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CLCT > SEC Filings for CLCT > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for COLLECTORS UNIVERSE INC

Form 10-Q for COLLECTORS UNIVERSE INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The discussion in this Item 2 of this Quarterly Report on Form 10-Q (this "Report") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Those Sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their expected future financial performance so long as they provide cautionary statements identifying important factors that could cause their actual results to differ from projected or anticipated results. Other than statements of historical fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking statements. Forward-looking statements often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." Our actual financial performance in future periods may differ significantly from the currently expected financial performance set forth in the forward-looking statements contained in this Report due to the risks to which our business is subject and other circumstances or occurrences which are not presently predictable and over which we do not have control. Consequently, the forward-looking statements and information contained in this Report are qualified in their entirety by, and readers of this Report are urged to read the risk factors that are described in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (the "Fiscal 2012 10-K"), which we filed with the Securities and Exchange Commission (the "SEC") on August 30, 2012, and the section, entitled "Factors that Can affect our Results of Operations or Financial Position," below in this Item 2.


Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained or recent trends that we describe in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on our historical financial performance. We also disclaim any obligation to update or revise any forward-looking statements contained in this Report or in our Fiscal 2012 10-K or any other prior filings with the SEC, except as may be required by applicable law or applicable Nasdaq rules.

Our Business

Collectors Universe, Inc. ("we", "us" "management" "our" or the "Company") provides authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, sports and historical memorabilia. We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectible they seek to buy or sell; thereby enhancing their marketability and providing increased liquidity to the dealers, collectors and consumers that own, buy and sell such collectibles.

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


Overview of First Quarter Fiscal 2013 Operating Results

The following table sets forth comparative financial data for the three months
ended September 30, 2012 and 2011 (in thousands):

                                                Three Months Ended                Three Months Ended
                                                September 30, 2012                September 30, 2011
                                                            Percent of                        Percent of
                                             Amount          Revenues          Amount          Revenues
Net revenues:
Grading authentication and related
services                                   $    10,680             95.1 %    $    11,901             98.6 %
Product sales                                      550              4.9 %            171              1.4 %
                                                11,230            100.0 %         12,072            100.0 %
Cost of revenues:
Grading authentication and related
services                                   $     4,340             40.6 %    $     4,539             38.1 %
Product sales                                      550            100.0 %            186            108.8 %
                                                 4,890             43.5 %          4,725             39.1 %
Gross profit:
Services                                   $     6,340             59.4 %    $     7,362             61.9 %
Product sales                                        -                -              (15 )           (8.8 )%
                                                 6,340             56.5 %          7,347             60.9 %

Selling and marketing expenses                   1,815             16.2 %          1,650             13.7 %
General and administrative expenses              3,234             28.8 %          3,204             26.5 %
Operating income                                 1,291             11.5 %          2,493             20.7 %
Interest and other income, net                      62              0.5 %             20              0.1 %
Income before provision for income taxes         1,353             12.0 %          2,513             20.8 %
Provision for income taxes                         535              4.7 %          1,019              8.4 %
Income from continuing operations                  818              7.3 %          1,494             12.4 %
Loss from discontinued operations, net
of income taxes                                    (12 )           (0.1 )%           (18 )           (0.2 )%
Net income                                 $       806              7.2 %    $     1,476             12.2 %

Net income per diluted share:
Income from continuing operations          $      0.10                       $      0.19
Loss from discontinued operations                    -                                 -
Net income                                 $      0.10                       $      0.19

Operating income decreased by $1,202,000 or 48% to $1,291,000 in the first quarter ended September 30, 2012 from $2,493,000 in the same period of the prior year. That decrease in operating income resulted primarily from a $1,221,000 or 10% decrease in service revenues to $10,680,000 in the first quarter, which included a $1,498,000 decrease in the revenues from of our coin authentication and grading business (which is our largest operating business). Also, contributing to the decrease in operating income was increased sales and marketing expenses of approximately $165,000 associated with attending a trade show in Hong Kong in the first quarter of fiscal 2013 and CEO transition expenses of approximately $164,000, which are included in general and administrative expenses.

In response to this general market decline, we have reduced our coin authentication and grading costs by approximately $1.1 million on an annual basis, to more closely align our authentication and grading capacity to current market conditions. Moreover, we will continue to closely monitor our cost structure and consider other actions that we may take to improve the profitability of the business.

These, as well as other factors affecting our operating results in the three months ended September 30, 2012, are described in more detail below. See "Factors that Can Affect our Operating Results and Financial Condition" and "Results of Operations for theThree Months Ended September 30, 2012, Compared to the Three Months Ended September 30, 2011, below.


Factors That Can Affect our Operating Results and Financial Position

Factors That Can Affect our Revenues and Gross Profit Margins. Authentication and grading fees accounted for approximately 76% of our total net revenues for the three months ended September 30, 2012. The amount of those fees and our gross profit margins are primarily driven by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our collectibles authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and other high-value collectibles.

In addition, our coin grading and authentication revenues are impacted by the level of modern coin submissions, which can be volatile, primarily depending on the timing and size of modern coin marketing programs by the United States Mint and by customers or dealers who specialize in sales of such coins.

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

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

Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 13% of our total net revenues in the three months ended September 30, 2012. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.

The following tables provide information regarding the respective numbers of coins, trading cards, autographs, and stamps that were authenticated and graded by us in the three months ended September 30, 2012 and 2011, respectively, and their estimated values, which are the amounts at which those coins, trading cards and stamps as declared for insurance purposes by the dealers and collectors who submitted them to us for grading and authentication (in thousands):

                                   Units Processed                                  Declared Value (000s)
                          Three Months Ended September 30,                    Three Months Ended September 30,
                           2012                      2011                      2012                      2011
Coins                343,000        47.3 %     478,800        57.3 %   $ 298,744        89.8 %   $ 336,559        90.7 %
Trading cards
and Autographs
(1)                  382,500        52.7 %     353,500        42.3 %      33,778        10.2 %      32,727         8.8 %
Stamps(2)                  -           -         3,500         0.4 %           -           -         1,891         0.5 %
Total                725,500       100.0 %     835,800       100.0 %   $ 332,522       100.0 %   $ 371,177       100.0 %



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

(2) We sold our stamp authentication and grading business in June 2012.


Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the volume of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by
(i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their ability and willingness to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally viewed as luxury goods and are purchased with disposable income;
(iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, because the threat of increased inflation or concerns about the weakening of the U.S. dollar often lead investors and consumers to purchase gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of hard assets, including gold coins, if they believe that the market prices of hard assets will increase. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressure, or declines 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.

Factors That Can Affect our Financial Position. A substantial number of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. As a result, historically, we have been able to rely on internally generated cash and have never incurred borrowings to fund our continuing operations. We currently expect that internally generated cash flows and current cash and cash equivalent balances will be sufficient to fund our continuing operations at least through the end of fiscal 2013.

In addition to the day-to-day operating performance of our business, our overall financial position can also be affected by the dividend policy adopted by the Board of Directors from time to time, the Company's decisions to invest in and to fund the acquisition of established and/or early stage businesses and any capital raising activities or stock repurchases. In addition, our financial position is impacted by the Company's tax position. Through June 30, 2012, the Company had fully utilized all of its federal net operating losses and other tax attributes, and therefore we will pay federal income taxes at 34% of taxable income on an annual basis in future periods. The Company continues to have net operating losses and other tax credits available for state income tax purposes in California, which should allow us to pay taxes at minimum levels in California for the foreseeable future.

Critical Accounting Policies and Estimates

Except as discussed below, during the three months ended September 30, 2012, there were no changes in our critical accounting policies or estimates which are described in Item 7 of our Annual Report on Form 10-K, filed with the SEC, for the fiscal year ended June 30, 2012. Readers of this report are urged to read that Section of that Annual Report for a more complete understanding and detailed discussion of our critical accounting policies and estimates.

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

During the first quarter ended September 30, 2012, we completed the annual goodwill impairment assessment with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair value over carrying value in prior years, and any material changes in the estimated cash flows of the reporting unit, and determined that it was more likely than not that the fair value of CCE and CoinFacts was greater than the carrying value, including goodwill, and therefore it was not necessary to proceed to the two-step impairment test.


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

Stock-Based Compensation. We recognize share-based compensation attributable to service-based equity grants over the service period based on the grant date fair value. For performance-based equity grants with a financial performance goal, we begin to recognize compensation expense based on the grant date fair value when it becomes probable that we will achieve the financial performance goal. Stock-based compensation in the three months ended September 30, 2012, represents expenses attributable to (i) prior year grants of restricted stock for which compensation is being recognized over the remaining service periods of those grants, (ii) grants of 12,500 shares granted in September 2012 to the Company's Chief Financial Officer, and (iii) $122,000 in connection with accelerated vesting of restricted shares for the Company's former CEO. The fiscal 2013 stock-based awards are service-based, and therefore in the three months ended September 30, 2012, we began recognizing stock-based compensation for those service-based shares.

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

Results of Operations for the Three Months Ended September 30, 2012, Compared to the Three Months Ended September 30, 2011

Net Revenues

Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards and autographs. We also generated fees from the authentication and grading of stamps through June 2012 (when we sold our stamp authentication business). To a lesser extent, we generate collectibles related service revenues (referred to as "other related revenues") from sales of Collectors Club memberships and advertising and commission earned from our websites (including Coinflation.com, which we acquired in September 2011) and in printed publications and collectibles price guides; subscription-based revenues primarily related to our CCE dealer-to-dealer Internet bid-ask market for certified coins and CoinFacts; and fees earned from promoting, managing and operating collectibles conventions. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we purchase under our authentication and grading warranty policy. We do not consider such product sales to be an integral part of our ongoing revenue generating activities.

The following table sets forth the total net revenues for the three months ended September 30, 2012 and 2011 between grading and authentication services revenues, other related services revenues and product sales (in thousands):

                                                                                  2012 vs. 2011
                             2012                        2011                  Increase (Decrease)
                                  % of Net                    % of Net
                     Amount       Revenues       Amount       Revenues        Amount          Percent
Grading and
authentication
fees                $  8,556           76.2 %   $  9,946           82.4 %   $    (1,390 )        (14.0 )%
Other related
services               2,124           18.9 %      1,955           16.2 %           169            8.6 %
Total service
revenues            $ 10,680           95.1 %   $ 11,901           98.6 %   $    (1,221 )        (10.3 )%
Product revenues         550            4.9 %        171            1.4 %           379          221.6 %
Total net
revenues            $ 11,230          100.0 %   $ 12,072          100.0 %   $      (842 )         (7.0 )%


The following table sets forth certain information regarding the increases (decreases) in net revenues in our larger markets (which are inclusive of revenues from our other related services) and in the number of units authenticated and graded in the three months ended September 30, 2012 and 2011 (in thousands):

                                                                                                      2012 vs. 2011
                                   2012                        2011                                Increase (Decrease)
                                        % of Net                    % of Net            Revenues                  Units Processed
                           Amount       Revenues       Amount       Revenues      Amounts      Percent         Number          Percent
Coins                     $  6,407           57.1 %   $  7,905           65.5 %   $ (1,498 )      (18.9 )%     (135,800 )         (28.4 )%
Cards and Autographs(1)      3,079           27.4 %      2,832           23.5 %        247          8.7 %        29,000             8.2 %
Other (2)                    1,194           10.6 %      1,164            9.6 %         30          2.6 %        (3,500 )(3)     (100.0 )%
Product sales                  550            4.9 %        171            1.4 %        379        221.6 %             -               -
                          $ 11,230          100.0 %   $ 12,072          100.0 %   $   (842 )       (7.0 )%     (110,300 )         (13.2 )%



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

(2) Includes CCE subscription fees, revenues earned from our Expos convention business, our Coinflation.com website and our formerly owned stamp authentication and grading business (for the three months ended September 30, 2011).

(3) Consists of the change in the number of stamps graded and authenticated as a result of the sale of our stamp authentication and grading business in June 2012.

For the three months ended September 30, 2012, our total service revenues decreased by $1,221,000 or 10.3%, compared to the three months ended September 30, 2011 and comprised a decrease of $1,390,000 or 14.0%, in grading and authentication fees and increased other related services of $169,000 or 8.6%.

The decreased grading and authentication fees in the three months ended September 30, 2012 was primarily attributable to a decrease in coin authentication and grading fees of $1,542,000 or 21% in the first quarter, due to a 28% decrease in the number of coins graded. The coin decreases was partially offset by increased fees earned by our cards and autographs authentication and grading business of $263,000 or 10.4% in this year's first quarter. In addition, due to the sale of PSE in June 2012, our stamp authentication and grading fees decreased by $111,000 compared to the three . . .

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