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CLCT > SEC Filings for CLCT > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for COLLECTORS UNIVERSE INC

Form 10-Q for COLLECTORS UNIVERSE INC


7-May-2014

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, 2013 (the "2013 10-K"), which we filed with the Securities and Exchange Commission (the "SEC") on August 28, 2013, 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 our 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 2013 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) revenues from sales of advertising placed and commissions earned on our websites; (ii) sales of printed publications and collectibles price guides and sales of advertising in our publications;
(iii) sales of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) sales of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for coins that have been authenticated and graded (or "certified") and to our CoinFacts™ website, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) the management and operation of 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 Three and Nine Months Ended March 31, 2014 Operating Results



The following table sets forth comparative financial data for the three and nine
months ended March 31, 2014 and 2013 (in thousands):



                                         Three Months Ended March 31,                              Nine Months Ended March 31,
                                       2014                        2013                         2014                         2013
                                           % of Net                     % of Net                     % of Net                     % of Net
                               Amount      Revenues        Amount       Revenues        Amount       Revenues        Amount       Revenues

Net Revenues:
Authentication, grading and
related services              $ 16,298          99.9 %    $ 14,488          100.0 %    $ 43,956           99.8 %    $ 34,763           98.4 %
Product sales                       10           0.1 %           -            0.0 %          68            0.2 %         550            1.6 %
                                16,308         100.0 %      14,488          100.0 %      44,024          100.0 %      35,313          100.0 %
Cost of Revenues:
Authentication, grading and
related services                 6,061          37.2 %       5,178           35.7 %      16,548           37.6 %      13,480           38.8 %
Product sales                       23         230.0 %           2              -            72          105.9 %         554          100.7 %
                                 6,084          37.3 %       5,180           35.8 %      16,620           37.8 %      14,034           39.7 %

Gross Profit:
Services                        10,237          62.8 %       9,310           64.3 %      27,408           62.4 %      21,283           61.2 %
Product sales                      (13 )      (130.0 %)         (2 )            -            (4 )         (5.9 %)         (4 )         (0.7 )%

                                10,224          62.7 %       9,308           64.2 %      27,404           62.2 %      21,279           60.3 %

Selling and marketing
expenses                         2,465          15.1 %       2,174           15.0 %       6,779           15.3 %       5,542           15.7 %
General & administrative
expenses                         4,046          24.8 %       3,214           22.2 %      11,958           27.2 %       9,556           27.1 %
Operating income                 3,713          22.8 %       3,920           27.0 %       8,667           19.7 %       6,181           17.5 %
Interest and other income,
net                                  3             -             8            0.1 %          27              -            79            0.2 %
Income before provision for
income taxes                     3,716          22.8 %       3,928           27.1 %       8,694           19.7 %       6,260           17.7 %
Provision for income taxes       1,581           9.7 %       1,541           10.6 %       3,663            8.3 %       2,475            7.0 %
Income from continuing
operations                       2,135          13.1 %       2,387           16.5 %       5,031           11.4 %       3,785           10.7 %
Loss from discontinued
operations, net of income
taxes                              (16 )        (0.1 %)         (7 )         (0.1 )%        (61 )         (0.1 %)        (38 )         (0.1 )%
Net income                    $  2,119          13.0 %    $  2,380           16.4 %    $  4,970           11.3 %    $  3,747           10.6 %
Net income per diluted
share:
Income from continuing
operations                    $   0.26                    $   0.29                     $   0.61                     $   0.47
Loss from discontinued
operations                           -                           -                        (0.01 )                      (0.01 )
Net income                    $   0.26                    $   0.29                     $   0.60                     $   0.46

We generated record service revenues of $16.3 million and $44.0 million in the three and nine months ended March 31, 2014 respectively, compared to $14.5 million and $35.3 million in the three and nine months ended March 31, 2013, respectively. Despite service revenues increasing by $1.8 million or 12.5% in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, operating income declined to $3.7 million or 22.8% of revenues in the three months ended March 31, 2014 compared to $3.9 million or 27.0% of revenues in the three months ended March 31, 2013. The decline in profitability in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013, reflects higher non-cash stock based compensation of $350,000 (see Stock-Based Compensation under Critical Accounting Policies and Estimates), increased losses at our foreign operations of $201,000 (which includes our start-up China operation) and a reduction of revenues at our Expos trade show business, due to a delay in the renewal of an auction contract. In the nine months ended March 31, 2014, service revenues increased by $9.2 million or 26.4% and operating income increased to $8.7 million or 19.7% of revenues compared to operating income of $6.2 million or 17.5% of revenues in the nine months ended March 31, 2013, despite non-cash stock based compensation increasing by $773,000, our foreign losses increasing by $260,000 and the reduction of revenues at our Expos trade show business due to the delay in the renewal of the Expos auction contract.


These, as well as other factors affecting our operating results in the three and nine months ended March 31, 2014, are described in greater detail below. See "Trends and Challenges in our Business", "Factors that Can Affect our Operating Results and Financial Condition" and "Results of Operations for the Three Months and Nine Months Ended March 31, 2014 Compared to the Three Months and Nine Months Ended March 31, 2013", 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 86% of our service revenues for the nine months ended March 31, 2014. 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, which we authenticate and grade.

In addition, our coin authentication and grading 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 conducted 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 primarily 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 than modern coins and trading cards; (iv) the value of revenues earned at our less mature overseas operations which can be less consistent than our mature domestic operations and can impact the overall group profit margin earned and (v) 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 may occur around the time of the shows, because short-term changes in gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows.

Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 18% and 13% of our total net revenues in the three and nine months ended March 31, 2014. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.


The following tables provide information regarding the respective numbers of coins, trading cards and autographs that were authenticated and graded by us in the three and nine months ended March 31, 2014 and 2013, and their estimated values, which are the amounts at which those coins and trading cards were declared for insurance purposes by the dealers and collectors who submitted them to us for grading and authentication (in thousands):

                                      Units Processed                                     Declared Value (000s)
                               Three Months Ended March 31,                           Three Months Ended March 31,
                              2014                        2013                       2014                       2013
Coins                   593,400         58.5 %     569,400         59.4 %   $ 528,480         94.7 %   $ 501,904         93.5 %
Trading cards and
Autographs(1)           420,100         41.5 %     389,800         40.6 %      29,680          5.3 %      34,849          6.5 %
Total                 1,013,500        100.0 %     959,200        100.0 %   $ 558,160       100.00 %   $ 536,753        100.0 %




                                   Units Processed                                        Declared Value (000s)
                             Nine Months Ended March 31,                               Nine Months Ended March 31,
                          2014                         2013                         2014                         2013
Coins             1,528,900         54.7 %     1,271,900         52.8 %   $ 1,354,320         92.6 %   $ 1,094,139         91.8 %
Trading cards
and
Autographs(1)     1,265,500         45.3 %     1,138,700         47.2 %       108,064          7.4 %        97,851          8.2 %
Total             2,794,400        100.0 %     2,410,600        100.0 %   $ 1,462,384        100.0 %   $ 1,191,990        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.

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 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 more recently worries about sovereign debt obligations and credit ratings in the United States and Europe, because conditions of this nature often lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; and as an alternative to investments in government bonds and other treasury instruments; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of gold coins, as well as other hard assets if they believe that the market prices of those assets will increase. As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by increases in disposable income and the availability of lower cost borrowings, on the one hand, or increases in inflation or in gold prices, economic uncertainties and declines in business and consumer confidence or a weakening of the U.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressures, or periods of stagnation or a downward trend in the market prices of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to other investments during periods of economic growth and growing consumer and business confidence and from stocks and other investments to gold during periods of economic uncertainties and decreases in disposable income and consumer and business confidence.

Factors 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. 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 2014.

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. 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 on 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.


Trends and Challenges in our Businesses

Our overall financial performance is largely dependent on the performance of our coin authentication business and can be impacted by volatility in the coin business. Revenues from coin authentication and grading and related services represented 69%, 64% and 66% of total consolidated revenues for the nine months ended March 31, 2014, fiscal year 2013 and fiscal year 2012, respectively. As previously discussed in our 2013 10-K, total service revenues for the six months ended December 31, 2012 declined by $2.9 million, or 13%, and operating income declined by $2.1 million, or 48%, compared to the six months ended December 31, 2011, primarily as a result of a general decline of 21% in coin service revenues, due to market conditions. By contrast, in the six months ended June 30, 2013, service revenues increased by $3.6 million or 15%, and operating income increased by $2.5 million or 52%, compared to the six months ended June 30, 2012, primarily as a result of a $3.0 million or 18% increase in coin authentication and grading and related service revenues. Furthermore, in the nine months ended March 31, 2014, total service revenues increased by $9.2 million or 26% and operating income increased by $2.5 million or 40%, compared to the same period of the prior year, primarily as a result of a $8.0 million or 36% increase in our coin authentication and grading revenues and related services. In addition, as we have expand into overseas markets to provide coin authentication and grading services, our dependence on our coin business has increased, which could make our future financial performance more vulnerable to volatility in the coin markets.

Critical Accounting Policies and Estimates

Except as discussed below, during the nine months ended March 31, 2014 there were no changes in our critical accounting policies or estimates which are described in Item 7 of our 2013 10-K. Readers of this report are urged to read that section of the 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, 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. Alternatively, 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, 2013, 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 respective fair values of CCE and CoinFacts were greater than their respective carrying values, inclusive of goodwill, and therefore it was not necessary to proceed to the two-step impairment test.

Stock-Based Compensation. We recognize share-based compensation attributable to service-based equity grants over the service period based on the grant date fair value. For performance-based equity grants with a financial performance goal, we recognize compensation expense based on the grant date fair value when it becomes probable that we will achieve the financial performance goal.

Fiscal 2013 Long-Term Performance-Based Equity Incentive Program. As previously reported, on December 28, 2012, the Compensation Committee of the Board of Directors adopted a Long-Term Performance-Based Equity Incentive Program ("LTIP") for the Company's executive officers (including the Company's Chief Executive Officer, Mr. Deuster, and the Chief Financial Officer, Mr. Wallace) and certain other key management employees (collectively, "Participants"). Under that program, in December 2012, 299,429 shares of restricted stock (the "restricted shares"), were granted 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 grant date fair value of those restricted shares was approximately $3,000,000.


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 in December 2012. However, it was not able to do so, because there were not a sufficient number of authorized shares available for such grants under the 2006 Plan. On December 9, 2013, the Company's stockholders approved the 2013 Equity Incentive Plan, which authorized the issuance up to 650,000 new shares of common stock for grants of equity incentives to the Company's executive officers and other key management employees, directors and consultants. As a result, in December 2013, the Compensation Committee approved grants totaling 223,949 of additional restricted shares (net of forfeitures) to the Participants in the LTIP (including 91,120 to Mr. Deuster and 34,170 to Mr. Wallace). The total grant date fair value of those shares, net of forfeitures, was approximately $3,700,000. As of March 31, 2014, there were 523,378 shares of restricted stock outstanding under the LTIP, with a total grant date fair value of approximately $6,700,000.

The vesting of the restricted shares is conditioned on the Company's achievement of increasing annual operating income levels during any fiscal year within a six-year period through the fiscal year ending June 30, 2018, as indicated in the following table:

. . .

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