Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-K, Received: 08/31/2017 16:09:25)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

(Mark One)

   

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

 
 

For the fiscal year ended June 30, 2017

 
     
 

OR

 
     

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

 
     
 

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 Incorporation or organization)

 

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

     

1921 E. Alton Avenue, Santa Ana, California

 

92705

(Address of principal executive offices)

 

(Zip Code)

 

(949) 567-1234

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class

 

Name of each Exchange on which registered

Common Stock, par value $.001 per share

 

NASDAQ Global Market

 

Securities registered pursuant to Section 12(g) of the Act:      None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐ No

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     

 

Accelerated Filer                       

     

Non-accelerated filer        ☐  (Do not check if a smaller reporting company)

 

Smaller reporting company       

     

Emerging growth company   

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 
 

 

 

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

 

As of December 30, 2016, the last business day of our most recently completed second fiscal quarter, the aggregate market value of our Common Stock held by non-affiliates was approximately $159,000,000 based on the per share closing price of $21.23 of registrant’s Common Stock as of such date as reported by the NASDAQ Global Market. This calculation does not reflect a determination that persons deemed to be affiliates for this purpose are affiliates for any other purpose.

 

As of August 26, 2017, a total of 8,920,998 shares of registrant's Common Stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Except as otherwise stated therein, Items 10, 11, 12, 13 and 14 in Part III of this Annual Report are incorporated by reference from Registrant's Definitive Proxy Statement, which is expected to be filed with the Securities and Exchange Commission on or before October 28, 2017, for its 2017 Annual Meeting of Stockholders. Other information contained in that Proxy Statement and other related solicitation materials are not deemed to be incorporated into or filed as part of this Annual Report.

 



 

 
 

 

 

 

COLLECTORS UNIVERSE, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2017

TABLE OF CONTENTS

PART I

   

Page

       
 

Forward-Looking Statements

1

 

Item 1.

Business

1

 

Item 1A.

Risk Factors

14

 

Item 1B.

Unresolved Staff Comments

21

 

Item 2.

Properties

21

 

Item 3.

Legal Proceedings

22

   

Executive Officers of Registrant

22

PART II

     
 

Item 5.

Market for Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

 

Item 6.

Selected Consolidated Financial Data

25

 

Item 7.

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

27

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

47

 

Item 8.

Financial Statements and Supplementary Data

48

   

Report of Independent Registered Public Accounting Firm

49

   

Consolidated Balance Sheets at June 30, 2017 and 2016

50

   

Consolidated Statements of Operations for the Years ended June 30, 2017, 2016 and 2015

51

   

Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2017, 2016 and 2015

52

   

Consolidated Statements of Cash Flows for the Years Ended June 30, 2017, 2016 and 2015

53

   

Notes to Consolidated Financial Statements

55

   

Schedule II – Valuation and Qualifying Accounts

75

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

75

 

Item 9A.

Controls and Procedures

75

 

Item 9B.

Other Information

78

PART III

     
 

Item 10.

Directors, Executive Officers and Corporate Governance

78

 

Item 11.

Executive Compensation

78

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

78

 

Item 13.

Certain Relationships and Related Transactions and Director Independence

78

 

Item 14.

Principal Accountant Fees and Services

78

       

PART IV

Item 15.

Exhibits and Financial Statement Schedules

79

   

SIGNATURES

S-1

   

INDEX TO EXHIBITS

E-1

 

 
 

 

 

FORWARD-LOOKING STATEMENTS

 

Statements contained in this annual report on Form 10-K (the “Annual Report”) that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or markets, constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, such statements 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.” Forward-looking statements contain estimates or predictions about or forecasts of our future financial condition and operating results and trends in our business and markets. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, those statements are necessarily based on current information available to us. Therefore, the information contained in the forward looking statements in this Annual Report are subject to change due to (i) future events and circumstances of which we are not aware and (ii) to a number of risks and uncertainties that could cause our future financial condition or operating results to differ significantly from those expected at the current time as described in those forward-looking statements. Those known risks and uncertainties are described in Item 1A in Part I of this Annual Report under the caption “RISK FACTORS,” and in Item 7 in Part II of this Annual Report under the caption “ Management’s Discussion and Analysis of Financial Condition and Results of Operations .” Accordingly, readers of this Annual Report are urged to read the cautionary statements and risk factors contained in those Items of this Annual Report. Also, our actual results in the future may differ due to additional risks and uncertainties of which we are not currently aware or which we do not currently view as material to our business or operating results.   Due to all of these uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Annual Report, which speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law or the applicable rules of the NASDAQ Stock Market.

-----------------------

References in this Annual Report to “Collectors Universe”, “we”, “us”, “our”, “management” and the “Company” refer to Collectors Universe, Inc. and its consolidated subsidiaries.

 

 

PART I

ITEM 1.     BUSINESS

 

Overview

 

We provide authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia (“collectibles”). We believe that our authentication and grading services add value to these collectibles by enhancing their marketability and thereby providing increased liquidity to the dealers, collectors and consumers that own and buy and sell them.

 

Once we have authenticated and assigned a quality grade to a collectible, we encapsulate it in a tamper-evident, clear plastic holder, or issue a certificate of authenticity, that (i) identifies the specific collectible; (ii) sets forth the quality grade we have assigned to it; and (iii) bears one of our brand names and logos: “PCGS” for coins, “PSA” for trading cards and event tickets and “PSA/DNA” for autographs and memorabilia. Additionally, we warrant our certification of authenticity and the quality grades that we assign to the coins and trading cards that we authenticate and grade. We do not warrant our authenticity determinations for autographs or memorabilia. For ease of reference in this Annual Report, we will sometimes refer to coins, trading cards and other collectibles that we have authenticated or graded as having been “certified.”

 

 

 
1

 

 

We generate revenues principally from the fees paid for our authentication and grading services. To a much lesser extent, we generate revenues from other related services, which consist of (i) the sale of advertising and click-through commissions earned on our websites, including Collectors.com, (ii) the sale of printed publications and collectibles price guides and advertising in such publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our Certified Coin Exchange (CCE) dealer-to-dealer Internet bid-ask market for certified coins, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) collectibles trade shows that we conduct, at which collectibles are exhibited and are bought and sold by collectibles dealers and collectors. We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we have purchased under our coin grading warranty program; however, these sales are not the focus, and we do not consider them to be an integral part of our ongoing revenue-generating activities.

 

We have developed some of the leading brands in the collectibles markets in which we conduct our business:

 

 

“PCGS” (Professional Coin Grading Service), which is the brand name for our independent coin authentication and grading service;

     
 

“PSA” (Professional Sports Authenticator), which is the brand name for our independent sports and trading cards authentication and grading service;

     
 

“PSA/DNA” (PSA/DNA Authentication Services), which is the brand name for our independent authentication and grading service for vintage autographs and memorabilia.

 

PCGS, PSA and PSA/DNA are among the leading independent authentication and grading services in their respective markets.

 

We foster brand loyalty and stimulate demand for our services by providing information and value added content to collectors and dealers through various means including our CCE websites, Collectors Clubs, Set Registry SM programs, Collectors.com, CoinFacts and PSA Collectibles Facts, collectibles population reports and price guides. We believe that by providing this information and content we generate more knowledgeable and active collectors and dealers.

 

We began offering our PCGS coin authentication and grading services in 1986 and, from inception through the fiscal year ended June 30, 2017, we have authenticated and graded approximately 36 million coins. In 1991, we launched our PSA trading cards authentication and grading service and, through June 30, 2017, had authenticated and graded approximately 28 million trading cards. In 1999, we launched our PSA/DNA vintage autograph authentication business and in June 2004 we extended that business by introducing vintage autograph grading services to dealers and collectors of autographed sports memorabilia.

 

The following table provides information regarding the respective numbers of coins, trading cards and autographs that we authenticated or graded in each of the fiscal years ended June 30, 2015 to 2017:

 

   

Units Processed

 
   

2017

   

2016

   

2015

 

Coins

    3,081,400       64 %     2,371,800       58 %     2,067,300       55 %

Trading cards

    1,457,900       30 %     1,278,900       31 %     1,269,800       34 %

Autographs

    297,800       6 %     448,000       11 %     434,900       11 %

Total

    4,837,100       100 %     4,098,700       100 %     3,772,000       100 %

 

The following table sets forth the estimated values at which our customers insured the coins, trading cards and autographs that were submitted to us for authentication or grading:

 

   

Declared Values (000’s)

 
   

20 17

   

2016

   

2015

 

Coins

  $ 2,074,400       89 %   $ 1,935,400       91 %   $ 2,093,900       93 %

Trading cards

    224,400       10 %     177,800       8 %     109,800       5 %

Autographs

    22,400       1 %     25,700       1 %     35,800       2 %

Total

  $ 2,321,200       100 %   $ 2,138,900       100 %   $ 2,239,500       100 %

 

                                                                     

 

 

 
2

 

 

Our revenues are comprised principally of our authentication and grading service fees. Those fees range from $1 to over $10,250 per item, based primarily on the type of collectible authenticated or graded, the turnaround times and the specific service selected by the customer. We charge higher fees for faster turnaround times. Our fees are generally not based on the value of the collectible, except for special coin services sometimes requested by customers, for which we charge supplemental fees that are based on the value of the coin. In fiscal 2017, our authentication and grading fees, per item processed, for all of our businesses averaged $12.82, and our coin authentication and grading fees ranged from $1 to over $10,250 , and averaged $14.92 , per coin.

 

In the case of trading cards, in fiscal 2017, the authentication and grading fees ranged from approximately $1 to $5,250 and averaged $8.35, per trading card. As a general rule, collectibles dealers and, to a lesser extent, individual collectors, request faster turnaround times and, therefore, generally pay higher fees for more valuable, older or “vintage” collectibles than they do for modern collectibles.

 

Industry Background

 

The primary determinants of the prices of, and the willingness of sellers, purchasers and collectors to purchase high-value or high-priced collectibles, are their authenticity, quality and rarity. The authenticity of a collectible relates not only to the genuineness of the collectible, but also to the absence of any alterations or repairs that may have been made to hide, damage or to restore the item. The quality of a collectible relates to its state of preservation relative to its original state of manufacture or creation. The rarity of a collectible relates to its uniqueness and depends primarily on the number of identical collectibles of equivalent or better quality that become available for purchase from time to time. With regard to value, confirmation of authenticity generally is required before a buyer is willing to proceed with a purchase of a high-priced collectible. Quality and rarity directly affect value and price, with higher quality and rare collectibles generally attracting dramatically higher prices than those of lower quality and lesser rarity. Even a relatively modest difference in quality can translate into a significant difference in perceived value and, therefore, in price.

 

Until the advent of independent third-party authentication and grading, most prospective buyers, including experienced collectibles dealers and retailers, insisted on physically examining high-priced collectibles before consummating transactions. However, unlike professionals in the trade, most purchasers and collectors lacked the experience and knowledge needed to determine, with confidence, the authenticity, quality or rarity, and hence the value, of high-priced collectibles, even when they had the opportunity to examine them physically. Therefore, they had to rely on representations made by sellers regarding authenticity, quality and rarity. For these reasons, “buyer beware” characterized the high-value collectibles markets, and “sight-unseen” markets for rare coins and other high-value collectibles were practically non-existent.

 

High-value collectibles have been traditionally marketed at retail by dealers through direct mail, catalogues, price lists and advertisements in trade publications, and sold and purchased by them at collectibles shows, auction houses and local dealer shops. These markets were highly inefficient because:

 

 

they were fragmented and localized, which limited both the variety of available collectibles and the number of potential buyers;

 

 

transaction costs were often relatively high due to the number of intermediaries involved;

 

 

buyers usually lacked the information needed to determine the authenticity and quality and, hence the value, of the collectibles being sold; and

 

 

buyers and sellers were vulnerable to fraudulent practices because they had to rely on the dealers or other sellers for opinions or representations as to authenticity, quality and rarity.

 

Coin Market . In an effort to overcome some of these inefficiencies, approximately 40 years ago, professional coin dealers began using a numerical quality grading scale for coins. That scale ranged from 1 to 70, with higher numbers denoting a higher quality. Previously, professional dealers used descriptive terms, such as “Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they sold, a practice that continued after the development of the numeric grading system. However, whether using a numeric or a descriptive system, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Moreover, dealers were hardly disinterested or independent since, as the sellers or buyers of the coins they were grading, they stood to benefit financially from the assignment of a particular grade.

 

 

 
3

 

 

Trading Cards Market . Misrepresentations of authenticity, quality and rarity also operated as a barrier to the liquidity and growth of the collectibles market for trading cards. Even experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher-priced trading cards. Most collectors lacked the knowledge needed to purchase collectible trading cards with confidence, even when they had physically examined them. Trading card dealers eventually developed a rudimentary adjectival system to provide measures of quality, using descriptive terms such as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of quality were assigned on the basis of such characteristics as the centering of the image on the card and the presence or absence of bent or damaged corners, scratches and color imperfections. However, as was the case with coins, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Additionally, since the dealers who bought and sold trading cards were the ones that assigned these grades, collectors remained vulnerable to misrepresentations as to the authenticity, quality and rarity of trading cards being sold or purchased by dealers.

 

Autographed Memorabilia Market . The market for autographed sports, entertainment and historical memorabilia has been plagued by a high incidence of forgeries and misrepresentations of authenticity. For example, Operation Bullpen, initiated by the FBI and other law enforcement agencies beginning in 1997, uncovered a high volume of outright forgeries of signatures and widespread misrepresentations as to the genuineness of sports memorabilia. We believe that the high incidence of such fraudulent activities was due, in large part, to a dearth of independent third-party memorabilia authentication services and an absence of systematic methodologies and specimen data needed for verification of authenticity.

 

These conditions created a need and the demand for independent authentication and grading services from which sellers, purchasers and collectors could obtain:

 

 

determinations, from independent, third-party experts, of the authenticity of the high-value collectibles that are sold and purchased by dealers and collectors, particularly “sight-unseen” or over the Internet;

 

 

representations of quality based on uniform standards consistently applied by independent, third-party experts; and

 

 

authoritative information, compiled by a credible third party, to help purchasers and collectors understand the factors that affect an item’s perceived value and price, including:

 

 

its rarity;

 

its quality or grade; and

 

its historical and recent selling prices.

 

The Impact of eBay and O ther e-Commerce Websites on the Collectible Markets . The advent of the Internet and, in particular, eBay’s development of an Internet or “virtual” marketplace and other Internet-selling websites, such as Amazon, have overcome many of the inefficiencies that had characterized the traditional collectibles markets. eBay and other online marketplaces (i) offer enhanced interaction between and greater convenience for sellers and buyers of high-value collectibles; (ii) eliminate or reduce the involvement of dealers and other “middlemen;” (iii) reduce transaction costs; (iv) allow trading at all hours; and (v) regularly provide updated information to collectors. In addition, in August 2015, the Company launched its Collectors.com website where it aggregates and organizes collectibles listings from sellers and collectibles categories and markets; to enable collectors to expeditiously locate collectibles they are interested in buying. However, Internet commerce still raises, and has even heightened, concerns about the authenticity and quality of the collectibles that are listed for sale on the Internet. Buyers have no ability to physically examine the collectibles and no means to confirm the identity or the credibility of the dealers or sellers on the Internet. As a result, we believe that the growth of Internet-selling websites, such as eBay and Amazon, and individual dealer-owned websites, has increased awareness of the importance of, and the demand for, independent third-party authentication and grading services of the type we provide. Our services enable purchasers and collectors to use the Internet to purchase high-value collectibles, without physical examination (“sight-unseen”), with the confidence of knowing that they are authentic and are of the quality represented by sellers. The importance and value of our services to purchasers and collectors, we believe, are demonstrated by eBay’s inclusion, on its collectibles websites, of information that identifies, and encourages visitors to use, our independent third-party authentication and grading services, as well as similar services offered by some of our competitors.

 
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Our Services

 

PCGS Coin Authentication and Grading Services . Recognizing the need for third-party authentication and grading services, we launched Professional Coin Grading Service in 1986. PCGS employs expert coin graders, who are independent of coin buyers and sellers, to provide impartial authentication and grading services. As of June 30, 2017, we employed 42 coin experts who have an average of 12 years of service with the Company. We also established uniform standards of quality measured against an actual “benchmark” set of coins kept at our offices. We place each coin that we authenticate and grade in a tamper-evident, clear plastic holder which bears our logo, so that any prospective buyer will know that it is a PCGS authenticated and graded coin. We also provide a warranty as to the accuracy of our coin authentication and grading determinations.

 

By providing an independent assessment by coin experts of the authenticity and quality of coins, we believe that PCGS has increased the liquidity of the trading market for collectible coins. Following the introduction of our independent, third-party authentication and grading service, buyer confidence, even between dealers, increased to such a degree that coins authenticated and graded by PCGS were able to be traded “sight-unseen.” In 1990, a dealer market was developed, known as the “Certified Coin Exchange,” on which coin dealers traded rare coins “sight-unseen,” over a private satellite network. We acquired CCE in 2005, which now operates on the Internet.

 

Our coin authentication and grading services have facilitated the development of a growing Internet or “virtual” marketplace for collectible coins. A prospective buyer, who might otherwise be reluctant to purchase a high-priced coin listed “sight-unseen” on the Internet, is able to rely on a PCGS certification, as well as authoritative information about the coin that is accessible on our website, in deciding whether or not to bid and in determining the amount to offer for the coin. As a result, to enhance the marketability of higher-priced coins, many sellers submit their coins to PCGS for authentication and grading. That enables the sellers to include, in their Internet sales listings, digital images of the coins in their tamper-evident, clear plastic holders, which identify the coins as having been authenticated and graded by PCGS, as well as their PCGS-assigned grades. We also provide a range of authoritative content on coin collecting to inform and communicate with the collector community, including guides and reports that track the trading prices and the rarity of PCGS-graded coins.

 

PSA Trading Card Authentication and Grading Services . Leveraging the credibility and using the methodologies that we had established with PCGS in the coin market, in 1991 we launched Professional Sports Authenticator (PSA), which instituted a similar authentication and grading system for trading cards. We are now the leading authenticator and grader of trading cards. Our independent trading card experts certify the authenticity of and assign quality grades to trading cards using a numeric system with a scale from 1-to-10 that we developed, together with an adjectival system to describe their condition. At June 30, 2017, we employed 18 experts who have an average of 15 years of service with the Company. We believe that our authentication and grading services have removed barriers that were created by the historical seller-biased grading process and, thereby, have improved the overall marketability of and facilitated commerce in trading cards, including over the Internet and at telephonic sports memorabilia auctions.

 

The trading cards submitted to us for authentication and grading include primarily (i) older or vintage trading cards, particularly of memorable or historically famous players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle, and (ii) modern or newly produced trading cards of current or new athletes who have become popular with sports fans or have achieved new records or milestones, such as Derek Jeter, Albert Pujols, Mariano Rivera and Miguel Cabrera . These trading cards have, or are perceived to have, sufficient collectible value and are sold more frequently than are trading cards of less notable athletes, leading dealers and collectors to submit them for grading to enhance their marketability. Also, the production and sale of each new series of trading cards, which take place at the beginning and during the course of each new sports season, create new collectibles that provide a source of future additional authentication and grading submissions to us.

 

PSA/DNA Autograph Authentication and Grading Services . In 1999, we launched our vintage autograph authentication business, initially offering authentication services for “vintage” sports autographs and memorabilia that were autographed or signed prior to the time they were presented to us for authentication. The vintage autograph authentication business is distinctly different from the “signed-in-the-presence” authentication of autographs where an “authenticator” is present and witnesses the actual signing. Our vintage autograph authentication service involves the rendering of an opinion of authenticity by an industry expert based on (i) an analysis of the signed object, such as the signed document or autographed item of memorabilia, to confirm its consistency with similar materials or items that existed during the signer’s lifetime; (ii) a comparison of the signature submitted for authentication with exemplars of such signatures; and (iii) a handwriting analysis. As of June 30, 2017, we employed 4 autograph experts who joined the Company in the last twelve months, as well as outside consultants that we sometimes use on a contract basis.

 

 

 
5

 

 

In June 2004, we also began offering grading services for autographs, beginning with baseballs containing a single signature or autograph. We use uniform grading standards that we have developed and a numeric scale of 1-to-10, with the highest number representing top quality or “Gem Mint” condition. We assign grades to the collectibles based on the physical condition or state of preservation of the autograph.

 

CCE Certified Coin Exchange and Collectors Corner. In September 2005, we acquired the Certified Coin Exchange (CCE), a subscription-based, business-to-business Internet bid-ask market for coins that have been certified by us or by other independent coin authentication and grading services, since 1990. The CCE website now features over 100,000 bid and ask prices for certified coins at www.certifiedcoinexchange.com . The CCE provides liquidity in the geographically dispersed and highly fragmented market for rare coins. In March 2007, we introduced the Collectors Corner, a business-to-consumer website that enables sellers on CCE to offer many certified coins simultaneously at wholesale prices on CCE and at retail prices on Collectors Corner ( www.collectorscorner.com ). Registration on Collectors Corner is free for consumers, who can search for and sort coins listed on the Collectors Corner website. Coin sellers must register and pay a fixed monthly subscription fee to us for access to and to effectuate sale transactions on both CCE and Collectors Corner. Currently, there are approximately 110,000 collectibles, consisting primarily of coins, trading cards, currency and stamps, which are offered for sale on Collectors Corner, with offering prices aggregating approximately $168 million. The enhanced liquidity provided by CCE and Collectors Corner for certified coins, trading cards, and certified stamps, has increased the volume and turnover of these items, which benefits us because, as a general rule, increases in sales and purchases of those collectibles increase the demand for our authentication and grading services.

 

Publications and Advertising . We publish authoritative price guides, rarity reports and other collectibles data to provide collectors with information that makes them better informed consumers and makes collecting more interesting and exciting. Our publications also enable us to market our services, to create increased brand awareness and to generate advertising revenues. We publish the Sports Market Report on a monthly basis primarily for distribution to approximately 7,540 PSA Collectors Club members. We sell advertising to dealers and vendors for placement in our publications. We manage a Collectors Universe website and individual websites for our authentication and grading services. On those websites, we offer collectible content, relevant to the marketplace for the specific authentication and grading service, some of which is available for a fee and some of which is available without charge. We believe our websites for PCGS in coins, and PSA in trading cards, have the highest number of visitors and web traffic in their respective markets. We sell advertising to dealers and vendors on these two websites and on the websites we maintain for PSA/DNA in autographs and CCE and Collectors Corner in coins.

 

C ollectible Trade Sho ws. We own Expos Unlimited LLC (“Expos”) a trade show management company that operates one of the larger coins and collectibles shows, staged in Long Beach, California, three times a year. At these shows collectibles are exhibited and are bought and sold by collectibles dealers and collectors.

 

Our Mission

 

Our mission is to provide the finest available independent authentication and grading services to sellers and buyers of high-value collectibles in order to:

 

 

increase the values and liquidity of high-value collectibles;

 

 

enable and facilitate transactions in high-value collectibles;

 

 

generally enhance interest, activity and trading in high-value collectibles; and

 

 

achieve profitable growth, build long-term value for our stockholders and provide rewarding opportunities for our employees.

 

 

 
6

 

 

Our Growth Strategy

 

We have established leading brands in our existing collectibles markets, including PCGS, PSA and PSA/DNA. We use those brands to promote Collectors Universe as the premier independent provider of authentication and grading services in the high-value collectibles markets, in order to (i) increase our market share among existing users of authentication and grading services, (ii) increase the use of our services by the numerous collectors that do not currently use any independent third-party authentication or grading services, and (iii) expand our coin services to selected international markets.

 

Although we have authenticated and graded approximately 36 million coins since the inception of PCGS, and approximately 28 million trading cards since the inception of PSA, we believe that less than 10% of the vintage United States coins and less than 10% of the vintage trading cards have been authenticated and graded by independent providers of authentication and grading services. Additionally, we estimate that we have authenticated and graded less than 10% of the potential market of autographs in the United States. Moreover, new collectibles are introduced each year into the markets in which we operate, some of which are authenticated and graded in the year of their introduction. Over time, these collectibles will increase the supply of vintage items that are sold by dealers and collectors, and we expect that many of them will be submitted for independent authentication and grading.

 

To take advantage of these market opportunities to expand our service offerings to customers and to solidify our position as a leading authority in the collectible markets that we serve, we have:

 

 

implemented more competitive and focused marketing programs for our modern coin business, effective January 1, 2016 to stimulate demand for our services.

 

 

expanded our geographical reach by opening offices in Paris, France, Hong Kong and Shanghai, China, the operations of which generated approximately 13% of net revenues in fiscal 2017;

 

 

provided special packaging on certain modern coin programs that enhances the value of commemorative coins and helps drive increased volumes of coins sold by dealers and distributors of those coins;

 

 

provided numismatic information and value added content through CoinFacts and PSA Collectible Facts;

 

 

participated at collectibles industry trade shows and organized “members only” shows for PCGS authorized dealers and Collectors Club members, at which we offer on-site authentication and grading services to facilitate collectibles trading activities;

 

 

established authorized PCGS and PSA dealer networks to increase the visibility of our brands and the use of our services by those dealers and their customers;

 

 

developed and expanded our Set Registry SM programs to increase demand for our collectible coin and trading card authentication and grading services, among collectors and to increase traffic on our websites;

 

 

expanded the offerings and markets in which Collectors Corner provides a business-to-consumer website for the sale of third-party collectibles certified by us;

 

 

promoted our Collectors Clubs to attract and to provide incentives for collectors to use our services;

 

 

expanded our website information services, to include auction results, reference materials and ongoing collectibles price guides and rarity reports; and

 

 

developed software for our Collectors.com website that enables collectors, to more expeditiously, locate collectibles they are interested in buying. The software aggregates and organizes collectibles listings from many sellers and multiple collectibles categories or markets.

 

 

 
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Operations

 

We offer authentication and grading services for coins, trading cards, autographs and autographed memorabilia. Our trained and experienced authentication and grading experts determine the authenticity of and using uniform quality standards, assign quality grades to these collectibles.

 

PCGS . Our authentication and grading of coins involves an exacting and standardized process. We receive coins from dealers and collectors and remove all packaging that identifies the submitter in any way. We then enter information regarding each coin into our proprietary computerized inventory system, which tracks the coin at every stage of the authentication and grading process. Generally, our process requires that two of our experts evaluate each coin independently, and no authenticity opinion is issued and no quality grade is assigned unless their opinions with respect to the authenticity and quality grade, independently assigned by each of them, are the same. In some cases, depending on the type of coin being authenticated and graded or on the results of the initial review process, we involve a third expert to make the final determinations of authenticity and grade. The coin’s authenticity and grade are then verified by one of our senior experts, who has the authority to resubmit the coin for further review if he or she deems it to be necessary. Only after this process is complete is the coin reunited with its identifying paperwork, thus keeping the authentication and grading process from being influenced by the identity of the owner and the history of the coin. The coin is then sonically sealed in our specially designed, tamper-evident, clear plastic holder, which also encases a label describing the coin, the quality grade that we have assigned to it, a unique certificate number and a bar code, the PCGS hologram and brand name and if requested by the customer, special inserts that can enhance the collectible value of the coin.

 

PSA . On receipt of trading cards from dealers and collectors, we remove all packaging that identifies the submitter in any way and enter information regarding the trading card into our proprietary computerized inventory system that enables us to track the trading cards throughout the authentication and grading process. Only after the authentication and grading process is complete is the trading card reunited with its identifying paperwork, thus keeping the authentication and grading process independent of the identity of the owner and the history of the trading card. The trading card is then sonically sealed in our specially designed, tamper-evident, clear plastic holder, which also encases a label that identifies the trading card, the quality grade that we have assigned to it and a unique certificate number, and the PSA hologram and brand name.

 

We primarily authenticate and grade baseball trading cards and, to a lesser extent, football, basketball, hockey and entertainment, as well as other types of collectible cards. As is the case with coin authentication and grading, trading card authentication and grading fees are based primarily on the particular turnaround time requested by the submitter, ranging from one day’s turnaround for the highest level of service to approximately 60 days for the lowest level of service.

 

PSA/DNA . Because of the variability in the size of autographed memorabilia, the authentication and grading procedures we use necessarily differ from those used in authenticating and grading coins and trading cards. Customers may ship the autographed memorabilia to us for authentication at our offices or, in the case of dealers or collectors that desire to have a large number of items authenticated, we will sometimes send an expert to the customer’s location for “on-site” examination and authentication. Our experts reference what we believe is one of the largest databases of known genuine exemplars of signatures for comparison to a submitted item and draw upon their training and experience in handwriting analysis. In most cases, we take a digital photograph of the autographs that we have authenticated and store those photographs in a master database. Before shipping the item back to the customer, a tamper-evident label is affixed to the collectible. The label contains our PSA/DNA name and logo and a unique certificate number. For additional security, in all cases when an item is fully authenticated, we tag the items with synthetic DNA-laced ink, which is odorless, colorless and tasteless and visible only when exposed to a narrow band wavelength of laser light using a hand-held, battery-powered lamp. Additional verification that an autographed item was authenticated by us can be obtained by using a chemical analysis to determine whether or not the ink used in the unique DNA code by PSA/DNA was applied to the autographed item. As a result, if the tamper-evident label that we affixed to an autographed item were to be removed or otherwise separated from the item, it is still possible to verify that the item was authenticated by us.

 

 

 
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Marketing

 

We employ both “pull” and “push” strategies in marketing our services to dealers and collectors of high-value collectibles. For collectibles, our “pull” strategies are designed to promote our brands, increase the preference among collectors for our authentication and grading services and encourage collectors to communicate that preference to their collectibles dealers, because most authentication and grading submissions are made by dealers. In our experience, if a customer requests a particular grading service, the dealer ordinarily will comply with that request. On the other hand, if the customer expresses no preference, the dealer will make its own choice of authentication and grading service or may even decide not to submit the collectible to an independent service for authentication and grading. Therefore, our “pull” oriented marketing programs emphasize (i) the protections that collectors and retail customers will have if they purchase collectibles that we have authenticated and graded; and (ii) the improved marketability and higher prices that they and the associated retailers can realize if they use our independent third-party authentication and grading services. Our “ p ush” s trategy , on the other hand, is designed to market our services directly to collectibles dealers to encourage them to use and promote our services.

 

Our “Pull” Strategy . We have developed and implemented a number of marketing programs and initiatives designed to create consumer preference for collectibles that have been authenticated and graded by us. Those programs and initiatives include:

 

 

Set Registry Programs . We provide collectors with the opportunity to participate in free Internet “Set Registry” programs that we host on our collectibles websites. These programs encourage collectors to assemble full sets of related collectibles that have been authenticated and graded by us. Generally, each registered set is comprised of between 50 and 200 separate, but related, collectibles. Examples include particular issues of coins, such as Twenty Dollar Gold Double Eagles or Morgan Silver Dollars; particular sets of trading cards, such as all Hall of Fame pitchers or a particular team, like the 1961 Yankees. Our Set Registry programs enable collectors:

 

 

to register their sets on our websites, which provides them with an off-site reference source for insurance and informational purposes;

 

 

to display on our websites, and compare the completeness and quality grades of the collectibles making up their sets to those of other collectors who have registered similar sets on our websites, thereby creating a competitive aspect to collecting that adds to its excitement; and

 

 

to enter our annual Company-sponsored Set Registry competitions and awards programs in which collectors can win awards for having collected the most complete and highest graded sets of particular series or issues of coins or trading cards.

 

The collectibles that may be registered on our Set Registries and included in our Set Registry competitions are limited to collectibles that have been authenticated and graded by us. To register the collectibles to be included in a particular set, a collector is required to enter the unique certificate number that we had assigned to each of the collectibles when last authenticated and graded by us. We use the certificate number to compare the information being submitted by the collector with our database of information to verify that the collectibles being registered by a participant for inclusion in a particular set qualify to be included in that set. We have found that our Set Registry competitions (i) create a preference and increase demand among collectors for our brands, and (ii) promote the trading of collectibles authenticated and graded by us by set registrants seeking to improve the completeness and overall quality of their sets, which generally results in additional authentication and grading submissions to us. Annual awards for set completeness and quality have been issued by PCGS and PSA each year since 2002. As an indication of the increasing popularity of our Set Registry programs, approximately 211,000 sets were registered on our Set Registries as of June 30, 2017, which represents a 9% increase over the number registered as of June 30, 2016.

 

 

Collectors Club Subscription Program . We also have established “Collectors Clubs” for coin and trading card collectors. For an annual membership fee, ranging from $69 to $249, collectors receive a number of benefits, including (i) the right to have, without any further charge, a specified number of collectibles authenticated and graded by us, a privilege that non-member collectors do not have; and (ii) access to certain proprietary data that we make available on our websites or in print. At June 30, 2017, there were approximately 18,659 members in our Collectors Clubs.

 

 

 
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Certified Coin Exchange (“CCE”) Business-to-Business Website. The CCE website is a business-to-business website where recognized dealers make markets in and over which they can sell and purchase coins and other collectibles that have been certified by us or by other independent coin grading services. Currently, there are over 100,000 certified coins being offered at bid and ask prices. We believe that the liquidity created for certified coins by CCE increases the demand for PCGS certified coins among dealers.

 

 

Collectors Corner Business-to-Consumer Website . We have launched Collectors Corner (www.collectorscorner.com) , which is a business-to-consumer website where consumers can visit, identify, search, sort over and purchase coins, trading cards and items of currency being offered for sale by dealers. At June 30, 2017, there were over approximately 110,000 collectibles listed for sale on Collectors Corner. All items on Collectors Corner are offered by dealer members who have applied for the right to offer such collectibles on Collectors Corner. We believe that Collectors Corner has advantages over other business-to-consumer websites because the counterparties to the consumers, who buy and sell collectibles via Collectors Corner, have been accepted as sellers on the Collectors Corner website and are known members in the collectibles markets and the collectibles selling communities. Collectibles are listed at fixed prices, with the opportunity to negotiate lower prices. We believe that the increased turnover offered for collectibles listed on Collectors Corner, as well as the ability to use Collectors Corner to improve a coin or trading card set in the PCGS and PSA Set Registries, respectively, creates increased brand preference for PCGS and PSA authenticated and graded collectibles.

 

Our “Push” Strategy . We also market our services directly to collectibles dealers and auctioneers to promote their use of our authentication and grading services. Our marketing message is focused on the enhanced marketability of collectibles that we have certified due to the increase in customer confidence that is attributable to our independent authentication and grading of those collectibles. These marketing programs include:

 

 

Trade Shows and Conventions . There are numerous collectibles trade shows and conventions held annually in the United States and overseas, where collectibles dealers gather on a trading floor or bourse to buy and sell collectibles. We attend the largest and most significant of those trade shows and conventions, at many of which we offer same-day on-site authentication and grading services, which facilitate the trading and sales of collectibles at these shows and conventions. At the same time, we obtain additional brand exposure and generate increased revenues, because dealers and collectors generally are willing to pay higher fees for same- day on-site services at such trade shows and conventions.

 

 

Expos. We own Expos Unlimited LLC (“Expos”), a trade show management company that operates one of the larger and better-known coin and collectibles shows staged, three times a year, in Long Beach, California. Those shows enable us to showcase our services and expertise better than at trade shows that we do not own or operate. In addition, Expos assures us of the continued availability of this show venue for our onsite authentication and grading services.

 

 

Authorized Dealer Network . We have implemented authorized dealer programs for coin and trading card collectibles dealers and auction companies. Authorized dealers are able to use our marketing materials which are designed to promote our services and those of our authorized dealers to collectors. Those materials include “point of sale” and “point of purchase” displays and brochures and direct mail pieces for insertion in customer mailings. In addition, authorized dealers may use our brand logotypes on their websites to attract buyers for coins and trading cards that have been authenticated and graded by us. We also conduct joint marketing programs with our authorized dealers in which we provide financial support for dealer marketing programs, approved by us, that promote both the dealer’s products and services and our authentication and grading services.

 

 

 
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Intellectual Property

 

Our intellectual property consists primarily of trademarks, copyrights, proprietary software and trade secrets. As part of our confidentiality procedures, we generally enter into agreements with our employees and consultants and limit access to, and distribution of, our software, documentation and other proprietary information.

 

The following table sets forth a list of our trademarks, both registered and unregistered, that are currently being used in the conduct of our business both in the United States and overseas:

 

Registered Marks

 

Unregistered Marks

Collectors Universe

 

PSA

 

Coin Universe

Professional Coin Grading Services

 

PSA/DNA

 

Collectors.com

PCGS

 

Quick Opinion

 

Expos Unlimited

PCGS Secure

 

Sports Market Report

 

Long Beach Coin, Stamp and Collectibles Expo

First Strike

 

Set Registry

   

CoinFacts

 

Rookie Ball and Graph

   

PCGS3000

 

Certified Coin Exchange

   

History in Your Hands

 

CCE

   

PCGS Currency

 

Collectors Corner

   

Professional Currency Grading

 

FACTS

   

Professional Sports Authenticator

 

SPOTS DATA

   

 

We have not conducted an exhaustive search of possible prior users of the unregistered trademarks listed above, and therefore it is possible that our use of some of these trademarks may conflict with others.

 

Collectibles Experts

 

As of June 30, 2017, we employed 64 experts in our authentication and grading operations, with an average of 12 years of service with the Company. Our experts include individuals that either (i) had previously been collectibles dealers or were recognized as experts in the markets we serve, (ii) have been trained by us in our authentication and grading methodologies and procedures, or (iii) had gained authentication and grading experience at competing authentication and grading companies. However, talented collectibles authentication and grading experts are in short supply, and there is considerable competition among collectibles authentication and grading companies for their services. As a result, we focus on training young authenticators and graders (including non-US individuals) who we believe have the skills or knowledge base to become collectibles experts. We also contract with outside experts, usually collectibles dealers, to assist us with special grading issues or to enable us to address short-term increases in authentication and grading orders.

 

Service Warranties

 

We generally issue an authenticity or grading warranty with every coin and trading card authenticated or graded by us. Under the terms of the warranty, in general, if a coin or trading card that was authenticated or graded by us later receives a lower grade upon resubmission to us for grading, or is found not to be authentic, we are obligated under our warranty either to purchase the coin or trading card at the current market value at the originally assigned grade or, instead, at the customer’s option, to pay the difference in the current market value of the item between its original assigned grade and its lower grade. We accrue for estimated warranty costs based on historical claims experience, and we monitor the adequacy of the warranty reserves on an ongoing basis. If warranty claims were to increase in relation to historical trends and experience, we would increase the warranty reserves and incur additional charges that would have the effect of reducing income in those periods during which the warranty reserve is increased. See Item 7: “MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- Critical Accounting Policies: Grading Warranty C osts , for more information regarding our warranty reserves. Before returning an authenticated or graded coin or trading card to our customer, we place the coin or trading card in a tamper-evident, clear plastic holder that encapsulates a label identifying the collectible as having been authenticated and graded by us. The warranty is voided in the event the plastic holder has been broken or damaged or shows signs of tampering. See footnote 7 to our consolidated financial statements included elsewhere in this Annual Report, for activity in our warranty reserves for fiscal years ended June 30, 2015 to 2017.

 

 

 
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We do not provide a warranty with respect to our opinions regarding the authenticity or quality of autographs or memorabilia.

 

Customer Service and Support

 

We devote significant resources, including a 34-person staff that provides personalized customer service and support in a timely manner, while also supporting our Set Registry, trade show programs and overseas offices. On our websites, customers are able to check the status of their collectibles submissions throughout the authentication and grading process and to confirm the authenticity of the collectibles that we have graded. When customers need services or have any questions, they can telephone or e-mail our support staff, Monday through Friday between the hours of 7:00 a.m. and 5:00 p.m., Pacific Time. We also involve our collectibles experts in providing support services, when necessary, to address special issues.

 

Supplies

 

In order to obtain volume discounts, through June 30, 2017 we have chosen to purchase the injection-molded critical high-volume plastic parts for our clear plastic holders principally from two suppliers. We choose one or the other of these suppliers to manufacture other less critical parts. We typically concentrate the purchase of holders through one supplier when developing new holders. There are numerous suppliers for these parts, and we believe that, if necessary, we could obtain those parts from other suppliers without incurring significant costs. However, if it became necessary for us to obtain any parts from another supplier, we might have to arrange for the fabrication of a die for the new supplier. Fabrication of high-value precision dies can be a lengthy process. Although we do not have back-up dies for some of our high-value volume injection-molded parts, we own the dies used to manufacture the parts, and we believe the inventory of parts we maintain is sufficient to give us the time to have another supplier build the parts, should the need to do so arise or should we decide to use another supplier for certain parts. As our business expands overseas we may source parts from overseas suppliers.

 

Competition

 

Coin Authentication and Grading . Our principal competitors in the coin authentication and grading market are Numismatic Guaranty Corporation of America (“NGC”), Independent Coin Grading and ANACS, all of which are privately owned businesses.

 

Trading Card Authentication and Grading . Our primary competitors in trading card authentication and grading are Beckett Trading Card Grading Corporation, and Trading Card Guaranty, LLC.

 

Autograph Authentication and Grading . In the vintage autograph authentication market, we compete with James Spence Authentication (“JSA”) and a few smaller competitors.

 

We believe that the principal competitive factors in our collectibles authentication and grading markets are (i) brand recognition and awareness; (ii) an established reputation for integrity, independence and consistency in our approach to establishing authenticity and in the application of grading standards; and (iii) responsiveness of service. We have found that price is much less of a factor in the case of vintage collectibles, but is a more important consideration with respect to modern coins and trading cards because of their significantly lower values. We believe that our PCGS, PSA and PSA/DNA brands compete favorably with respect to all of these factors and are among the leaders in each of their respective markets. Barriers to entry into the authentication and grading market are relatively low, especially in the trading card authentication and grading market. However, brand name recognition and a reputation for integrity, independence and consistency in the application of grading standards can take several years to develop. In addition, we believe that the sheer number of coins and cards that are in PCGS and PSA holders acts as a barrier to entry to new competitive start-up brands. The limited supply of experienced collectibles experts also operates as a barrier to entry.

 

 
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Information Technology

 

IT Systems. We have developed a number of proprietary software systems for use in our authentication and grading operations, as well as for the operation and maintenance of our websites. Custom applications include grading systems, inventory control and order tracking systems, and other internally developed applications to manage the day-to-day operations of the Company. Websites have multiple customer-facing content/information systems, including (but not limited to) PSA CollectibleFacts, PCGS CoinFacts, multiple price guide and population reports, and multiple eCommerce solutions. Internally, these websites and applications are managed through a proprietary content management system. The majority of internally developed systems are written in Microsoft C# .NET and, in some limited cases, Microsoft Visual Basic .NET (all using a number of high-availability Microsoft SQL Server clusters on the back end).

 

The majority of the information technology systems (both for internal use and on publicly-accessible websites) are located at a Statement on Standards for Attestation Engagements (“SSAE”) 16 compliant data center in Southern California. This data center offers:

 

 

24/7/365 monitoring and alerting of environmental conditions (including temperature, humidity, power status, etc.) through multiple/redundant hardware sensors and systems;

 

24/7/365 physical security through both technology (cameras, sensors, biometric access control, etc.) and always-present security staff; and

 

redundant Internet connectivity, power, and cooling systems that are tested on a regular basis.

 

We also maintain a number of systems to monitor the availability and performance of our sites and systems, including:

 

 

24/7/365 monitoring and alerting of website availability and performance through both internally developed and third-party solution providers; and

 

24/7/365 monitoring and alerting of Internet-based security threats through internal security systems, dedicated hardware devices, and external third-party solution providers.

 

In addition to the Southern California data center, smaller internal-use-only local area networks exist in our Southern California, New Jersey, Paris, Shanghai, and Hong Kong operations centers. However, the Information Technology infrastructure in those smaller offices is limited. Therefore any damage to, or failure of, our computer systems due to a catastrophic event in Southern California, such as an earthquake, could cause an interruption in our services. These risks are mitigated by a comprehensive data backup/protection solution, which includes regular rotation of offsite data storage.

 

Cyber Security . Cyber security is one of our top priorities and is always contemplated when developing and deploying new systems (both software and hardware). To this end, key staff members maintain industry-standard security and audit certifications and regularly expand their security knowledge and deploy new security tools as considered necessary.

 

We maintain multiple Internet connections for both web serving and outbound Internet access. Internet access points (across all offices) are protected with Palo Alto enterprise-level firewalls and security products. Additionally, access to critical network components is protected by both local Intrusion Detection Systems (IDS) and a security-centric managed service provider. In addition to the constant monitoring of these security devices, network security scans (of both internal and publicly-accessible servers) are performed on a regular basis. These scans include penetration/intrusion testing, vulnerability assessments, and attack surface analysis. We have multiple overlapping security infrastructures to mitigate potential single failures. However, as many other businesses have experienced, there can be no assurance that the security measures we have adopted will prove to be adequate to enable us to detect and prevent all cyber-security breaches that could lead to the theft by hackers of confidential information entrusted to us by our customers, including passwords and credit card numbers. See “ Risk Factors -Our business is subject to online security risks, including security breaches” in Item A below in this Annual Report.

 

Government Regulation

 

With the exception of laws in some states that require memorabilia authenticators to certify to the accuracy of their authentication opinions, there are no material government regulations specifically relating to the authentication and grading businesses that we conduct, other than regulations that apply generally to businesses operating in the markets where we maintain operations or conduct business.

 

 

 
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Employees

 

As of June 30, 2017, we had a total of 369 employees, of which 312 were full-time employees and 57 were part-time employees and 53 were employed outside of the United States. Our authentication and grading-related businesses employed 307 people, including our 64 experts and 34 customer service and support personnel. Of the other 62 employees, 18 work in information services, 10 in marketing, 7 in our CCE subscription business, 10 in our Expos business (of which 9 were part-time employees), and 17 in other business and administrative services. We have never had a work stoppage, and no employees are represented under collective bargaining agreements. We consider relations with our employees to be good.

 

 

Available Information

 

Our internet address is www.collectors universe .com . We post links to our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our websites and the information contained thereon are not part of, nor are they incorporated into, this Report.

 

 

ITEM 1A     RISK FACTORS

 

Our business is subject to a number of risks and uncertainties that could prevent us from achieving our business objectives and could hurt our future financial performance and the price performance of our common stock. Such risks and uncertainties also could cause our future financial condition and future financial performance to differ significantly from our current expectations, which are described in the forward-looking statements contained in this Annual Report. Those risks and uncertainties, many of which are outside of our control, include the following:

 

A decline in the popularity of high-value collectibles and a resulting decrease in submissions for our services could adversely impact our business.

 

The volume of collectibles submitted to us for authentication and grading is affected by the demand for and market value of those collectibles and the popularity of certain coins released by the United States Mint. As the demand for and value of collectibles increase, authentication and grading submissions, as well as requests by submitters for higher priced faster turnaround times, can also increase. However, that also means that a decline in the popularity and, therefore, in the value of the collectibles that we authenticate and grade would cause decreases in authentication and grading submissions to us and in the requests we receive for faster turnaround times resulting in declines in our revenues and profitability. We have found, over the years, as evidenced by the reduction in our coin grading fees starting in the fourth quarter of fiscal 2012 and continuing through the first half of fiscal 2013, and again in the fourth quarter of fiscal 2015 and the first half of fiscal 2016, that the popularity of collectibles for certain specific coin programs, can vary due to a number of factors, most of which are outside of our control, including perceived scarcity of collectibles, general consumer confidence and trends and their impact on disposable income, precious metals prices, interest rates and other general economic conditions.

 

 

 
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Our dependence on coin authentication and grading services for most of our revenues makes us vulnerable to changes in economic conditions that could adversely affect the demand for those services and our operating results.

 

Coin authentication and grading and other coin-related services accounted for approximately 68%, 66% and 68% of our total net revenues in fiscal 2017, 2016 and 2015, respectively. Our modern coin authentication and grading revenues represented approximately 27%, 20% and 24% of our total revenues in fiscal 2017, 2016 and 2015, respectively. We believe that the principal factors that can lead to fluctuations in coin grading submissions include:(i) economic downturns which can result in a decline in consumer and business confidence and disposable income and, therefore, the willingness of dealers and collectors to buy collectible coins, (ii) the performance of the stock and bond markets, the level of interest rates and fluctuations in the value of the U.S. Dollar and in the value of precious metals, which can lead investors to shift some of their investments between stocks and bonds, on the one hand, and precious metals, on the other; (iii) in the case of modern coin submissions, increases or reductions in the marketing activities or the popularity of programs that are conducted by the U.S. Mint or dealers or customers, who specialize in selling modern coins (iv) the pricing of our services particularly for our modern coin programs and (v) short-term changes in the value of gold, particularly around the time of collectibles trade shows. This lack of diversity in our sources of revenues and our dependence on coin authentication and grading submissions for a majority of our net revenues make us more vulnerable to these conditions, which could result in reductions in our total net revenues and gross margin and, therefore, hurt our operating results.

 

Moreover, if the economic recovery in the United States remains relatively weak for an extended period of time or another economic downturn were to occur, our dependence on coin authentication and grading services for our revenues could increase, because the prices that dealers and collectors can realize on sales of trading cards generally are significantly lower than the prices they are able to realize on sales of collectible coins, making it more difficult, for trading card collectors to afford or justify incurring the costs of obtaining independent authentication and grading services. In addition, our coin business is expanding into overseas markets, thereby increasing our reliance on the coin market.

 

Declines in general economic conditions could result in decreased demand for our services, which could adversely affect our operating results.

 

The availability of discretionary or disposable income and the confidence of collectors and dealers about future economic conditions are important factors that can affect their willingness and ability to purchase, and the prices that they are willing to pay for, high-value collectibles. Additionally, declines in the confidence and reductions in the cash flows of, and reductions in credit that is available to collectibles dealers, can adversely affect their ability to purchase high-value collectibles and willingness to sell collectibles that may have declined in value due to adverse changes in economic conditions of this nature. Declines in purchases and sales, or in the value of collectibles usually result, in turn, in declines in the use of authentication and grading services, as such services are most often used in conjunction with and to facilitate collectibles sale and purchase transactions. As a result, economic uncertainties, downturns and recessions can and do adversely affect our operating results by (i) reducing the frequency with which collectibles dealers and collectors submit their coins, trading cards and other collectibles for authentication and grading including, in particular, modern coins and trading cards, primarily because authentication and grading fees are relatively high in relation to the value of such collectibles; and (ii) adversely affecting the ability of customers to pay outstanding accounts receivable on a timely basis.

 

Temporary popularity of some collectibles may result in short-term increases, followed by decreases, in the volume of submissions for our services, which could cause our revenues to fluctuate.

 

Temporary popularity or “fads” among collectors, or the popularity of certain coin marketing programs, either by the U.S. Mint or by dealers or distributors of collectibles, may lead to short-term or temporary increases, followed by decreases in the volume and in the average service fees earned on collectibles that we authenticate and grade. This can be particularly common with modern coins released by the U.S. Mint or other special releases that are seasonal in nature. Trends of this nature may result in significant period-to-period fluctuations in our operating results and could result in declines in our net revenues and profitability, not only because of a resulting decline in the volume of authenticating and grading submissions, but also because such trends could lead to increased price competition, or pressure on the level of fees we are able to charge customers, and could require us to reduce our authentication and grading fees in order to maintain market share.

 

Our top five customers account for approximately 18 % o f our total net revenues in fiscal 2017

 

During the year ended June 30, 2017, five of our customers accounted, in the aggregate, for approximately 18% of our total net revenues. As a result, the loss of any of those customers, or the lack of success of marketing programs by those customers, thereby leading to a decrease in the volume of grading submissions by any of them, could cause our net revenues to decline and, therefore, could harm our operating results.

 

 

 
15

 

 

There are risks associated with new or expanded service offerings and geographic expansion, with which we have little experience.

 

On an ongoing basis, we seek to introduce new services that we can offer to our existing authentication and grading customers as a means of increasing our net revenues and profitability. As discussed under our growth strategies on Page 7 of this Annual Report, we are investing in Collectors.com on the expectation that over time we will be able to generate revenues from sellers of collectibles by aggregating collectibles items for sale on Collectors.com. In addition, in recent years we began offering and providing coin authentication and grading services in Paris, Hong Kong and Shanghai. Those new services and our international operations, however, may not meet our expectations and may prove to be unprofitable which could lead to impairments of amounts capitalized and negatively impact our operating results. Furthermore, volatility in the level of services generated at our international operations, particularly in China, may add volatility to our operating results in certain periods.

 

Our business is subject to risks associated with doing business outside the United States.

 

We have expanded our coin authentication and grading businesses into foreign markets including Europe and China. Those operations pose risks that might adversely affect, possibly materially, our future financial performance. Those risks include the following:

 

 

potential difficulties in complying with multiple and potentially conflicting laws and regulations, which could increase our costs of doing business internationally and could expose us to possible governmental or legal action in the foreign countries where we conduct business;

 

 

difficulties in staffing and managing international operations;

 

 

differences in intellectual property protections;

 

 

potentially adverse tax consequences due to overlapping or differing tax structures;

 

 

fluctuations in currency exchange rates and navigating the exchange control rules that apply to China; and

 

 

risks associated with operating a business in a potentially unstable political climate.

 

We invoice our overseas customers for our coin authentication and grading services in the local foreign currency in the country in which the business operates, except in the case of Hong Kong, where we invoice our customers in U.S. dollars. In fiscal 2017, the impact of fluctuations in foreign currencies on our financial results was immaterial. There can, however, be no assurance that there will not be changes in foreign exchange rates that would have a material adverse effect on our results of operations in the future.

 

We are dependent on our key management personnel.

 

Our performance is greatly dependent on the performance of our senior management and certain other key employees. As a result, the loss of the services of any of our executive officers or other key management and business development employees could harm our business. Some of our executive officers and key employees are experts in the collectibles markets and have industry-wide reputations for authentication and grading of collectibles. The loss of key employees and experts, could have a negative effect on our reputation for expertise in the collectible coin market and could lead to a reduction in coin authentication and grading submissions to us.

 

On August 2, 2017, the Company announced that its Chief Executive Officer, Robert G. Deuster, has decided to retire, effective on the appointment of his successor, in order to be able to spend more time with his family. Mr. Deuster will remain as a member of the Board of Directors. The Company has retained a nationally known executive search firm to assist the Board of Directors in finding a successor CEO. The Company cannot predict the impact that this change in CEO might have on its operations or financial performance.

 

 

 
16

 

 

We are dependent on our collectibles experts.

 

In each of our markets, there are a limited number of individuals who have the expertise to authenticate and grade collectibles, and competition for available collectibles experts is intense. Accordingly, our business and our growth initiatives are heavily dependent on our ability (i) to retain our existing collectibles experts, who have developed relatively unique skills and enjoy a reputation for being experts within the collectibles markets, and (ii) to implement personnel programs to enable us to add collectibles experts, as necessary, to grow our business, both in the United States and overseas and to offset employee turnover that can occur from time to time. Moreover, some of our experts could and have left our company to join competitors or start a competing business. If we are not successful in retaining our existing collectibles experts or in hiring and training new collectibles experts, this could limit our ability to grow our business and adversely affect our operating results and financial condition.

 

 

D amage to our reputation could have a material adverse effect on our business, financial condition and results of operations.

 

We have developed a reputation as one of the leading third party providers of collectibles authentication and grading services, as well as related services, as a result of a number of factors including, we believe, the rigorousness and consistency of our grading standards and the integrity of our grading processes, which enables us to provide warranty protection to our customers, our knowledge of the collectibles markets in which we operate, and innovative programs and services that we have developed and are able to offer to our customers, including the Collectors Club, our Set Registry Programs and our Certified Coin Exchange dealer-to-dealer Internet bid-ask market. As a result, our continued success is heavily dependent on our maintaining that reputation among collectibles dealers and collectors. Failures or errors in authentication or grading processes, such as inconsistent application of grading standards or incidents that put the integrity of those processes into question, could significantly impair our reputation in the marketplace which, in turn, could lead to a loss of customer confidence and a decrease in the demand for our services and, therefore, could have a material adverse effect on our business, financial condition and results of operations.

 

We could suffer losses on authentication and grading warranties.

 

In general, we issue an authenticity or grading warranty for coins and trading cards that we authenticate or grade. Those warranties provide that:

 

 

if a coin or trading card that we authenticated and sealed in one of our tamper-evident plastic cases is later determined not to have been genuine, we would have to purchase the collectible at its current market value; or

 

 

if a coin or trading card that we graded and sealed in one of our tamper-evident plastic cases later receives a lower grade upon resubmission to us for grading, we would be obligated either to purchase the collectible at the current market value or to pay the difference in its value at its original assigned grade, as compared to its value at the lower grade.

 

We have no insurance coverage for claims made under these warranties, and therefore we maintain reserves for such warranty claims based on historical experience. However, there is no assurance that these warranty reserves will prove to be adequate, and as we expand our services in overseas markets, we may incur higher warranty claims than we have experienced in previous years. If our warranty reserves prove to be inadequate, our gross margin and operating results could be harmed. As a result, we monitor the adequacy of our warranty reserves on an ongoing basis. For example, during 2008, we unexpectedly received certain coin grading warranty claims that were significant when compared to our prior warranty claims experience. As a result, we recognized an additional expense in 2008 to provide for those claims. At that time, we also increased our warranty accrual rate to reflect this higher warranty claims experience. Those actions contributed to an increase in our costs of sales and, therefore, reduced our operating income and earnings in fiscal 2008. See note 7 to the consolidated financial statements for activity on our warranty reserves for fiscal years 2015 to 2017 contained elsewhere in this Annual Report.

 

 

 
17

 

 

Increased competition could adversely affect our financial performance.

 

Although there are few major competitors in the collectibles authentication and grading markets in which we currently operate, competition in these markets is, nevertheless, intense. Increased competition in our collectibles markets could adversely affect our pricing and profit margins and our ability to achieve further growth, and we cannot provide assurances that we will continue to be successful in competing against existing or future competitors in our collectibles markets. Also, if we were to enter into new collectibles markets, it is likely we would face intense competition from competitors in those markets who are likely to have greater brand name recognition and long-term relationships with collectibles dealers and individual collectors in those markets than we will have. Such competition could adversely affect our ability to generate profits and could cause us to incur losses or impairment charges in those markets and damage our financial condition.

 

There is no assurance that we will continue to pay cash dividends at current levels or at all.

 

The Company’s current policy is to pay cash dividends to stockholders at $0.35 per share per quarter. However, the continued payment of cash dividends is subject to a number of factors, including changes in market and financial conditions and the cash requirements of our business. Therefore, there is no assurance that the amount of the current quarterly cash dividend will not be reduced or the payment of cash dividends will not be suspended or discontinued by the Board of Directors. See “MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES”─ Dividends in Part II, Item 5 of this Annual Report.

 

Our reliance on two suppliers for principally all of our “tamper-evident,” clear plastic coin and trading card holders exposes us to potential supply and quality problems.

 

We place all of the coins and trading cards that we authenticate and grade, in tamper-evident, clear plastic holders. In addition, we incorporate security features into the holders to mitigate the risk of counterfeits. In order to take advantage of volume-pricing discounts, we purchase substantially all of those holders, on a purchase order basis, from two principal suppliers. For our highest volume most critical plastic part, we have chosen to split the supply of these parts between our two suppliers. For our other parts, we have one or the other of these suppliers manufacture the parts. In addition, when developing new holders, we concentrate the purchase of holders through one supplier initially. Our reliance on a limited number of suppliers for a substantial portion of those plastic holders exposes us to the potential for delays in our ability to deliver timely authentication and grading services in the event that one of the suppliers was to terminate its services to us or encounter financial or production problems. If, in such an event, we were unable to obtain replacement holders in a relatively short period of time, we could lose customer orders, or incur additional production costs. To mitigate this risk, the Company (i) owns the dies used to manufacture the parts, (ii) has increased its inventory of holders, to give us more time to arrange for production from other suppliers in the event of a termination of or interruption in service from either of our existing suppliers. However, if the replacement holders obtained from other suppliers are not of comparable quality to those produced by our existing suppliers, or counterfeit holders were manufactured by other suppliers, we could be exposed to additional warranty claims because tampering with those holders may not be as readily detectible. These occurrences could cause a decline in our net revenues and increases in our costs of sales which would have a material adverse effect on our results of operations.

 

Our computer systems and network systems may be vulnerable to system failure due to a lack of redundant systems at other locations.

 

Our operations are dependent on our ability to protect our computer systems against damage from fire, power loss, telecommunications failure, earthquakes and similar catastrophic events. In this regard, Southern California, where we are located and our computer systems are housed, is particularly vulnerable to earthquakes and fires that could result in damage to our computer systems that could cause interruptions of our services. Additionally, we could encounter disruptions that would harm our business as a result of problems on the internet or actions of internet users that could make it difficult for our customers to access our websites. Difficulties encountered during planned system upgrades or re-implementations also could lead to disruptions of our services.

 

We do not have redundant computer systems at any locations that are remote from Southern California. As a result, if any such events, disruptions or other of these problems were to occur, we could become unable to access information that is critically important to our ability to continue our operations without costly interruptions in the delivery of our services which could harm our business, operating results and financial condition.

 

 

 
18

 

 

Our business is subject to online security risks, including security breaches .

 

In the ordinary course of our business, we receive and store confidential personally identifiable information provided to us by our customers, such as passwords and credit card information.

 

An increasing number of large internet companies and traditional “brick and mortar” businesses have disclosed security breaches of their websites and computer systems that have led to the interruptions of service and, in certain cases, the misappropriation or theft of confidential personally identifiable information of their customers (often referred to as “identity theft”). Because the techniques used by the perpetrators of such security breaches change frequently and may be difficult to detect, like those companies and businesses, we may be unable to anticipate the techniques used in such breaches or to implement adequate preventative measures. Data security breaches may also result from non-technical causes such as, for example, actions of employees or third party service providers. Our servers also are vulnerable to computer viruses or malware and physical or electronic break-ins that could prevent our customers from accessing our online services. In addition, hardware that we develop or procure from third parties may contain defects in design or other problems that could unexpectedly compromise information security or disrupt our operations. We rely on encryption and authentication technology licensed from third parties to provide for secure storage and transmissions of confidential information, including customer passwords and payment card numbers. However, as the recent disclosures by large internet companies and traditional businesses indicate, such technology may not be sufficient to enable us to detect or prevent security breaches or the misappropriation or theft of personally identifiable customer information, which could damage our reputation and lead customers to discontinue their use of our services.

 

In addition, security breaches could result in a violation of privacy and other applicable laws, thereby exposing us to potentially significant legal or financial exposure to government actions and private litigation. Governmental agencies investigating any such breaches may seek to impose fines or other monetary penalties on us or to seek injunctive relief that could materially increase our data security costs and adversely impact our operations.

 

We rely on third parties for various Internet and processing services.

 

Our operations depend on a number of third parties for Internet access and delivery services. We have limited control over these third parties and no long-term relationships with any of them. For example, we do not own a gateway onto the Internet, but, instead, rely on Internet service providers to connect our website to the Internet. Should the third parties that we rely on for Internet access or delivery services be unable to serve our needs for a sustained time period as a result of a strike, natural disaster or for any other reason, our revenues and business could be harmed.

 

Acquisitions, the commencement of new businesses and expansion into overseas markets, present risks, and we may be unable to achieve our financial and strategic goals related to those activities.

 

There may be opportunities that present themselves to acquire existing businesses, commence new businesses or expand our markets through overseas expansion that would give us the opportunity to increase our revenues and our earnings. The purchase or commencement of a new business , or the expansion of our overseas businesses, however, present a number of risks and uncertainties, including (i) difficulties in integrating a new business or a new location into our existing operations, as a result of which we may incur increased operating costs that can adversely affect our operating results; (ii) the risk that our current and planned facilities, computer systems and personnel and controls will not be adequate to support our expanded operations; (iii) the diversion of management time and capital resources from our existing businesses, which could adversely affect the performance and our operating results; (iv) dependence on key management personnel of the acquired or newly started businesses or at the new geographic locations and the risk that we will be unable to integrate or retain such personnel; and (v)  the risk that the anticipated benefits of any acquisition or of the commencement of any new business or overseas operations may not be realized or changes we make to an acquired business may harm the performance of that business, in which event we will not be able to achieve an acceptable return or we may incur losses on our investments.

 

 
19

 

 

We depend on our ability to protect and enforce our intellectual property rights.

 

We believe that our trademarks and other proprietary rights are important to our success and competitive position. We rely on a combination of patents, trademarks, copyright and trade secret laws to establish and protect our proprietary rights. However, the actions we take to establish and protect our intellectual and other proprietary rights may prove to be inadequate to prevent imitation of our services or products, especially in international markets, or to prevent others from claiming violations of their intellectual and proprietary rights by us. In addition, others may develop similar trade secrets or other intellectual property independently or assert rights in our intellectual and other proprietary rights that could lead them to seek to block sales of our services based on allegations that use of some of our marks or other intellectual property constitutes a violation of their intellectual property rights.

 

Our unregistered trademarks could conflict with trademarks of others.

 

We have not conducted an exhaustive search of possible prior users of our unregistered trademarks or service marks. Therefore, it is possible that our use of some of these trademarks or service marks may conflict with the rights of others. As a result, we could face litigation or lose the use of some of these trademarks or service marks, which could have an adverse effect on our name recognition and result in a decrease in our revenues and an increase in our expenses.

 

The imposition of government regulations could increase our costs of doing business.

 

With the exception of state laws applicable to autograph authentication, the collectible coin and other high-value collectibles markets are not currently subject to direct federal, state or local regulation. However, from time to time government authorities discuss additional regulations which could impose restrictions on the collectibles industry, such as regulating collectibles as securities or requiring collectibles dealers to meet registration or reporting requirements, or regulating the conduct of collectibles auction businesses. Adoption of laws or regulations of this nature could lead to a decline in sales and purchases of collectibles and, therefore, also to a decline in the volume of coins, trading cards and other collectibles that are submitted to us for authentication and grading.

 

The market for our shares is limited, which may adversely affect the trading value and liquidity of our common stock.

 

As of June 30, 2017, affiliates of the Company owned a total of approximately 1,211,000 shares (or about 14% of the 8,920,998 shares outstanding) and therefore those shares are not included in our public float. As a result, the trading volume of our shares is relatively low, at a daily average of approximately 30,000 shares during the 90 days ended July 31, 2017, which reduces the liquidity of our shares, making it more difficult for our stockholders to sell their shares if the need to do so arises. These factors may depress, and make it more difficult to achieve increases in, the trading prices of our shares.

 

If our quarterly results are below market expectations, the price of our common stock may decline.

 

Many factors, including those described in this “Risk Factors” section, can affect our business, financial condition and results of operations, which makes the prediction of our future financial results difficult and uncertain. These factors include:

 

 

increases or decreases in the numbers and mix of collectibles graded from period to period arising from volatility in the level of modern coin programs (domestically and/or overseas), on a quarterly basis;

 

 

changes in market conditions that can affect the demand for our authentication and grading services, such as a decline in the popularity of certain collectibles and volatility in the prices of gold and other precious metals, or the existence, popularity or the absence of U.S. Mint programs.

 

 

changes in economic conditions that reduce the availability of disposable income and may cause collectors and collectibles dealers to reduce their purchases of collectibles, which could result in declines in the demand for the services we provide; and

 

 

 
20

 

 

 

the actions of our competitors.

 

If, as a result of these or other conditions or factors, our quarterly operating results fall below market expectations, some of our stockholders may sell their shares, which could adversely affect the trading prices of our common stock. Additionally, in the past, companies that have experienced declines in the trading prices of their shares due to events of this nature have been the subject of securities class action litigation. If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and resources, thus harming our business.

 

Provisions in our charter documents or in Delaware law may make an acquisition of us more difficult or delay a change in control, which may adversely affect the market price of our common stock.

 

Our Amended and Restated Certificate of Incorporation and Bylaws contain anti-takeover provisions, including those listed below, that could make it more difficult for a third party to acquire control of us, even if that change of control would be beneficial to our stockholders:

 

 

our board of directors has the authority to issue additional common stock and preferred stock and to determine the price, rights and preferences of any new series of preferred stock without stockholder approval;

 

 

there are limitations on who can call special meetings of our stockholders;

 

 

stockholders may not take action by written consent; and

 

 

In addition, provisions of Delaware law and provisions of our stock incentive plans may also discourage, delay or prevent a change in control or unsolicited acquisition proposals.

 

Moreover, the fact that our affiliates own approximately 14% of our outstanding shares may deter third parties from seeking to acquire control of the Company.

 

ITE M 1B.     UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2.       PROPERTIES

 

We lease approximately 48,500 square feet for our California-based headquarters under a nine-year lease that expires on March 31, 2019. We currently sublease 4,260 square feet of this office space to a related party subtenant with an expiration date that coincides with the expiration of the Company's lease. In addition, we currently rent additional small office spaces in California, New Jersey, Paris, France, Hong Kong and Shanghai, China.

 

On February 3, 2017, the Company, as tenant, entered into a triple net office lease, pursuant to which the Company will be leasing approximately 62,755 rentable square feet space for its headquarters office and principal business operations. Under the terms of the lease, the Company will be responsible for its share of real estate taxes, building insurance and maintenance costs (“triple net”).The term of this new lease will be approximately 10 years and 10 months, commencing on the completion of tenant improvements, which are expected to be completed on or about December 1, 2017. The Company will be entitled to an abatement of the monthly rent for the period from the 2 nd month through the 11 th month of the lease term, provided there is no default by the Company in its obligations under the lease. The landlord will contribute approximately $2.8 million to the tenant improvements. Aggregate minimum obligations over the term of the lease will be approximately $14.2 million.

 

Although we discontinued and exited our jewelry authentication and grading businesses in March 2009, we continue to have payment obligations with respect to one office facility in New York City that we had leased for those businesses. In May 2010, that facility was returned to the landlord, and the lease terminated in exchange for a reduction in the remaining financial obligations that we have with respect to that facility. This financial obligation expires in December 2017. See “Critical Accounting Policies and Estimates— Accrual for Losses on Facility Leases.”

 

 

 
21

 

 

ITEM 3.     LEGAL PROCEEDINGS

 

We are named from time to time as a defendant in lawsuits that arise in the ordinary course of business. We do not believe that any of such lawsuits that are currently pending are likely to have a material adverse effect on our business, financial condition or results of operations.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not Applicable

 

EXECUTIVE OFFICERS OF REGISTRANT

 

Name

 

Age

 

Positions

Robert G. Deuster

 

67

 

Chief Executive Officer

David G. Hall

 

70

 

President

Joseph J. Wallace

 

57

 

Chief Financial Officer

 

 

ROBERT G. DEUSTER has been the Company’s Chief Executive Officer since October 15, 2012. Mr. Deuster served as Chairman and Chief Executive Officer of Newport Corporation, a public company that is a global supplier of laser, optical and motion control products, from May 1996 until his retirement in October of 2007. He also served as President of Newport from May 1996 until July 2004, and in June 1997 became Chairman of the Board. From 1985 to 1996, Mr. Deuster served in various senior management positions at Applied Power, Inc. (now Actuant Corporation, a New York Stock Exchange listed company), which is a global manufacturer of electrical and hydraulic products, serving as Senior Vice President of the Distributed Products Group from 1994 to 1996, President of the Barry Controls Division from 1989 to 1994, President of the APITECH Division from 1986 to 1989 and Vice President of Sales and Marketing of the Enerpac Division from 1985 to 1986. From 1975 to 1985, he held engineering and marketing management positions at General Electric Company's Medical Systems Division. Mr. Deuster currently serves as a director of Ondax, Inc., a private optical components company. He also served on the board of directors of Symmetry Medical Inc., which provides medical devices and solutions to the global orthopedic market, until that Company was sold in June 2016. Mr. Deuster received a B.S. in Electrical Engineering from Marquette University in 1973. Mr. Deuster holds a Masters Professional Director Certification from the American College of Corporate Directors, a public company director education and credentialing organization. As previously announced by the Company, Mr. Deuster has decided to retire as the Company’s CEO, effective on the appointment of a successor CEO.

 

DAVID G. HALL has served as President of Collectors Universe since October 2001 and as a Director since its founding in February 1999. From April 2000 to September 2001, Mr. Hall served as the Chief Executive Officer of the Company and as Chairman of the Board from February 1999 to October 2001. Mr. Hall was a director of Professional Coin Grading Service, Inc., and was its Chief Executive Officer from 1986 to February 1999, when it was acquired by the Company. Mr. Hall was honored in 1999 by COINage Magazine as Numismatist of the Century, along with 14 other individuals. In 1990, Mr. Hall was named Orange County Entrepreneur of the Year by INC. Magazine . In addition, Mr. Hall has written A Mercenary’s Guide to the Rare Coin Market , a book dedicated to coin collecting. Mr. Hall invented and introduced the concept of and developed the business of independent third party grading of high value collectible coins and sports cards. He is also known in the numismatics community as one of the leading experts in identifying and grading high value collectible coins and he is in demand as a speaker at coin conventions and trade shows. Mr. Hall holds a Professional Director Certification from the American College of Corporate Directors, a public company director education and credentialing organization.

 

JOSEPH J. WALLACE became the Company’s Chief Financial Officer in September 2005. Prior to becoming Chief Financial Officer, he was the Company’s Vice President of Finance from November 2004 and Controller from June 2004. From 1997 to 2003, Mr. Wallace was Vice President of Finance, Chief Financial Officer and Secretary of STM Wireless, Inc., a publicly traded company engaged in the business of developing, manufacturing and marketing satellite communications products and services. Mr. Wallace is a Fellow of the Institute of Chartered Accountants in Ireland, and a CPA in the State of California.

 

 
22

 

 

PART II

 

ITEM 5.     MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is listed on the NASDAQ Global Market, trading under the symbol CLCT. The following tables set forth the high and low closing prices of our common stock, as reported by NASDAQ, and the cash dividends per share that we paid to our stockholders, in each of the fiscal quarters in the fiscal years ended June 30, 2017 and 2016:

 

 

   

Closing Share Prices

   

Cash
Dividend

 

Fiscal 201 7

 

High

   

Low

    Per Share  

First Quarter

  $ 22.18     $ 18.03     $ 0.35  

Second Quarter

    21.80       16.62       0.35  

Third Quarter

    26.10       20.07       0.35  

Fourth Quarter

    28.69       24.79       0.35  

 

   

Closing Share Prices

   

Cash
Dividend

 

Fiscal 201 6

 

High

   

Low

    Per Share  

First Quarter

  $ 20.33     $ 14.63     $ 0.35  

Second Quarter

    17.61       14.82       0.35  

Third Quarter

    17.35       13.95       0.35  

Fourth Quarter

    19.75       16.10       0.35  

 

We had approximately 102 holders of record and approximately 7,409 beneficial owners of our common stock as of June 30, 2017.

 

Dividends . In January 2015, the Board of Directors approved the Company’s current cash dividend policy, which provides for the payment of cash dividends to our stockholders of $0.35 per share, per quarter, for an annual dividend of $1.40 per share. The previous dividend policy of $0.325 per share per quarter called for an annual dividend of $1.30 per share, and applied for the period October 2010 to December 2014. Dividends paid to our stockholders in fiscal 2017, 2016 and 2015 totaled $11.9 million, $12.0 million, and $11.4 million, respectively.

 

The declaration and payment of cash dividends in the future, pursuant to the Company’s dividend policy, 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 and its stockholders. Accordingly, there is no assurance that, in the future, the amount of the quarterly cash dividend will not be reduced or that the payment of dividends will not be suspended or altogether discontinued.

 

Share Buyback Program . In December 2005, our Board of Directors approved a share buyback program that authorized us to repurchase up to $10,000,000 of our shares of common stock in open market or privately negotiated transactions, in accordance with applicable Securities Exchange Commission (“SEC”) rules, when opportunities to make such repurchases, at attractive prices, become available. As of June 30, 2017, we had $3.7 million available for future share repurchases under this program. There were no repurchases of shares under this program in fiscal 2017, 2016 or 2015. Moreover, we are under no obligation to repurchase any additional shares under this program, and the timing, actual number and value of any additional shares that may be repurchased by us under this program will depend on a number of factors, including the Company’s future financial performance, the Company’s available cash resources and competing uses for the cash, prevailing market prices of the Company’s common stock, the number of shares that become available for sale at prices that the Company believes are attractive and the effect that such repurchases may have on our public float and the market liquidity of our shares.

 

 

 
23

 

 

STOCK PERFORMANCE GRAPH

 

The following graph compares, for each of the years in the five year period ended June 30, 2017, the cumulative total returns for the Company and for (i) the companies included in the Russell 2000 Index, of which the Company is a member, and (ii) an index of fourteen companies that we selected (the “Peer Group”).

 

The companies comprising the Peer Group and their respective trading symbols are: Cass Information Systems Inc. (“CASS”), Cherokee Inc. (“CHKE”), Daily Journal Corp. (“DJCO”), Forward Industries Inc. (“FORD”), Innodata Inc. (“INOD”), Jetpay Corp. (“JYPY”), Lakeland Industries Inc. (“LAKE”), Planet Payment Inc. (“PLPM”), PRGX Global Inc. (“PRGX”), Reis Inc. (“REIS”), Sequential Brands Group Inc. (“SQBG”), Techtarget Inc. (“TTGT”), Value Line Inc. (“VALU”), and Xo Group Inc. (“XOXO”). The cumulative total return data for these companies was obtained from Thomson Reuters.

 

The selection of Peer Group companies presented a challenge for us, because of the relative uniqueness of our business, which consists primarily of providing authentication and grading and information services to collectibles dealers and to individuals who collect and buy and sell coins and other high value collectibles.

 

 

At June 30,  
   

2012

   

2013

   

2014

   

2015

   

2016

   

2017

 
                                                 

Collectors Universe, Inc.

    100.00       100.27       159.16       172.29       185.05       247.79  

Russell 2000

    100.00       124.21       153.57       163.53       152.52       190.05  

Peer Group

    100.00       98.32       129.65       139.61       130.59       126.64  

 

 
24

 

   

This Stock Performance Graph assumes that $100 was invested, on June 30, 2012, in the Company’s shares, the Russell 2000 Index and in the shares of the companies in the Peer Group Index, respectively, and that any dividends paid for the indicated periods were reinvested. Stockholder returns shown in the Stock Performance Graph are not necessarily indicative of future stock performance.

 

This above performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Collectors Universe, Inc. under that Act or the Securities Act of 1933, as amended .

 

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

 

The selected operating data for the fiscal years ended June 30, 2017, 2016 and 2015, and the selected balance sheet data at June 30, 2017 and 2016 set forth below are derived from the Company’s audited consolidated financial statements included elsewhere in this Annual Report. The selected operating data for the fiscal years ended June 30, 2014 and 2013 and the related balance sheet data at June 30, 2015, 2014, and 2013 were derived from audited consolidated financial statements that are not included in this Annual Report. The following selected consolidated data should be read in conjunction with our consolidated financial statements and the related notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below in this Annual Report.

 

Our Continuing Operations . The results of our continuing operations, as set forth in the table below, consist primarily of the results of operations of our collectible coin, trading card, autographs and memorabilia authentication and grading businesses and our Coinflation.com, Certified Coin Exchange (“CCE”) and Expos businesses for each of the fiscal years in the five-year period ended June 30, 2017.

 

Our Discontinued Operations . The results of our discontinued operations, as set forth in the table below, consist primarily of accretion expense associated with the remaining lease obligations of our former jewelry businesses and royalty income realized from our former currency grading business, net of income taxes.

 

 
25

 

 

Consolidated Statement of Operations Data:

 

Year Ended June 30,

 
   

201 7

   

20 16

   

20 15

   

20 14

   

20 13

 
   

(In thousands, except per share data)

 

Net revenues

  $ 70,158     $ 60,954     $ 61,684     $ 60,571     $ 49,090  

Cost of revenues

    26,847       22,902       23,053       22,663       19,068  

Gross profit

    43,311       38,052       38,631       37,908       30,022  

Selling, general and administrative expenses (i)

    30,087       25,682       26,523       25,432       20,528  

Operating income

    13,224       12,370       12,108       12,476       9,494  

Interest income, net

    (1 )     22       38       36       68  

Other (expense) income, net

    11       (73 )     (80 )     3       29  

Income before provision for income taxes

    13,234       12,319       12,066       12,515       9,591  

Provision for income taxes

    4,718       4,720       4,682       5,081       3,803  

Income from continuing operations

    8,516       7,599       7,384       7,434       5,788  

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

    (7 )     41       17       (75 )     (58 )

Net income

  $ 8,509     $ 7,640     $ 7,401     $ 7,359     $ 5,730  
                                         

Net income per basic share:

                                       

Income from continuing operations

  $ 1.00     $ 0.90     $ 0.88     $ 0.91     $ 0.72  

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

    -       -       0.01       (0.01 )     (0.01 )

Net income per share

  $ 1.00     $ 0.90     $ 0.89     $ 0.90     $ 0.71  

Net income per diluted share:

                                       

Income from continuing operations

  $ 0.99     $ 0.89     $ 0.87     $ 0.90     $ 0.71  

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

    -       -       -       (0.01 )     -  

Net income per share

  $ 0.99     $ 0.89     $ 0.87     $ 0.89     $ 0.71  

Weighted average shares outstanding

                                       

Basic

    8,480       8,445       8,345       8,167       8,052  

Diluted

    8,630       8,545       8,518       8,247       8,101  
                                         

Cash dividends paid on common stock

  $ 11,912     $ 12,008     $ 11,361     $ 10,731     $ 10,801  

Cash dividends declared per share of common stock

  $ 1.40     $ 1.40     $ 1.35     $ 1.30     $ 1.30  

 

   

At June 30,

 
   

2017

   

2016

   

2015

   

2014

   

2013

 

Balance Sheet Data :

 

(In thousands)

 

Cash and cash equivalents

  $ 9,826     $ 11,967     $ 17,254     $ 19,909     $ 18,711  

Working capital – continuing operations

    5,799       6,980       10,382       12,768       13,884  

Working capital (deficit) – discontinued operations

    (391 )     (619 )     (778 )     (849 )     (802 )

Goodwill and Intangibles – continuing

    4,266       3,845       3,641       3,355       3,560  

Total assets – continuing operations

    28,530       28,111       32,020       35,406       32,836  

Total assets – discontinued operations

    79       79       182       182       182  

Stockholders' equity

    15,917       14,995       18,469       20,640       20,562  

 


 

 

(i)

Selling, general and administrative expenses in fiscal 2017 include an increase of approximately $3.5 million in non-cash stock-based compensation expense as compared to fiscal 2016. See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- Critical Accounting Policies and Estimates: Stock-Based Compensation and results of operations- Stock-Based Compensation Expense below.

 

 

 

 
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ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Consolidated Financial Data” and our Consolidated Financial Statements and related notes, included elsewhere in Part II of this Annual Report. This discussion also should be read in conjunction with the information in Item IA of Part I of this Report, entitled “Risk Factors,” which contains information about certain risks and uncertainties that can affect our business and our financial performance in the future.

 

Introduction and Overview

 

Our Business

 

Collectors Universe, Inc. (“we”, “us” “management” “our” or the “Company”) provides authentication and grading services to dealers and collectors of 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 collectibles 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 by our customers for our authentication and grading services. To a much lesser extent, we generate revenues from other related services which consist of: (i) the sale of advertising and commissions earned on our websites ; (ii) the sale of printed publications, and advertising in our publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins and 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 primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.

 

Factors That Can Affect Operating Results and our Financial Position

 

Factors T hat C an Affect our Revenue . Our authentication and grading fees accounted for approximately 89% of our total net revenues in the year ended June 30, 2017. The amounts of those fees 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.

 

The amounts of our authentication and grading revenues 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, as vintage or classic collectibles are of significantly higher value they justify a higher average service fee and (iv) the volume and timing of marketing programs for modern coins. Our fees are generally not based on the value of the collectible, except for special coin services sometimes requested by customers, for which we charge supplemental fees that are based on the value of the coin.

 

 

 
27

 

 

In addition, our coin authentication and grading revenues are impacted by the number of modern coin submissions and the related average service fee earned on those submissions, both of which can be volatile and depend on the timing and popularity of modern coin programs released by the United States Mint and by customers or dealers who specialize in sales of such coins. Effective January 1, 2016 and as previously disclosed, the Company implemented more competitive and focused marketing programs for our modern coin business, which we believe, contributed to the increase in the submission of modern coins since then. Furthermore, we achieved a significant increase in overseas coin authentication and grading revenues, mainly in China, in fiscal 2017, primarily attributable to the previously announced multi-year services agreement with a customer that markets collectible coins to the banking channels in China. The levels of future revenues that we will generate from this contract are dependent upon the success of our customer’s coin marketing programs, which could lead to volatility in the level of world coin revenues we are able to generate on a quarterly and annual basis.

 

Our revenues are also affected by the volume 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 should they 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.

 

Furthermore, our overseas revenues can fluctuate due to the number of authentication and vintage grading events we conduct at our overseas operations on a quarterly basis.

 

Five of our customers accounted, in the aggregate, for approximately 18% of our total net revenues in the year ended June 30, 2017. 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 table provides information regarding the respective numbers of coins, trading cards and autographs that we authenticated or graded in the fiscal years ended June 30, 2017, 2016, and 2015:

 

   

Units Processed

 
   

2017

   

2016

   

2015

 

Coins

    3,081,400       64 %     2,371,800       58 %     2,067,300       55 %

Trading cards

    1,457,900       30 %     1,278,900       31 %     1,269,800       34 %

Autographs

    297,800       6 %     448,000       11 %     434,900       11 %

Total

    4,837,100       100 %     4,098,700       100 %     3,772,000       100 %

 

The following table sets forth the estimated values at which our customers insured the coins, trading cards, and autographs that they submitted to us for grading or authentication:

 

   

Declared Values (000’s)

 
   

2017

   

2016

   

2015

 

Coins

  $ 2,074,400       89 %   $ 1,935,400       91 %   $ 2,093,900       93 %

Trading cards

    224,400       10 %     177,800       8 %     109,800       5 %

Autographs

    22,400       1 %     25,700       1 %     35,800       2 %

Total

  $ 2,321,200       100 %   $ 2,138,900       100 %   $ 2,239,500       100 %

 


 

Factors Affecting our Gross Profit Margins . The gross profit margins we earn on collectibles authentication and grading submissions are impacted by many of the same factors that impact our revenues, as the average service fee and the resulting gross profit margin earned is affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (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 level of other related services in any reporting period. In addition, because a significant proportion of our costs of sales are fixed in nature in the short-term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.

 

 

 
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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 economy 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; as well 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 in 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 collectible back to them. As a result, historically, we have been able to rely on internally generated cash to fund our continuing operations.

 

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, the Company’s decisions to invest in, the need to fund the acquisition of established and/or early stage businesses and any capital raising activities, stock repurchases or by the Company’s tax position.

 

As discussed in note 1 to the consolidated financial statements included elsewhere in this Annual Report, and in “Liquidity and Capital Resources— Future Sources of Cash ” below, in January 2017 the Company obtained a $10 million three year unsecured revolving credit line from a commercial bank. We currently expect that internally generated cash flows, current cash and cash equivalent balances and available borrowings will be sufficient to fund our continuing operations at least through the end of fiscal 2018.

 

Trends in our Businesses

 

Our overall financial performance is largely dependent on the performance of our coin authentication and grading business which can be impacted by volatility in that business. In fiscal years 2017, 2016 and 2015, revenues from coin authentication and grading and related services represented 68%, 66%, and 68%, respectively, of our total consolidated revenues. Our quarterly results can be significantly impacted by the timing of revenues from modern coin programs that are dependent on new issuances of coins from the US Mint and the level of submissions from a China customer, who serves the banking channel in China. In addition, the recent expansion into overseas markets and the increase in revenues generated in China in fiscal 2017 led to increased dependence on our coin business in fiscal 2017, making our financial performance more vulnerable to volatility in the coin markets. See “Results of Operations: Net Revenues” below.

 

 

 
29

 

 

Overview of Fiscal 2017 Operating Results

 

The following table sets forth comparative financial data for the years ended June 30, 2017 and 2016:

 

   

Year Ended June 30, 2017

   

Year Ended June 30, 2016

 
   


Amount

   

Percent of

Revenues

   


Amount

   

Percent of
Revenues

 
                                 

Net revenues

  $ 70,158       100.0 %   $ 60,954       100.0 %

Cost of revenues

    26,847       38.3 %     22,902       37.6 %

Gross profit

    43,311       61.7 %     38,052       62.4 %

Selling and marketing expenses

    9,333       13.3 %     8,635       14.2 %

General and administrative expenses

    20,754       29.6 %     17,047       27.9 %

Operating income

    13,224       18.8 %     12,370       20.3 %

Interest income, net

    (1 )     -       22       -  

Other expense

    11       0.1 %     (73 )     (0.1 )%

Income before provision for income taxes

    13,234       18.9 %     12,319       20.2 %

Provision for income taxes

    4,718       6.8 %     4,720       7.7 %

Income from continuing operations

    8,516       12.1 %     7,599       12.5 %

Income from discontinued operations

    (7 )     -       41       -  

Net income

  $ 8,509       12.1 %   $ 7,640       12.5 %

Net income per diluted share:

                               

Income from continuing operations

  $ 0.99             $ 0.89          

Income from discontinued operations

    -               -          

Net income

  $ 0.99             $ 0.89          

 

Grading authentication and related service revenues increased by $9.2 million or 15% to a record of $70.2 million in fiscal 2017, as compared to $61.0 million in fiscal 2016. The increase in services revenues was attributable to (i) a $7.3 million or 18% increase in coin service revenues and (ii) a $2.0 million or 13% increase in card and autograph revenues in fiscal 2017 as compared to fiscal 2016. See Net Revenues below.

 

Due primarily to the revenue increase, operating income increased to a record $13.2 million in fiscal 2017, as compared to $12.4 million in fiscal 2016. In fiscal 2017, non-cash stock-based compensation was $4.0 million as compared to $0.6 million in fiscal 2016 and that increase was primarily due to the Company’s achievement of the remaining performance goals under the Company’s Long –Term Incentive Plan in fiscal 2017. See Stock-Based Compensation: Fiscal 2013 Long-Term Performance Base Equity Incentive Plan , below.

 

These, as well as other factors affecting our operating results are described in more detail below. See “Factors that Can Affect our Operating Results and Financial Position” and “Results of Operations”, below.

 

Critical Accounting Policies and Estimates

 

General. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record our assets at the lower of cost, net realizable value or fair value. In determining the fair value of certain of our assets, principally accounts receivable, inventories, goodwill, capitalized software and intangible assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or trends that could impact, e.g., our ability to fully collect our accounts receivable or realize the value of our inventories in future periods. Those judgments, estimates, and assumptions are based on current information available to us at that time. Many of these conditions, trends and circumstances on which our judgments or estimates are based; however, are outside of our control and, if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates. Changes in such estimates may require that we reduce the carrying values of the affected assets on our balance sheet (which are commonly referred to as “write-downs” of the assets involved).

 

It is our practice to establish reserves, allowances, charges or losses to record such downward adjustments or write-downs in the carrying value of assets, such as, for example, accounts receivable and inventory. Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the period when those reserves, allowances, charges or losses are established or increased to take account of changed conditions or events. As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations.

 

 

 
30

 

 

The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments and judgments about the effects and duration of events or changes in circumstances. For example, it is difficult to predict whether events or conditions, such as increases in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for their full effects to be recognized. Therefore, management makes such estimates based upon the information available at that time and reevaluates and adjusts the Company’s reserves, allowances, charges or losses for potential write-downs on a quarterly basis.

 

In addition, we also make estimates with respect to the (i) valuation of stock-based compensation awards and the timing and recognition of related stock-based compensation expense and in particular, the timing and recognition of stock-based compensation expense associated with the Company’s Long-Term Incentive Plan, (ii) the amount and adequacy of warranty reserves, (iii) the provision for income taxes and related valuation allowances, (iv) the carrying value of capitalized software costs (v) the valuation of coin and grading consumable inventory, and (vi) the impairment of goodwill and other intangible assets.

 

In making our estimates and assumptions, we follow GAAP in order to make fair and consistent estimates of the fair value of assets and to establish adequate reserves, allowances, charges or losses for possible write-downs in the carrying values of our assets.

 

Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.

 

Revenue Recognition Policies . We generally record revenue at the time of shipment of the authenticated and graded collectible to the customer, net of any taxes collected. Due to the normal insignificant delay between the completion of our grading and authentication services and the shipment of the collectible or other high-value asset back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sales of special 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 our customers. 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.

 

A portion of our net revenues is comprised of subscription fees paid by customers for memberships in our Collectors Club. Those memberships entitle members access to our on-line and printed publications and, in some cases, include vouchers for free grading services. The balance of the membership fee is recognized over the life of the membership. We recognize revenue attributable to grading vouchers on a specific basis through expiration and classify such revenues as part of grading and authentication fees.

 

In the case of our Expos trade show business, we recognize revenue generated by the promotion, management and operation of each of its collectibles conventions or trade shows in the fiscal period in which the convention or show takes place.

 

We recognize Certified Coin Exchange’s subscription revenues ratably over the relevant subscription period. Advertising revenues are recognized in the period when the advertisement is displayed in our publications or websites. Click-through commissions earned through our website from third party affiliate programs are recognized in the period that the commissions relate to.

 

We also recognize the revenue from the sales of coins when they are shipped to the customer. Such sales consist primarily of collectible coins that we have purchased pursuant to our coin authentication and grading warranty program and those sales are not the focus, and are not considered to be an integral part, of our ongoing revenue generating activities.

 

 

 
31

 

 

Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an ongoing basis. We regularly review our accounts receivable and exercise judgment in estimating the amounts of, and establish an allowance for, uncollectible accounts in each quarterly period. The amount of that allowance is based on several factors, including the age and extent of significant past due accounts and known conditions or trends that may affect the ability of account debtors to pay their accounts receivable balances. Each quarter we review our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of our specific account debtors to pay their accounts in full. Since the allowance is increased by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause an increase in such expenses. At June 30, 2017 and 2016, the allowance for doubtful accounts was $77,000, and $35,000, respectively.

 

Inventory Valuation Reserves. Our collectibles inventories, which consist of collectible coins that we have purchased pursuant to our coin warranty program and other consumable inventory related to our authentication and grading activities, are valued at the lower of cost or estimated fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories below their carrying values. The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sales value of the collectibles inventories. Additionally, due to the relative uniqueness and special features of some of the collectible coins included in our collectibles inventory and the volatility in the prices of precious metals, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products. As a result, we review the estimated market values of the collectibles in our inventory on a quarterly basis and make adjustments to the valuation reserve that we believe are necessary or prudent based on our judgments regarding these matters. In the event that a collectible is sold for a price below its carrying value, we record a charge to cost of services. In addition, we review our other consumable inventory on a regular basis for recoverability and, if considered necessary, establish reserves for those items that have no future value to us. At June 30, 2017 and 2016, inventories were $3,699,000 and $2,574,000, respectively, and inventory reserves were $977,000 and $739,000, respectively. See Note 4 to the Consolidated Financial Statements. If we liquidate collectible coins at amounts below their carrying values, we may incur losses in excess of our recorded inventory reserves.

 

Grading Warranty Costs . We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if such a 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 re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible for a price equal to the value of collectible at its original grade, or, at the customer’s option, pay the difference between the value of the collectible at its original grade as compared with the value at 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 the item or if we otherwise determine that the collectible had been altered after we had authenticated and graded it. If we purchase an item under a warranty claim, we recognize the difference in the value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve. We include the purchased item in our inventory at the estimated value of the re-graded collectible, which will be lower than the price we paid to purchase the item. We accrue for estimated warranty costs based on historical trends and related experience, and we monitor the adequacy of our warranty reserve on an ongoing basis. There also are a number of factors that can cause the estimated values of the collectibles purchased under our warranty program to change over time and, as a result, we review the market values of those collectibles on a quarterly basis (see Inventory Valuation Reserves above). However, once we have classified such items as inventory and they have been held in inventory beyond the end of the fiscal quarter in which we purchased them, we classify any further losses in the estimated fair value of the items or the subsequent disposal of such items, as part of the gain or loss on product sales on a quarterly basis.

 

 

 
32

 

 

In the third quarter fiscal 2016, the Company performed a detailed analysis of our coin warranty payments and related reserve requirements using improved operational systems, which enabled us to better match warranty payments to the periods in which the coins were originally authenticated and graded by us. We concluded that, although there is no time limitation on our warranty obligation, the majority of our warranty claims arise within five years following the authentication and grading of the coin by us. Therefore, we deemed it appropriate to reduce our warranty reserve to $869,000 at March 31, 2016, which reduced the warranty expense recognized in the nine months ended March 31, 2016 by $656,000 as compared to the nine months ended March 31, 2015. As of April 1, 2016 we began to accrue warranty costs, at a rate per coin that reflects the nature of the coin (i.e. vintage or modern). In the fourth quarter of fiscal 2017, we reviewed the adequacy of our warranty reserve, based on the updated trend in warranty payments over the five years ended June 30, 2017 and changes in the mix of coins authenticated and graded since March 31, 2016. This review resulted in a reduction in our warranty expense of $405,000 in the fourth quarter of fiscal 2017. See Note 7 to the consolidated financial statements for activity in our warranty reserve. Net warranty expense recognized was $302,000, ($145,000) and $535,000 in fiscal 2017, 2016 and 2015, respectively. Our warranty reserve was $834,000 and $892,000 at June 30, 2017 and 2016, respectively.

 

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, we consider qualitative factors, and where determined necessary, 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 to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.

 

During the first quarter of fiscal 2017, ended September 30, 2016, we completed the annual impairment evaluations with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair values over carrying values in prior years, and any material changes in the estimated cash flows of those reporting units, and determined that it was more likely than not that the respective fair values of CCE and CoinFacts exceeded their respective carrying values, including goodwill, and therefore, as a result, it was not necessary to proceed to the two-step impairment test.

 

We completed our annual goodwill impairment evaluation with respect to Expos at June 30, 2017 and concluded that no impairment had occurred.

 

Long-Lived Assets Other Than Goodwill . We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment. Such reviews occur annually, or more frequently, if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full. In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred. If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write-down the asset to its estimated fair value.

 

Stock-Based Compensation.     Stock-based compensation expense is measured at the grant date fair value of the equity award, and is recognized as expense over the employee’s 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, 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 a determination that a performance condition has become probable, and it is subsequently determined that the performance condition was not met in the expected vesting period, then if the shares may still vest in future periods, management will extend the period over which the remaining expense would be recognized. If the shares fail to vest, or managements concludes that it is not probable the shares will vest, then all expense previously recognized with respect to that performance condition would be reversed.

 

 
33

 

 

Restricted Shares

 

Annual Non-Employee Director Grants. In each of fiscal years 2017, 2016, and 2015, each of our six outside directors was granted restricted service-based stock with grant date fair values of $45,000, $45,000, and $40,000, respectively for a total fair value of $270,000 in each of fiscal 2017 and 2016 and $240,000 in fiscal 2015.

 

Other Service- B ased A wards. In fiscal 2017 and 2015 the Company granted 10,000 and 4,000 service-based restricted shares respectively, with grant date fair values of $209,000 and $86,000, respectively, and with vesting periods ranging from three to four years. Stock based compensation expense for those shares is being recognized over their respective vesting periods.

 

Fiscal 2013 Long-Term Performance-Based Equity Incentive Program . As previously disclosed, 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 other key management employees (collectively, “Participants”). As of June 30, 2014 there were 523,378 restricted shares outstanding under the LTIP, (including 200,000 shares for Mr. Deuster and 75,000 for Mr. Wallace), with a total grant date fair value of approximately $6,700,000.

 

The vesting of the restricted shares is conditioned on the Company’s achievement of increasing annual operating income before stock-based compensation (“OI”) levels during any fiscal year within a six-year period 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 a determination that a performance goal or goals have been achieved for a fiscal year, 50% of the shares related to achieving that performance goal or goals vest immediately and the remaining 50% vest on June 30 of the following fiscal year, provided that the Participant is still in the service of the Company.

 

Based on the level of OI achieved in fiscal 2014, a determination was made that the Company had achieved the Threshold Performance Goal and the Intermediate Performance Goal #1 and therefore in accordance with the terms of the LTIP, 25% of the LTIP shares were fully vested at June 30, 2015.

 

In November 2014, an additional 18,957 performance-based restricted shares with similar terms as the other LTIP shares and a grant date fair value of $400,000 were issued to a new participant, 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:

 

   

Cumulative

Percent of 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

    45%  

The Maximum Performance Goal is Achieved

    100%  

 

At September 30, 2014, we concluded that it was probable that the Company would achieve Intermediate Performance Goal #2 by June 30, 2015 and therefore the Company began accruing stock-based compensation expense for that performance goal. However, based on the actual OI achieved in fiscal 2015 and fiscal 2016, we did not achieve Intermediate Performance Goal #2 through 2016.

 

 

 
34

 

 

Based on the record level of OI achieved in fiscal 2017, a determination was made that the Company had achieved the Maximum Performance Goal in fiscal 2017 and therefore in accordance with the terms of the LTIP, 50% of the shares attributable to Performance Goals #2, #3, and the Maximum Performance Goal vested at the determination date and the remaining 50% of the shares will vest on June 30, 2018.

 

Through the nine months ended March 31, 2017, it was only considered probable that we would achieve Performance Goal #2 and therefore in the fourth quarter of fiscal 2017, we recognized non-cash stock-based compensation expense related to Performance Goal #3 and the Maximum Performance Goal of $3,576,000, which included a catch-up expense of $3,339,000, representing expense required to be recognized from the service inception dates of the shares attributable to Performance Goal #3 and the Maximum Performance Goal through March 31, 2017. As a result, LTIP related stock-based compensation expense was $3,661,000 in fiscal 2017 as compared to $85,000 in fiscal 2016.

 

The Company recognized total stock-based compensation related to both service-based and performance-based restricted shares of $4,025,000, $596,000, and $2,239,000, in fiscal years ended June 30, 2017, 2016, and 2015, respectively. See Results of Operations: Stock-Based Compensation Expense below for additional information on stock-based compensation expense.

 

Capitalized Software . In fiscal years 2017, 2016, and 2015, we capitalized approximately $1,045,000, $752,000, and $441,000, respectively, of software development costs related to a number of in-house software development projects. GAAP requires that certain software development costs incurred, either from internal or external sources, be capitalized as part of intangible assets and amortized on a straight-line basis over the useful life of the software, which we have estimated at three years. On the other hand, planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software development project are recognized as expense in the periods in which they are incurred. During the fiscal years ended June 30, 2017, 2016, and 2015, we recorded approximately $480,000, $272,000, and $122,000, respectively, as amortization expense related to such capitalized software projects.

 

We evaluate the carrying values of capitalized software to determine whether those values are impaired and, if necessary, we record an impairment charge in the period in which we determine that an impairment has occurred.

 

Income Ta xes, Deferred Tax Assets and Valuation Allowances . We account for income taxes in accordance with GAAP, which requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns or uncertain tax positions. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, GAAP requires that we evaluate the probability of realizing the future income tax benefits comprising that asset based on a number of factors, which include projections of future taxable income and the nature of the tax benefits and the respective expiration dates of tax credits and net operating losses.

 

The Company recognized income tax provisions of approximately $4.7 million, in each of the three years ended June 30, 2015 to 2017.

 

Accru al for L oss es on Discontinued F acility L eases . As a result of the discontinuance of and our exit from the jewelry authentication and grading businesses in fiscal 2009, we ceased the occupancy of facilities we had leased for their operations and established estimated loss accruals for liabilities under those leases. At December 31, 2015 one of the facility obligations, related to our discontinued jewelry business had expired. At June 30, 2017, our remaining obligation in respect of the remaining facility totaled approximately $241,000.

 

 

 
35

 

 

Results of Operations

 

The following table sets forth certain financial data, expressed as a percentage of net revenues, derived from our Consolidated Statements of Operations for the respective periods indicated below:

 

   

Fiscal Year Ended June 30,

 
   

2017

   

2016

   

2015

 

Net revenues

    100.0 %     100.0 %     100.0 %

Cost of revenues

    38.3 %     37.6 %     37.4 %

Gross profit

    61.7 %     62.4 %     62.6 %

Operating expenses:

                       

Selling and marketing expenses

    13.3 %     14.2 %     14.4 %

General & administrative expenses

    29.6 %     27.9 %     28.6 %

Total operating expenses

    42.9 %     42.1 %     43.0 %

Operating income

    18.8 %     20.3 %     19.6 %

Interest and other income, net

    0.1 %     (0.1 )%     -  

Income before provision for income taxes

    18.9 %     20.2 %     19.6 %

Provision for income taxes

    6.8 %     7.7 %     7.6 %

Income from continuing operations

    12.1 %     12.5 %     12.0 %

Income (loss) from discontinued operations

    -       -       -  

Net income

    12.1 %     12.5 %     12.0 %

 

Net Revenues . Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, consisting of coins, trading cards and autographs and 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; subscription/membership revenues related to our CCE (dealer-to-dealer Internet bid-ask market for certified coins), and Collectors Club; and fees generated 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 warranty policy. We do not consider such product sales to be an integral part of our ongoing revenue generating activities.

 

The following tables set forth the total net revenues for the fiscal years ended June 30, 2017, 2016 and 2015 between authentication and grading services revenues, other related services (in the thousands):

 

                                   

2017 vs. 2016

 
   

2017

   

2016

   

Increase (Decrease)

 
   

Amount

   

% of Net

Revenues

   

Amount

   

% of Net
Revenues

   

Amount

   


Percent

 

Authentication and grading fees

  $ 62,260       88.7 %   $ 52,650       86.4 %   $ 9,610       18.3 %

Other related services

    7,898       11.3 %     8,304       13.6 %     (406 )     (4.9% )

Total service revenues

    70,158       100.0 %     60,954       100.0 %     9,204       15.1 %

 

 

                                   

2016 vs. 2015

 
   

2016

   

2015

   

Increase (Decrease)

 
   

Amount

   

% of Net

Revenues

   

Amount

   

% of Net

Revenues

   

Amount

   


Percent

 

Authentication and grading fees

  $ 52,650       86.4 %   $ 53,132       86.1 %   $ (482 )     (0.9% )

Other related services

    8,304       13.6 %     8,552       13.9 %     (248 )     (2.9% )

Total service revenues

    60,954       100.0 %     61,684       100.0 %   $ (730 )     (1.2% )

 

 


 

 

 
36

 

 

The following tables set forth certain information regarding the increases or decreases in net revenues from our larger markets (which are inclusive of revenues from our other related services) and in the number of units authenticated and graded in each of the periods presented below (in the thousands):

 

                                   

2017 vs. 2016

 
   

2017

   

2016

   

Increase (Decrease)

 
           

% of Net

           

% of Net

   

Revenues

   

Units Processed

 
   

Amount

   

Revenues

   

Amount

   

Revenues

   

Amounts

   

Percent

   

Number

   

Percent

 

Coins

  $ 47,544       67.8 %   $ 40,205       66.0 %   $ 7,339       18.3 %     709,600       29.9 %

Cards and Autographs (1)

    17,926       25.5 %     15,911       26.1 %     2,015       12.7 %     28,800       1.7 %

Other (2)

    4,688       6.7 %     4,838       7.9 %     (150 )     (3.1% )     -       -  
    $ 70,158       100.0 %   $ 60,954       100.0 %     9,204       15.1 %     738,400       18.0 %

 

 

                                   

2016 vs. 2015

 
   

2016

   

2015

   

Increase (Decrease)

 
           

% of Net

           

% of Net

   

Revenues

   

Units Processed

 
   

Amount

   

Revenues

   

Amount

   

Revenues

   

Amounts

   

Percent

   

Number

   

Percent

 

Coins

  $ 40,205       66.0 %   $ 42,060       68.2 %   $ (1,855 )     (4.4% )     304,500       14.7 %

Cards and Autographs (1)

    15,911       26.1 %     14,925       24.2 %     986       6.6 %     22,200       1.3 %

Other (2)

    4,838       7.9 %     4,699       7.6 %     139       3.0 %     -       -  
    $ 60,954       100.0 %   $ 61,684       100.0 %   $ (730 )     (1.2 )%     326,700       8.7 %

 

 


 

(1)

Consists of revenues from our PSA trading card authentication and grading business and our PSA/DNA autograph authentication and grading business.

 

 

(2)

Includes the revenues generated by our CCE subscription business, Coinflation.com and the Expos trade show and convention business and sales of product.

 

For the fiscal year 2017, our total service revenues increased by $9,204,000 or 15.1%, to an annual record of $70,158,000 and included record second, third and fourth quarter revenues. The total increase of $9,204,000 was attributable to a $9,610,000, or 18.3%, increase in authentication and grading fees, partially offset by a decrease of $406,000, or 4.9%, in other related services. The increase in authentication and grading fees was attributable to a $7,794,000, or 20.5% increase in coin fees and a $1,816,000, or 12.4%, increase in cards and autograph fees.

 

The increases in coin authentication and grading fees in fiscal 2017 reflected (i) higher world coin fees of $4,407,000 or 72.0%, resulting in record world coin fees, which is inclusive of higher fees generated in China (ii) higher US generated vintage coin fees of $2,198,000 or 17.8% in, resulting in record annual vintage coins revenues (iii) higher US modern fees of $1,499,000 or 12.4%, which included record revenues for modern coins in the third quarter of fiscal 2017, partially offset by lower coin trade show revenues of $310,000 or 4.1%, representing less revenue per show in fiscal 2017 as compared to fiscal 2016.

 

Due to the increase in our coin authentication and grading revenues in fiscal 2017, our coin business represented approximately 68% of total service revenues in that period, as compared to 66% of total service revenues in fiscal 2016, reflecting the continued importance of and our dependence on our coin authentication and grading business to our overall financial performance.

 

As discussed above under “Factors That Can Affect our Revenues and Gross Profit Margin”, and “Impact of Economic Conditions on our Financial Performance”, the level of coin revenues can be volatile.

 

Revenues from our trading cards and autographs business continued to show consistent growth with a revenue increase of 12.7% in fiscal 2017 for that business as compared to fiscal 2016. Moreover, our card and autographs business has achieved quarter-over-quarter revenue growth in 27 of the last 28 quarters.

 

The record revenues generated in fiscal 2017 as discussed above, included record revenues of approximately $6.6 million in China. As previously discussed in our fiscal 2017 quarterly filings, the level of our China revenues will vary depending upon the success of one of our Chinese customer’s coin marketing programs in the banking channels in China. Our expectation is that, over-time we will generate a higher level of revenues in China and reduce our dependence on revenues from any individual customer, however, it is uncertain as to the level of revenues to expect in China on a quarterly or annual basis. With respect to the United States, at this time, we continue to see strong momentum, although it remains uncertain as to the level of revenues we will generate in fiscal 2018.

 

 

 
37

 

 

The reductions in other related services in the fiscal 2017, primarily reflects the previously disclosed decision to eliminate the subscription fees previously charged for access to our CoinFacts website in the second half of fiscal 2016.

 

Fiscal 2016 vs. 2015. In fiscal 2016, our total service revenues were essentially flat, with services revenues of $60,954,000 as compared to $61,684,000 in fiscal 2015.

 

In fiscal 2016, authentication and grading fees decreased by $482,000, or 0.9%, and other related service revenues decreased by $248,000 or 2.9%. The decrease in authentication and grading fees was attributable due to a $1,378,000, or 3.5% decrease in coin fees that were partially offset by an increase of $896,000, or 6.5%, increase in cards and autograph fees.

 

The net decrease in coin authentication and grading fees of $1,378,000 in fiscal 2016 as compared to fiscal 2015 reflected (i) lower modern fees of approximately $3,000,000 or 19.9%, primarily due to the absence of significant revenues from the Baseball Hall of Fame and 50 th Anniversary Kennedy (“HOF”) modern coin programs that benefited fiscal 2015 and (ii) lower vintage coin fees of $328,000 or 2.6% due to the absence of revenues earned in fiscal 2015 from the authentication and grading of a customer’s coin collection that did not recur in fiscal 2016. These decreases were partially offset by increases in (i) coin trade show revenues of $1,170,000 or 18.5%, reflecting higher average service fees earned per coin authenticated and graded at shows and increased coin submissions per show and (ii) world coin revenues of $780,000 or 14.6%, which is inclusive of a $864,000 or 46% increase in coins fees earned from our China operation.

 

Revenues from our trading cards and autographs business increased by 15.1% in the fourth quarter of fiscal 2016, and by 6.6% for the entirety of fiscal 2016 and these increases represented record quarterly and annual revenues for that business.

 

The reduction in other related services in fiscal 2016, primarily reflected the Company’s decision to eliminate, effective January 2016, the subscriptions fees that we had previously charged customers to access our CoinFacts.

 

Gross Profit

 

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

 

Set forth below is information regarding our gross profit and gross profit margins in the fiscal years ended June 30, 2017, 2016 and 2015:

 

   

Fiscal Year Ended June 30,

 
   

2017

   

2016

   

2015

 

Gross profit

  $ 43,311     $ 38,052     $ 38,631  

Gross profit margin

    61.7 %     62.4 %     62.6 %

 

Fiscal 2017 vs. 2016. As indicated in the above table our gross profit margin was 61.7% in fiscal 2017 as compared to 62.4% in fiscal 2016. As discussed under our Critical Policy and Estimates , both fiscal 2017 and 2016 benefited from adjustments to warranty reserves. Excluding the warranty benefits, the gross profit margin would have been about the same in both years. In addition, as discussed in prior reports, there can be variability in the services gross profit margin due to the mix of revenues in any period. During the three years ended June 30, 2017, our quarterly services gross profit varied between 59% and 65%.

 

Fiscal 2016 vs. 2015. As indicated in the above table, our gross profit margin was 62.4% for fiscal 2016, as compared to 62.6% for fiscal 2015. Excluding the warranty benefit, of $658,000 in fiscal 2016 our services gross profit would have been approximately 60.4% for the second half of fiscal 2016, which reflected in the more competitive programs we introduced, effective January 1, 2016, for modern coins.

 

 

 
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Selling and Marketing Expenses

 

Selling and marketing expenses are comprised primarily of advertising and promotions costs, trade-show expenses, customer service personnel costs, business development incentive compensation costs, depreciation and third-party consulting costs.

 

The following table sets forth selling and marketing expenses that we incurred in fiscals 2017, 2016 and 2015 (in thousands):

 

   

Fiscal Year Ended June 30,

 
   

2017

   

2016

   

2015

 

Selling and marketing expenses