

  $ 121     $ 138     $ 373     $ 346  

Trading cards and autographs

    51       41       151       93  

Other

    84       80       251       243  

Total

    256       259       775       682  

Unallocated amortization and depreciation

    47       79       199       225  

Consolidated amortization and depreciation

  $ 303     $ 338     $ 974     $ 907  

Stock-based compensation:

                               

Coins

  $ 93     $ 95     $ 354     $ 209  

Trading cards and autographs

    41       60       197       136  

Other

    29       42       136       96  

Total

    163       197       687       441  

Unallocated stock-based compensation

    275       345       1,116       957  

Consolidated stock-based compensation

  $ 438     $ 542     $ 1,803     $ 1,398  

Operating income:

                               

Coins

  $ 3,879     $ 3,997     $ 10,515     $ 9,850  

Trading cards and autographs

    708       533       2,235       1,623  

Other

    394       330       805       961  

Total

    4,981       4,860       13,555       12,434  

Unallocated operating expenses

    (1,309 )     (1,147 )     (4,212 )     (3,767 )

Consolidated operating income

  $ 3,672     $ 3,713     $ 9,343     $ 8,667  

 

   

March 31,

   

June 30,

 
   

201 5

   

2014

 

Identifiable Assets:

               

Coins

  $ 6,707     $ 6,636  

Trading cards and autographs

    1,427       1,475  

Other

    2,680       2,378  

Total

    10,814       10,489  

Unallocated assets

    22,349       25,099  

Consolidated assets

  $ 33,163     $ 35,588  

Goodwill:

               

Coins

  $ 515     $ 515  

Other

    1,568       1,568  

Consolidated goodwill

  $ 2,083     $ 2,083  

 

 
13

 

 

10.

RELATED-PARTY TRANSACTIONS

 

During the three and nine months ended March 31, 2015, an adult member of the immediate family of Mr. David Hall, the President of the Company, paid grading and authentication fees to us of $179,000 and $828,000, compared with $218,000 and $930,000 for the three and nine months ended March 31, 2014. At March 31, 2015, the amount owed to the Company for these services was approximately $200,000, compared with $79,000 at June 30, 2014.

 

An associate of Richard Kenneth Duncan Sr., who as of October 3, 2014 was the beneficial owner of 6% of our outstanding shares, paid us grading and authentication fees of $208,000 and $748,000 in the three and nine months ended March 31, 2015, as compared to $281,000 and $870,000 in the same three and nine months of fiscal 2014. At March 31, 2015, the amount owed to the Company for these services was approximately $19,000, compared to $68,000 at June 30, 2014.

 

In each case, these authentication and grading fees were comparable in amount to the fees which we charge, in the ordinary course of our business, for similar services authentication and grading services we render to unaffiliated customers.
 

11.

CONTINGENCIES

 

The Company is named from time to time, as a defendant in lawsuits and disputes that arise in the ordinary course of 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 23, 2015, the Company announced that, in accordance with its dividend policy the Board of Directors had approved a fourth quarter cash dividend of $0.35 per share of common stock and such dividend will be paid on May 29, 2015 to stockholders of record on May 15, 2015. 

 

 
14

 

 

ITEM 2.

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

 

Forward-Looking Statements

 

The discussion in this Item 2 of this Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Those Sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their expected future financial performance so long as they provide cautionary statements identifying important factors that could cause their actual results to differ from projected or anticipated results. Other than statements of historical fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking statements. Forward-looking statements often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." Our actual financial performance in future periods may differ significantly from the currently expected financial performance set forth in the forward-looking statements contained in this Report due to risks and uncertainties 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, 2014 (the “Fiscal 2014 10-K”), which we filed with the Securities and Exchange Commission (the “SEC”) on August 28, 2014, and the section, entitled “Factors that Can affect our Results of Operations or Financial Position,” below in this Item 2 below.

 

Due to these and other possible risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements that are 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 our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update or revise any forward-looking statements contained in this Report or in our Fiscal 2014 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 by dealers and collectors for our authentication and grading services. To a lesser extent, we generate revenues from other related services which consist of: (i) revenues from sales of advertising placed and commissions earned on our websites; (ii) sales of printed publications and collectibles price guides and sales of advertising in our publications; (iii) sales of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) sales of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for coins that have been authenticated and graded (or “certified”) and 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 our Expos Long Beach collectibles trade shows. 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.

 

 
15

 

 

Overview of three and nine months ended March 31, 2015 Operating Results

 

The following table sets forth comparative financial data for the three and nine months ended March 31, 2015 and 2014 (in thousands):

 

   

Three Months Ended March 31,

   

Nine Months Ended March 31,

 
   

201 5

   

201 4

   

201 5

   

201 4

 
   

Amount

   

% of Net

Revenues

   

Amount

   

% of Net

Revenues

   

Amount

   

% of Net

Revenue s

   

Amount

   

% of Net

Revenues

 

Net Revenues:

                                                               

Grading authentication and related services

  $ 15,987       100.0 %   $ 16,298       99.9 %   $ 46,304       100.0 %   $ 43,956       99.8 %

Product sales

    -       -       10       0.1 %     9       -       68       0.2 %
      15,987       100.0 %     16,308       100.0 %     46,313       100.0 %     44,024       100.0 %

Cost of Revenues:

                                                               

Grading authentication and related services

    5,865       36.7 %     6,061       37.2 %     16,692       36.0 %     16,548       37.6 %

Product sales

    10       -       23       230.0 %     46       511.1 %     72       105.9 %
      5,875       36.7 %     6,084       37.3 %     16,738       36.1 %     16,620       37.8 %
                                                                 

Gross Profit:

                                                               

Services

    10,122       63.3 %     10,237       62.8 %     29,612       64.0 %     27,408       62.4 %

Product sales

    (10 )     -       (13 )     (130.0% )     (37 )     (411.1% )     (4 )     (5.9 )%
      10,112       63.3 %     10,224       62.7 %     29,575       63.9 %     27,404       62.2 %
                                                                 

Selling and marketing expenses

    2,285       14.3 %     2,465       15.1 %     6,799       14.7 %     6,779       15.3 %

General & administrative expenses

    4,155       26.0 %     4,046       24.8 %     13,433       29.0 %     11,958       27.2 %

Operating income

    3,672       23.0 %     3,713       22.8 %     9,343       20.2 %     8,667       19.7 %

Interest and other income (expense), net

    (40 )     (0.3% )     3       -       (42 )     (0.1% )     27       -  

Income before provision for income taxes

    3,632       22.7 %     3,716       22.8 %     9,301       20.1 %     8,694       19.7 %

Provision for income taxes

    1,450       9.1 %     1,581       9.7 %     3,670       7.9 %     3,663       8.3 %

Income from continuing operations

    2,182       13.6 %     2,135       13.1 %     5,631       12.2 %     5,031       11.4 %

Income (loss) from discontinued operations, net of income taxes

    (12 )     -       (16 )     (0.1% )     (3 )     -       (61 )     (0.1% )

Net income

  $ 2,170       13.6 %   $ 2,119       13.0 %   $ 5,628       12.2 %   $ 4,970       11.3 %

Net income per diluted share:

                                                               

Income from continuing operations

  $ 0.26             $ 0.26             $ 0.66             $ 0.61          

Loss from discontinued operations

    (0.01 )             -               -               (0.01 )        

Net income

  $ 0.25             $ 0.26             $ 0.66             $ 0.60          

 

 

Service revenues decreased by 2% to $16.0 million in this year’s third quarter and increased 5% to $46.3 million in the nine months ended March 31, 2015, representing record nine months service revenues for our business. Coin service revenues decreased by 5.5% to $11.0 million in the third quarter of fiscal 2015 and increased by 5.0% to a coin nine-month record of $31.9 million in the nine months ended March 31, 2015. The lower coins services revenues in the third quarter of fiscal 2015, was primarily due to staging one less trade show in the quarter, but also reflects the challenge of generating on-going revenue growth when prior periods revenues were at record levels. Cards and autographs revenues increased by 4.7% and 6.6% in the three and nine months ended March 31, 2015, respectively, and the third quarter increase represented the 19 th quarter of quarter-on-quarter revenue growth in that business.

 

Operating income was essentially flat at $3.7 million in the three months ended March 31, 2015 and increased by 8% to a nine-month record of $9.3 million in the nine months ended March 31, 2015, as compared to the same periods of the prior year. The nine month increase was earned despite us incurring higher litigation related legal expenses of $0.4 million and higher non-cash stock based compensation of $0.4 million. As discussed in the Form 10Q for the three months ended December 31, 2014, we are focused on providing higher value services to our customers although the overall average service fee earned in any period reflects the mix of services in that period.

 

These, as well as other factors affecting our operating results in the three and nine months ended March 31, 2015, are described in more detail below. See “Factors that Can Affect our Operating Results and Financial Position” and “Results of Operations for the Three and Nine Months Ended March 31, 2015, Compared to the Three and Nine Months Ended March 31, 2014”, below.

 

 
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Factors That Can Affect our Operating Results and Financial Position

 

Factors T hat Can Affect our Revenues and Gross Profit Margins . Authentication and grading fees accounted for approximately 87% of our service revenues in the nine months ended March 31, 2015. 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 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 the other high-value collectibles, that we authenticate and grade.

 

In addition, our coin authentication and grading and revenues are impacted by the volume 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; (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 generally are of significantly higher value 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 proportion of our costs of revenues are relatively fixed in nature in the short term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.

 

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

 

Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 22% and 17% of our total net revenues in the three and nine months ended March 31, 2015, 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 and autographs that we authenticated and graded in the three and nine months ended March 31, 2015 and 2014, and their estimated values, which are the amounts at which those coins and trading cards were declared for insurance purposes by the dealers and collectors who submitted them to us for grading and authentication:

 

   

Units Processed

Three Months Ended March 31 ,

   

Declared Value (000 s )

Three Months Ended March 31 ,

 
   

201 5

   

20 14

   

201 5

   

20 14

 

Coins

    559,100       57.2 %     593,400       58.5 %     635,671       94.5 %     528,480       94.7 %

Trading cards and Autographs (1)

    417,900       42.8 %     420,100       41.5 %     36,768       5.5 %     29,680       5.3 %

Total

    977,000       100.0 %     1,013,500       100.0 %     672,439       100.0 %     558,160       100.0 %

 

   

Units Processed

Nine Months Ended March 31,

   

Declared Value (000 s )

Nine Months Ended March 31,

 
   

201 5

   

201 4

   

201 5

   

201 4

 

Coins

    1,532,800       54.5 %     1,528,900       54.7 %     1,596,464       93.6 %     1,354,320       92.6 %

Trading cards and Autographs (1)

    1,281,300       45.5 %     1,265,500       45.3 %     109,834       6.4 %     108,064       7.4 %

Total

    2,814,100       100.0 %     2,794,400       100.0 %     1,706,298       100.0 %     1,462,384       100.0 %

 


(1)      Consists of trading card units authenticated and graded by our PSA trading card authentication and grading business and autographs certified by our PSA/DNA autograph authentication and grading business.

 

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

 

Fact ors That Can Affect our Liquidity and Financial Position . A substantial number of our authentication and grading customers pay our authentication and grading fees when they submit their collectibles to us for authentication and grading or prior to the shipment of the authenticated and graded collectible back to them. 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 2015.

 

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. Our financial position is also impacted by the Company’s tax position. As previously disclosed, the Company has fully utilized all of its federal net operating loss carry forwards and other tax attributes, and therefore we pay federal income taxes at a rate of 35% 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.

 

As previously reported, on January 22, 2015, we announced that the Board of Directors had authorized an increase in our quarterly cash dividend to $0.35 per share from $0.325 per share of common stock, to an annualized rate of $1.40 per share from $1.30 per share.

 

 
18

 

 

Critical Accounting Policies and Estimates

 

Except as discussed below, during the nine months ended March 31, 2015, there were no changes in our critical accounting policies or estimates that are described in Item 7 of our Annual Report on Form 10-K, filed with the SEC, for the fiscal year ended June 30, 2014. 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 when determined necessary by management, we proceed to the two-step goodwill impairment test. When applying the two-step impairment test, we apply a discounted cash flow model or an income approach in determining a fair value that is used to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.

 

During the quarter ended September 30, 2014, we completed the annual goodwill impairment assessment with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of their fair values over carrying value in previous years, and any material changes in the estimated cash flows of the reporting units, and determined that it was, more likely than not, that the fair values of CCE and CoinFacts were greater than their respective carrying values, including goodwill. Therefore, it was not necessary to proceed to the two-step impairment test.

 

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 recognize compensation expense based on the grant date fair value when it becomes probable that we will achieve the financial performance goal.

 

Restricted Stock Awards  

 

As previously reported, through June 30, 2014 the Company had issued 523,378 shares (net of forfeitures) under the Company’s Long-Term Incentive Plan (“LTIP”) with a grant date fair value of approximately $6,700,000. Based on the level of operating income before stock-based compensation (“OI”) achieved in fiscal 2014, a determination was made that the Company had achieved the Threshold Performance Goal and the Intermediate Goal #1 and therefore in accordance with the terms of the LTIP up to 25% of the LTIP shares will vest, of which 12.5% vested upon the determination that the goals had been achieved and 12.5% will vest on June 30, 2015, assuming continuous service by the LTIP participants. Through March 31, 2015, $1,557,000 of expense has been recognized related to the Threshold Performance Goal and Intermediate Goal #1 and an additional $113,000 will be recognized through June 30, 2015 assuming continuous service, such that by June 30, 2015, $1,670,000 of expense will have been recognized related to those performance goals.

 

 
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At September 30, 2014, based on the significantly improved level of operating income before stock based compensation in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, we concluded that it was probable that the Company would achieve the Performance Goal #2 by June 30, 2015.

 

In the nine months ended March 31, 2015, an additional 18,957 restricted shares with a grant date fair value of $400,000 were issued, with a service inception date of November 19, 2014. The vesting of those shares is conditioned on the Company’s achievement of the same levels of OI as the LTIP participants through June 30, 2018, as indicated in the following table:

 

   

Percent of LTIP

Shares Vesting

 

If in any fiscal year during the term of the Program:

       

Intermediate Performance Goal #2 is Achieved

    20%  

Intermediate Performance Goal #3 is Achieved

    25%  

The Maximum Performance Goal is Achieved

    55%  

 

In the third quarter of fiscal 2015, the Company continued to recognize stock-based compensation expense on the assumption it was probable that the Company will achieve Performance Goal #2 by June 30, 2015. Therefore, the Company recognized stock-based compensation expense of approximately $169,000 and $991,000 in three and nine months ended March 31, 2015, respectively related to that performance goal, representing the expense required to be recognized from the respective service inception dates through March 31, 2015.

 

Through March 31, 2015 total stock based compensation recognized in respect of the LTIP shares, since inception of the LTIP program, was approximately $2,549,000.

 

At this time it is not considered probable that the Company will achieve additional Performance Goals beyond Performance Goal #2 in fiscal 2015 or future periods. Management will continue to reassess at each reporting date whether any additional stock-based compensation expense should be recognized based on the probability of achieving additional milestones under the LTIP, and the period over which such stock-based compensation expense should be recognized.

 

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 warranty 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. Effective July 1, 2014, the Company reduced its warranty accrual rate on coins and cards based upon a review of the overall level of the warranty reserves and the historical trends in warranty claims and payments.

 

Results of Operations for the Three and Nine Months Ended March 31 , 201 5 , Compared to the T hree and Nine M onths Ended March 31 , 201 4

 

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, including related special inserts, if applicable. To a lesser extent, we generate collectibles related service revenues (which we refer to as “other related revenues”) from advertising and commissions earned on our websites and in printed publications and collectibles price guides; subscription/membership revenues related to our CCE (dealer-to-dealer Internet bid-ask market for certified coins), CoinFacts and Collectors Club; and fees earned from promoting, managing and operating collectibles trade shows. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we purchase under our coin authentication and grading warranty policy. We do not consider such product sales to be an integral part of our ongoing revenue generating activities.

 

 
20

 

 

The following table sets forth the total net revenues for the three and nine months ended March 31, 2015 and 2014 between authentication and grading services revenues, other related services revenues and product sales (in thousands):

 

   

Three Months Ended March 31,

 
   

2015

   

2014

   

Increase (Decrease)

 
   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

 

Authentication and grading fees

  $ 13,727       85.9 %   $ 14,126       86.6 %   $ (399 )     (2.8% )

Other related services

    2,260       14.1 %     2,172       13.3 %     88       4.1 %

Total service revenues

    15,987       100.0 %     16,298       99.9 %     (311 )     (1.9% )

Product sales

    -       -       10       0.1 %     (10 )     (100.0% )

Total net revenues

  $ 15,987       100.0 %   $ 16,308       100.0 %   $ (321 )     (2.0% )

 

   

Nine Months Ended March 31,

 
   

2015

   

2014

   

Increase (Decrease)

 
   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

 

Authentication and grading fees

  $ 40,136       86.7 %   $ 37,625       85.5 %   $ 2,511       6.7 %

Other related services

    6,168       13.3 %     6,331       14.4 %     (163 )     (2.6 %)

Total service revenues

    46,304       100.0 %     43,956       99.9 %     2,348       5.3 %

Product sales

    9       -       68       0.1 %     (59 )     (86.8 %)

Total net revenues

  $ 46,313       100.0 %   $ 44,024       100.0 %   $ 2,289       5.2 %

 

The following table sets forth certain information regarding the increases (decreases) in net revenues in our larger markets (which are inclusive of revenues from our other related services) and in the number of units authenticated and graded in the three and nine months ended March 31, 2015 and 2014 (in thousands):

 

   

Three Months Ended March 31,

 
                                   

201 5 vs. 201 4

 
   

201 5

   

201 4

   

Increase (Decrease)

 
           

% of Net