Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-Q, Received: 05/03/2017 16:15:18)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarter ended March 31, 2017

   
 

OR

   

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

   
 

For the transition period from _______ to _____

 

Commission file number 1-34240

 

COLLECTORS UNIVERSE, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

33-0846191

(State or other jurisdiction of

(I.E. Employer Identification No.)

Incorporation or organization)

 

 

 

1921 E. Alton Avenue, Santa Ana, California 92705

(address of principal executive offices and zip code)

 

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

 

Not Applicable

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class

 

Outstandizng as of April 30, 2017

Common Stock $.001 Par Value

 

8,920,998

 



 

 
 

 

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31 , 201 7

TABLE OF CONTENTS

PART I

Financial Information

Page

 

Item 1.

Financial Statements (unaudited):

 
       
   

Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016

1

       
   

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2017 and 2016

2

       
   

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016

3

       
   

Notes to Condensed Consolidated Financial Statements

5

       
 

Item 2.

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

14

   

Forward-Looking Statements

14

   

Our Business

14

   

Overview of the Three and Nine Months Ended March 31, 2017 Operating Results

15

   

Factors That Can Affect Our Operating Results and Financial Position

16

   

Critical Accounting Policies and Estimates

18

    Results of Operations for the Three and Nine Months Ended March 31, 2017 as compared to the Three and Nine Months Ended March 31, 2016 19
   

Liquidity and Capital Resources

24

       
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

Item 4.

Controls and Procedures

27

PART II

Other Information

 
 

Item 1A.

Risk Factors

29

 

Item 6.

Exhibits

29

     

SIGNATURES

 

S-1

INDEX TO EXHIBITS

E-1

EXHIBITS

 

Exhibit 31.1

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

     
 

Exhibit 31.2

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

     
 

Exhibit 32.1

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

     
 

Exhibit 32.2

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

     
 

Exhibit 101.INS

XBRL Instance Document

     
 

Exhibit 101.SCH

XBRL Taxonomy Extension Schema Document

     
 

Exhibit 101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

     
 

Exhibit 101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

     
 

Exhibit 101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

     
 

Exhibit 101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 
(i)

 

 

PART 1 –  FINANCIAL INFORMATION

Item 1.     Financial Statements

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share data)

(Unaudited)  

 

 

 

March 31,

2017

   

June 30,

2016

 
ASSETS                

Current assets:

               

Cash and cash equivalents

  $ 10,836     $ 11,967  

Accounts receivable, net of allowance of $64 and $35 at March 31, 2017 and June 30, 2016, respectively

    3,887       3,883  

Inventories, net

    2,853       1,835  

Prepaid expenses and other current assets

    1,597       1,273  

Total current assets

    19,173       18,958  
                 

Property and equipment, net

    2,953       2,839  

Goodwill

    2,083       2,083  

Intangible assets, net

    2,009       1,762  

Deferred income tax assets

    2,229       2,229  

Other assets

    412       240  

Non-current assets of discontinued operations

    79       79  

Total assets

  $ 28,938     $ 28,190  

LIABILITIES AND STOCKHOLDERS’ E QUITY

               

Current liabilities:

               

Accounts payable

  $ 3,047     $ 2,728  

Accrued liabilities

    2,326       2,491  

Accrued compensation and benefits

    3,817       3,414  

Income taxes payable

    2,034       782  

Deferred revenue

    3,008       2,563  

Current liabilities of discontinued operations

    522       619  

Total current liabilities

    14,754       12,597  
                 

Deferred rent

    308       381  

Non-current liabilities of discontinued operations

    -       217  
                 

Commitments and contingencies (Note 10)

               
                 

Stockholders’ equity:

               

Preferred stock, $.001 par value; 3,000 shares authorized; no shares issued or outstanding

    -       -  

Common stock, $.001 par value; 20,000 shares authorized; 8,921 and 8,898 issued and outstanding at March 31, 2017 and June 30, 2016, respectively.

    9       9  

Additional paid-in capital

    80,972       80,642  

Accumulated deficit

    (67,105 )     (65,656 )

Total stockholders’ equity

    13,876       14,995  

Total liabilities and stockholders’ equity

  $ 28,938     $ 28,190  

 

See accompanying notes to condensed consolidated financial statements.

 

 
1

 

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except per share data)

(Unaudited)

 

 

   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 
   

2017

   

2016

   

2017

   

2016

 

Net revenues

  $ 18,596     $ 17,329     $ 52,206     $ 44,583  

Cost of revenues

    7,365       6,288       19,979       16,444  

Gross profit

    11,231       11,041       32,227       28,139  

Operating expenses:

                               

Selling and marketing expenses

    2,210       2,132       6,959       6,341  

General and administrative expenses

    4,312       4,504       13,274       12,508  

Total operating expenses

    6,522       6,636       20,233       18,849  

Operating income

    4,709       4,405       11,994       9,290  

Interest income and other expense, net

    13       3       (59 )     (39 )

Income before provision for income taxes

    4,722       4,408       11,935       9,251  

Provision for income taxes

    1,765       1,695       4,467       3,600  

Income from continuing operations

    2,957       2,713       7,468       5,651  

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

    6       65       (3 )     47  

Net income

  $ 2,963     $ 2,778     $ 7,465     $ 5,698  
                                 

Net income per basic share:

                               

Income from continuing operations

  $ 0.35     $ 0.32     $ 0.88     $ 0.67  

Income from discontinued operations

    -       0.01       -       -  

Net income per basic share

  $ 0.35     $ 0.33     $ 0.88     $ 0.67  
                                 

Net income per diluted share:

                               

Income from continuing operations

  $ 0.35     $ 0.32     $ 0.87     $ 0.66  

Income from discontinued operations

    -       -       -       0.01  
                                 

Net income per diluted share

  $ 0.35     $ 0.32     $ 0.87     $ 0.67  
                                 

Weighted average shares outstanding:

                               

Basic

    8,482       8,447       8,478       8,441  

Diluted

    8,569       8,549       8,569       8,544  

Dividends declared per common share

  $ 0.35     $ 0.35     $ 1.05     $ 1.05  

 

See accompanying notes to condensed consolidated financial statements.

 

 
2

 

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

   

Nine Months Ended

March 31,

 
   

2017

   

201 6

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 7,465     $ 5,698  

Discontinued operations

    3       (47 )

Income from continuing operations

    7,468       5,651  

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

               

Depreciation and amortization expense

    1,243       1,094  

Stock-based compensation expense

    330       449  

Provision for bad debts

    32       5  

Provision for inventory write-down

    32       46  

Provision for warranty

    506       (293 )

Gain on sale of property and equipment

    5       (2 )

Change in operating assets and liabilities:

               

Accounts receivable

    (36 )     (1,213 )

Inventories

    (1,050 )     (262 )

Prepaid expenses and other

    (323 )     (313 )

Other assets

    (172 )     (31 )

Accounts payable and accrued liabilities

    (286 )     47  

Accrued compensation and benefits

    402       (960 )

Income taxes payable

    1,252       2,020  

Deferred revenue

    445       109  

Deferred rent

    (73 )     (15 )

Net cash provided by operating activities of continuing operations

    9,775       6,332  

Net cash used in operating activities of discontinued businesses

    (379 )     (331 )

Net cash provided by operating activities

    9,396       6,001  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from sale of business

    53       49  

Capital expenditures

    (919 )     (1,113 )

Capitalized software

    (723 )     (615 )

Patents and other intangibles

    (5 )     (4 )

Net cash used in investing activities

    (1,594 )     (1,683 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Dividends paid to common stockholders

    (8,933 )     (8,991 )

Net cash used in financing activities

    (8,933 )     (8,991 )
                 

Net decrease in cash and cash equivalents

    (1,131 )     (4,673 )

Cash and cash equivalents at beginning of period

    11,967       17,254  

Cash and cash equivalents at end of period

  $ 10,836     $ 12,581  

 

See accompanying notes to condensed consolidated financial statements.

 

 
3

 

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands)

(Unaudited)

 

 

   

Nine Months Ended

March 31,

 
   

201 7

   

201 6

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Interest paid during the period

  $ -     $ -  

Income taxes paid during the period

  $ 2,934     $ 1,609  

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

 

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

SUMMARY OF Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Collectors Universe, Inc. and its operating subsidiaries (the “Company”, “we”, “us”, or “our”). At March 31, 2017, our operating subsidiaries were Certified Asset Exchange, Inc. (“CAE”), Collectors Universe (Hong Kong) Limited, Collectors Universe (Shanghai) Limited, and Expos, LLC. (“Expos”), all of which are ultimately 100% owned by Collectors Universe, Inc. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Unaudited Interim Financial Information

 

The accompanying interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with generally accepted accounting principles as in effect in the United States of America (“GAAP”). Operating results for the three and nine months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30, 2017 or for any other interim period during such year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016, as filed with the SEC (our “Fiscal 2016 10-K”). Amounts related to disclosure of June 30, 2016 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and the notes thereto.

 

Reclassification s

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Revenue Recognition Policies  

 

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

 

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

 

 
5

 

 

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

 

Use of Estimates

 

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

 

Goodwill and Other Long-Lived Assets

 

We evaluate the carrying value of goodwill and indefinite-lived intangible assets at least annually, or more frequently if facts and circumstances indicate that impairment may have occurred. Qualitative factors are considered in performing our goodwill impairment assessment, including the significant excess of fair value over carrying value in prior years, and any material changes in the estimated cash flows of the reporting unit. We also evaluate the carrying values of all other tangible and intangible assets for impairment if circumstances arise in which the carrying values of these assets may not be recoverable on the basis of future undiscounted cash flows. We determined that no impairment of goodwill or other long-lived assets existed as of March 31, 2017.

 

Foreign Currency

 

The Company has determined that the U.S. Dollar is the functional currency for its French branch office and its Hong Kong and China subsidiaries. Based on this determination, the Company’s foreign operations are re-measured by reflecting the financial results of such operations as if they had taken place within a U.S. dollar-based economic environment. Fixed assets and other non-monetary assets and liabilities are re-measured from foreign currencies to U.S. dollars at historical exchange rates; whereas cash, accounts receivable and other monetary assets and liabilities are re-measured at current exchange rates. Gains and losses resulting from those re-measurements, which are included in income for the current period, were not material.

 

Stock-Based Compensation

 

We recognize stock-based compensation attributable to service-based equity grants over the service period based on the grant date fair values of the awards. For performance-based equity grants with financial performance goals, we begin recognizing compensation expense based on their respective grant date fair values when it becomes probable that we will achieve the financial performance goals.

 

Restricted Stock Awards  

 

As previously disclosed, in fiscal 2013, the Compensation Committee of the Board of Directors adopted a Long-Term Incentive Plan (“LTIP”) for the Company’s Chief Executive Officer and Chief Financial Officer, as well as for other selected key management employees (collectively, “Participants”) and currently there are approximately 411,000 unvested restricted shares outstanding under the LTIP. At the time of the adoption of the LTIP, the Compensation Committee established a threshold annual financial performance goal, and four increasingly higher financial performance goals and made the vesting of the LTIP shares conditioned on the Company’s achievement of one or more of those financial performance goals during any fiscal year within a six year period ending on June 30, 2018 (the “Performance Period”). Through fiscal 2015, the Company had achieved the threshold and the first of the other financial performance goals, resulting in the vesting of 25% of the restricted shares that had been granted under the LTIP.

 

 
6

 

 

The Company did not achieve any additional financial performance goals in fiscal 2016 and, therefore, no additional restricted shares became vested in fiscal 2016. However, a determination was made that it had become probable the Company would achieve at least the next higher financial performance goal prior to the expiration of the LTIP in fiscal 2018. Therefore, the Company is accruing the remaining stock-based compensation expense for that goal on a prospective basis, through the expected later vesting date.

 

At this time, it is not considered probable that the Company will achieve any of the remaining financial goals under the LTIP in fiscal 2017 or 2018. We will continue to reassess at each reporting date whether it has become probable that any additional performance goals will be achieved. If it becomes probable that any of the remaining financial performance goals will be achieved, the Company would recognize additional stock-based compensation expense based on the expected vesting dates.

 

Stock-based compensation in the three and nine months ended March 31, 2017 was $119,000 and $330,000, respectively, as compared to $159,000 and $449,000, respectively, in the three and nine months ended March 31, 2016.

 

Concentrations

 

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

 

Financial Instruments and Cash Balances. At March 31, 2017 we had cash and cash equivalents totaling approximately $10,836,000, of which approximately $6,566,000 was invested in money market accounts, and the balance of $4,270,000 was in non-interest bearing bank accounts for general day-to-day operations. Cash in overseas bank accounts was approximately $1,818,000 at March 31, 2017 of which $1,414,000 was in China. We will remit excess cash from China in accordance with Chinese exchange control regulations.

 

Substantially all of our cash is deposited at one FDIC insured financial institution. We maintained cash due from banks, inclusive of cash in overseas accounts, in excess of the bank’s FDIC insured deposit limits of approximately $8,357,000 at March 31, 2017.

 

New Credit Line . On January 10, 2017 the Company obtained a three-year, $10 million unsecured revolving credit line (the “Credit Line”) from a commercial bank. The Company is entitled to obtain borrowings under the Credit Line at such times and in such amounts as it may request, provided that the maximum principal amount of the borrowings that may be outstanding at any one time under the Credit Line may not exceed $10 million and each year there must be a period of 30 consecutive days during which no borrowings are outstanding. The Company also may, at any time or from time to time and at its option, repay outstanding borrowings, in whole or in part, and may reborrow amounts so repaid at such times and in such amounts as it deems appropriate.

 

Credit Line borrowings will bear interest, at the Company’s option, at LIBOR plus 2.25% or at 0.25% below the highest prime lending rate published from time to time by the Wall Street Journal. The Company will be required to pay a quarterly unused commitment fee of 0.0625% of the amount by which (if any) that the average of the borrowings outstanding under the Credit Line in any calendar quarter is less than $4 million. The loan agreement contains a financial covenant that requires the Company to maintain a funded debt coverage ratio and certain other covenants typical for this type of credit line. There were no borrowings under the line of credit at March 31, 2017.

 

Accounts Receivable.  A substantial portion of accounts receivable are due from collectibles dealers. One individual customer’s accounts receivable balance exceeded 10% of the Company’s total gross accounts receivable balances at March 31, 2017 whereas there were no customer accounts receivable balances that exceeded 10% at June 30, 2016. We perform an analysis of the expected collectability of accounts receivable based on several factors, including the age and extent of significant past due accounts and economic conditions or trends that may adversely affect the ability of debtors to pay their account receivable balances. Based on that review, we establish an allowance for doubtful accounts, when deemed necessary. The allowance for doubtful accounts receivable was $64,000 and $35,000 at March 31, 2017 and June 30, 2016, respectively. Ultimately, we will write-off accounts receivable balances when it is determined that there is no possibility of collection.

 

 
7

 

 

Coin Revenues . The authentication, grading and sales of collectible coins, related services and coin product sales accounted for approximately 69% of our net revenues for nine months ended March 31, 2017, as compared to 66% of our net revenues for the nine months ended March 31, 2016.

 

Customers. Five of our customers, in the aggregate accounted for approximately 20% and 14% of our net revenues in the nine months ended March 31, 2017 and 2016, respectively.

 

Inventories

 

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

 

Capitalized Software

 

We capitalize certain costs incurred in the development and upgrading of our software, either from internal or external sources, as part of intangible assets and we amortize these costs on a straight-line basis over the estimated useful life of the software of three years. In the three and nine months ended March 31, 2017 we capitalized approximately $352,000 and $723,000, respectively, of software development costs as compared to $245,000 and $615,000 in the three and nine months ended March 31, 2016, respectively. In the three and nine months ended March 31, 2017, we recorded approximately $122,000 and $342,000, respectively, as amortization expense for capitalized software as compared to $64,000 and $168,000, respectively, in the three and nine months ended March 31, 2016. Planning, training, support and maintenance costs incurred either prior to or following the implementation phase of software development projects are recognized as expense in the period in which they occur. We evaluate the carrying value of capitalized software for possible impairment, and, if necessary, an impairment loss is recorded in the period in which any impairment is determined to have occurred.

 

Warranty Costs

 

We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if any collectible coin or trading card that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon that re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible or, in the alternative, at the customer’s option, pay the difference in value of the item at its original grade, as compared with its lower grade. However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded it. We accrue for estimated warranty costs based on historical trends and related experience. We monitor the adequacy of our warranty reserves on an ongoing basis for significant claims resulting from resubmissions receiving lower grades, or deemed not to be authentic. In the third quarter fiscal 2016, the Company performed a detailed analysis of our coin warranty payments and related reserve requirements and deemed it appropriate to reduce our warranty reserve to $869,000 at March 31, 2016, which reduced the warranty expense recognized in the three and nine months ended March 31, 2016 by $656,000. (See note 4 below).

 

Dividends

 

In accordance with the Company’s current quarterly dividend policy, we paid quarterly cash dividends of $0.35 per share of common stock in the third quarter of fiscal 2017. The declaration of cash dividends in the future is subject to final determination each quarter by the Board of Directors based on a number of factors, including the Company’s financial performance and its available cash resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company.

 

 
8

 

 

Recent Accounting Pronouncements

 

In May 2014, FASB issued ASU 2014-09, on Revenue from Contracts with Customers. The updated guidance modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. In July 2015, the FASB approved a one year deferral of the effective date. Accordingly, the update is effective for us in the first quarter of fiscal 2019 with retrospective application to prior periods presented or as a cumulative effect adjustment in the period of adoption. Early adoption is permitted in the first quarter of 2018. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." This new guidance provides additional implementation guidance on how an entity should identify the unit of accounting for the principal versus agent evaluations. In May 2016, the FASB issued 2016 ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients." This new ASU provides more specific guidance on certain aspects of Topic 606. We are currently evaluating the impact these updates will have on our consolidated financial statements.

 

In February 2016, FASB issued Accounting Standards Update 2016-02 on Accounting for Leases. The core principle of this guidance is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The adoption of this guidance is expected to have a material effect on the Company’s consolidated financial statement and related disclosures. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods thereafter. Early adoption is permitted.

 

In August 2016, FASB issued Accounting Standards Update No, 2016-15 on Statement of Cash Flows-Classification of Certain Cash Receipts and Cash Payments. The updated guidance addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements and related disclosures. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods thereafter.

 

In January 2017, FASB issued 2017-04, on Simplifying the Test for Goodwill Impairment. The updated guidance eliminated step 2 from the goodwill impairment test.   Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for fiscal years beginning after December 9, 2019.

 

 
9

 

 

2.

INVENTORIES

 

Inventories consist of the following (in thousands):

   

March 31 ,

   

June 30,

 
   

2017

   

201 6

 

Coins

  $ 459     $ 437  

Other collectibles

    446       292  

Grading raw materials consumable inventory

    2,717       1,845  
      3,622       2,574  

Less inventory reserve

    (769 )     (739 )

Inventories, net

  $ 2,853     $ 1,835  

 

The inventory reserve represents a valuation allowance on certain items of our coins, other collectibles and consumable inventories based upon our review of the current market value of such coins and collectibles and the usage of consumables.

 

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

 

 

3.

PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following (in thousands):

 

   

March 31,

   

June 30,

 
   

2017

   

2016

 

Coins grading reference sets

  $ 263     $ 263  

Computer hardware and equipment

    2,875       2,777  

Computer software

    1,224       1,202  

Equipment

    5,798       5,134  

Furniture and office equipment

    1,145       1,116  

Leasehold improvements

    1,244       1,138  

Trading card reference library

    52       52  
      12,601       11,682  

Less accumulated depreciation and amortization

    (9,648 )     (8,843 )

Property and equipment, net

  $ 2,953     $ 2,839  

 

 

4.

ACCRUED LIABILITIES

 

Accrued liabilities consist of the following (in thousands):

 

   

March 31 ,

   

June 30,

 
   

2017

   

201 6

 

Warranty reserves

  $ 1,130     $ 892  

Professional fees

    348       484  

Other

    848       1,115  
    $ 2,326     $ 2,491  

 

 
10

 

 

 

The following table presents the changes in the Company’s warranty reserve during the nine months ended March 31, 2017 and 2016 (in thousands):

 

   

Nine Months Ended

March 31 ,

 
   

2017

   

2016

 

Warranty reserve beginning of period

  $ 892     $ 1,492  

Provision charged to cost of revenues

    506       363  

Change in Estimate

    -       (656 )

Payments

    (268 )     (330 )

Warranty reserve, end of period

  $ 1,130     $ 869  

 

5.

DISCONTINUED OPERATIONS

 

During fiscal 2009, the Board of Directors authorized the divesture and sale of the Company’s jewelry and currency grading businesses, the remaining assets and liabilities of which have been reclassified as assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016.

 

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

 

The remaining lease obligation in connection with the fiscal 2009 disposal of our jewelry businesses was $359,000 at March 31, 2017, all of which was classified as a current liability in the accompanying condensed consolidated balance sheet at March 31, 2017.

 

6.

INCOME TAXES

 

In the nine months ended March 31, 2017 and 2016, we recognized provisions for income taxes based upon estimated annual effective tax rates of approximately 37% and 39% respectively. The lower estimated annual effective rate in the nine months ended March 31, 2017, reflects the release of valuation allowances for prior year losses in China, due to the expectation that all prior year losses in China will be utilized in fiscal 2017 which reduced this year’s rate by approximately 2%. In addition, our annual effective tax rates assume the repatriation of foreign earnings.

 

7.

NET INCOME PER SHARE

 

The following table presents the changes in the Company’s weighted average shares outstanding for the three and nine months ended March 31, 2017 and 2016 (in thousands):

 

   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 
   

2017

   

20 16

   

2017

   

2016

 

Weighted average shares outstanding: Basic

    8,482       8,447       8,478       8,441  

Dilutive effect of restricted shares

    87       102       91       103  

Weighted average shares outstanding: Diluted

    8,569       8,549       8,569       8,544  


     A total of 10,000 and 5,000 unvested restricted shares of common stock were excluded from the computation of diluted income per share, in the three and nine months ended March 31, 2017, respectively, as compared to 24,000 anti-dilutive unvested restricted shares that were excluded from the computation, in the three months ended March 31, 2016.

 

 
11

 

 

In addition, approximately 254,000 and 260,000 of unvested performance-based restricted shares of common stock were excluded from the computation of diluted earnings per share in the three and nine months ended March 31, 2017, respectively, as compared to 279,000 and 264,000 of unvested performance based shares in the three and nine months ended March 31, 2016, respectively, because we had not achieved the related performance goals required for those shares to vest.

 

8.

BUSINESS SEGMENTS

 

Operating segments are defined as the components or “segments” of an enterprise for which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker, or decision-making group, in deciding how to allocate resources to and in assessing performance of those components or “segments”. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s operating segments are organized based on the respective services that they offer to customers. Similar operating segments have been aggregated to reportable operating segments based on having similar services, types of customers, and other criteria.

 

For our continuing operations, we operate principally in three reportable service segments: coins, trading cards and autographs and other collectibles. Services provided by these segments include authentication, grading, publications, advertising and commissions earned, subscription-based revenues and product sales. The other collectibles segment is comprised of CCE, Coinflation.com, Collectors.com and our collectibles trade show business.

 

We allocate certain operating expenses to each service segment based upon each segment’s estimated expense usage. The following tables set forth on a segment basis, including a reconciliation with the condensed consolidated financial statements, (i) external revenues, (ii) amortization and depreciation, (iii) stock-based compensation expense, and (iv) operating income for the three months and nine months ended March 31, 2017 and 2016, respectively. Net identifiable assets are provided by business segment as of March 31, 2017 and June 30, 2016, respectively (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31,

   

March 31,

 
   

20 17

   

20 16

   

20 17

   

20 16

 

Net revenues from external customers:

                               

Coins (1)

  $ 12,825     $ 11,992     $ 35,776     $ 29,590  

Trading cards and autographs

    4,427       4,005       12,965       11,576  

Other

    1,344       1,332       3,465       3,417  

Consolidated total revenue

  $ 18,596     $ 17,329     $ 52,206     $ 44,583  

Amortization and depreciation:

                               

Coins

  $ 163     $ 118     $ 461     $ 381  

Trading cards and autographs

    51       57       159       169  

Other

    127       125       398       344  

Total

    341       300       1,018       894  

Unallocated amortization and depreciation

    73       94       225       200  

Consolidated amortization and depreciation

  $ 414     $ 394     $ 1,243     $ 1,094  

Stock-based compensation:

                               

Coins

  $ 28     $ 22     $ 56     $ 67  

Trading cards and autographs

    3       3       8       8  

Other

    2       2       6       5  

Total

    33       27       70       80  

Unallocated stock-based compensation

    86       132       260       369  

Consolidated stock-based compensation

  $ 119     $ 159     $ 330     $ 449  

Operating income:

                               

Coins

  $ 4,481     $ 4,516     $ 12,033     $ 10,117  

Trading cards and autographs

    1,006       906       3,008       2,422  

Other

    388       62       808       57  

Total

    5,875       5,484       15,849       12,596  

Unallocated operating expenses

    (1,166 )     (1,079 )     (3,855 )     (3,306 )

Consolidated operating income

  $ 4,709     $ 4,405     $ 11,994     $ 9,290  

 

(1) Includes service revenues of $1.3 million and $7.0 million generated from outside the United States in the three and nine months ended March 31, 2017, respectively as compared to $1.4 million and $3.4 million in the three and nine months ended March 31, 2016, respectively.

 

 
12

 

 

 

   

March 31,

   

June 30,

 
   

2017

   

201 6

 

Identifiable Assets:

               

Coins (2)

  $ 9,560     $ 7,824  

Trading cards and autographs

    1,291       1,451  

Other

    3,326       3,360  

Total

    14,177       12,635  

Unallocated assets (2)

    14,761       15,555  

Consolidated assets

  $ 28,938     $ 28,190  

Goodwill:

               

Coins

  $ 515     $ 515  

Other

    1,568       1,568  

Consolidated goodwill

  $ 2,083     $ 2,083  

 

(2 ) Includes assets of $4.0 million and $2.9 million outside the United States at March 31, 2017 and June 30, 2016, respectively.

 

9.

RELATED-PARTY TRANSACTIONS

 

During the three and nine months ended March 31, 2017, an adult member of the immediate family of Mr. David Hall, the President of the Company, paid grading and authentication fees to us of $665,000 and $1,611,000, respectively, as compared to $552,000 and $1,557,000 for the three and nine months ended March 31, 2016, respectively. At March 31, 2017, the amount owed to the Company by that person for these services was approximately $150,000, as compared to $92,000 at June 30, 2016.

 

An associate of Richard Kenneth Duncan Sr., who as of July 2015 was the beneficial owner of approximately 5% of our outstanding shares, paid us grading and authentication fees of $354,000 and $760,000 in the three and nine months ended March 31, 2017, respectively, as compared to $378,000 and $944,000, respectively, in the same three and nine months of fiscal 2016. At March 31, 2017, there was no amount owed to the Company for these services, as compared to $101,000 at June 30, 2016.

 

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

 

10.

CONTINGENCIES

 

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

 

11.

SUBSEQUENT EVENTS

 

On April 24, 2017, the Company announced that, in accordance with its dividend policy the Board of Directors had approved a fourth quarter cash dividend of $0.35 per share of common stock which will be paid on May 26, 2017 to stockholders of record on May 17, 2017. 

 

 
13

 

 

ITEM 2.

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

 

Forward-Looking Statements

 

The discussion in this Item 2 of this Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Those Sections of the 1933 Act and 1934 Act provide a “safe harbor” from liability for forward-looking statements in order to encourage companies to provide prospective information about their expected future financial performance so long as they provide cautionary statements identifying important factors that could cause their actual results to differ from projected or anticipated results. Other than statements of historical fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking statements. Forward-looking statements often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." Our actual financial performance in future periods may differ significantly from the currently expected financial performance set forth in the forward-looking statements contained in this Report due to the risks to which our business is subject and other circumstances or occurrences which are not presently predictable and over which we do not have control. Consequently, the forward-looking statements and information contained in this Report are qualified in their entirety by, and readers of this Report are urged to read the risk factors that are described in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (the “Fiscal 2016 10-K”), which we filed with the Securities and Exchange Commission (the “SEC”) on August 30, 2016, and the section, entitled “Factors that Can affect our Results of Operations or Financial Position,” below in this Item 2.

 

Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements that are contained or recent trends that we describe in this Report, which speak only as of the date of this Report, or to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update or revise any forward-looking statements contained in this Report or in our Fiscal 2016 10-K or any of our other prior filings with the SEC, except as may be required by applicable law or applicable NASDAQ rules.

 

Our Business

 

Collectors Universe, Inc. (“we”, “us”, “our”, or the “Company”) provides authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, sports and historical memorabilia. We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the 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 for our authentication and grading services. To a lesser extent, we generate revenues from other related services which consist of: (i) revenues from sales of advertising placed and commissions earned on our websites; (ii) sales of printed publications and collectibles price guides and sales of advertising in our publications; (iii) sales of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) sales of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for coins that have been authenticated and graded (or “certified”) and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.

 

 

 
14

 

 

Overview of Three and Nine Months ended March 31, 2017 Operating Results

 

The following table sets forth comparative financial data for the three and nine months ended March 31, 2017 and 2016 (in thousands):

 

   

Three Months Ended March 31,

   

Nine Months Ended March 31,

 
   

201 7

   

201 6

   

201 7

   

201 6

 
   

Amount

   

% of Net

Revenues

   

Amount

   

% of Net

Revenues

   

Amount

   

% of Net

Revenues

   

Amount

   

% of Net

Revenues

 

Net Revenues:

                                                               

Grading authentication and related services

  $ 18,596       100.0 %   $ 17,329       100.0 %   $ 52,206       100.0 %   $ 44,583       100.0 %

Cost of Revenues:

                                                               

Grading authentication and related services

    7,365       39.6 %     6,288       36.3 %     19,979       38.3 %     16,444       36.9 %
                                                                 

Gross Profit:

    11,231       60.4 %     11,041       63.7 %     32,227       61.7 %     28,139       63.1 %
                                                                 

Selling and marketing expenses

    2,210       11.9 %     2,132       12.3 %     6,959       13.3 %     6,341       14.2 %

General & administrative expenses

    4,312       23.2 %     4,504       26.0 %     13,274       25.4 %     12,508       28.1 %

Operating income

    4,709       25.3 %     4,405       25.4 %     11,994       23.0 %     9,290       20.8 %

Interest and other income, net

    13       0.1 %     3       -       (59 )     (0.1 %)     (39 )     (0.1 %)

Income before provision for income taxes

    4,722       25.4 %     4,408       25.4 %     11,935       22.9 %     9,251       20.7 %

Provision for income taxes

    1,765       9.5 %     1,695       9.7 %     4,467       8.6 %     3,600       8.0 %

Income from continuing operations

    2,957       15.9 %     2,713       15.7 %     7,468       14.3 %     5,651       12.7 %

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

    6       -       65       0.3 %     (3 )     -       47       0.1 %

Net income

  $ 2,963       15.9 %   $ 2,778       16.0 %   $ 7,465       14.3 %   $ 5,698       12.8 %

Net income per diluted share:

                                                               

Income from continuing operations

  $ 0.35             $ 0.32             $ 0.87             $ 0.66          

Loss from discontinued operations

    -               -               -               0.01          

Net income

  $ 0.35             $ 0.32             $ 0.87             $ 0.67          

 

Grading authentication and related service revenues increased $1.3 million or 7% to a quarterly record of $18.6 million and by $7.6 million or 17% to a nine month record of $52.2 million in the three and nine months ended March 31, 2017, respectively, as compared to the same respective periods of the prior year. These increases in services revenues were attributable to (i) coin increases of $0.8 million or 7% in the third quarter and $6.2 million or 21% in the nine months and (ii) card and autograph increases $0.4 million or 11% in the third quarter and $1.4 million or 12% in the nine months. See Net Revenues below.

 

Due primarily to these revenue increases, operating income increased to a quarterly record of $4.7 million and a nine month record of $12.0 million in the three and nine months ended March 31, 2017, respectively, as compared to $4.4 million and $9.3 million in the three and nine months ended March 31, 2016. Operating income in the three and nine months ended March 31, 2016 included the previously disclosed warranty benefit of $0.7 million.

 

These, as well as other factors affecting our operating results in the three and nine months ended March 31, 2017, are described in more detail below. See “Factors that Can Affect our operating Results and Financial Position” and “Results of Operations for the Three and Nine Months Ended March 31, 2017, as compared to the Three and Nine Months Ended March 31, 2016”, below.

 

 
15

 

 

Factors That Can Affect our Operating Results and Financial Position

 

Factors That Can Affect our Revenues and Gross Profit Margins . Authentication and grading fees accounted for approximately 89% of our service revenues in the three and nine months ended March 31, 2017. The amount of those fees and our gross profit margins are primarily driven by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and the other high-value collectibles, that we authenticate and grade.

 

In addition, our coin authentication and grading revenues are impacted by the volume of modern coin submissions, which can be volatile, primarily depending on the timing and size of modern coin marketing programs by the United States Mint and by customers or dealers who specialize in sales of such coins. Furthermore, we have achieved a significant increase in world coin authentication and grading revenues, mainly in China, in the nine months ended March 31, 2017, primarily attributable to the previously announced multi-year 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 basis. Additionally, in our third fiscal quarter the level of revenues generated in China can be impacted by the Chinese New Year holidays that occur in that quarter.

 

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

 

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

 

Our top five customers accounted, in the aggregate, for approximately 19% and 20% of our total revenues in the three and nine months ended March 31, 2017, respectively. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.

 

 
16

 

 

The following tables provide information regarding the respective numbers of coins and trading cards and autographs that we authenticated and graded in the three and nine months ended March 31, 2017 and 2016, and their estimated values, which are the amounts at which those coins and trading cards and autographs were declared for insurance purposes by the dealers and collectors who submitted them to us for authentication and grading:

 

   

Units Processed

Three Months Ended March 31 ,

   

Declared Value (000 s )

Three Months Ended March 31 ,

 
   

201 7

   

20 16

   

201 7

   

20 16

 

Coins

    828,000       65.0 %     815,100       65.1 %   $ 557,419       89.9 %   $ 476,104       88.7 %

Trading cards and autographs (1)

    445,600       35.0 %     437,300       34.9 %     62,361       10.1 %     60,838       11.3 %

Total

    1,273,600       100.0 %     1,252,400       100.0 %   $ 619,780       100.0 %   $ 536,942       100.0 %

 

   

Units Processed

Nine Months Ended March 31,

   

Declared Value (000 s )

Nine Months Ended March 31 ,

 
   

201 7

   

20 16

   

201 7

   

20 16

 

Coins

    2,346,500       64.4 %     1,692,300       57.2 %   $ 1,599,187       89.2 %   $ 1,451,081       91.2 %

Trading cards and autographs (1)

    1,299,900       35.6 %     1,268,300       42.8 %     194,239       10.8 %     140,408       8.8 %

Total

    3,646,400       100.0 %     2,960,600       100.0 %   $ 1,793,426       100.0 %   $ 1,591,489       100.0 %

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

 

Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the 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 and have never incurred borrowings to fund our continuing operations.

 

In addition to the operating performances of our businesses, and in particular our coin authentication and grading business, our overall financial position can also be affected by the dividend policy adopted by the Board of Directors from time to time, the Company’s decisions to invest in and to fund the acquisition of established and/or early stage businesses and any capital raising activities or stock repurchases. In addition, our financial position is impacted by the Company’s tax position. As previously disclosed, the Company has fully utilized all of its federal net operating loss carry forwards and other tax attributes, and therefore we pay federal income taxes at a rate of approximately 35% of taxable income on an annual basis. The Company continues to have net operating losses and other tax credits available for state income tax purposes in California, which should allow us to pay taxes at minimum levels in California for the foreseeable future.

 

 
17

 

 

As discussed in note 1 to the condensed consolidated financial statements included elsewhere in this Quarterly 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 borrowings available under the credit line will be sufficient to fund our continuing operations at least through the end of March 2018.

 

Critical Accounting Policies and Estimates

 

During the nine months ended March 31, 2017 there were no changes in our critical accounting policies or estimates which are described in Item 7 of our Fiscal 2016 10-K. Readers of this report are urged to read that Section of the Fiscal 2016 10-K for a more complete understanding and detailed discussion of our critical accounting policies and estimates.

 

Goodwill

 

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

 

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

 

Stock-Based Compensation

 

We recognize stock-based compensation attributable to service-based equity grants over the service period based on the grant date fair value of the awards. For performance-based equity grants with financial performance goals, we begin recognizing compensation expense based on their respective grant date fair values when it becomes probable that we will achieve one or more of the financial performance goals.

 

Restricted Stock Awards  

 

As previously disclosed, in fiscal 2013, the Compensation Committee of the Board of Directors adopted a Long-Term Incentive Plan (“LTIP”) for the Company’s Chief Executive Officer and Chief Financial Officer, as well as for other selected key management employees (collectively, “Participants”). Currently, there are approximately 411,000 unvested restricted shares outstanding under that LTIP. At the time of the adoption of the LTIP, the Compensation Committee established a threshold annual financial performance goal and four increasingly higher financial performance goals and made the vesting of the LTIP shares conditioned on the Company’s achievement of one or more of those annual financial performance goals prior to the expiration of the LTIP on June 30, 2018. Through fiscal 2015, the Company had achieved the threshold and the first of the other financial performance goals, resulting in the vesting of 25% of the restricted shares that had been granted under the LTIP.

 

The Company did not achieve any additional financial performance goals under the LTIP in fiscal 2016 and, therefore, no additional restricted shares became vested under the LTIP in fiscal 2016. However, a determination was made that it had become probable the Company would achieve at least the next higher financial performance goal prior to the expiration of the LTIP in fiscal 2018. Therefore, we are accruing the remaining stock-based compensation expense for that goal on a prospective basis, through the expected later vesting date.

 

 
18

 

 

At this time, it is not considered probable that the Company will achieve any of the remaining financial performance goals under the LTIP in fiscal 2017 or 2018. However, we will continue to reassess at each reporting date whether it has become probable that any additional performance goals will be achieved. If it does become probable, then the Company would recognize additional stock-based compensation expense in respect of the shares that will become vested, based on the expected vesting dates of those shares. Consistent with prior periods, there would be a catch-up expense required to be recognized for prior services from the grant date of those shares to the date such vesting becomes probable.

 

Stock-based compensation for the three and nine months ended March 31, 2017 was $119,000 and $330,000, respectively, as compared to $159,000 and $449,000 for the three and nine months ended March 31, 2016, respectively. The reductions of $40,000 in the third quarter and $119,000, in the nine months, primarily reflected lower stock-based compensation expense recognized for service grants that became fully vested as of June 30, 2016.

 

Results of Operations for the Three and Nine Months Ended March 31, 2017 as compared to the Three and Nine Months Ended March 31, 2016

 

Net Revenues

 

Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards and autographs, 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 and collectibles price guides; subscription/membership revenues related to our CCE (dealer-to-dealer Internet bid-ask market for certified coins), CoinFacts (through December 31, 2015) and Collectors Club memberships; and fees earned from promoting, managing and operating collectibles trade shows. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we have purchased under our coin authentication and grading warranty policy. We do not consider such product sales to be the focus or an integral part of our ongoing revenue generating activities.

 

 
19

 

 

The following tables set forth the information regarding our net revenues for the three and nine months ended March 31, 2017 and 2016 (in thousands):

 

   

Three Months Ended March 31 ,

 
   

2017

   

2016

   

Increase (Decrease)

 
   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

 

Authentication and grading fees

  $ 16,461       88.5 %   $ 15,167       87.5 %   $ 1,294       8.5 %

Other related services

    2,135       11.5 %     2,162       12.5 %     (27 )     (1.2 )%

Total service revenues

  $ 18,596       100.0 %   $ 17,329       100.0 %   $ 1,267       7.3 %

 

   

Nine Months Ended March 31 ,

 
   

2017

   

2016

   

Increase (Decrease)

 
   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

   


Amount

   

% of Net
Revenues

 

Authentication and grading fees

  $ 46,329       88.7 %   $ 38,445       86.2 %   $ 7,884       20.5 %

Other related services

    5,877       11.3 %     6,138       13.8 %     (261 )     (4.3 )%

Total net revenues

  $ 52,206       100.0 %   $ 44,583       100.0 %   $ 7,623       17.1 %

 

The following tables set forth certain information regarding the increases (decreases) in net revenues in our larger markets (which are inclusive of revenues from our other related services) and in the number of units authenticated and graded in the three and nine months ended March 31, 2017 and 2016 (in thousands):

 

   

Three Months Ended March 31 ,

 
                                   

2017 vs. 2016

 
   

2017

   

2016

   

Increase (Decrease)

 
           

% of Net

           

% of Net

   

Revenues

   

Units Processed

 
   

Amount

   

Revenues

   

Amount

   

Revenues

   

Amounts

   

%

   

Number

   

%

 

Coins

  $ 12,825       69.0 %   $ 11,992       69.2 %   $ 833       6.9 %     12,900       1.6 %

Cards and autographs (1)

    4,427       23.8 %     4,005       23.1 %     422       10.5 %     8,300       1.9 %

Other (2)

    1,344       7.2 %     1,332       7.7 %     12       0.9 %     -       -  
    $ 18,596       100.0 %   $ 17,329       100.0 %   $ 1,267       7.3 %     21,200       1.7 %

 

   

Nine Months Ended March 31 ,

 
                                   

2017 vs. 2016

 
   

2017

   

2016

   

Increase (Decrease)

 
           

% of Net

           

% of Net

   

Revenues

   

Units Processed

 
   

Amount

   

Revenues

   

Amount

   

Revenues

   

Amounts

   

%

   

Number

   

%

 

Coins

  $ 35,776       68.5 %   $ 29,590       66.4 %   $ 6,186       20.9 %     654,200       38.7 %

Cards and autographs (1)

    12,965       24.8 %     11,576       26.0 %     1,389       12.0 %     31,600       2.5 %

Other (2)

    3,465       6.7 %     3,417       7.6 %     48       1.4 %     -       -  
    $ 52,206       100.0 %   $ 44,583       100.0 %   $ 7,623       17.1 %     685,800       23.2 %

 

 

 

(1)

Consists of revenues from our trading card and our autograph authentication and grading businesses.

 

(2)

Includes CCE subscription fees, Coinflation.com revenues and revenues earned from our Expos convention business.

 

For the three months ended March 31, 2017, our total service revenues increased by $1,267,000, or 7.3%, to a quarterly record of $18,596,000. That increase was attributable to a $1,294,000, or 8.5%, increase in authentication and grading fees partially offset by a decrease of $27,000, or 1.2%, in other related services. The increase in authentication and grading fees was attributable to a $940,000, or 8.2%, increase in coin fees and a $354,000, or 9.6%, increase in cards and autograph fees.

 

For the nine months ended March 31, 2017, our total service revenues increased by $7,623,000 or 17.1%, to a nine months record of $52,206,000. That increase was attributable to a $7,884,000, or 20.5%, increase in authentication and grading fees, partially offset by a decrease of $261,000, or 4.3%, in other related services. The increase in authentication and grading fees was attributable to a $6,652,000, or 23.9% increase in coin fees and a $1,232,000, or 11.6%, increase in cards and autograph fees.

 

 
20

 

 

The increases of 8.5% and 20.5% in authentication and grading fees in the three and nine months ended March 31, 2017, respectively, as compared to the increases of 1.7% and 23.2% in the number of units processed in the same respective periods, reflect the mix of units processed and the related average fees earned in those periods.

 

The increases in coin authentication and grading fees in the third quarter and nine months ended March 31, 2017 reflected (i) higher vintage coin fees of $980,000 or 32% in the third quarter and $1,756,000 or 19.2% in the nine months, representing record quarterly revenues for vintage coins in the three and nine month periods (ii) higher modern fees of $510,000 or 10.7% in the third quarter and $1,310,000 or 14.9% in the nine months, representing record revenues for modern coins in the third quarter (iii) lower world coin fees of $162,000 or 9.4% in the third quarter and higher world fees of $3,652,000 or 86.1% in the nine months, representing record world coin fees for the nine months, primarily attributable to higher fees generated in China in this year’s second quarter and (iv) lower coin trade show revenues of $388,000 or 19.9% in the third quarter and $66,000 or 1.2% in the nine months, representing one less trade show in the three and nine months.

 

Due to the increase in our coin authentication and grading revenues in the nine months ended March 31, 2017, our coin business represented approximately 69% of total service revenues in that period, as compared to 66% of total service revenues for the same period of the prior year, reflecting the continued importance of 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. Those revenues increased by 10.5% in the third quarter, and 12.0% in the nine months and represented record third quarter and nine months revenues for that business. Moreover, our card and autographs business has achieved quarter-over-quarter revenue growth in 26 of the last 27 quarters.

 

As previously disclosed, our third fiscal quarter is typically our seasonally strongest quarter of the year, due to the release of Gold and Silver Eagles by the US Mint in that quarter. The record revenues generated in this year’s third quarter as discussed above, follows record revenues generated in this year’s second quarter, which included record quarterly revenues of $3.7 million in China. By contrast, this year’s third quarter China revenues were $0.5 million and were down as compared to the third quarter of fiscal 2016. As discussed in our quarterly filing for the three months ended December 31, 2016, our China revenues are impacted by the success of our customer’s marketing programs in the banking channels in China and, in the third quarter, by the Chinese New Year holidays that occur in that quarter. Our expectation is that, overall, we will generate a higher level of revenues in China in future periods; although, it is uncertain as to the level of revenues to expect on a quarterly 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 the fourth quarter of fiscal 2017.

 

The reductions in other related services in the three and nine months ended March 31, 2017 reflect the previously disclosed decision to eliminate, effective January 2016, the subscription fees previously charged for access to our CoinFacts website.

 

 
21

 

 

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 and occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of generating our non-grading related services revenues and the costs of product revenues, which represent the carrying value of the inventory of products (primarily collectible coins) that we sold and any inventory related reserves, considered necessary.

 

Set forth below is information regarding our gross profit in the three and nine months ended March 31, 2017 and 2016 (in thousands):

 

   

Three Months Ended March 31,

   

Nine Months Ended March 31,

 
   

20 17

   

20 16

   

20 17

   

20 16

 
                                                                 
   

Amount s

   

% of

Revenues

   

Amount s

   

% of

Revenues

   

Amounts

   

% of

Revenues

   

Amounts

   

% of

Revenues

 

Gross profit

  $ 11,231       60.4 %   $ 11,041       63.7 %   $ 32,227       61.7 %   $ 28,139       63.1 %

 

As indicated in the above table, our services gross profit margin was 60.4% and 61.7% for the three and nine months ended March 31, 2017, respectively, as compared to 63.7% and 63.1% in the same periods of fiscal 2016. As previously disclosed, in the three and nine months ended March 31, 2016, our gross profit margin benefited from a reduction of $656,000 in the Company’s warranty reserves. Excluding the warranty benefit, our gross profit percentage would have been 59.9% and 61.6% in the three and nine months ended March 31, 2016. Consistent with the first quarter of fiscal 2017, the gross profit margin in the third quarter was impacted by higher direct cost in China, in anticipation of higher coin volumes in China in future periods. As discussed in prior filings, there can be variability in the services gross profit margin due to the mix of revenue and the seasonality of our business that can impact the level of revenues generated in any given quarter. During the three years ended June 30, 2016, our quarterly services gross profit varied between 59% and 65%.

 

Selling and Marketing Expenses