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CLCT > SEC Filings for CLCT > Form 10-Q on 8-May-2013All Recent SEC Filings

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Quarterly Report


Forward-Looking Statements

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

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

Our Business

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

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

Overview of the Operating Results for the Three and Nine Months Ended March 31, 2013

The following table sets forth comparative financial data for the three and nine months ended March 31, 2013 and 2012 (in thousands):

                                                 Three Months Ended March 31,                             Nine Months Ended March 31,
                                              2013                         2012                        2013                         2012
                                                   % of Net                     % of Net                    % of Net                     % of Net
                                      Amount       Revenues        Amount       Revenues       Amount       Revenues        Amount       Revenues
Net Revenues:
Grading authentication and related
services                             $ 14,488          100.0 %    $ 13,003           99.4 %   $ 34,763           98.4 %    $ 36,210           98.9 %
Product sales                               -              -            79            0.6 %        550            1.6 %         416            1.1 %
                                       14,488          100.0 %      13,082          100.0 %     35,313          100.0 %      36,626          100.0 %
Cost of Revenues:
Grading authentication and related
services                                5,178           35.7 %       4,989           38.4 %     13,480           38.8 %      14,019           38.7 %
Product sales                               2              -            75           94.9 %        554          100.7 %         486          116.8 %
                                        5,180           35.8 %       5,064           38.7 %     14,034           39.7 %      14,505           39.6 %

Gross Profit:
Services                                9,310           64.3 %       8,014           61.6 %     21,283           61.2 %      22,191           61.3 %
Product sales                              (2 )            -             4            5.1 %         (4 )         (0.7 )%        (70 )        (16.8 )%
                                        9,308           64.2 %       8,018           61.3 %     21,279           60.3 %      22,121           60.4 %

Selling and marketing expenses          2,174           15.0 %       1,869           14.3 %      5,542           15.7 %       5,087           13.9 %
General & administrative expenses       3,214           22.2 %       3,235           24.7 %      9,556           27.1 %       9,732           26.6 %
Operating income                        3,920           27.0 %       2,914           22.3 %      6,181           17.5 %       7,302           19.9 %
Interest and other income, net              8            0.1 %          26            0.2 %         79            0.2 %          63            0.2 %
Income before provision for income
taxes                                   3,928           27.1 %       2,940           22.5 %      6,260           17.7 %       7,365           20.1 %
Provision for income taxes              1,541           10.6 %       1,209            9.3 %      2,475            7.0 %       3,024            8.3 %
Income from continuing operations       2,387           16.5 %       1,731           13.2 %      3,785           10.7 %       4,341           11.8 %
Loss from discontinued operations,
net of income taxes                        (7 )         (0.1 )%          7            0.1 %        (38 )         (0.1 )%        (43 )         (0.1 )%
Net income                           $  2,380           16.4 %    $  1,738           13.3 %   $  3,747           10.6 %    $  4,298           11.7 %
Net income per diluted share:
Income from continuing operations    $   0.29                     $   0.22                    $   0.47                     $   0.54
Loss from discontinued operations           -                            -                       (0.01 )                          -
Net income                           $   0.29                     $   0.22                    $   0.46                     $   0.54

Operating income increased by $1,006,000, or 35%, to $3,920,000 in the third quarter ended March 31, 2013 from $2,914,000 in the same period of the prior year. That increase was driven primarily by an 11% increase in total services revenues to $14,488,000 in the third quarter, and included a 13% increase in the revenues of our coin business (which is our largest operating business, representing 69% of total service revenues in the quarter) and a 12% increase in our trading card revenues. Operating income represented 27% of revenues in the third quarter of fiscal 2013, compared to 22% for the same period of the prior year.

For the nine months ended March 31, 2013, operating income declined by $1,121,000 or 15% to $6,181,000 from $7,302,000 for the same period of the prior year. That decline in operating income was attributable primarily to a 9% decline in service revenues from our coin business in the nine months ended March 31, 2013, which included a 21% decline in coin revenues in the first six months of the year, partially offset by the improved revenue performance in this year's third quarter, as discussed above.

These, as well as other factors affecting our operating results in the three and nine months ended March 31, 2013, are described in more detail below. See "Factors that Can Affect our Operating Results and Financial Condition" and "Results of Operations for the Three and Nine Months Ended March 31, 2013, Compared to the Three and Nine Months Ended March 31, 2012," 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 82% of our total service revenues for the nine months ended March 31, 2013. The amount of those fees and our gross profit margins on the authentication and grading of collectibles 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 authentication and grading revenues are impacted by the number of modern coins submitted to us for authentication and grading, 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 generally of significantly higher value and are more saleable by dealers than modern coins and trading cards; and (iv) as discussed above, the volume and timing of marketing programs for modern coins. Furthermore, because a significant portion of our costs of sales are relatively fixed in nature in the short term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.

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

Five of our coin authentication and grading customers represented, in the aggregate, approximately 22% and 15% of our total net revenues in the three and nine months ended March 31, 2013, respectively. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.

The following tables provide information regarding the respective numbers of coins, trading cards, autographs, and stamps that were authenticated and graded by us in the three and nine months ended March 31, 2013 and 2012, respectively, and their estimated values, which are the amounts at which those coins, trading cards and stamps are declared for insurance purposes by the dealers and collectors who submitted them to us for authentication and grading:

                                    Units Processed                                  Declared Value (000)
                             Three Months Ended March 31,                        Three Months Ended March 31,
                            2013                      2012                      2013                      2012
Coins                 569,400        59.4 %     570,400        60.7 %   $ 501,904        93.5 %   $ 328,256        91.7 %
Trading cards and
autographs(1)         389,800        40.6 %     366,200        39.0 %      34,849         6.5 %      26,074         7.3 %
Stamps(2)                   -           -         3,300         0.3 %           -           -         3,586         1.0 %
Total                 959,200       100.0 %     939,900       100.0 %   $ 536,753       100.0 %   $ 357,916       100.0 %

                                        Units Processed                                        Declared Value (000)
                                  Nine Months Ended March 31,                               Nine Months Ended March 31,
                               2013                         2012                         2013                         2012
Coins                  1,271,900         52.8 %     1,478,100         57.8 %   $ 1,094,139         91.8 %   $   962,872         91.4 %
Trading cards and
autographs(1)          1,138,700         47.2 %     1,069,200         41.8 %        97,851          8.2 %        83,524          7.9 %
Stamps(2)                      -            -          10,900          0.4 %             -            -           6,990          0.7 %
Total                  2,410,600        100.0 %     2,558,200        100.0 %   $ 1,191,990        100.0 %   $ 1,053,386        100.0 %

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

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

Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are primarily affected by the volume of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their ability and willingness to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally viewed as luxury goods and are purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, because the threat of increased inflation or concerns about the weakening of the U.S. dollar often lead investors and consumers to purchase gold and silver coins as hedges against inflation and reductions in the purchasing power of the U.S. currency; and
(v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of hard assets, including gold coins, if they believe that the market prices of hard assets will increase. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressure, or declines or stagnation in the market price of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to other investments during periods of economic growth and growing consumer and business confidence.

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

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 have begun paying federal income taxes at 34% 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.

Critical Accounting Policies and Estimates

Except as discussed below, during the nine months ended March 31, 2013, there were no changes in our critical accounting policies or estimates which are described in Item 7 of our Annual Report on Form 10-K, filed with the SEC, for the fiscal year ended June 30, 2012. Readers of this report are urged to read that Section of that Annual Report for a more complete understanding and detailed discussion of our Critical Accounting Policies and Estimates.

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

During the first quarter ended September 30, 2012, we completed the annual goodwill impairment assessment with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair value over carrying value in prior years, and any material changes in the estimated cash flows of the reporting unit, and determined that it was more likely than not that the fair value of CCE and CoinFacts was greater than the carrying value, including goodwill, and therefore it was not necessary to proceed to the second-step of the 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 nine months ended March 31, 2013.

Revenue Recognition

A portion of our net revenues are comprised of subscription fees paid by customers for annual memberships in our Collectors Club. Those membership subscription fees entitle members to access our on-line and printed publications and, in some cases, to receive vouchers for free grading services during the membership period. Through December 31, 2011, we recorded revenue for this multi-element service arrangement by recognizing approximately 65% of the membership fees as revenue in the month following the membership purchase. The balance of the membership fee was recognized as revenue over the life of the membership. We evaluated, at least semi-annually, the relative fair values of the deliverables and the percentage factors used to allocate the membership fees between the grading services and the other services provided to members. In the third quarter of fiscal 2012, arising from the upgrading of the Company's accounting systems, which enables us to track separately the issuance and redemption of individual Collectors Club free grading vouchers, the Company began recognizing revenue attributed to the vouchers on a specific basis, to classify those revenues as part of authentication and grading fees rather than other related service revenues and to classify unredeemed vouchers as deferred revenue. The balance of the membership fees continue to be recognized over the life of the membership. During the three months ended March 31, 2013, the Company began to recognize revenue attributable to expired vouchers that had not been redeemed during the membership period. The amount of such revenue was immaterial for the three and nine months ended March 31, 2013.

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. 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 has become probable that we will achieve the financial performance goal.

(i) Fiscal 2013 Expense. Stock-based compensation in the three and nine months ended March 31, 2013, represents expenses attributable to (i) prior year grants of restricted stock for which compensation is being recognized over the remaining service periods of those grants; (ii) grants of 84,000 shares of restricted stock granted in the nine months ended March 31, 2013 (including 40,000 shares granted to the Company's new Chief Executive Officer, 12,500 shares granted the Company's Chief Financial Officer and 24,000 shares granted to the Company's outside directors), all of which are service-based grants and, therefore, require recognition of stock-based compensation from the respective grant dates; (iii) $103,000 in connection with accelerated vesting of prior year grants of restricted shares for the Company's former CEO; and (iv) grants of restricted stock under the Company's Long-Term Performance-Based Equity Incentive Plan (see below).

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

(ii) Fiscal 2013 Long-Term Performance-Based Equity Incentive Program

On December 28, 2012, the Compensation Committee of the Board of Directors adopted a Long-Term Performance-Based Equity Incentive Program ("LTIP") for the Company's executive officers (including the Company's Chief Executive Officer, Mr. Deuster, and the Chief Financial Officer, Mr. Wallace) and certain management employees ("Participants") and granted approximately 300,000 shares of restricted stock (the "restricted shares"), including 108,880 shares to Mr. Deuster and 40,830 shares to Mr. Wallace, from the Company's stockholder-approved 2006 Equity Incentive Plan (the "2006 Plan").

The primary purposes of this program are (i) to focus executive management on achieving substantial increases in the Company's operating income, and thereby increase internally generated cash flows, and (ii) to align the longer-term financial interests of executive management with the longer-term interests of the Company's stockholders. For purposes of this program, operating income is defined as the Company's operating income before non-cash stock-based compensation expense.

The Compensation Committee had intended to grant a total of approximately 550,000 restricted shares to the Participants (including 200,000 restricted shares to Mr. Deuster and 75,000 restricted shares to Mr. Wallace) under the LTIP. However, it was not able to do so, because there were not a sufficient number of shares available for such grants under the 2006 Plan. As a result, the Compensation Committee expects to approve grants of additional shares to the . . .

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