UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) |
|
☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2016 | |
OR | |
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _____ |
Commission file number 1-34240
COLLECTORS UNIVERSE, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
33-0846191 | |
(State or other jurisdiction of |
(I.R.S. Employer Identification No.) | |
Incorporation or organization) |
||
1921 E. Alton Avenue, Santa Ana, California |
92705 | |
(Address of principal executive offices) |
(Zip Code) |
(949) 567-1234
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class |
Name of each Exchange on which registered | |
Common Stock, par value $.001 per share |
NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate, by check mark, whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate, by check mark, if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ☐ |
Indicate by check mark whether the Registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2). Yes ☐ No ☒
As of December 31, 2015 , the last business day of our most recently completed second fiscal quarter, the aggregate market value of our Common Stock held by non-affiliates was approximately $115,000,000 based on the per share closing price of $15.50 of registrant’s Common Stock as of such date as reported by the NASDAQ Global Market. This calculation does not reflect a determination that persons deemed to be affiliates for this purpose are affiliates for any other purpose.
As of August 22, 2016, a total of 8,898,104 shares of registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Except as otherwise stated therein, Items 10, 11, 12, 13 and 14 in Part III of this Annual Report are incorporated by reference from Registrant's Definitive Proxy Statement, which is expected to be filed with the Securities and Exchange Commission on or before October 28, 2016, for its 2016 Annual Meeting of Stockholders. Other information contained in that Proxy Statement and other related solicitation materials are not deemed to be incorporated into or filed as part of this Annual Report.
COLLECTORS UNIVERSE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2016
TABLE OF CONTENTS
Page | |||
PART I |
|||
Forward-Looking Statements |
1 | ||
Item 1. |
Business |
1 | |
Item 1A. |
Risk Factors |
14 | |
Item 1B. |
Unresolved Staff Comments |
21 | |
Item 2. |
Properties |
21 | |
Item 3. |
Legal Proceedings |
21 | |
Executive Officers of Registrant |
21 | ||
PART II |
|||
Item 5. |
Market for Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |
23 | |
Item 6. |
Selected Consolidated Financial Data |
25 | |
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 | |
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
47 | |
Item 8. |
Financial Statements and Supplementary Data |
48 | |
Report of Independent Registered Public Accounting Firm |
49 | ||
Consolidated Balance Sheets at June 30, 2016 and 2015 |
50 | ||
Consolidated Statements of Operations for the Years ended June 30, 2016, 2015 and 2014 |
51 | ||
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2016, 2015 and 2014 |
52 | ||
Consolidated Statements of Cash Flows for the Years Ended June 30, 2016, 2015 and 2014 |
53 | ||
Notes to Consolidated Financial Statements |
55 | ||
Schedule II – Valuation and Qualifying Accounts |
75 | ||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
75 | |
Item 9A. |
Controls and Procedures |
75 | |
Item 9B. |
Other Information |
78 | |
PART III |
|||
Item 10. |
Directors, Executive Officers and Corporate Governance |
78 | |
Item 11. |
Executive Compensation |
78 | |
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
78 | |
Item 13. |
Certain Relationships and Related Transactions and Director Independence |
78 | |
Item 14. |
Principal Accountant Fees and Services |
78 | |
PART IV |
Item 15. |
Exhibits and Financial Statement Schedules |
79 |
SIGNATURES |
S-1 | ||
INDEX TO EXHIBITS |
E-1 |
FORWARD-LOOKING STATEMENTS
Statements contained in this annual report on Form 10-K (the “Annual Report”) that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or markets, constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, such statements include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Forward-looking statements contain estimates or predictions about or forecasts of our future financial condition and operating results and trends in our business and markets. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, those statements are necessarily based on current information available to us. Therefore, the information contained in the forward looking statements in this Annual Report are subject to change due to (i) future events and circumstances of which we are not aware and (ii) to a number of risks and uncertainties that could cause our future financial condition or operating results to differ significantly from those expected at the current time as described in those forward-looking statements. Those known risks and uncertainties are described in Item 1A in Part I of this Annual Report under the caption “Risk Factors,” and in Item 7 in Part II of this Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Accordingly, readers of this Annual Report are urged to read the cautionary statements and risk factors contained in those Items of this Annual Report. Also, our actual results in the future may differ due to additional risks and uncertainties of which we are not currently aware or which we do not currently view as material to our business or operating results. Due to all of these uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Annual Report, which speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law or the applicable rules of the NASDAQ Stock Market.
-----------------------
References in this Annual Report to “Collectors Universe”, “we”, “us”, “our”, “management” and the “Company” refer to Collectors Universe, Inc. and its consolidated subsidiaries.
PART I
ITEM 1. BUSINESS
Overview
We provide authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia (“collectibles”). We believe that our authentication and grading services add value to these collectibles by enhancing their marketability and thereby providing increased liquidity to the dealers, collectors and consumers that own and buy and sell them.
Once we have authenticated and assigned a quality grade to a collectible, we encapsulate it in a tamper-evident, clear plastic holder, or issue a certificate of authenticity, that (i) identifies the specific collectible; (ii) sets forth the quality grade we have assigned to it; and (iii) bears one of our brand names and logos: “PCGS” for coins, “PSA” for trading cards and event tickets and “PSA/DNA” for autographs and memorabilia. Additionally, we warrant our certification of authenticity and the quality grades that we assign to the coins and trading cards bearing our brands. We do not warrant our authenticity determinations for autographs or memorabilia. For ease of reference in this Annual Report, we will sometimes refer to coins, trading cards and other collectibles that we have authenticated or graded as having been “certified.”
We generate revenues principally from the fees paid for our authentication and grading services. To a much lesser extent, we generate revenues from other related services, which consist of (i) the sale of advertising and click-through commissions earned on our websites, including Collectors.com, (ii) the sale of printed publications and collectibles price guides and advertising in such publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our Certified Coin Exchange (CCE) dealer-to-dealer Internet bid-ask market for certified coins, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) collectibles trade shows that we conduct, at which collectibles are exhibited and are bought and sold by collectibles dealers and collectors. We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we have purchased under our coin grading warranty program; however, these sales are not the focus, and we do not consider them to be an integral part of our ongoing revenue-generating activities.
We have developed some of the leading brands in the collectibles markets in which we conduct our business:
■ |
“PCGS” (Professional Coin Grading Service), which is the brand name for our independent coin authentication and grading service; |
■ |
“PSA” (Professional Sports Authenticator), which is the brand name for our independent sports and trading cards authentication and grading service; | |
■ |
“PSA/DNA” (PSA/DNA Authentication Services), which is the brand name for our independent authentication and grading service for vintage autographs and memorabilia. | |
PCGS, PSA and PSA/DNA are among the leading independent authentication and grading services in their respective markets.
We foster brand loyalty and stimulate demand for our services through providing information and value added content to collectors and dealers through various means including our CCE websites, Collectors Clubs, Set RegistrySM programs, Collectors.com, CoinFacts and PSA Collectibles Facts, population reports and price guides. We believe that by providing this information and content we generate more knowledgeable and active collectors and dealers.
We began offering our PCGS coin authentication and grading services in 1986 and, from inception through the fiscal year ended June 30, 2016, we have authenticated and graded approximately 33 million coins. In 1991, we launched our PSA trading cards authentication and grading service and, through June 30, 2016, had authenticated and graded approximately 26 million trading cards. In 1999, we launched our PSA/DNA vintage autograph authentication business and in June 2004 we extended that business by introducing vintage autograph grading services to dealers and collectors of autographed sports memorabilia.
The following table provides information regarding the respective numbers of coins, trading cards and autographs that we authenticated or graded in each of the fiscal years ended June 30, 2014 to 2016:
Units Processed |
||||||||||||||||||||||||
2016 |
2015 |
2014 |
||||||||||||||||||||||
Coins |
2,371,800 | 58 | % | 2,067,300 | 55 | % | 2,075,300 | 55 | % | |||||||||||||||
Trading cards |
1,278,900 | 31 | % | 1,269,800 | 34 | % | 1,259,100 | 33 | % | |||||||||||||||
Autographs |
448,000 | 11 | % | 434,900 | 11 | % | 431,800 | 12 | % | |||||||||||||||
Total |
4,098,700 | 100 | % | 3,772,000 | 100 | % | 3,766,200 | 100 | % |
The following table sets forth the estimated values at which our customers insured the coins, trading cards and autographs that were submitted to us for authentication or grading:
Declared Values (000’s) |
||||||||||||||||||||||||
2016 |
2015 |
2014 |
||||||||||||||||||||||
Coins |
$ | 1,935,400 | 91 | % | $ | 2,093,900 | 93 | % | $ | 1,887,000 | 93 | % | ||||||||||||
Trading cards |
177,800 | 8 | % | 109,800 | 5 | % | 99,000 | 5 | % | |||||||||||||||
Autographs |
25,700 | 1 | % | 35,800 | 2 | % | 38,000 | 2 | % | |||||||||||||||
Total |
$ | 2,138,900 | 100 | % | $ | 2,239,500 | 100 | % | $ | 2,024,000 | 100 | % |
______________________
Our revenues are comprised principally of our authentication and grading service fees. Those fees range from $2 to over $10,000 per item, based primarily on the type of collectible authenticated or graded, the turnaround times and the specific service selected by the customer. We charge higher fees for faster turnaround times. Our fees are generally not based on the value of the collectible, except for special coin services sometimes requested by customers, for which we charge supplemental fees that are based on the value of the coin. In fiscal 2016, our authentication and grading fees, per item processed, for all of our businesses averaged $12.83, and our coin authentication and grading fees ranged from $2 to over $10,000, and averaged $16.05, per coin.
In the case of trading cards, in fiscal 2016, the authentication and grading fees ranged from approximately $2 to $500 and averaged $7.41, per trading card. As a general rule, collectibles dealers and, to a lesser extent, individual collectors, request faster turnaround times and, therefore, generally pay higher fees for more valuable, older or “vintage” collectibles than they do for modern collectibles.
Industry Background
The primary determinants of the prices of, and the willingness of sellers, purchasers and collectors to purchase high-value or high-priced collectibles, are their authenticity, quality and rarity. The authenticity of a collectible relates not only to the genuineness of the collectible, but also to the absence of any alterations or repairs that may have been made to hide, damage or to restore the item. The quality of a collectible relates to its state of preservation relative to its original state of manufacture or creation. The rarity of a collectible relates to its uniqueness and depends primarily on the number of identical collectibles of equivalent or better quality that become available for purchase from time to time. With regard to value, confirmation of authenticity generally is required before a buyer is willing to proceed with a purchase of a high-priced collectible. Quality and rarity directly affect value and price, with higher quality and rare collectibles generally attracting dramatically higher prices than those of lower quality and lesser rarity. Even a relatively modest difference in quality can translate into a significant difference in perceived value and, therefore, in price.
Until the advent of independent third-party authentication and grading, most prospective buyers, including experienced collectibles dealers and retailers, insisted on physically examining high-priced collectibles before consummating transactions. However, unlike professionals in the trade, most purchasers and collectors lacked the experience and knowledge needed to determine, with confidence, the authenticity, quality or rarity, and hence the value, of high-priced collectibles, even when they had the opportunity to examine them physically. Therefore, they had to rely on representations made by sellers regarding authenticity, quality and rarity. For these reasons, “buyer beware” characterized the high-value collectibles markets, and “sight-unseen” markets for rare coins and other high-value collectibles were practically non-existent.
High-value collectibles have been traditionally marketed at retail by dealers through direct mail, catalogues, price lists and advertisements in trade publications, and sold and purchased by them at collectibles shows, auction houses and local dealer shops. These markets were highly inefficient because:
■ |
they were fragmented and localized, which limited both the variety of available collectibles and the number of potential buyers; |
■ |
transaction costs were often relatively high due to the number of intermediaries involved; | |
|
■ |
buyers usually lacked the information needed to determine the authenticity and quality and, hence the value, of the collectibles being sold; and | |
■ |
buyers and sellers were vulnerable to fraudulent practices because they had to rely on the dealers or other sellers for opinions or representations as to authenticity, quality and rarity. | |
Coin Market. In an effort to overcome some of these inefficiencies, approximately 40 years ago, professional coin dealers began using a numerical quality grading scale for coins. That scale ranged from 1 to 70, with higher numbers denoting a higher quality. Previously, professional dealers used descriptive terms, such as “Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they sold, a practice that continued after the development of the numeric grading system. However, whether using a numeric or a descriptive system, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Moreover, dealers were hardly disinterested or independent since, as the sellers or buyers of the coins they were grading, they stood to benefit financially from the assignment of a particular grade.
Trading Cards Market. Misrepresentations of authenticity, quality and rarity also operated as a barrier to the liquidity and growth of the collectibles market for trading cards. Even experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher-priced trading cards. Most collectors lacked the knowledge needed to purchase collectible trading cards with confidence, even when they had physically examined them. Trading card dealers eventually developed a rudimentary adjectival system to provide measures of quality, using descriptive terms such as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of quality were assigned on the basis of such characteristics as the centering of the image on the card and the presence or absence of bent or damaged corners, scratches and color imperfections. However, as was the case with coins, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Additionally, since the dealers who bought and sold trading cards were the ones that assigned these grades, collectors remained vulnerable to misrepresentations as to the authenticity, quality and rarity of trading cards being sold or purchased by dealers.
Autographed Memorabilia Market. The market for autographed sports, entertainment and historical memorabilia has been plagued by a high incidence of forgeries and misrepresentations of authenticity. For example, Operation Bullpen, initiated by the FBI and other law enforcement agencies beginning in 1997, has uncovered a high volume of outright forgeries of signatures and widespread misrepresentations as to the genuineness of sports memorabilia. We believe that the high incidence of such fraudulent activities was due, in large part, to a dearth of independent third-party memorabilia authentication services and an absence of systematic methodologies and specimen data needed for verification of authenticity.
These conditions created a need and the demand for independent authentication and grading services from which sellers, purchasers and collectors could obtain:
■ |
determinations, from independent, third-party experts, of the authenticity of the high-value collectibles that are sold and purchased by dealers and collectors, particularly “sight-unseen” or over the Internet; | |
■ |
representations of quality based on uniform standards consistently applied by independent, third-party experts; and | |
■ |
authoritative information, compiled by a credible third party, to help purchasers and collectors understand the factors that affect an item’s perceived value and price, including: | |
— |
its rarity; |
— |
its quality or grade; and |
— |
its historical and recent selling prices. |
The Impact of eBay and Other e-Commerce Websites on the Collectible Markets. The advent of the Internet and, in particular, eBay’s development of an Internet or “virtual” marketplace and other Internet-selling websites, such as Amazon, have overcome many of the inefficiencies that had characterized the traditional collectibles markets. eBay and other online marketplaces (i) offer enhanced interaction between and greater convenience for sellers and buyers of high-value collectibles; (ii) eliminate or reduce the involvement of dealers and other “middlemen;” (iii) reduce transaction costs; (iv) allow trading at all hours; and (v) regularly provide updated information to collectors. In addition, in August 2015, the Company launched its Collectors.com website where it aggregates and organizes collectibles listings from sellers and collectibles categories and markets; to enable collectors to expeditiously locate collectibles they are interested in buying. However, Internet commerce still raises, and has even heightened, concerns about the authenticity and quality of the collectibles that are listed for sale on the Internet. Buyers have no ability to physically examine the collectibles and no means to confirm the identity or the credibility of the dealers or sellers on the Internet. As a result, we believe that the growth of Internet-selling websites, such as eBay and Amazon, and individual dealer-owned websites, has increased awareness of the importance of, and the demand for, independent third-party authentication and grading services of the type we provide. Our services enable purchasers and collectors to use the Internet to purchase high-value collectibles, without physical examination (“sight-unseen”), with the confidence of knowing that they are authentic and are of the quality represented by sellers. The importance and value of our services to purchasers and collectors, we believe, are demonstrated by eBay’s inclusion, on its collectibles websites, of information that identifies, and encourages visitors to use, our independent third-party authentication and grading services, as well as similar services offered by some of our competitors.
Our Services
PCGS Coin Authentication and Grading Services. Recognizing the need for third-party authentication and grading services, we launched Professional Coin Grading Service in 1986. PCGS employs expert coin graders, who are independent of coin buyers and sellers, to provide impartial authentication and grading services. As of June 30, 2016, we employed 36 coin experts who have an average of 12 years of service with the Company. We also established uniform standards of quality measured against an actual “benchmark” set of coins kept at our offices. We place each coin that we authenticate and grade in a tamper-evident, clear plastic holder which bears our logo, so that any prospective buyer will know that it is a PCGS authenticated and graded coin. We also provide a warranty as to the accuracy of our coin authentication and grading determinations.
By providing an independent assessment by coin experts of the authenticity and quality of coins, we believe that PCGS has increased the liquidity of the trading market for collectible coins. Following the introduction of our independent, third-party authentication and grading service, buyer confidence, even between dealers, increased to such a degree that coins authenticated and graded by PCGS were able to be traded “sight-unseen.” As a result, PCGS facilitated the development, in 1990, of a dealer market, known as the “Certified Coin Exchange,” on which coin dealers traded rare coins “sight-unseen,” over a private satellite network, which now operates on the Internet and which we have owned since 2005.
Our coin authentication and grading services have facilitated the development of a growing Internet or “virtual” marketplace for collectible coins. A prospective buyer, who might otherwise be reluctant to purchase a high-priced coin listed “sight-unseen” on the Internet, is able to rely on a PCGS certification, as well as authoritative information about the coin that is accessible on our website, in deciding whether or not to bid and in determining the amount to offer for the coin. As a result, to enhance the marketability of higher-priced coins, many sellers submit their coins to PCGS for authentication and grading. That enables the sellers to include, in their Internet sales listings, digital images of the coins in their tamper-evident, clear plastic holders, which identify the coins as having been authenticated and graded by PCGS, as well as their PCGS-assigned grades. We also provide a range of authoritative content on coin collecting to inform and communicate with the collector community, including guides and reports that track the trading prices and the rarity of PCGS-graded coins.
PSA Trading Card Authentication and Grading Services. Leveraging the credibility and using the methodologies that we had established with PCGS in the coin market, in 1991 we launched Professional Sports Authenticator (PSA), which instituted a similar authentication and grading system for trading cards. We are now the dominant authenticator and grader of trading cards. Our independent trading card experts certify the authenticity of and assign quality grades to trading cards using a numeric system with a scale from 1-to-10 that we developed, together with an adjectival system to describe their condition. At June 30, 2016, we employed 15 experts who have an average of 15 years of service with the Company. We believe that our authentication and grading services have removed barriers that were created by the historical seller-biased grading process and, thereby, have improved the overall marketability of and facilitated commerce in trading cards, including over the Internet and at telephonic sports memorabilia auctions.
The trading cards submitted to us for authentication and grading include primarily (i) older or vintage trading cards, particularly of memorable or historically famous players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle, and (ii) modern or newly produced trading cards of current or new athletes who have become popular with sports fans or have achieved new records or milestones, such as Derek Jeter, Albert Pujols, Mariano Rivera and Miguel Cabrera. These trading cards have, or are perceived to have, sufficient collectible value and are sold more frequently than are trading cards of less notable athletes, leading dealers and collectors to submit them for grading to enhance their marketability. Also, the production and sale of each new series of trading cards, which take place at the beginning and during the course of each new sports season, create new collectibles that provide a source of future additional authentication and grading submissions to us.
PSA/DNA Autograph Authentication and Grading Services. In 1999, we launched our vintage autograph authentication business, initially offering authentication services for “vintage” sports autographs and memorabilia that were autographed or signed prior to the time they were presented to us for authentication. The vintage autograph authentication business is distinctly different from the “signed-in-the-presence” authentication of autographs where an “authenticator” is present and witnesses the actual signing. Our vintage autograph authentication service involves the rendering of an opinion of authenticity by an industry expert based on (i) an analysis of the signed object, such as the signed document or autographed item of memorabilia, to confirm its consistency with similar materials or items that existed during the signer’s lifetime; (ii) a comparison of the signature submitted for authentication with exemplars of such signatures; and (iii) a handwriting analysis. As of June 30, 2016, we employed 3 autograph experts with an average of 11 years of service with the Company, as well as outside consultants that we sometimes use on a contract basis.
In June 2004, we also began offering grading services for autographs, beginning with baseballs containing a single signature or autograph. We use uniform grading standards that we have developed and a numeric scale of 1-to-10, with the highest number representing top quality or “Gem Mint” condition. We assign grades to the collectibles based on the physical condition or state of preservation of the autograph.
CCE Certified Coin Exchange and Collectors Corner. In September 2005, we acquired the Certified Coin Exchange (CCE), a subscription-based, business-to-business Internet bid-ask market for coins that have been certified by us or by other independent coin authentication and grading services. CCE has been a marketplace in U.S. certified rare coin trading between major coin dealers in the United States since 1990. The CCE website now features over 100,000 bid and ask prices for certified coins at www.certifiedcoinexchange.com. The CCE provides liquidity in the geographically dispersed and highly fragmented market for rare coins. In March 2007, we introduced the Collectors Corner, a business-to-consumer website that enables sellers on CCE to offer many certified coins simultaneously at wholesale prices on CCE and at retail prices on Collectors Corner (www.collectorscorner.com). Registration on Collectors Corner is free for consumers, who can search for and sort coins listed on the Collectors Corner website. Coin sellers must register and pay a fixed monthly subscription fee to us for access to and to effectuate sale transactions on both CCE and Collectors Corner. Currently, there are approximately 108,000 collectibles, consisting primarily of coins, trading cards, currency and stamps, which are offered for sale on Collectors Corner, with offering prices aggregating approximately $117 million. The enhanced liquidity provided by CCE and Collectors Corner for certified coins, trading cards, and certified stamps, has increased the volume and turnover of these items, which benefits us because, as a general rule, increases in sales and purchases of those collectibles increase the demand for our authentication and grading services.
Publications and Advertising. We publish authoritative price guides, rarity reports and other collectibles data to provide collectors with information that makes them better informed consumers and makes collecting more interesting and exciting. Our publications also enable us to market our services, to create increased brand awareness and to generate advertising revenues. We publish the Sports Market Report on a monthly basis primarily for distribution to approximately 5,900 PSA Collectors Club members. We sell advertising to dealers and vendors for placement in our publications. We manage a Collectors Universe website and individual websites for our authentication and grading services. On those websites, we offer collectible content, relevant to the marketplace for the specific authentication and grading service, some of which is available for a fee and some of which is available without charge. We believe our websites for PCGS in coins, and PSA in trading cards, have the highest number of visitors and web traffic in their respective markets. We sell advertising to dealers and vendors on these two websites and on the websites we maintain for PSA/DNA in autographs and CCE and Collectors Corner in coins.
Collectible Trade Shows. We own Expos Unlimited LLC (“Expos”) a trade show management Company that operates one of the larger coins and collectibles shows, staged in Long Beach, California, three times a year. At the shows collectibles are exhibited and are bought and sold by collectibles dealers and collectors.
Our Mission
Our mission is to provide the finest available independent authentication and grading services to sellers and buyers of high-value collectibles in order to:
■ |
increase the values and liquidity of high-value collectibles; |
■ |
enable and facilitate transactions in high-value collectibles; | |
■ |
generally enhance interest, activity and trading in high-value collectibles; and | |
■ |
achieve profitable growth, build long-term value for our stockholders and provide rewarding opportunities for our employees. |
Our Growth Strategy
We have established leading brands in our existing collectibles markets, including PCGS, PSA and PSA/DNA. We use those brands to promote Collectors Universe as the premier independent provider of authentication and grading services in the high-value collectibles markets, in order to (i) increase our market share among existing users of authentication and grading services, (ii) increase the use of our services by the numerous collectors that do not currently use any independent third-party authentication or grading services, and (iii) expand our coin services to selected international markets.
Although we have authenticated and graded approximately 33 million coins since the inception of PCGS, and approximately 26 million trading cards since the inception of PSA, we believe that less than 10% of the vintage United States coins and less than 10% of the vintage trading cards have been authenticated and graded by independent providers of authentication and grading services. Additionally, we estimate that we have authenticated and graded less than 10% of the potential market of autographs in the United States. Moreover, new collectibles are introduced each year into the markets in which we operate, some of which are authenticated and graded in the year of their introduction. Over time, these collectibles will increase the supply of vintage items that are sold by dealers and collectors, and we expect that many of them will be submitted for independent authentication and grading.
To take advantage of these market opportunities and to expand our service offerings to customers, we have:
■ |
implemented more competitive and focused marketing programs for our modern coin business, effective January 1, 2016 to stimulate demand for our services. |
■ |
expanded our geographical reach by opening offices in Paris, France, Hong Kong and Shanghai, China, the operations of which represented approximately 8% of total revenues in fiscal 2016; |
■ |
expanded our services offerings to include PCGS Secure Plus and Reconsideration and Restoration Services. PCGS Secure Plus uses a laser scanning process to help detect coins that have been artificially enhanced since their last certification and can help identify recovered stolen coins; |
■ |
enhanced our marketing programs to promote our brands and services directly to Internet, other auction-related businesses and high-volume distributors of modern coins which emphasize the benefits of using our services, including increased marketability and the prospect of higher bids for collectibles; |
■ |
provide special packaging on certain modern coin programs that enhances the value of commemorative coins and helps drive increased volumes of coins sold by dealers and distributors of those coins; |
■ |
provided numismatic information and value added content through CoinFacts and PSA Collectible Facts; |
■ |
participated at collectibles industry trade shows and organized “members only” shows for PCGS authorized dealers and Collectors Club members, at which we offer on-site authentication and grading services to facilitate collectibles trading activities; |
■ |
established authorized PCGS and PSA dealer networks to increase the visibility of our brands and the use of our services by those dealers and their customers; |
■ |
developed and expanded our Set RegistrySM programs to increase demand for our collectible coin and trading card authentication and grading services, among collectors and increase traffic on our websites; |
■ |
expanded the offerings and markets in which Collectors Corner provides a business-to-consumer website for the sale of third-party collectibles certified by us; |
■ |
promoted our Collectors Clubs to attract and to provide incentives for collectors to use our services; |
■ |
expanded our website information services, to include auction results, reference materials and ongoing collectibles price guides and rarity reports; and |
■ |
developed software for our Collectors.com website that enables collectors, to more expeditiously, locate collectibles they are interested in buying. The software aggregates and organizes collectibles listings from many sellers and multiple collectibles categories or markets. |
Operations
We offer authentication and grading services for coins, trading cards, autographs and autographed memorabilia. Our trained and experienced authentication and grading experts determine the authenticity of and using uniform quality standards, assign quality grades to these collectibles.
PCGS. Our authentication and grading of coins involves an exacting and standardized process. We receive coins from dealers and collectors and remove all packaging that identifies the submitter in any way. We then enter information regarding each coin into our proprietary computerized inventory system, which tracks the coin at every stage of the authentication and grading process. Generally, our process requires that two of our experts evaluate each coin independently, and no authenticity opinion is issued and no quality grade is assigned unless their opinions with respect to the authenticity and quality grade, independently assigned by each of them, are the same. In some cases, depending on the type of coin being authenticated and graded or on the results of the initial review process, we involve a third expert to make the final determinations of authenticity and grade. The coin’s authenticity and grade are then verified by one of our senior experts, who has the authority to resubmit the coin for further review if he or she deems it to be necessary. Only after this process is complete is the coin reunited with its identifying paperwork, thus keeping the authentication and grading process from being influenced by the identity of the owner and the history of the coin. The coin is then sonically sealed in our specially designed, tamper-evident, clear plastic holder, which also encases a label describing the coin, the quality grade that we have assigned to it, a unique certificate number and a bar code, the PCGS hologram and brand name and if requested by the customer, special inserts that can enhance the collectible value of the coin.
PSA. On receipt of trading cards from dealers and collectors, we remove all packaging that identifies the submitter in any way and enter information regarding the trading card into our proprietary computerized inventory system that enables us to track the trading cards throughout the authentication and grading process. Only after the authentication and grading process is complete is the trading card reunited with its identifying paperwork, thus keeping the authentication and grading process independent of the identity of the owner and the history of the trading card. The trading card is then sonically sealed in our specially designed, tamper-evident, clear plastic holder, which also encases a label that identifies the trading card, the quality grade that we have assigned to it and a unique certificate number, and the PSA hologram and brand name.
We primarily authenticate and grade baseball trading cards and, to a lesser extent, football, basketball, hockey and entertainment, as well as other types of collectible cards. As is the case with coin authentication and grading, trading card authentication and grading fees are based primarily on the particular turnaround time requested by the submitter, ranging from one day’s turnaround for the highest level of service to approximately 60 days for the lowest level of service.
PSA/DNA. Because of the variability in the size of autographed memorabilia, the authentication and grading procedures we use necessarily differ from those used in authenticating and grading coins and trading cards. Customers may ship the autographed memorabilia to us for authentication at our offices or, in the case of dealers or collectors that desire to have a large number of items authenticated, we will sometimes send an expert to the customer’s location for “on-site” examination and authentication. Our experts reference what we believe is one of the largest databases of known genuine exemplars of signatures for comparison to a submitted item and draw upon their training and experience in handwriting analysis. In most cases, we take a digital photograph of the autographs that we have authenticated and store those photographs in a master database. Before shipping the item back to the customer, a tamper-evident label is affixed to the collectible. The label contains our PSA/DNA name and logo and a unique certificate number. For additional security, in all cases when an item is fully authenticated, we tag the items with synthetic DNA-laced ink, which is odorless, colorless and tasteless and visible only when exposed to a narrow band wavelength of laser light using a hand-held, battery-powered lamp. Additional verification that an autographed item was authenticated by us can be obtained by using a chemical analysis to determine whether or not the ink used in the unique DNA code by PSA/DNA was applied to the autographed item. As a result, if the tamper-evident label that we affixed to an autographed item were to be removed or otherwise separated from the item, it is still possible to verify that the item was authenticated by us.
Marketing
We employ both “pull” and “push” strategies in marketing our services to dealers and collectors of high-value collectibles. For collectibles, our “pull” strategies are designed to promote our brands, increase the preference among collectors for our authentication and grading services and encourage collectors to communicate that preference to their collectibles dealers, because most authentication and grading submissions are made by dealers. In our experience, if a customer requests a particular grading service, the dealer ordinarily will comply with that request. On the other hand, if the customer expresses no preference, the dealer will make its own choice of authentication and grading service or may even decide not to submit the collectible to an independent service for authentication and grading. Therefore, our “pull” oriented marketing programs emphasize (i) the protections that collectors and retail customers will have if they purchase collectibles that we have authenticated and graded; and (ii) the improved marketability and higher prices that they and the associated retailers can realize if they use our independent third-party authentication and grading services. Our “push” strategy, on the other hand, is designed to market our services directly to collectibles dealers to encourage them to use and promote our services.
Our “Pull” Strategy. We have developed and implemented a number of marketing programs and initiatives designed to create consumer preference for collectibles that have been authenticated and graded by us. Those programs and initiatives include:
■ |
Set Registry Programs. We provide collectors with the opportunity to participate in free Internet “Set Registry” programs that we host on our collectibles websites. These programs encourage collectors to assemble full sets of related collectibles that have been authenticated and graded by us. Generally, each registered set is comprised of between 50 and 200 separate, but related, collectibles. Examples include particular issues of coins, such as Twenty Dollar Gold Double Eagles or Morgan Silver Dollars; particular sets of trading cards, such as all Hall of Fame pitchers or a particular team, like the 1961 Yankees. Our Set Registry programs enable collectors: |
— |
to register their sets on our websites, which provides them with an off-site reference source for insurance and informational purposes; |
— |
to display on our websites, and compare the completeness and quality grades of the collectibles making up their sets to those of other collectors who have registered similar sets on our websites, thereby creating a competitive aspect to collecting that adds to its excitement; and |
— |
to enter our annual Company-sponsored Set Registry competitions and awards programs in which collectors can win awards for having collected the most complete and highest graded sets of particular series or issues of coins and trading cards. |
The collectibles that may be registered on our Set Registries and included in our Set Registry competitions are limited to collectibles that have been authenticated and graded by us. To register the collectibles to be included in a particular set, a collector is required to enter the unique certificate number that we had assigned to each of the collectibles when last authenticated and graded by us. We use the certificate number to compare the information being submitted by the collector with our database of information to verify that the collectibles being registered by a participant for inclusion in a particular set qualify to be included in that set. We have found that our Set Registry competitions (i) create a preference and increase demand among collectors for our brands, and (ii) promote the trading of collectibles authenticated and graded by us by set registrants seeking to improve the completeness and overall quality of their sets, which generally results in additional authentication and grading submissions to us. Annual awards for set completeness and quality have been issued by PCGS and PSA each year since 2002. As an indication of the increasing popularity of our Set Registry programs, approximately 193,000 sets were registered on our Set Registries as of June 30, 2016, which represents an 8% increase over the number registered as of June 30, 2015.
■ |
Collectors Club Subscription Program. We also have established “Collectors Clubs” for coin and trading card collectors. For an annual membership fee, ranging from $69 to $249, collectors receive a number of benefits, including (i) the right to have, without any further charge, a specified number of collectibles authenticated and graded by us, a privilege that non-member collectors do not have; and (ii) access to certain proprietary data that we make available on our websites or in print. At June 30, 2016, there were approximately 16,300 members in our Collectors Clubs. |
■ |
Certified Coin Exchange (“CCE”) Business-to-Business Website. The CCE website is a business-to-business website where recognized dealers make markets in and over which they can sell and purchase coins and other collectibles that have been certified by us or by other independent coin grading services. Currently, there are over 100,000 certified coins being offered at bid and ask prices. We believe that the liquidity created for certified coins by CCE increases the demand for PCGS certified coins among dealers. |
■ |
Collectors Corner Business-to-Consumer Website. We have launched Collectors Corner (www.collectorscorner.com), which is a business-to-consumer website where consumers can visit, identify, search, sort over and purchase coins, trading cards and items of currency being offered for sale by dealers. At June 30, 2016, there were over approximately 108,000 collectibles listed for sale on Collectors Corner. All items on Collectors Corner are offered by dealer members who have applied for the right to offer such collectibles on Collectors Corner. We believe that Collectors Corner has advantages over other business-to-consumer websites because the counterparties to the consumers, who buy and sell collectibles via Collectors Corner, have been accepted as sellers on the Collectors Corner website and are known members in the collectibles markets and the collectibles selling communities. Collectibles are listed at fixed prices, with the opportunity to negotiate lower prices. We believe that the increased turnover offered for collectibles listed on Collectors Corner, as well as the ability to use Collectors Corner to improve a coin or trading card set in the PCGS and PSA Set Registries, respectively, creates increased brand preference for PCGS and PSA authenticated and graded collectibles. |
Our “Push” Strategy. We also market our services directly to collectibles dealers and auctioneers to promote their use of our authentication and grading services. Our marketing message is focused on the enhanced marketability of collectibles that we have certified due to the increase in customer confidence that is attributable to our independent authentication and grading of those collectibles. These marketing programs include:
■ |
Trade Shows and Conventions. There are numerous collectibles trade shows and conventions held annually in the United States, where collectibles dealers gather on a trading floor or bourse to buy and sell collectibles. We attend the largest and most significant of those trade shows and conventions, at which we offer same-day on-site authentication and grading services, which facilitate the trading and sales of collectibles at these shows and conventions. At the same time, we obtain additional brand exposure and generate increased revenues, because dealers and collectors generally are willing to pay higher fees for same- day on-site services at trade shows and conventions. |
■ |
Expos. We own Expos Unlimited LLC (“Expos”), a trade show management company that operates one of the larger and better-known coin and collectibles shows staged in Long Beach, California. Those shows are conducted three times a year and enable us to showcase our services and expertise better than at trade shows that we do not own or operate. In addition, Expos assures us of the continued availability of this show venue for our onsite authentication and grading services. |
■ |
Authorized Dealer Network. We have implemented authorized dealer programs for coin and trading card collectibles dealers and auction companies. Authorized dealers are able to use our marketing materials which are designed to promote our services and those of our authorized dealers to collectors. Those materials include “point of sale” and “point of purchase” displays and brochures and direct mail pieces for insertion in customer mailings. In addition, authorized dealers may use our brand logotypes on their websites to attract buyers for coins and trading cards that have been authenticated and graded by us. We also conduct joint marketing programs with our authorized dealers in which we provide financial support for dealer marketing programs, approved by us, that promote both the dealer’s products and services and our authentication and grading services. |
Intellectual Property
Our intellectual property consists primarily of trademarks, copyrights, proprietary software and trade secrets. As part of our confidentiality procedures, we generally enter into agreements with our employees and consultants and limit access to, and distribution of, our software, documentation and other proprietary information.
The following table sets forth a list of our trademarks, both registered and unregistered, that are currently being used in the conduct of our business both in the United States and overseas:
Registered Marks |
Unregistered Marks | |||
Collectors Universe |
PSA |
Coin Universe | ||
Professional Coin Grading Services |
PSA/DNA |
Collectors.com | ||
PCGS |
Quick Opinion |
Expos Unlimited | ||
PCGS Secure |
Sports Market Report |
Long Beach Coin, Stamp and Collectibles Expo | ||
First Strike |
Set Registry |
|||
CoinFacts |
Rookie Graph |
|||
PCGS3000 |
Certified Coin Exchange |
|||
History in Your Hands |
CCE |
|||
PCGS Currency |
Collectors Corner |
|||
Professional Currency Grading |
FACTS |
|||
Professional Sports Authenticator |
SPOTS DATA |
We have not conducted an exhaustive search of possible prior users of the unregistered trademarks listed above, and therefore it is possible that our use of some of these trademarks may conflict with others.
Collectibles Experts
As of June 30, 2016, we employed 54 experts in our authentication and grading operations, with an average of 13 years of service with the Company. Our experts include individuals that either (i) had previously been collectibles dealers or were recognized as experts in the markets we serve, (ii) have been trained by us in our authentication and grading methodologies and procedures, or (iii) had gained authentication and grading experience at competing authentication and grading companies. However, talented collectibles authentication and grading experts are in short supply, and there is considerable competition among collectibles authentication and grading companies for their services. As a result, we focus on training young authenticators and graders (including non-US individuals) who we believe have the skills or knowledge base to become collectibles experts. We also sometimes contract with outside experts, usually collectibles dealers, to assist us with special grading issues or to enable us to address short-term increases in authentication and grading orders.
Service Warranties
We generally issue an authenticity or grading warranty with every coin and trading card authenticated or graded by us. Under the terms of the warranty, in general, if a coin or trading card that was graded by us later receives a lower grade upon resubmission to us for grading, we are obligated under our warranty either to purchase the coin or trading card at the price paid by the then-owner of the coin or trading card or, instead, at the customer’s option, to pay the difference in value of the item between its original grade as compared with its lower grade. Similarly, if a coin or trading card that has been authenticated by us is later determined not to have been authentic, we are obligated under our warranty policy to purchase the coin or trading card at the price that the then-owner paid for that collectible. We accrue for estimated warranty costs based on historical claims experience, and we monitor the adequacy of the warranty reserves on an ongoing basis. If warranty claims were to increase in relation to historical trends and experience, we would increase the warranty reserves and incur additional charges that would have the effect of reducing income in those periods during which the warranty reserve is increased. See Item 7: Critical Accounting Policies: Grading Warranty Costs, for more information regarding our warranty reserves. Before returning an authenticated or graded coin or trading card to our customer, we place the coin or trading card in a tamper-evident, clear plastic holder that encapsulates a label identifying the collectible as having been authenticated and graded by us. The warranty is voided in the event the plastic holder has been broken or damaged or shows signs of tampering. See footnote 8 to our consolidated financial statements included elsewhere in this report, for activity in our warranty reserves for fiscal years 2014 to 2016.
We do not provide a warranty with respect to our opinions regarding the authenticity or quality of autographs or memorabilia.
We devote significant resources, including a 29-person staff that provides personalized customer service and support in a timely manner, while also supporting our Set Registry, trade show programs and overseas offices. On our websites, customers are able to check the status of their collectibles submissions throughout the authentication and grading process and to confirm the authenticity of the collectibles that we have graded. When customers need services or have any questions, they can telephone or e-mail our support staff, Monday through Friday between the hours of 7:00 a.m. and 5:00 p.m., Pacific Time. We also involve our collectibles experts in providing support services, when necessary, to address special issues.
Supplies
In order to obtain volume discounts, through June 30, 2016 we have chosen to purchase substantially all of the injection-molded plastic parts for our clear plastic holders principally from two suppliers. We have chosen to order our most critical high-volume plastic part from both of these suppliers. We choose one or the other of these suppliers to manufacture other less critical parts. We typically concentrate the purchase of holders through one supplier when developing new holders. There are numerous suppliers for these parts, and we believe that, if necessary, we could obtain those parts from other suppliers without incurring significant costs. However, if it became necessary for us to obtain any parts from another supplier, we might have to arrange for the fabrication of a die for the new supplier. Fabrication of high-value precision dies can be a lengthy process. Although we do not have back-up dies for some of our high-value volume injection-molded parts, we own the dies used to manufacture the parts, and we believe the inventory of parts we maintain is sufficient to give us the time to have another supplier build the parts, should the need to do so arise or should we decide to use another supplier for certain parts. As our business expands overseas we may source parts from overseas suppliers.
Competition
Coin Authentication and Grading. Our principal competitors in the coin authentication and grading market are Numismatic Guaranty Corporation of America (“NGC”), Independent Coin Grading and ANACS, all of which are privately owned businesses.
Trading Card Authentication and Grading. Our primary competitors in trading card authentication and grading are Beckett Trading Card Grading Corporation, and Trading Card Guaranty, LLC.
Autograph Authentication and Grading. In the vintage autograph authentication market, we compete with James Spence Authentication (“JSA”) and a few smaller competitors.
We believe that the principal competitive factors in our collectibles authentication and grading markets are (i) brand recognition and awareness; (ii) an established reputation for integrity, independence and consistency in our approach to establishing authenticity and in the application of grading standards; and (iii) responsiveness of service. We have found that price is much less of a factor in the case of vintage collectibles, but is a more important consideration with respect to modern coins and trading cards because of their significantly lower values. We believe that our PCGS, PSA and PSA/DNA brands compete favorably with respect to all of these factors and are among the leaders in each of their respective markets. Barriers to entry into the authentication and grading market are relatively low, especially in the trading card authentication and grading market. However, brand name recognition and a reputation for integrity, independence and consistency in the application of grading standards can take several years to develop. In addition, we believe that the sheer number of coins and cards that are in PCGS and PSA holders acts as a barrier to entry to new competitive start-up brands. The limited supply of experienced collectibles experts also operates as a barrier to entry.
Information Technology
IT Systems. We have developed a number of proprietary software systems for use in our authentication and grading operations, as well as for the operation and maintenance of our websites. Custom applications include grading systems, inventory control and order tracking systems, and other internally developed applications to manage the day-to-day operations of the Company. Websites have multiple customer-facing content/information systems, including (but not limited to) PSA CollectibleFacts, PCGS CoinFacts, multiple price guide and population reports, and multiple eCommerce solutions. Internally, these websites and applications are managed through a proprietary content management system. The majority of internally developed systems are written in Microsoft C# .NET and, in some limited cases, Microsoft Visual Basic .NET (all using a number of high-availability Microsoft SQL Server clusters on the back end).
The majority of the information technology systems (both for internal use and on publicly-accessible websites) are located at an SSAE 16 compliant data center in Southern California. This data center offers:
● |
24/7/365 monitoring and alerting of environmental conditions (including temperature, humidity, power status, etc.) through multiple/redundant hardware sensors and systems; |
● |
24/7/365 physical security through both technology (cameras, sensors, biometric access control, etc.) and always-present security staff; and |
● |
redundant Internet connectivity, power, and cooling systems that are tested on a regular basis. |
We also maintain a number of systems to monitor the availability and performance of our sites and systems, including:
● |
24/7/365 monitoring and alerting of website availability and performance through both internally developed and third-party solution providers; and |
● |
24/7/365 monitoring and alerting of Internet-based security threats through internal security systems, dedicated hardware devices, and external third-party solution providers. |
In addition to the Southern California data center, smaller internal-use-only local area networks exist in our Southern California, New Jersey, Paris, Shanghai, and Hong Kong operations centers. However, the Information Technology infrastructure in those smaller offices is limited. Therefore any damage to, or failure of, our computer systems due to a catastrophic event in Southern California, such as an earthquake, could cause an interruption in our services. These risks are mitigated by a comprehensive data backup/protection solution, which includes regular rotation of offsite data storage. We are also in the process of transitioning many of our key business systems to the Amazon Web Services (AWS).
Cyber Security. Cyber security is one of our top priorities and is always contemplated when developing and deploying new systems (both software and hardware). To this end, key staff members maintain industry-standard security and audit certifications and regularly expand their security knowledge and deploy new security tools as considered necessary.
We maintain multiple Internet connections for both web serving and outbound Internet access. Internet access points (across all offices) are protected with Palo Alto enterprise-level firewalls and security products. Additionally, access to critical network components is protected by both local Intrusion Detection Systems (IDS) and a security-centric managed service provider. In addition to the constant monitoring of these security devices, network security scans (of both internal and publicly-accessible servers) are performed on a regular basis. These scans include penetration/intrusion testing, vulnerability assessments, and attack surface analysis. We have multiple overlapping security infrastructures to mitigate potential single failures. However, as many other businesses have experienced, there can be no assurance that the security measures we have adopted will prove to be adequate to enable us to detect and prevent all cyber-security breaches that could lead to the theft by hackers of confidential information entrusted to us by our customers, including passwords and credit card numbers. See “Risk Factors-Our business is subject to online security risks, including security breaches” below in this report.
Government Regulation
With the exception of laws in some states that require memorabilia authenticators to certify to the accuracy of their authentication opinions, there are no material government regulations specifically relating to the authentication and grading businesses that we conduct, other than regulations that apply generally to businesses operating in the markets where we maintain operations or conduct business.
Employees
As of June 30, 2016, we had a total of 302 employees, of which 270 were full-time employees and 32 were part-time employees. Our authentication and grading-related businesses employed 247 people, including our 54 experts and 29 customer service and support personnel. Of the other 55 employees, 17 work in information services, 9 in marketing, 5 in our CCE subscription business, 9 in our Expos business (of which 8 were part-time employees), and 15 in other business and administrative services. We have never had a work stoppage, and no employees are represented under collective bargaining agreements. We consider relations with our employees to be good.
Available Information
Our internet address is www.collectorsuniverse.com. We post links to our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our websites and the information contained thereon are not part of, nor are they incorporated into, this Report.
ITEM 1A RISK FACTORS
Our business is subject to a number of risks and uncertainties that could prevent us from achieving our business objectives and could hurt our future financial performance and the price performance of our common stock. Such risks and uncertainties also could cause our future financial condition and future financial performance to differ significantly from our current expectations, which are described in the forward-looking statements contained in this Annual Report. Those risks and uncertainties, many of which are outside of our control, include the following:
A decline in the popularity of high-value collectibles and a resulting decrease in submissions for our services could adversely impact our business.
The volume of collectibles submitted to us for authentication and grading is affected by the demand for and market value of those collectibles and the popularity of certain coins released by the United States Mint. As the demand for and value of collectibles increase, authentication and grading submissions, as well as requests by submitters for higher priced faster turnaround times, can also increase. However, that also means that a decline in the popularity and, therefore, in the value of the collectibles that we authenticate and grade would cause decreases in authentication and grading submissions to us and in the requests we receive for faster turnaround times resulting in declines in our revenues and profitability. We have found, over the years, as evidenced by the reduction in our coin grading fees starting in the fourth quarter of fiscal 2012 and continuing through the first half of fiscal 2013, and again in the fourth quarter of fiscal 2015 and the first half of fiscal 2016, that the popularity of collectibles for certain specific coin programs, can vary due to a number of factors, most of which are outside of our control, including perceived scarcity of collectibles, general consumer confidence and trends and their impact on disposable income, precious metals prices, interest rates and other general economic conditions.
Our dependence on coin authentication and grading services for most of our revenues makes us vulnerable to changes in economic conditions that could adversely affect the demand for those services and our operating results.
Coin authentication and grading and other coin-related services accounted for approximately 66%, 68% and 69% of our total net revenues in fiscal 2016, 2015 and 2014, respectively. Our modern coin authentication and grading revenues represented approximately 20% of our total revenues in fiscal 2016. We believe that the principal factors that can lead to fluctuations in coin grading submissions include:(i) economic downturns which can result in a decline in consumer and business confidence and disposable income and, therefore, the willingness of dealers and collectors to buy collectible coins, (ii) the performance of the stock and bond markets, the level of interest rates and fluctuations in the value of the U.S. Dollar and in the value of precious metals, which can lead investors to shift some of their investments between stocks and bonds, on the one hand, and precious metals, on the other; (iii) in the case of modern coin submissions, increases or reductions in the marketing activities or the popularity of programs that are conducted by the U.S. Mint and by dealers who specialize in selling modern coins (iv) the pricing of our services particularly for our modern coin programs and (v) short-term changes in the value of gold around the time of collectibles trade shows. This lack of diversity in our sources of revenues and our dependence on coin authentication and grading submissions for a majority of our net revenues make us more vulnerable to these conditions, which could result in reductions in our total net revenues and gross margin and, therefore, hurt our operating results.
Moreover, if the economic recovery in the United States remains relatively weak for an extended period of time or another economic downturn were to occur, our dependence on coin authentication and grading services for our revenues could increase, because the prices that dealers and collectors can realize on sales of trading cards generally are significantly lower than the prices they are able to realize on sales of collectible coins, making it more difficult, for trading card collectors to afford or justify incurring the costs of obtaining independent authentication and grading services. In addition, our coin business is expanding into overseas markets, thereby increasing our reliance on the coin market.
Declines in general economic conditions could result in decreased demand for our services, which could adversely affect our operating results.
The availability of discretionary or disposable income and the confidence of collectors and dealers about future economic conditions are important factors that can affect their willingness and ability to purchase, and the prices that they are willing to pay for, high-value collectibles. Additionally, declines in the confidence and reductions in the cash flows of, and reductions in credit that is available to collectibles dealers, can adversely affect their ability to purchase high-value collectibles and to sell collectibles that may have declined in value due to adverse changes in economic conditions of this nature. Declines in purchases and sales, or in the value of collectibles usually result, in turn, in declines in the use of authentication and grading services, as such services are most often used in conjunction with and to facilitate collectibles sale and purchase transactions. As a result, economic uncertainties, downturns and recessions can and do adversely affect our operating results by (i) reducing the frequency with which collectibles dealers and collectors submit their coins, trading cards and other collectibles for authentication and grading including, in particular, modern coins and trading cards, primarily because authentication and grading fees are relatively high in relation to the value of such collectibles; and (ii) adversely affecting the ability of customers to pay outstanding accounts receivable on a timely basis.
Temporary popularity of some collectibles may result in short-term increases, followed by decreases, in the volume of submissions for our services, which could cause our revenues to fluctuate.
Temporary popularity or “fads” among collectors, or the popularity of certain coin marketing programs, either by the U.S. Mint or by dealers or distributors of collectibles, may lead to short-term or temporary increases, followed by decreases in the volume and in the average service fees earned on collectibles that we authenticate and grade. Trends of this nature may result in significant period-to-period fluctuations in our operating results and could result in declines in our net revenues and profitability, not only because of a resulting decline in the volume of authenticating and grading submissions, but also because such trends could lead to increased price competition, or pressure on the level of fees we can charge customers, and could require us to reduce our authentication and grading fees in order to maintain market share.
Our top five customers account for approximately 16% of our total net revenues in fiscal 2016
During the year ended June 30, 2016, five of our customers accounted, in the aggregate, for approximately 16% of our total net revenues. As a result, the loss of any of those customers, each of which is a collectibles dealer or consolidator, or a decrease in the volume of grading submissions by any of them could cause our net revenues to decline and, therefore, could harm our operating results.
There are risks associated with new or expanded service offerings and geographic expansion, with which we have little experience.
On an ongoing basis, we seek to introduce new services that we can offer to our existing authentication and grading customers as a means of increasing our net revenues and profitability. As discussed under our growth strategies on Page 7, we are investing in Collectors.com on the expectation that over time we can generate revenues from sellers of collectibles from aggregating collectibles items for sale. In addition, in recent years we began offering and providing coin authentication and grading services in Paris, Hong Kong and Shanghai. Those new services and our international operations, however, may not meet our expectations and may prove to be unprofitable which could lead to impairments of amounts capitalized and negatively impact our operating results.
Our business is subject to risks associated with doing business outside the United States.
We have expanded our coin authentication and grading businesses into foreign markets including Europe and China. Those operations pose risks that might adversely affect, possibly materially, our future financial performance. Those risks include the following:
• |
potential difficulties in complying with multiple and potentially conflicting laws and regulations, which could increase our costs of doing business internationally and could expose us to possible governmental or legal action in the foreign countries where we conduct business; |
• |
difficulties in staffing and managing international operations; |
• |
differences in intellectual property protections; |
• |
potentially adverse tax consequences due to overlapping or differing tax structures; |
• |
fluctuations in currency exchange rates; and |
• |
risks associated with operating a business in a potentially unstable political climate. |
We invoice our overseas customers for our coin authentication and grading services in the local foreign currency in the country in which the business operates, except in the case of Hong Kong, we invoice our customers in U.S. dollars. Through June 30, 2016, the impact of fluctuations in foreign currencies on our financial results has been immaterial, although we did experience foreign currency losses primarily associated with the fluctuations in the Euro and the Chinese Renminbi in relation to the U.S. Dollar in fiscal 2016. There can, however, be no assurance that there will not be changes in foreign exchange rates that would have a material adverse effect on our results of operations in the future, as our international operations increase in size.
We are dependent on our key management personnel.
Our performance is greatly dependent on the performance of our senior management and certain other key employees. As a result, the loss of the services of any of our executive officers or other key management and business development employees could harm our business. Some of our executive officers and key employees are experts in the collectibles markets and have industry-wide reputations for authentication and grading of collectibles. The loss of key employees and experts, could have a negative effect on our reputation for expertise in the collectible coin market and could lead to a reduction in coin authentication and grading submissions to us.
We are dependent on our collectibles experts.
In each of our markets, there are a limited number of individuals who have the expertise to authenticate and grade collectibles, and competition for available collectibles experts is intense. Accordingly, our business and our growth initiatives are heavily dependent on our ability (i) to retain our existing collectibles experts, who have developed relatively unique skills and enjoy a reputation for being experts within the collectibles markets, and (ii) to implement personnel programs to enable us to add collectibles experts, as necessary, to grow our business, both in the United States and overseas and to offset employee turnover that can occur from time to time. Moreover, some of our experts could leave our company to join competitors or start a competing business. If we are not successful in retaining our existing collectibles experts or in hiring and training new collectibles experts, this could limit our ability to grow our business and adversely affect our operating results and financial condition.
Damage to our reputation could have a material adverse effect on our business, financial condition and results of operations.
We have developed a reputation as one of the leading third party providers of collectibles authentication and grading services, as well as related services, as a result of a number of factors including, we believe, the rigorousness and consistency of our grading standards and the integrity of our grading processes, which enables us to provide warranty protection to our customers, our knowledge of the collectibles markets in which we operate, and innovative programs and services that we have developed and are able to offer to our customers, including the Collectors Club, our Set Registry Programs and our Certified Coin Exchange dealer-to-dealer Internet bid-ask market. As a result, our continued success is heavily dependent on our maintaining that reputation among collectibles dealers and collectors. Failures or errors in authentication or grading processes, such as inconsistent application of grading standards or incidents that put the integrity of those processes into question, could significantly impair our reputation in the marketplace which, in turn, could lead to a loss of customer confidence and a decrease in the demand for our services and, therefore, could have a material adverse effect on our business, financial condition and results of operations.
We could suffer losses on authentication and grading warranties.
In general, we issue an authenticity or grading warranty for coins and trading cards that we authenticate or grade. Those warranties provide that:
■ |
if a coin or trading card that we authenticated and sealed in one of our tamper-evident plastic cases is later determined not to have been genuine, we would have to purchase the collectible at its current market value; and |
■ |
if a coin or trading card that we graded and sealed in one of our tamper-evident plastic cases later receives a lower grade upon resubmission to us for grading, we would be obligated either to purchase the collectible at the current market value or to pay the difference in its value at its original grade, as compared to its value at the lower grade. |
We have no insurance coverage for claims made under these warranties, and therefore we maintain reserves for such warranty claims based on historical experience. However, there is no assurance that these warranty reserves will prove to be adequate, and as we expand our services in overseas markets, we may incur higher warranty claims than we have experienced in previous years. If our warranty reserves prove to be inadequate, our gross margin and operating results could be harmed. As a result, we monitor the adequacy of our warranty reserves on an ongoing basis. For example, during 2008, we unexpectedly received certain coin grading warranty claims that were significant when compared to our prior warranty claims experience. As a result, we recognized an additional expense in 2008 to provide for those claims. At that time, we also increased our warranty accrual rate to reflect this higher warranty claims experience. Those actions contributed to an increase in our costs of sales and, therefore, reduced our operating income and earnings in fiscal 2008. In addition, in fiscal 2016, we re-evaluated and reduced our warranty reserves by approximately $0.7 million as we determined they were excessive. See note 8 to the consolidated financial statements for activity on our warranty reserves for fiscal years 2014 to 2016.
Increased competition could adversely affect our financial performance.
Although there are few major competitors in the collectibles authentication and grading markets in which we currently operate, competition in these markets is, nevertheless, intense. Increased competition in our collectibles markets could adversely affect our pricing and profit margins and our ability to achieve further growth, and we cannot provide assurances that we will continue to be successful in competing against existing or future competitors in our collectibles markets. Also, if we were to enter into new collectibles markets, it is likely we would face intense competition from competitors in those markets who are likely to have greater brand name recognition and long-term relationships with collectibles dealers and individual collectors in those markets than we will have. Such competition could adversely affect our ability to generate profits and could cause us to incur losses or impairment charges in those markets and damage our financial condition.
There is no assurance that we will continue to pay cash dividends at current levels or at all.
The Company’s current policy is to pay cash dividends to stockholders at $0.35 per share per quarter. Our dividend policy was changed in the third quarter of fiscal 2015 to increase the quarterly dividend from $0.325 to $0.35 per share. However, the continued payment of cash dividends is subject to a number of factors, including changes in market and financial conditions and the cash requirements of our business. Therefore, there is no assurance that the amount of the current quarterly cash dividend will not be reduced or the payment of cash dividends will not be suspended or discontinued by the Board of Directors. See “MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES”─Dividends in Part II, Item 5 of this Annual Report.
Our reliance on two suppliers for principally all of our “tamper-evident,” clear plastic coin and trading card holders exposes us to potential supply and quality problems.
We place all of the coins and trading cards that we authenticate and grade, in tamper-evident, clear plastic holders. In addition, we incorporate security features into the holders to mitigate the risk of counterfeits. In order to take advantage of volume-pricing discounts, we purchase substantially all of those holders, on a purchase order basis, from two principal suppliers. For our highest volume most critical plastic part, we have chosen to split the supply of this part between our two supplies. For our other parts, we have one or the other of these suppliers manufacture the part. In addition, when developing new holders, we concentrate the purchase of holders through one supplier initially. Our reliance on a limited number of suppliers for a substantial portion of those plastic holders exposes us to the potential for delays in our ability to deliver timely authentication and grading services in the event that one of the suppliers was to terminate its services to us or encounter financial or production problems. If, in such an event, we were unable to obtain replacement holders in a relatively short period of time, we could lose customer orders, or incur additional production costs. To mitigate this risk, the Company (i) owns the dies used to manufacture the parts, (ii) has increased its inventory of holders, to give us more time to arrange for production from other suppliers in the event of a termination of or interruption in service from either of our existing suppliers. However, if the replacement holders obtained from other suppliers are not of comparable quality to those produced by our existing suppliers, or counterfeit holders were manufactured by other suppliers, we could be exposed to additional warranty claims because tampering with those holders may not be as readily detectible. These occurrences could cause a decline in our net revenues and increases in our costs of sales which would have a material adverse effect on our results of operations.
Our computer systems and network systems may be vulnerable to system failure due to a lack of redundant systems at other locations.
Our operations are dependent on our ability to protect our computer systems against damage from fire, power loss, telecommunications failure, earthquakes and similar catastrophic events. In this regard, Southern California, where we are located and our computer systems are housed, is particularly vulnerable to earthquakes and fires that could result in damage to our computer systems that could cause interruptions of our services. Additionally, we could encounter disruptions that would harm our business as a result of problems on the internet or actions of internet users that could make it difficult for our customers to access our websites. Difficulties encountered during planned system upgrades or re-implementations also could lead to disruptions of our services.
We do not have redundant computer systems at any locations that are remote from Southern California. As a result, if any such events, disruptions or other of these problems were to occur, we could become unable to access information that is critically important to our ability to continue our operations without costly interruptions in the delivery of our services which could harm our business, operating results and financial condition. To mitigate these risks in fiscal 2015, the Company began a transition of many of its key business systems to the Amazon Web Services (AWS) cloud.
Our business is subject to online security risks, including security breaches.
In the course of our business, we receive and store confidential personally identifiable information provided to us by our customers, such as passwords and credit card information.
An increasing number of large internet companies and traditional “brick and mortar” businesses have disclosed security breaches of their websites and computer systems that have led to the interruptions of service and, in certain cases, instances of the misappropriation or theft of confidential personally identifiable information of their customers (often referred to as “identity theft”). Because the techniques used by the perpetrators of such security breaches change frequently and may be difficult to detect, like those companies and businesses, we may be unable to anticipate the techniques used in such breaches or to implement adequate preventative measures. Data security breaches may also result from non-technical causes such as, for example, actions of employees or third party service providers. Our servers also are vulnerable to computer viruses or malware and physical or electronic break-ins that could prevent our customers from accessing our online services. In addition, hardware that we develop or procure from third parties may contain defects in design or other problems that could unexpectedly compromise information security or disrupt our operations. We rely on encryption and authentication technology licensed from third parties to provide for secure storage and transmissions of confidential information, including customer passwords and payment card numbers. However, as the recent disclosures by large internet companies and traditional businesses indicate, such technology may not be sufficient to enable us to detect or prevent security breaches or the misappropriation or theft of personally identifiable customer information, which could damage our reputation and lead customers to discontinue their use of our services.
In addition, security breaches could result in a violation of privacy and other applicable laws, thereby exposing us to potentially significant legal or financial exposure to government actions and private litigation. Governmental agencies investigating any such breaches may seek to impose fines or other monetary penalties on us or to seek injunctive relief that could materially increase our data security costs and adversely impact our operations.
We rely on third parties for various Internet and processing services.
Our operations depend on a number of third parties for Internet access and delivery services. We have limited control over these third parties and no long-term relationships with any of them. For example, we do not own a gateway onto the Internet, but, instead, rely on Internet service providers to connect our website to the Internet. Should the third parties that we rely on for Internet access or delivery services be unable to serve our needs for a sustained time period as a result of a strike, natural disaster or for any other reason, our revenues and business could be harmed.
Acquisitions, the commencement of new businesses and expansion into overseas markets, present risks, and we may be unable to achieve our financial and strategic goals related to those activities.
There may be opportunities that present themselves to acquire existing businesses, commence new businesses or expand our markets through overseas expansion that would give us the opportunity to increase our revenues and our earnings. The purchase or commencement of a new business expansion overseas, however, present a number of risks and uncertainties, including (i) difficulties in integrating a new business or a new location into our existing operations, as a result of which we may incur increased operating costs that can adversely affect our operating results; (ii) the risk that our current and planned facilities, computer systems and personnel and controls will not be adequate to support our expanded operations; (iii) the diversion of management time and capital resources from our existing businesses, which could adversely affect the performance and our operating results; (iv) dependence on key management personnel of the acquired or newly started businesses or at the new geographic locations and the risk that we will be unable to integrate or retain such personnel; and (v) the risk that the anticipated benefits of any acquisition or of the commencement of any new business or overseas operations may not be realized or changes we make to an acquired business may harm the performance of that business, in which event we will not be able to achieve an acceptable return or we may incur losses on our investment.
We depend on our ability to protect and enforce our intellectual property rights.
We believe that our trademarks and other proprietary rights are important to our success and competitive position. We rely on a combination of patents, trademarks, copyright and trade secret laws to establish and protect our proprietary rights. However, the actions we take to establish and protect our intellectual and other proprietary rights may prove to be inadequate to prevent imitation of our services or products or to prevent others from claiming violations of their intellectual and proprietary rights by us. In addition, others may develop similar trade secrets or other intellectual property independently or assert rights in our intellectual and other proprietary rights that could lead them to seek to block sales of our services based on allegations that use of some of our marks or other intellectual property constitutes a violation of their intellectual property rights.
Our unregistered trademarks could conflict with trademarks of others.
We have not conducted an exhaustive search of possible prior users of our unregistered trademarks or service marks. Therefore, it is possible that our use of some of these trademarks or service marks may conflict with the rights of others. As a result, we could face litigation or lose the use of some of these trademarks or service marks, which could have an adverse effect on our name recognition and result in a decrease in our revenues and an increase in our expenses.
The imposition of government regulations could increase our costs of doing business.
With the exception of state laws applicable to autograph authentication, the collectible coin and other high-value collectibles markets are not currently subject to direct federal, state or local regulation. However, from time to time government authorities discuss additional regulations which could impose restrictions on the collectibles industry, such as regulating collectibles as securities or requiring collectibles dealers to meet registration or reporting requirements, or regulating the conduct of collectibles auction businesses. Adoption of laws or regulations of this nature could lead to a decline in sales and purchases of collectibles and, therefore, also to a decline in the volume of coins, trading cards and other collectibles that are submitted to us for authentication and grading.
The market for our shares is limited, which may adversely affect the trading value and liquidity of our common stock.
Affiliates of the Company own a total of approximately 1,439,000 shares (or about 16% of the 8,898,104 shares that were outstanding at June 30, 2016) which are not included in our public float. As a result, the trading volume of our shares is relatively low, at a daily average of approximately 19,000 shares during the 90 days ended July 31, 2016, which reduces the liquidity of our shares, making it more difficult for our stockholders to sell their shares if the need to do so arises. These factors may depress, and make it more difficult to achieve increases in, the trading price of our shares.
If our quarterly results are below market expectations, the price of our common stock may decline.
Many factors, including those described in this “Risk Factors” section, can affect our business, financial condition and results of operations, which makes the prediction of our future financial results difficult and uncertain. These factors include:
■ |
increases or decreases in the numbers and mix of collectibles graded from period to period; |
■ |
changes in market conditions that can affect the demand for our authentication and grading services, such as a decline in the popularity of certain collectibles and volatility in the prices of gold and other precious metals, or the existence, popularity or the absence of U.S. Mint programs. |
■ |
changes in economic conditions that reduce the availability of disposable income and may cause collectors and collectibles dealers to reduce their purchases of collectibles, which could result in declines in the demand for the services we provide; and |
■ |
the actions of our competitors. |
If, as a result of these or other conditions or factors, our quarterly operating results fall below market expectations, some of our stockholders may sell their shares, which could adversely affect the trading prices of our common stock. Additionally, in the past, companies that have experienced declines in the trading prices of their shares due to events of this nature have been the subject of securities class action litigation. If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and resources, thus harming our business.
Provisions in our charter documents or in Delaware law may make an acquisition of us more difficult or delay a change in control, which may adversely affect the market price of our common stock.
Our Amended and Restated Certificate of Incorporation and Bylaws contain anti-takeover provisions, including those listed below, that could make it more difficult for a third party to acquire control of us, even if that change of control would be beneficial to our stockholders:
■ |
our board of directors has the authority to issue additional common stock and preferred stock and to determine the price, rights and preferences of any new series of preferred stock without stockholder approval; |
■ |
there are limitations on who can call special meetings of our stockholders; |
■ |
stockholders may not take action by written consent; and |
■ |
In addition, provisions of Delaware law and provisions of our stock incentive plans may also discourage, delay or prevent a change in control or unsolicited acquisition proposals. |
Moreover, the fact that our affiliates own more than 16% of our outstanding shares may deter third parties from seeking to acquire control of the Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
We lease approximately 48,500 square feet for our California-based headquarters under a nine-year lease that expires on March 31, 2019. We currently sublease 4,260 square feet of this office space to a related party subtenant with an expiration date that coincides with the expiration of the Company's lease. In addition, we currently rent additional small office spaces in California, New Jersey, Paris, France, Hong Kong and Shanghai, China.
Although we discontinued and exited our jewelry authentication and grading businesses in March 2009, we continue to have payment obligations with respect to one office facility in New York City that we had leased for those businesses. In May 2010, that facility was returned to the landlord, and the lease terminated in exchange for a reduction in the remaining financial obligations that we have with respect to that facility. See “Critical Accounting Policies and Estimates—Accrual for Losses on Facility Leases.”
ITEM 3. LEGAL PROCEEDINGS
We are named from time to time as a defendant in lawsuits that arise in the ordinary course of business. We do not believe that any of such lawsuits that are currently pending are likely to have a material adverse effect on our business, financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
EXECUTIVE OFFICERS OF REGISTRANT
Name |
Age |
Positions | ||
Robert G. Deuster |
66 |
Chief Executive Officer | ||
David G. Hall |
69 |
President | ||
Joseph J. Wallace |
56 |
Chief Financial Officer |
ROBERT G. DEUSTER has been the Company’s Chief Executive Officer since October 15, 2012. Mr. Deuster served as Chairman and Chief Executive Officer of Newport Corporation, a public company that is a global supplier of laser, optical and motion control products, from May 1996 until his retirement in October of 2007. He also served as President of Newport from May 1996 until July 2004, and in June 1997 became Chairman of the Board. From 1985 to 1996, Mr. Deuster served in various senior management positions at Applied Power, Inc. (now Actuant Corporation, a New York Stock Exchange listed company), which is a global manufacturer of electrical and hydraulic products, serving as Senior Vice President of the Distributed Products Group from 1994 to 1996, President of the Barry Controls Division from 1989 to 1994, President of the APITECH Division from 1986 to 1989 and Vice President of Sales and Marketing of the Enerpac Division from 1985 to 1986. From 1975 to 1985, he held engineering and marketing management positions at General Electric Company's Medical Systems Division. Mr. Deuster currently serves on the boards of directors of two public companies: Symmetry Medical Inc., which provides medical devices and solutions to the global orthopedic market, and Pico Holdings, Inc., which acquires and develops unique undervalued assets, including water assets, land, and other businesses in strategic areas. He also serves as a director of Ondax, Inc., a private optical components company. Mr. Deuster received a B.S. in Electrical Engineering from Marquette University in 1973. Mr. Deuster holds a Masters Professional Director Certification from the American College of Corporate Directors, a public company director education and credentialing organization.
DAVID G. HALL has served as President of Collectors Universe since October 2001 and as a Director since its founding in February 1999. From April 2000 to September 2001, Mr. Hall served as the Chief Executive Officer of the Company and as Chairman of the Board from February 1999 to October 2001. Mr. Hall was a director of Professional Coin Grading Service, Inc., and was its Chief Executive Officer from 1986 to February 1999, when it was acquired by the Company. Mr. Hall was honored in 1999 by COINage Magazine as Numismatist of the Century, along with 14 other individuals. In 1990, Mr. Hall was named Orange County Entrepreneur of the Year by INC. Magazine. In addition, Mr. Hall has written A Mercenary’s Guide to the Rare Coin Market, a book dedicated to coin collecting. Mr. Hall invented and introduced the concept of and developed the business of independent third party grading of high value collectible coins and sports cards. He is also known in the numismatics community as one of the leading experts in identifying and grading high value collectible coins and he is in demand as a speaker at coin conventions and trade shows. Mr. Hall holds a Professional Director Certification from the American College of Corporate Directors, a public company director education and credentialing organization.
JOSEPH J. WALLACE became the Company’s Chief Financial Officer in September 2005. Prior to becoming Chief Financial Officer, he was the Company’s Vice President of Finance from November 2004 and Controller from June 2004. From 1997 to 2003, Mr. Wallace was Vice President of Finance, Chief Financial Officer and Secretary of STM Wireless, Inc., a publicly traded company engaged in the business of developing, manufacturing and marketing satellite communications products and services. Mr. Wallace is a Fellow of the Institute of Chartered Accountants in Ireland, and a CPA in the State of California.
PART II
ITEM 5. MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NASDAQ Global Market, trading under the symbol CLCT. The following tables set forth the high and low closing prices of our common stock, as reported by NASDAQ, and the cash dividends per share that we paid to our stockholders, in each of the fiscal quarters in the fiscal years ended June 30, 2016 and 2015:
Closing Share Prices |
Cash |
|||||||||||
Fiscal 2016 |
High |
Low |
Per Share | |||||||||
First Quarter |
$ | 20.33 | $ | 14.63 | $ | 0.35 | ||||||
Second Quarter |
17.61 | 14.82 | 0.35 | |||||||||
Third Quarter |
17.35 | 13.95 | 0.35 | |||||||||
Fourth Quarter |
19.75 | 16.10 | 0.35 |
Closing Share Prices |
Cash |
|||||||||||
Fiscal 2015 |
High |
Low |
Per Share | |||||||||
First Quarter |
$ | 22.00 | $ | 18.78 | $ | 0.325 | ||||||
Second Quarter |
25.82 | 19.34 | 0.325 | |||||||||
Third Quarter |
24.95 | 19.76 | 0.35 | |||||||||
Fourth Quarter |
23.50 | 19.75 | 0.35 |
We had approximately 98 holders of record and approximately 7,508 beneficial owners of our common stock as of June 30, 2016.
Dividends. In January 2015, the Board of Directors approved the Company’s current cash dividend policy, which provides for the payment of cash dividends to our stockholders of $0.35 per share, per quarter, for an annual dividend of $1.40 per share. The previous dividend policy of $0.325 per share per quarter called for an annual dividend of $1.30 per share, and applied for the period October 2010 to December 2014. Dividends paid to our stockholders in fiscal 2016, 2015 and 2014 totaled $12.0 million, $11.4 million, and $10.7 million, respectively.
The declaration and payment of cash dividends in the future, pursuant to the Company’s dividend policy, is subject to final determination each quarter by the Board of Directors based on a number of factors, including the Company’s financial performance and its available cash resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company and its stockholders. Accordingly, there is no assurance that, in the future, the amount of the quarterly cash dividend will not be reduced or that the payment of dividends will not be suspended or altogether discontinued.
Share Buyback Program. In December 2005, our Board of Directors approved a share buyback program that authorized us to repurchase up to $10,000,000 of our shares of common stock in open market or privately negotiated transactions, in accordance with applicable Securities Exchange Commission (“SEC”) rules, when opportunities to make such repurchases, at attractive prices, become available. As of June 30, 2016, we had $3.7 million available for future share repurchases under this program. There were no repurchases of shares under this program in fiscal 2016, 2015 or 2014. Moreover, we are under no obligation to repurchase any additional shares under this program, and the timing, actual number and value of any additional shares that may be repurchased by us under this program will depend on a number of factors, including the Company’s future financial performance, the Company’s available cash resources and competing uses for the cash, prevailing market prices of the Company’s common stock, the number of shares that become available for sale at prices that the Company believes are attractive and the effect that such repurchases may have on our public float and the market liquidity of our shares.
STOCK PERFORMANCE GRAPH
The following graph compares, for each of the years in the five year period ended June 30, 2016, the cumulative total returns for the Company and for (i) the companies included in the Russell 2000 Index, of which the Company is a member, and (ii) an index of fourteen companies that we selected (the “Peer Group”).
The companies comprising the Peer Group and their respective trading symbols are: Cass Information Systems Inc. (“CASS”), Cherokee Inc. (“CHKE”), Daily Journal Corp. (“DJCO”), Forward Industries Inc. (“FORD”), Innodata Inc. (“INOD”), Jetpay Corp. (“JYPY”), Lakeland Industries Inc. (“LAKE”), Planet Payment Inc. (“PLPM”), PRGX Global Inc. (“PRGX”), Reis Inc. (“REIS”), Sequential Brands Group Inc. (“SQBG”), Techtarget Inc. (“TTGT”), Value Line Inc. (“VALU”), and Xo Group Inc. (“XOXO”). The cumulative total return data for these companies was obtained from Thomson Reuters.
The selection of Peer Group companies presented a challenge for us, because of the relative uniqueness of our business, which consists primarily of providing authentication and grading and information services to collectibles dealers and to individuals who collect and buy and sell coins and other high value collectibles.
|
At June 30, | ||||||||||||||||||||||||
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
|||||||||||||||||||
Collectors Universe, Inc. |
100.00 | 107.45 | 107.74 | 171.02 | 185.13 | 198.84 | ||||||||||||||||||
Russell 2000 |
100.00 | 97.92 | 121.63 | 150.38 | 160.13 | 149.35 | ||||||||||||||||||
Peer Group |
100.00 | 103.46 | 101.72 | 134.14 | 144.44 | 135.11 |
This Stock Performance Graph assumes that $100 was invested, on June 30, 2011, in the Company’s shares, the Russell 2000 Index and in the shares of the companies in the Peer Group Index, respectively, and that any dividends issued for the indicated period were reinvested. Stockholder returns shown in the Stock Performance Graph are not necessarily indicative of future stock performance.
This above performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Collectors Universe, Inc. under that Act or the Securities Act of 1933, as amended.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected operating data for the fiscal years ended June 30, 2016, 2015 and 2014, and the selected balance sheet data at June 30, 2016 and 2015 set forth below are derived from the Company’s audited consolidated financial statements included elsewhere in this Annual Report. The selected operating data for the fiscal years ended June 30, 2013 and 2012 and the related balance sheet data at June 30, 2014, 2013 and 2012 were derived from audited consolidated financial statements that are not included in this Annual Report. The following data should be read in conjunction with our consolidated financial statements and the related notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below in this Annual Report.
Our Continuing Operations. The results of our continuing operations, as set forth in the table below, consist primarily of the results of operations of our collectible coin, trading card, autographs and memorabilia authentication and grading businesses and our Coinflation.com, Certified Coin Exchange (“CCE”) and Expos businesses for each of the fiscal years in the five-year period ended June 30, 2016.
Our Discontinued Operations. The results of our discontinued operations, as set forth in the table below, consist primarily of accretion expense associated with the remaining lease obligations of our former jewelry businesses and royalty income realized from our former currency grading business, net of income taxes.
Consolidated Statement of Operations Data:
Year Ended June 30, |
||||||||||||||||||||
2016 |
2015 |
2014 |
2013 |
2012 |
||||||||||||||||
(In thousands, except per share data) |
||||||||||||||||||||
Net revenues(1) |
$ | 60,954 | $ | 61,684 | $ | 60,571 | $ | 49,090 | $ | 48,359 | ||||||||||
Cost of revenues |
22,902 | 23,053 | 22,663 | 19,068 | 19,402 | |||||||||||||||
Gross profit(1) |
38,052 | 38,631 | 37,908 | 30,022 | 28,957 | |||||||||||||||
Selling, general and administrative expenses |
25,682 | 26,523 | 25,432 | 20,528 | 19,800 | |||||||||||||||
Impairment losses |
- | - | - | - | - | |||||||||||||||
Operating income |
12,370 | 12,108 | 12,476 | 9,494 | 9,157 | |||||||||||||||
Interest income, net |
22 | 38 | 36 | 68 | 104 | |||||||||||||||
Other (expense) income, net |
(73 | ) | (80 | ) | 3 | 29 | (16 | ) | ||||||||||||
Income before provision for income taxes |
12,319 | 12,066 | 12,515 | 9,591 | 9,245 | |||||||||||||||
Provision for income taxes(2) |
4,720 | 4,682 | 5,081 | 3,803 | 2,425 | |||||||||||||||
Income from continuing operations |
7,599 | 7,384 | 7,434 | 5,788 | 6,820 | |||||||||||||||
Income (loss) from discontinued operations, (net of income taxes) |
41 | 17 | (75 | ) | (58 | ) | (71 | ) | ||||||||||||
Net income (loss) |
$ | 7,640 | $ | 7,401 | $ | 7,359 | $ | 5,730 | $ | 6,749 | ||||||||||
Net income per basic share: |
||||||||||||||||||||
Income from continuing operations |
$ | 0.90 | $ | 0.88 | $ | 0.91 | $ | 0.72 | $ | 0.86 | ||||||||||
Income (loss) from discontinued operations, (net of income taxes) |
- | 0.01 | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||||||
Net income per share |
$ | 0.90 | $ | 0.89 | $ | 0.90 | $ | 0.71 | $ | 0.85 | ||||||||||
Net income per diluted share: |
||||||||||||||||||||
Income from continuing operations |
$ | 0.89 | $ | 0.87 | $ | 0.90 | $ | 0.71 | $ | 0.85 | ||||||||||
Income (loss) from discontinued operations, (net of income taxes) |
- | - | (0.01 | ) | - | (0.01 | ) | |||||||||||||
Net income per share |
$ | 0.89 | $ | 0.87 | $ | 0.89 | $ | 0.71 | $ | 0.84 | ||||||||||
Weighted average shares outstanding |
||||||||||||||||||||
Basic |
8,445 | 8,345 | 8,167 | 8,052 | 7,905 | |||||||||||||||
Diluted |
8,545 | 8,518 | 8,247 | 8,101 | 7,987 | |||||||||||||||
Cash dividends paid on common stock |
$ | 12,008 | $ | 11,361 | $ | 10,731 | $ | 10,801 | $ | 10,355 | ||||||||||
Cash dividends declared per share of common stock |
$ | 1.40 | $ | 1.35 | $ | 1.30 | $ | 1.30 | $ | 1.30 |
At June 30, |
||||||||||||||||||||
2016 |
2015 |
2014 |
2013 |
2012 |
||||||||||||||||
Balance Sheet Data: |
(In thousands) |
|||||||||||||||||||
Cash and cash equivalents |
$ | 11,967 | $ | 17,254 | $ | 19,909 | $ | 18,711 | $ | 21,214 | ||||||||||
Working capital – continuing operations (3) |
6,980 | 10,382 | 12,768 | 13,884 | 17,724 | |||||||||||||||
Working capital (deficit) – discontinued operations |
(619 | ) | (778 | ) | (849 | ) | (802 | ) | (777 | ) | ||||||||||
Goodwill and Intangibles – continuing |
3,845 | 3,641 | 3,355 | 3,560 | 3,871 | |||||||||||||||
Total assets – continuing operations |
28,111 | 32,020 | 35,406 | 32,836 | 36,236 | |||||||||||||||
Total assets – discontinued operations |
79 | 182 | 182 | 182 | 209 | |||||||||||||||
Stockholders' equity |
14,995 | 18,469 | 20,640 | 20,562 | 24,531 |
|
1. |
Includes revenues from product sales, consisting primarily of sales of coins purchased under our warranty policy, of $68,000, $132,000, $103,000, $583,000, and $500,000, in fiscal 2016, 2015, 2014, 2013 and 2012, respectively. Such product sales are not considered an integral part of our ongoing revenue generating activities. The gross margins on product sales were (31)%, (15) %, (18) %, 2%, and (28) %, in fiscal 2016, 2015, 2014, 2013 and 2012, respectively. |
|
2. |
The lower income tax provision in fiscal 2012 reflects a benefit for the excess tax basis over the book basis of the Company’s investment in a subsidiary and a lower effective tax rate resulting from a change in the Company’s state apportionment factors recognized in fiscal 2012. |
|
3. |
Reflects the reclassification of deferred tax assets classified as current assets in prior years to long –term assets in accordance with FASB update 2015-17. See Recent Accounting Pronouncements. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Consolidated Financial Data” and our Consolidated Financial Statements and related notes, included elsewhere in Part II of this Annual Report. This discussion also should be read in conjunction with the information in Item IA of Part I of this Report, entitled “Risk Factors,” which contains information about certain risks and uncertainties that can affect our business and our financial performance in the future.
Introduction and Overview
Our Business
Collectors Universe, Inc. (“we”, “us” “management” “our” or the “Company”) provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs, sports and historical memorabilia. We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to buy or sell; thereby enhancing their marketability and providing increased liquidity to the dealers, collectors and consumers that own, buy and sell such collectibles.
We principally generate revenues from the fees paid by our customers for our authentication and grading services. To a much lesser extent, we generate revenues from other related services which consist of: (i) the sale of advertising and commissions earned on our websites; (ii) the sale of printed publications, collectibles price guides and advertising in our publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins and to our CoinFacts website, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from sales of our collectibles inventory, which is primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.
Factors That Can Affect Operating Results and our Financial Position
Factors That Can Affect our Revenue. Our authentication and grading fees accounted for approximately 86% of our total net revenues in the year ended June 30, 2016. The amounts of those fees are primarily driven by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our collectibles authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and other high-value collectibles.
The amounts of our authentication and grading revenues are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards, 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.
In addition, our coin authentication and grading revenues are impacted by the number of modern coin submissions and the related average service fee earned on those submissions, both of which can be volatile and depend on the timing and popularity of modern coin programs released by the United States Mint and by customers or dealers who specialize in sales of such coins. As previously discussed in our Quarterly Report on Form 10-Q filed with the SEC for the three months ended December 31, 2015 and March 31, 2016, respectively, effective January 1, 2016, the Company implemented more competitive and focused marketing programs for our modern coin business, which we believe, contributed to the increase in the submission of modern coins in the third and fourth quarters of fiscal 2016.
Our revenues are also affected by the volume of coin authentication and grading submissions we receive at collectibles trade shows where we provide on-site authentication and grading services to show attendees, because they typically request higher-priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. The level of trade show submissions varies from period to period depending upon a number of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by short-term changes in the prices of gold should they occur around the time of the shows, because gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows.
Furthermore, our revenues can also fluctuate due to the number of authentication and grading events we conduct at our overseas operations on a quarterly basis and the fact that those overseas businesses are less mature than our US coin business.
Five of our customers accounted, in the aggregate, for approximately 16% of our total net revenues in the year ended June 30, 2016. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.
The following table provides information regarding the respective numbers of coins, trading cards and autographs that we authenticated or graded in the fiscal years ended June 30, 2016, 2015, and 2014:
Units Processed |
||||||||||||||||||||||||
2016 |
2015 |
2014 |
||||||||||||||||||||||
Coins |
2,371,800 | 58 | % | 2,067,300 | 55 | % | 2,075,300 | 55 | % | |||||||||||||||
Trading cards |
1,278,900 | 31 | % | 1,269,800 | 34 | % | 1,259,100 | 33 | % | |||||||||||||||
Autographs |
448,000 | 11 | % | 434,900 | 11 | % | 431,800 | 12 | % | |||||||||||||||
Total |
4,098,700 | 100 | % | 3,772,000 | 100 | % | 3,766,200 | 100 | % |
The following table sets forth the estimated values at which our customers insured the coins, trading cards, and autographs that they submitted to us for grading or authentication:
Declared Values (000’s) |
||||||||||||||||||||||||
2016 |
2015 |
2014 |
||||||||||||||||||||||
Coins |
$ | 1,935,400 | 91 | % | $ | 2,093,900 | 93 | % | $ | 1,887,000 | 93 | % | ||||||||||||
Trading cards |
177,800 | 8 | % | 109,800 | 5 | % | 99,000 | 5 | % | |||||||||||||||
Autographs |
25,700 | 1 | % | 35,800 | 2 | % | 38,000 | 2 | % | |||||||||||||||
Total |
$ | 2,138,900 | 100 | % | $ | 2,239,500 | 100 | % | $ | 2,024,000 | 100 | % |
______________________
Factors Affecting our Gross Profit Margins. The gross profit margins we earn on collectibles authentication and grading submissions are impacted by many of the same factors that impact our revenues, as the average service fee and the resulting gross profit margin earned is affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the 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. In addition, because a significant proportion of our costs of sales are fixed in nature in the short-term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period. Furthermore, the level of other related services in any period can impact our overall gross profit margin.
Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the volume of collectibles transactions by 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 2017.
In addition to the day-to-day operating performance of our business, our overall financial position can also be affected by the dividend policy adopted by the Board of Directors, the Company’s decisions to invest in and to fund the acquisition of established and/or early stage businesses and any capital raising activities, stock repurchases or the exercise of stock options by employees or our non-employee directors. 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 in our Businesses
Our overall financial performance is largely dependent on the performance of our coin authentication and grading business which can be impacted by volatility in that business. In fiscal years 2016, 2015 and 2014, revenues from coin authentication and grading and related services represented 66%, 68%, and 69%, respectively, of our total consolidated revenues. Our quarterly results can be significantly impacted by the timing of revenues from modern coin programs that are dependent of new issuances of coins from the US Mint. In addition, the recent expansion into overseas markets to provide coin authentication and grading services, may increase our dependence on our coin business, and make our financial performance more vulnerable to volatility in the coin markets. See “Results of Operations: Net Revenues” below.
Overview of Fiscal 2016 Operating Results
The following table sets forth comparative financial data for the years ended June 30, 2016 and 2015:
Year Ended June 30, 2016 |
Year Ended June 30, 2015 |
|||||||||||||||
|
Percent of Revenues |
|
Percent of |
|||||||||||||
Net revenues |
$ | 60,954 | 100.0 | % | $ | 61,684 | 100.0 | % | ||||||||
Cost of revenues |
22,902 | 37.6 | % | 23,053 | 37.4 | % | ||||||||||
Gross profit |
38,052 | 62.4 | % | 38,631 | 62.6 | % | ||||||||||
Selling and marketing expenses |
8,635 | 14.2 | % | 8,896 | 14.4 | % | ||||||||||
General and administrative expenses |
17,047 | 27.9 | % | 17,627 | 28.6 | % | ||||||||||
Operating income |
12,370 | 20.3 | % | 12,108 | 19.6 | % | ||||||||||
Interest income, net |
22 | - | 38 | 0.1 | % | |||||||||||
Other expense |
(73 | ) | (0.01 | )% | (80 | ) | (0.1 | %) | ||||||||
Income before provision for income taxes |
12,319 | 20.2 | % | 12,066 | 19.6 | % | ||||||||||
Provision for income taxes |
4,720 | 7.7 | % | 4,682 | 7.6 | % | ||||||||||
Income from continuing operations |
7,599 | 12.5 | % | 7,384 | 12.0 | % | ||||||||||
Income from discontinued operations |
41 | - | 17 | - | ||||||||||||
Net income |
$ | 7,640 | 12.5 | % | $ | 7,401 | 12.0 | % | ||||||||
Net income per diluted share: |
||||||||||||||||
Income from continuing operations |
$ | 0.89 | $ | 0.87 | ||||||||||||
Income from discontinued operations |
- | - | ||||||||||||||
Net income |
$ | 0.89 | $ | 0.87 |
Service revenues in fiscal 2016 were essentially flat at $60.9 million, as compared to $61.6 million in fiscal 2015, representing a 1% decline in services revenues for the year. That decline, reflected decreased service revenues of approximately $3.4 million from the Baseball Hall of Fame and 50th Anniversary Kennedy modern coin programs in fiscal 2016 as compared to fiscal 2015, which was substantially offset by increased revenues generated in other areas of the business, including higher coin show revenues of approximately $1.2 million, coin world revenues (including China) of $0.8 million and cards and autograph revenues of $1.0 million. See Results of Operations: Revenue below which discusses the changes in revenues in more detail.
Operating income increased to $12.4 million in fiscal 2016 from $12.1 million in fiscal 2015. Operating income in fiscal 2016 benefited from (i) lower non-cash stock based compensation expense of $1.6 million due to lower LTIP expense and (ii) lower warranty expense of $0.7 million due to a reduction in the company’s warranty reserves in in each case as compared to fiscal 2015. Partially offsetting those benefits, we incurred increased losses of $1.3 million in Collectors.com in fiscal 2016 as compared to fiscal 2015.
Critical Accounting Policies and Estimates
General. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record our assets at the lower of cost, net realizable value or fair value. In determining the fair value of certain of our assets, principally accounts receivable, inventories, goodwill, capitalized software and intangible assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or trends that could impact, e.g., our ability to fully collect our accounts receivable or realize the value of our inventories in future periods. Those judgments, estimates, and assumptions are based on current information available to us at that time. Many of these conditions, trends and circumstances on which our judgments or estimates are based; however, are outside of our control and, if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates. Changes in such estimates may require that we reduce the carrying values of the affected assets on our balance sheet (which are commonly referred to as “write-downs” of the assets involved).
It is our practice to establish reserves, allowances, charges or losses to record such downward adjustments or write-downs in the carrying value of assets, such as, for example, accounts receivable and inventory. Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the period when those reserves, allowances, charges or losses are established or increased to take account of changed conditions or events. As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations.
The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments and judgments about the effects and duration of events or changes in circumstances. For example, it is difficult to predict whether events or conditions, such as increases in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for their full effects to be recognized. Therefore, management makes such estimates based upon the information available at that time and reevaluates and adjusts its reserves, allowances, charges or losses for potential write-downs on a quarterly basis.
In addition, we also make estimates with respect to the (i) valuation of stock-based compensation awards and the timing and recognition of related stock-based compensation expense and in particular, the timing and recognition of stock-based compensation expense associated with the Company’s Long-Term Incentive Plan, (ii) the amount and adequacy of warranty reserves, (iii) the provision for income taxes and related valuation allowances, (iv) the carrying value of capitalized software costs and (v) the impairment of goodwill and other intangible assets.
In making our estimates and assumptions, we follow GAAP in order to make fair and consistent estimates of the fair value of assets and to establish adequate reserves, allowances, charges or losses for possible write-downs in the carrying values of our assets.
Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.
Revenue Recognition Policies. We generally record revenue at the time of shipment of the authenticated and graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our grading and authentication services and the shipment of the collectible or other high-value asset back to the customer, the time of shipment corresponds to the completion of our services. We recognize revenue from the sales of special inserts at the time the customer takes legal title to the insert. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to our customers. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend open account privileges, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer.
A portion of our net revenues is comprised of subscription fees paid by customers for memberships in our Collectors Club. Those memberships entitle members access to our on-line and printed publications and, in some cases, include vouchers for free grading services. We recognize revenue attributable to free grading vouchers on a specific basis and classify such revenues as part of grading and authentication fees. The balance of the membership fee is recognized over the life of the membership.
In the case of our Expos trade show business, we recognize revenue generated by the promotion, management and operation of each of its collectibles conventions or trade shows in the fiscal period in which the convention or show takes place.
We recognize Certified Coin Exchange’s subscription revenues ratably over the relevant subscription period.
We also recognize the revenue from the sales of coins when they are shipped to the customer and all the requirements for revenue recognition have been satisfied. Such sales consist primarily of collectible coins that we have purchased pursuant to our coin authentication and grading warranty program and those sales are not the focus, and are not considered to be an integral part, of our ongoing revenue generating activities.
Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an ongoing basis. We regularly review our accounts receivable and exercise judgment in estimating the amounts of, and establish an allowance for, uncollectible accounts in each quarterly period. The amount of that allowance is based on several factors, including the age and extent of significant past due accounts and known conditions or trends that may affect the ability of account debtors to pay their accounts receivable balances. Each quarter we review our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of our specific account debtors to pay their accounts in full. Since the allowance is increased by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause an increase in such expenses. At June 30, 2016 and 2015, the allowance for doubtful accounts was $35,000, and $33,000, respectively.
Inventory Valuation Reserves. Our collectibles inventories, which consist of collectible coins that we have purchased pursuant to our coin warranty program and other consumable inventory related to our authentication and grading activities, are valued at the lower of cost or estimated fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories below their carrying values. The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sales value of the collectibles inventories. Additionally, due to the relative uniqueness and special features of some of the collectible coins included in our collectibles inventory and the volatility in the prices of precious metals, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products. As a result, we review the estimated market values of the collectibles in our inventory on a quarterly basis and make adjustments to the valuation reserve that we believe are necessary or prudent based on our judgments regarding these matters. In the event that a collectible is sold for a price below its carrying value, we record a charge to cost of services. In addition, we review our other consumable inventory on a regular basis for recoverability and, if considered necessary, establish reserves for those items that have no future value to us. At June 30, 2016 and 2015, inventories were $2,574,000 and $2,232,000, respectively, and inventory reserves were $739,000 and $613,000, respectively. See Note 5 to the Consolidated Financial Statements. If we liquidate collectible coins at amounts below their carrying values, we may incur losses in excess of our recorded inventory reserves.
Grading Warranty Costs. We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if such a collectible that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible for a price equal to the value of collectible at its original grade, or, at the customer’s option, pay the difference between the value of the collectible at its original grade as compared with the value at its lower grade. However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item or if we otherwise determine that the collectible had been altered after we had authenticated and graded it. If we purchase an item under a warranty claim, we recognize the difference in the value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve. We include the purchased item in our inventory at the estimated value of the re-graded collectible, which will be lower than the price we paid to purchase the item. We accrue for estimated warranty costs based on historical trends and related experience, and we monitor the adequacy of our warranty reserve on an ongoing basis. There also are a number of factors that can cause the estimated values of the collectibles purchased under our warranty program to change over time and, as a result, we review the market values of those collectibles on a quarterly basis (see Inventory Valuation Reserves above). However, once we have classified such items as inventory and they have been held in inventory beyond the end of the fiscal quarter in which we purchased them, we classify any further losses in the estimated fair value of the items on a quarterly basis or the subsequent disposal of such items as part of the gain or loss on product sales and not as an adjustment to our warranty reserves.
Effective July 1, 2014, the Company reduced its warranty accrual rate on coins and cards based upon a review of the overall level of warranty reserves and trends in warranty payments over an extended period of time. In the third quarter fiscal 2016, the Company performed a more detailed analysis of our coin warranty payments and related reserve requirements made possible by improved operational systems, which enabled us to better match warranty payments to the periods in which the coins were originally authenticated and graded by us. We concluded that, although there is no time limitation on our warranty obligation, the majority of our warranty claims arise within five years following the coin being authenticated and graded by us. Therefore, we deemed it appropriate to reduce our warranty reserve to $869,000 at March 31, 2016, which reduced the warranty expense recognized in the nine months ended March 31, 2016 by $656,000 as compared to the nine months ended March 31, 2015. Furthermore, our improved systems allow us to accrue for estimated warranty costs for coins more precisely and we now accrue warranty costs, at a rate per coin that reflects the nature of the coin (i.e. vintage or modern). As a result of this change in estimate, in fiscal 2016 we recognized a warranty credit of $145,000 as compared to a warranty expense of $535,000 in fiscal 2015. See Note 8 to the consolidated financial statements for activity in our warranty reserves. Our warranty reserves were $892,000 and $1,492,000 at June 30, 2016 and 2015, respectively.
Goodwill. We test the carrying value of goodwill and other indefinite-lived intangible assets at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist. When testing for impairment, we consider qualitative factors, and where determined necessary, we proceed to the two-step goodwill impairment test. When applying the two-step impairment test, we apply a discounted cash flow model or an income approach to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.
During the first quarter of fiscal 2016, ended September 30, 2015, we completed the annual impairment evaluations with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair values over carrying values in prior years, and any material changes in the estimated cash flows of those reporting units, and determined that it was more likely than not that the respective fair values of CCE and CoinFacts exceeded their respective carrying values, including goodwill, and therefore, as a result, it was not necessary to proceed to the two-step impairment test.
We completed our annual goodwill impairment evaluation with respect to Expos at June 30, 2016 and concluded that no impairment had occurred.
Long-Lived Assets Other Than Goodwill. We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment. Such reviews occur annually, or more frequently, if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full. In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred. If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write-down the asset to its estimated fair value.
Stock-Based Compensation. Stock-based compensation expense is measured at the grant date fair value of the equity award, and is recognized as expense over the employee’s or non-employee director’s requisite service period, which is generally the vesting period of the award. However, if the vesting of a stock-based compensation award is subject to satisfaction of a performance requirement or condition, stock-based compensation expense is recognized if, and when, management determines that the achievement of the performance requirement or condition (and therefore the vesting of the award) has become probable. If stock-based compensation is recognized due to a determination that a performance condition is probable, and it is subsequently determined that the performance condition was not met in the expected vesting period, then if the shares can vest in future periods, management will refine the period over which the remaining expense would be recognized. If the shares fail to vest, or managements concludes that it is not probable the shares will vest, then all expense previously recognized with respect to the performance condition would be reversed.
We recognized stock-based compensation expense for service-based stock option awards using the Black-Scholes option pricing model. No options were granted in fiscal years 2014 through 2016, and all options previously granted had become fully vested, and had been fully expensed, by June 30, 2012.
Annual Director Grants. In each of fiscal years 2016, 2015, and 2014 each of our six outside directors was granted restricted service-based stock with a grant date fair value of $45,000, $40,000, and $40,000, respectively for a total of fair value of $270,000 in fiscal 2016 and $240,000 in each of fiscal 2015 and 2014.
Other Service-Based Awards. There was no grants of restricted stocks in fiscal 2016. In fiscal 2015 and 2014, the Company granted, 4,000, and 11,300 service-based restricted shares, respectively, with grant date fair values of $86,000, and $224,000 respectively, and with vesting periods ranging from three to four years. Stock based compensation expense for those shares is being recognized over the respective vesting period.
Fiscal 2013 Long-Term Performance-Based Equity Incentive Program. As previously disclosed, on December 28, 2012, the Compensation Committee of the Board of Directors adopted a Long-Term Performance-Based Equity Incentive Program (“LTIP”) for the Company’s executive officers (including the Company’s Chief Executive Officer, Mr. Deuster, and the Chief Financial Officer, Mr. Wallace) and certain other key management employees (collectively, “Participants”). As of June 30, 2014 there were 523,378 restricted shares outstanding under the LTIP, (including 200,000 shares for Mr. Deuster and 75,000 for Mr. Wallace), with a total grant date fair value of approximately $6,700,000.
The vesting of the restricted shares is conditioned on the Company’s achievement of increasing annual operating income before stock-based compensation (“OI”) levels during any fiscal year within a six-year period through the fiscal year ending June 30, 2018, as indicated in the following table:
Cumulative Percent of Shares Vested |
||||
If in any fiscal year during the term of the Program: |
||||
The Threshold Performance Goal is Achieved |
10 | % | ||
Intermediate Performance Goal #1 is Achieved |
25 | % | ||
Intermediate Performance Goal #2 is Achieved |
45 | % | ||
Intermediate Performance Goal #3 is Achieved |
70 | % | ||
The Maximum Performance Goal is Achieved |
100 | % |
Upon a determination that a performance goal or goals have been achieved for a fiscal year, 50% of the shares related to achieving that performance goal or goals will vest immediately and the remaining 50% will vest on June 30 of the following fiscal year, provided that the Participant is still in the service of the Company.
If performance goals are not achieved during the term of the Program, all of the restricted shares attributed to those performance goals that have not been achieved, will be forfeited effective June 30, 2018.
Based on the level of OI achieved in fiscal 2014, a determination was made that the Company had achieved the Threshold Performance Goal and the Intermediate Performance Goal #1 and therefore in accordance with the terms of the LTIP, 25% of the LTIP shares were fully vested at June 30, 2015.
In November 2014, an additional 18,957 performance-based restricted shares with similar terms as the other LTIP shares and a grant date fair value of $400,000 were issued to a new participant, with a service inception date of November 19, 2014. The vesting of those shares is conditioned on the Company’s achievement of the same levels of OI before stock based compensation as the LTIP participants through June 30, 2018, as indicated in the following table:
Cumulative Percent of Shares Vesting |
||||
If in any fiscal year during the term of the Program: |
||||
Intermediate Performance Goal #2 is Achieved |
20 | % | ||
Intermediate Performance Goal #3 is Achieved |
45 | % | ||
The Maximum Performance Goal is Achieved |
100 | % |
At September 30, 2014, based on the significantly improved level of OI in the first quarter of fiscal 2015 as compared to the first quarter of fiscal 2014, we concluded that it was probable that the Company would achieve Intermediate Performance Goal #2 by June 30, 2015 and therefore the Company began accruing stock-based compensation expense for that performance goal in the first and subsequent quarters of fiscal 2015. However, based on the actual OI achieved in fiscal 2015, we did not achieve Intermediate Performance Goal #2 in fiscal 2015. Nevertheless, we still consider it probable that we will achieve that goal prior to the expiration of the Company’s LTIP in fiscal 2018 and therefore in fiscal 2016 we accrued the remaining stock-based compensation expense for Performance Goal #2, through the expected updated vesting date.
At this time, it is considered too early to determine if it is probable that the Company will achieve additional Performance Goals beyond Performance Goal #2 in fiscals 2017 or 2018. Management will continue to reassess at each reporting date whether it has become probable that any additional shares will vest and if so, additional stock-based compensation expense will be recognized based on the expected vesting period.
The Company recognized total stock-based compensation related to both service-based and performance-based restricted shares of $596,000, $2,239,000, and $1,946,000, in fiscal years ended June 30, 2016, 2015, and 2014, respectively. See Results of Operations: Stock-Based Compensation Expense below for additional information on stock-based compensation expense.
Capitalized Software. In fiscal years 2016, 2015 and 2014, we capitalized approximately $752,000, $441,000, and $191,000, respectively, of software development costs related to a number of in-house software development projects. GAAP requires that certain software development costs incurred, either from internal or external sources, be capitalized as part of intangible assets and amortized on a straight-line basis over the useful life of the software, which we have estimated at three years. On the other hand, planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software development project are recognized as expense in the periods in which they are incurred. During the fiscal years ended June 30, 2016, 2015 and 2014, we recorded approximately $272,000, $122,000, and $115,000, respectively, as amortization expense related to such capitalized software projects.
We evaluate the carrying values of capitalized software to determine whether those values are impaired and, if necessary, we record an impairment charge in the period in which we determine that an impairment has occurred.
Income Taxes, Deferred Tax Assets and Valuation Allowances. We account for income taxes in accordance with GAAP, which requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns or uncertain tax positions. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, GAAP requires that we evaluate the probability of realizing the future income tax benefits comprising that asset based on a number of factors, which include projections of future taxable income and the nature of the tax benefits and the respective expiration dates of tax credits and net operating losses.
In fiscal 2016, 2015 and 2014, the Company recognized income tax provisions of $4.7 million, $4.7 million, and $5.1 million, respectively.
At June 30, 2016, in accordance with Accounting Standard Update (“ASU”) 2015-17 the Company classified all deferred tax assets as non-current assets and reclassified deferred tax assets at June 30, 2015 on a consistent basis.
Accrual for Losses on Discontinued Facility Leases. As a result of the discontinuance of and our exit from the jewelry authentication and grading businesses in fiscal 2009, we ceased the occupancy of facilities we had leased for their operations and established estimated loss accruals for liabilities under those leases. At December 31, 2015 one of the facility obligations, related to our discontinued jewelry business had expired. At June 30, 2016, our remaining obligation in respect of the remaining facility totaled $687,000.
Results of Operations
The following table sets forth certain financial data, expressed as a percentage of net revenues, derived from our Consolidated Statements of Operations for the respective periods indicated below:
Fiscal Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Net revenues |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of revenues |
37.6 | % | 37.4 | % | 37.4 | % | ||||||
Gross profit |
62.4 | % | 62.6 | % | 62.6 | % | ||||||
Operating expenses: |
||||||||||||
Selling and marketing expenses |
14.2 | % | 14.4 | % | 15.0 | % | ||||||
General & administrative expenses |
27.9 | % | 28.6 | % | 27.0 | % | ||||||
Total operating expenses |
42.1 | % | 43.0 | % | 42.0 | % | ||||||
Operating income |
20.3 | % | 19.6 | % | 20.6 | % | ||||||
Interest and other income, net |
(0.1 | )% | - | 0.1 | % | |||||||
Income before provision for income taxes |
20.2 | % | 19.6 | % | 20.7 | % | ||||||
Provision for income taxes |
7.7 | % | 7.6 | % | 8.4 | % | ||||||
Income from continuing operations |
12.5 | % | 12.0 | % | 12.3 | % | ||||||
Income (loss) from discontinued operations |
- | - | (0.2 | )% | ||||||||
Net income |
12.5 | % | 12.0 | % | 12.1 | % |
Net Revenues. Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, consisting of coins, trading cards and autographs and including 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), and Collectors Club; and fees generated from promoting, managing and operating collectibles conventions. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we purchase under our warranty policy. We do not consider such product sales to be an integral part of our ongoing revenue generating activities.
The following tables set forth the total net revenues for the fiscal years ended June 30, 2016, 2015 and 2014 between authentication and grading services revenues, other related services and product sales revenues:
2016 |
2015 |
2016 vs. 2015 Increase (Decrease) |
||||||||||||||||||||||
Amount |
% of Net Revenues |
Amount |
% of Net |
Amount |
|
|||||||||||||||||||
Authentication and grading fees |
$ | 52,650 | 86.4 | % | $ | 53,132 | 86.1 | % | $ | (482 | ) | (0.9 | %) | |||||||||||
Other related services |
8,236 | 13.5 | % | 8,420 | 13.7 | % | (184 | ) | (2.2 | %) | ||||||||||||||
Total service revenues |
60,886 | 99.9 | % | 61,552 | 99.8 | % | $ | (666 | ) | (1.1 | %) | |||||||||||||
Coin sales |
68 | 0.1 | % | 132 | 0.2 | % | (64 | ) | (48.5 | %) | ||||||||||||||
Total net revenues |
$ | 60,954 | 100.0 | % | $ | 61,684 | 100.0 | % | $ | (730 | ) | (1.2 | %) |
2015 |
2014 |
2015 vs. 2014 Increase (Decrease) |
||||||||||||||||||||||
Amount |
% of Net Revenues |
Amount |
% of Net Revenues |
Amount |
|
|||||||||||||||||||
Authentication and grading fees |
$ | 53,132 | 86.1 | % | $ | 51,903 | 85.7 | % | $ | 1,229 | 2.4 | % | ||||||||||||
Other related services |
8,420 | 13.7 | % | 8,565 | 14.1 | % | (145 | ) | (1.7 | %) | ||||||||||||||
Total service revenues |
61,552 | 99.8 | % | 60,468 | 99.8 | % | 1,084 | 1.8 | % | |||||||||||||||
Coin sales |
132 | 0.2 | % | 103 | 0.2 | % | 29 | 28.2 | % | |||||||||||||||
Total net revenues |
$ | 61,684 | 100.0 | % | $ | 60,571 | 100.0 | % | $ | 1,113 | 1.8 | % |
_______________
The following tables set forth certain information regarding the increases or decreases in net revenues from our larger markets (which are inclusive of revenues from our other related services) and in the number of units authenticated and graded (in thousands) in each of the periods presented below:
2016 |
2015 |
2016 vs. 2015 Increase (Decrease) |
||||||||||||||||||||||||||||||
% of Net |
% of Net |
Revenues |
Units Processed |
|||||||||||||||||||||||||||||
Amount |
Revenues |
Amount |
Revenues |
Amounts |
Percent |
Number |
Percent |
|||||||||||||||||||||||||
Coins |
$ | 40,205 | 66.0 | % | $ | 42,060 | 68.2 | % | $ | (1,855 | ) | (4.4 | %) | 304,500 | 14.7 | % | ||||||||||||||||
Cards and Autographs(1) |
15,911 | 26.1 | % | 14,925 | 24.2 | % | 986 | 6.6 | % | 22,200 | 1.3 | % | ||||||||||||||||||||
Other (2) |
4,770 | 7.8 | % | 4,567 | 7.4 | % | 203 | 4.4 | % | - | - | |||||||||||||||||||||
Coin Sales |
68 | 0.1 | % | 132 | 0.2 | % | (64 | ) | (48.5 | )% | - | - | ||||||||||||||||||||
$ | 60,954 | 100.0 | % | $ | 61,684 | 100.0 | % | $ | (730 | ) | (1.2 | )% | 326,700 | 8.7 | % |
2015 |
2014 |
2015 vs. 2014 Increase (Decrease) |
||||||||||||||||||||||||||||||
% of Net |
% of Net |
Revenues |
Units Processed |
|||||||||||||||||||||||||||||
Amount |
Revenues |
Amount |
Revenues |
Amounts |
Percent |
Number |
Percent |
|||||||||||||||||||||||||
Coins |
$ | 42,060 | 68.2 | % | $ | 41,997 | 69.3 | % | $ | 63 | 0.2 | % | (8,000 | ) | (0.4 | %) | ||||||||||||||||
Cards and Autographs(1) |
14,925 | 24.2 | % | 14,090 | 23.3 | % | 835 | 5.9 | % | 13,800 | 0.8 | % | ||||||||||||||||||||
Other (2) |
4,567 | 7.4 | % | 4,381 | 7.2 | % | 186 | 4.2 | % | - | - | |||||||||||||||||||||
Coin sales |
132 | 0.2 | % | 103 | 0.2 | % | 29 | 28.2 | % | - | - | |||||||||||||||||||||
$ | 61,684 | 100.0 | % | $ | 60,571 | 100.0 | % | $ | 1,113 | 1.8 | % | 5,800 | 0.2 | % |
_____________
(1) |
Consists of revenues from our PSA trading card authentication and grading business and our PSA/DNA autograph authentication and grading business. |
(2) |
Includes the revenues of our CCE subscription business, Coinflation.com and the Expos trade show and convention business. |
Fiscal 2016 vs. 2015. In fiscal 2016, our total service revenues were essentially flat, with services revenues of $60,886,000 as compared to $61,552,000 in fiscal 2015. However, in the second half of fiscal 2016, we generated record second half service revenues, which increased by $2,403,000, or 7.7%, as compared to our service revenues in the second half of fiscal 2015.
In fiscal 2016, authentication and grading fees decreased by $482,000, or 0.9%, and other related service revenues decreased by $184,000 or 2.2%. The decrease in authentication and grading fees was attributable due to a $1,378,000, or 3.5% decrease in coin fees that were partially offset by an increase of $896,000, or 6.5%, increase in cards and autograph fees.
The net decrease in coin authentication and grading fees of $1,378,000 in fiscal 2016 as compared to fiscal 2015 reflected (i) lower modern fees of approximately $3,000,000 or 19.9%, primarily due to the absence of significant revenues from the Baseball Hall of Fame and 50th Anniversary Kennedy (“HOF”) modern coin programs that benefited fiscal 2015 and (ii) lower vintage coin fees of $328,000 or 2.6% due to the absence of revenues earned in fiscal 2015 from the authentication and grading of a customer’s coin collection that did not recur in fiscal 2016. These decreases were partially offset by increases in (i) coin trade show revenues of $1,170,000 or 18.5%, reflecting higher average service fees earned per coin authenticated and graded at shows and increased coin submissions per show and (ii) world coin revenues of $780,000 or 14.6%, which is inclusive of a $864,000 or 46% increase in coins fees earned from our China operation.
In the second half of the year, our coin authentication and grading fees increased by $1,809,000 or 9.1%, as compared to a decrease of $3,187,000 or 16.3%, in the first half of the year, in both instances as compared to same periods of fiscal 2015. The second half increase included increases in trade show and world coin fees for the reasons as discussed above. As previously disclosed, to stimulate increased demand for our services, effective January 1, 2016, the Company implemented more competitive and focused marketing programs for our modern coin business, which, we believe, contributed to offsetting most of the approximate $1,000,000 of HOF revenues that benefited the second half of fiscal 2015.
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 modern coin and trade show revenues can be volatile.
Revenues from our trading cards and autographs business increased by 15.1% in the fourth quarter of fiscal 2016, and by 6.6% for the entirety of fiscal 2016 and these increases represented record quarterly and annual revenues for that business. Moreover, our cards and autographs business has achieved quarter-on-quarter revenue growth in 23 out of the last 24 quarters.
We have entered fiscal 2017 with stronger momentum than we entered fiscal 2016, although we expect the seasonality of the coin business (in that, the 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 whereas the second quarter is typically the slowest quarter of the year, due to the holidays in that quarter), will continue to impact our quarterly results. In addition, we are seeing continued momentum in our China coin business and consistent growth in our trading cards and autographs business. Therefore, we are optimistic about the Company’s prospects for fiscal 2017, although it remains uncertain as to the level of growth the Company may achieve in any quarter and in fiscal 2017.
Despite the reduction in our coin authentication and grading revenues in fiscal 2016, our coin business represented approximately 66% of total service revenues in the current year, as compared to 68% of total service revenues for the prior year, and indicates the continued importance of our coin authentication and grading business to our overall financial performance.
The reduction in other related services in fiscal 2016, primarily reflects the Company’s decision to eliminate, effective January 2016, the subscriptions fees that we had previously charged customers to access our CoinFacts website thereby allowing all dealers and collectors to have free access to this numismatic and value added content. We believe that allowing free access to this information will generate more knowledgeable dealers and collectors over time, which should benefit our business and, we expect, will more than offset the short-term reduction in revenues, arising from this decision.
Fiscal 2015 vs. 2014. Total service revenues of $61,552,000 in fiscal 2015, represented a record for the Company and increased by $1,084,000 or 1.8% over total service revenues of $60,468,000 in fiscal 2014.
Authentication and grading fees increased by $1,229,000 or 2.4% in fiscal 2015 as compared to fiscal 2014 and comprised increases of $892,000 or 7.0% in cards and autographs and $337,000 or 0.9% in coins. Other related services declined by $145,000, or 1.7%, due to lower advertising and affiliate program revenues in fiscal 2015 as compared to fiscal 2014.
The $337,000 increase in our coin authentication and grading fees in fiscal 2015, was comprised of increases in (i) vintage fees of $1,015,000 or 8.7% (ii) modern fees of $286,000 or 1.9% and (iii) world fees of $173,000 or 3.3% substantially but not entirely offset by a decrease in show fees of $1,137,000 or 15.2%. The decrease in show fees in fiscal 2015 was due to us earning lower average authentication and grading fees on a per show basis, primarily, due to two larger customers submitting fewer coins at shows in fiscal 2015 as compared to fiscal 2014.
Coin fees in fiscal 2015 benefited from revenues of approximately $3,500,000 earned from the Baseball Hall of Fame (“HOF”) and Kennedy anniversary coins programs as compared to approximately $1,400,000 in fiscal 2014, as the HOF program only began generating revenue in the fourth quarter of fiscal 2014.
Despite the increase of $337,000 in coin authentication fees in fiscal 2015 discussed above, in the fourth quarter of fiscal 2015, coin authentication and grading fees declined by $1,458,000 or 13.3% as compared to the same quarter of fiscal 2014. That decline in the fourth quarter of fiscal 2015 was due to reductions, in modern coin fees of $1,010,000, primarily due to less revenue earned from the HOF coin program and vintage fees of $400,000, in part due to the absence of submissions from one larger customer.
Cards and autographs service revenues increased $835,000 or 5.9% to $14,925,000 in fiscal 2015 which included a fourth quarter revenue increase of 4.0%, representing the twentieth quarter of quarter-over-quarter revenue growth in that business.
Through the first two quarters of fiscal 2015, the Company had generated eight quarters of quarter-over-quarter consolidated revenue growth. Although, we experienced declines in revenues in the third and fourth quarters of fiscal 2015, as compared to the record revenues generated in the corresponding periods of fiscal 2014, revenues generated in the third and fourth quarter of fiscal 2015 represented the second highest revenues generated by the Company in any previous third and fourth quarter periods. We generated record first and second quarter revenues, in the first half of fiscal 2015.
Gross Profit
Gross profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percent of net revenues. The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense, occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of the revenues generated by our other non-grading related services and the costs of product revenues (which represent the carrying value of the inventory of products, which are primarily collectible coins that we sold and any inventory-related reserves, considered necessary).
Set forth below is information regarding our gross profits in the fiscal years ended June 30, 2016, 2015 and 2014:
Fiscal Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Gross profit services |
62.5 | % | 62.8 | % | 62.7 | % | ||||||
Gross profit product sales |
(30.9 | %) | (15.2 | %) | (18.4 | )% | ||||||
Total |
62.4 | % | 62.6 | % | 62.6 | % |
Fiscal 2016 vs. 2015. As indicated in the above table, our services gross profit margin was 62.5% for fiscal 2016, as compared to 62.8% for fiscal 2015. As discussed under our Critical Accounting Policies and Estimates: Warranty Costs, in the third quarter of fiscal 2016, the Company reduced its warranty reserve which reduced our cost of revenues by $658,000 in fiscal 2016 as compared to fiscal 2015. Excluding the warranty benefit, our services gross profit would have been approximately 60.4% for the second half of fiscal 2016, which reflects in the more competitive programs we introduced, effective January 1, 2016, for modern coins, as discussed under Net Revenues above. In addition, as discussed in prior reports, there can be variability in the services gross profit margin due to the mix of revenues in any period. During the three years ended June 30, 2016, our quarterly services gross profit varied between 59% and 65%.
Fiscal 2015 vs. 2014. Our services gross profit margin at 62.8% in fiscal 2015 was consistent with the 62.7% earned in fiscal 2014. In the fourth quarter of fiscal 2015, our services gross profit margin was 59.3% as compared to 63.7% in the fourth quarter of fiscal 2014, reflecting lower margins on special HOF coin inserts and lower average service fees earned for coins in the fourth quarter of fiscal 2015.
Selling and Marketing Expenses
Selling and marketing expenses are comprised primarily of advertising and promotions costs, trade-show expenses, customer service personnel costs, business development incentive compensation costs, depreciation and third-party consulting costs.
The following table sets forth selling and marketing expenses that we incurred in fiscals 2016, 2015 and 2014 (in thousands):
Fiscal Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Selling and marketing expenses |
8,635 | $ | 8,896 | $ | 9,106 | |||||||
As a percentage of net revenues |
14.2 | % | 14.4 | % | 15.0 | % |
Fiscal 2016 vs. 2015. Selling and marketing expenses represented 14.2% of net revenues in fiscal 2016 as compared to 14.4% in fiscal 2015. The $261,000 reduction in selling and marketing expenses in fiscal 2016, as compared to fiscal 2015, primarily, included decreased business development costs of $846,000 in the fiscal 2016, reflecting lower incentives due to the resignation of our Vice President of Business Development partially offset by increased selling and marketing expenses of $621,000 for our Collectors.com launch and roll-out.
Fiscal 2015 vs. 2014. Sales and marketing expenses represented 14.4% of net revenues, in fiscal 2015 as compared to 15.0% of net revenues in fiscal 2014. The $210,000 reduction in selling and marketing expenses in fiscal 2015, primarily reflects reductions in sales and marketing personnel at our overseas offices and travel related costs, incurred for our overseas grading events in fiscal 2015 as compared to fiscal 2014.
General and Administrative Expenses
General and administrative (“G&A”) expenses are comprised primarily of compensation paid to general and administrative personnel, including executive management, finance and accounting personnel and information technology personnel, facilities management costs, depreciation, amortization and other miscellaneous expenses. G&A expenses also include stock-based compensation costs, arising from the grant of stock awards to general and administrative personnel and outside directors.
The following table sets forth G&A expenses that we incurred in fiscals 2016, 2015 and 2014 (in thousands):
Fiscal Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
General & administrative expenses |
$ | 17,047 | $ | 17,627 | $ | 16,326 | ||||||
As a percentage of net revenues |
27.9 | % | 28.6 | % | 27.0 | % |
Fiscal 2016 vs. 2015. G&A expenses represented 27.9% of net revenues in fiscal 2016 as compared to 28.6% of net revenues in fiscal 2015. The decrease in G&A expenses of $580,000 in fiscal 2016, as compared to fiscal 2015, was primarily due to lower G&A non-cash stock based compensation of $1,617,000, as discussed below, partially offset by higher G&A costs for Collectors.com of $837,000.
Fiscal 2015 vs. 2014. G&A expenses represented 28.6% of net revenues in fiscal 2015 and 27.0% of net revenues in fiscal 2014, respectively, The increase of $1,301,000 in G&A expenses in fiscal 2015, as compared to fiscal 2014, included increased (i) legal costs of $435,000 primarily attributable to two litigation related matters that commenced in prior years and which went to trial in fiscal 2015 (ii) G&A stock-based compensation expense of $256,000 due to the timing of LTIP costs recognized as discussed below, (iii) IT and general payroll costs of $169,000 (net of capitalized software development costs), incurred to support the growth of our businesses and (iv) consulting and third party service fees $257,000 to support content and other management initiatives.
Stock-Based Compensation Expense
We recognize non-cash stock-based compensation expense, arising from grants of restricted stock and stock option awards. Stock-based compensation expense is recorded as part of (i) costs of revenues, in the case of stock awards granted to employees whose costs are classified as cost of revenues; (ii) sales and marketing expenses, in the case of stock granted to employees whose costs are classified as sales and marketing personnel and (iii) general and administrative expenses, in the case of stock awards granted to directors, executive and financial management and administrative personnel.
The following table sets forth the stock-based compensation expenses we incurred in fiscals 2016, 2015 and 2014 (in thousands):
Fiscal Year Ended June 30, |
||||||||||||
Included In: |
2016 |
2015 |
2014 |
|||||||||
Cost of grading, authentication and related services |
$ | 36 | $ | 45 | $ | 45 | ||||||
Sales and Marketing |
31 | 48 | 11 | |||||||||
General and administrative expenses |
529 | 2,146 | 1,890 | |||||||||
$ | 596 | $ | 2,239 | $ | 1,946 |
For those shares that have performance conditions, the amount of stock-based compensation recognized in any period can vary depending upon management’s assessment as to whether it has become probable that the Company will achieve performance goals under the LTIP and the time periods in which those goals are expected to be achieved. When it becomes probable that a performance goal will be achieved, there is a catch-up of stock-based compensation expense in that period reflecting the expense required to be recognized from the service inception date through the period when it became probable that the goal will be achieved, resulting in higher expense in that period. Thereafter, stock-based compensation expense is recognized over the expected remaining service period to vesting
In fiscal 2016, the reduction of $1,643,000 in stock-based compensation as compared to fiscal 2015, primarily related to lower stock-based compensation expense recognized for LTIP related shares due to (i) the Threshold and Performance Goal #1 shares being fully vested at June 30, 2015 whereas in fiscal 2015, expense of $450,000, was required to be recognized and (ii) lower expense $1,075,000 in fiscal 2016, required to be recognized for the Performance Goal #2 shares, as it was originally expected that Performance Goal #2 would be achieved in fiscal 2015.
In fiscal 2015, the increase in stock-based compensation of $293,000 as compared to fiscal 2014, related to increased costs recognized in connection with the Company’s LTIP and included (i) the remaining costs associated with the Threshold Performance and Performance Goal #1, which were achieved in fiscal 2014 and were fully vested by June 30, 2015 and (ii) costs associated with Performance Goal #2, which management concluded in the first quarter of fiscal 2015 was probable of being achieved in fiscal 2015. In the first quarter of fiscal 2015, due to us concluding that Performance Goal #2 would be achieved in fiscal 2015, we recognized a catch-up expense of $513,000, related to prior service periods as discussed in the preceding paragraph. See Critical Accounting Policies and Estimates: Fiscal 2013 Long-Term Performance-based Equity Incentive Program.
A total of $409,000 of stock-based compensation expense related to unvested equity awards remained unrecognized as of June 30, 2016, based on the assumption that the holders of those awards will remain in the Company’s service through 2019 and it will not become probable that the Company will achieve any additional performance goals under the Company’s LTIP. This expense will be recognized as compensation expense in future periods, as follows (in thousands):
Year Ending June 30, |
||||
2017 |
$ | 254 | ||
2018 |
135 | |||
2019 |
20 | |||
Total |
$ | 409 |
The $409,000 of unrecognized compensation expense does not include expense that would result from the grant of any additional equity awards that may be granted in future periods.
Interest Income, Net
Interest income is generated on cash balances that we have invested, primarily in highly liquid money market accounts and funds. The following table compares the interest income we earned on our cash balances in the fiscal years ended June 30, 2016, 2015 and 2014 (in thousands):
Fiscal Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Interest income, net |
$ | 22 | $ | 38 | $ | 36 |
Due to the continued low interest rates prevailing in all periods, interest income, net, was $22,000, $38,000, and $36,000, in fiscal 2016, 2015 and 2014, respectively.
Provision for Income Taxes
Fiscal Year Ended June 30, (in thousands) |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Provision for income taxes |
$ | 4,720 | $ | 4,682 | $ | 5,081 |
The income tax provisions of $4,720,000, $4,682,000, and $5,081,000, in fiscals 2016, 2015 and 2014, respectively, represented estimated annual effective tax rates, as adjusted for valuation allowances for foreign losses, of approximately 38%, 39%, and 41%, respectively.
Discontinued Operations
Fiscal Year Ended June 30, (in thousands) |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Income (losses) from discontinued operations, (net of income taxes) |
$ | 41 | $ | 17 | $ | (75 | ) |
The income (losses) from discontinued operations (net of income taxes), reflects ongoing pre-tax accretion expenses of $47,000, $77,000, and $106,000, in fiscal years 2016, 2015 and 2014, respectively, recognized in connection with the Company’s ongoing obligations for the New York City facilities, formerly occupied by its discontinued jewelry businesses. One of the leases expired in fiscal 2016 and upon the expiration of that lease we recognized a pre-tax credit of approximately $84,000 for excess lease accruals. In addition, we realized pre-tax trademark license income of $38,000, and $118,000, in fiscal 2016 and 2015, respectively, arising from the disposal of the Company’s former currency authentication and grading business. See “Critical Accounting Policies and Estimates—Accrual for Losses on Facility Leases.”
Quarterly Results of Operations and Seasonality
The following tables present unaudited selected quarterly financial data for each of the eight quarters beginning September 30, 2014 and ending on June 30, 2016. The information has been derived from our unaudited quarterly condensed consolidated financial statements, which have been prepared on a basis consistent with our audited Consolidated Financial Statements appearing in Item 8 in this Annual Report. The consolidated financial information set forth below includes all adjustments (consisting of normal adjustments and accruals) that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the Consolidated Financial Statements and the notes thereto appearing elsewhere in Item 8 this Annual Report. These quarterly operating results are not necessarily indicative of results that may be expected for any subsequent fiscal periods.
Generally, the revenues generated by our collectibles grading and authentication businesses are lower during our second quarter, which ends on December 31, than in other quarterly periods, because collectibles commerce generally decreases during the holiday season. As discussed under “Net Revenues” there can be volatility in coin revenues due to general market conditions that will impact the level of coin revenues in a given quarter.
Our collectibles trade show business adds to the variability in our quarter-to-quarter operating results, as its revenues vary based on the timing of the collectibles trade shows it conducts. Generally, the revenues of this business are higher in the first, third and fourth quarters of our fiscal years, compared to the second quarter, because the Long Beach, California Collectibles Shows take place during the first, third and fourth quarters.
Quarterly Results of Operations |
Quarter Ended (In thousands, except per share data) |
|||||||||||||||||||||||||||||||
Sept. 30, |
Dec. 31, |
Mar. 31, |
June 30, |
Sept. 30, |
Dec.31, 2015 |
Mar.31, |
June 31, 2016 |
|||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||
Net revenues |
$ | 16,178 | $ | 14,148 | $ | 15,987 | $ | 15,371 | $ | 14,618 | $ | 12,636 | $ | 17,329 | $ | 16,371 | ||||||||||||||||
Cost of revenues* |
5,796 | 5,067 | 5,875 | 6,315 | 5,147 | 5,010 | 6,288 | 6,457 | ||||||||||||||||||||||||
Gross profit |
10,382 | 9,081 | 10,112 | 9,056 | 9,471 | 7,626 | 11,041 | 9,914 | ||||||||||||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||||||||||
SG&A expenses |
7,357 | 6,435 | 6,440 | 6,291 | 6,276 | 5,937 | 6,636 | 6,833 | ||||||||||||||||||||||||
Operating income |
3,025 | 2,646 | 3,672 | 2,765 | 3,195 | 1,689 | 4,405 | 3,081 | ||||||||||||||||||||||||
Interest and other income, net |
6 | (7 | ) | (40 | ) | (1 | ) | (26 | ) | (15 | ) | 3 | (13 | ) | ||||||||||||||||||
Income before provision for income taxes |
3,031 | 2,639 | 3,632 | 2,764 | 3,169 | 1,674 | 4,408 | 3,068 | ||||||||||||||||||||||||
Provision for income taxes |
1,249 | 971 | 1,450 | 1,012 | 1,226 | 679 | 1,695 | 1,120 | ||||||||||||||||||||||||
Income from continuing operations |
1,782 | 1,668 | 2,182 | 1,752 | 1,943 | 995 | 2,713 | 1,948 | ||||||||||||||||||||||||
Income (loss) from discontinued operations, (net of income taxes) |
22 | (13 | ) | (12 | ) | 20 | (12 | ) | (6 | ) | 65 | (6 | ) | |||||||||||||||||||
Net income |
$ | 1,804 | $ | 1,655 | $ | 2,170 | $ | 1,772 | $ | 1,931 | $ | 989 | $ | 2,778 | $ | 1,942 | ||||||||||||||||
Net income per basic share: |
||||||||||||||||||||||||||||||||
From continuing operations |
$ | 0.21 | $ | 0.20 | $ | 0.26 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.32 | $ | 0.23 | ||||||||||||||||
From discontinued operations, (net of income taxes) |
0.01 | - | - | - | - | - | 0.01 | - | ||||||||||||||||||||||||
Net income per share |
$ | 0.22 | $ | 0.20 | $ | 0.26 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.33 | $ | 0.23 | ||||||||||||||||
Net income per diluted share: |
||||||||||||||||||||||||||||||||
From continuing operations |
$ | 0.21 | $ | 0.20 | $ | 0.26 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.32 | $ | 0.23 | ||||||||||||||||
From discontinued operations, (net of income taxes) |
- | (0.01 | ) | (0.01 | ) | - | - | - | - | - | ||||||||||||||||||||||
Net income per share |
$ | 0.21 | $ | 0.19 | $ | 0.25 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.32 | $ | 0.23 | ||||||||||||||||
Weighted average shares outstanding |
||||||||||||||||||||||||||||||||
Basic |
8,326 | 8,339 | 8,353 | 8,361 | 8,434 | 8,441 | 8,447 | 8,459 | ||||||||||||||||||||||||
Diluted |
8,502 | 8,519 | 8,531 | 8,519 | 8,534 | 8,549 | 8,549 | 8,548 |
Quarter Ended |
||||||||||||||||||||||||||||||||
Sept. 30, |
Dec. 31, |
Mar. 31, |
June 30, 2015 |
Sept. 30, |
Dec. 31, |
Mar. 31, |
June 30, 2016 |
|||||||||||||||||||||||||
Selected Operating Data: |
||||||||||||||||||||||||||||||||
Units authenticated or graded |
||||||||||||||||||||||||||||||||
Coins |
516 | 458 | 559 | 534 | 433 | 444 | 815 | 680 | ||||||||||||||||||||||||
Trading cards and autographs |
425 | 438 | 418 | 424 | 441 | 390 | 437 | 459 | ||||||||||||||||||||||||
Total |
941 | 896 | 977 | 958 | 874 | 834 | 1,252 | 1,139 |
*Cost of revenues in the third quarter of fiscal 2016, benefited by approximately $656,000 from a reduction in the Company’s warranty reserves at March 31, 2016. See Critical Accounting Policies and Estimates: Grading Warranty Costs.
Liquidity and Capital Resources
Cash and Cash Equivalent Balances. At June 30, 2016, we had cash and cash equivalents of $11,967,000 as compared to $17,254,000 at June 30, 2015 and $19,909,000 at June 30, 2014.
Historically, we have been able to rely on internally generated funds, rather than borrowings, as our primary source of funds to support our continuing grading operations, because many of our authentication and grading customers prepay our fees at the time they submit their collectibles to us for authentication and grading.
Cash Flows.
Cash Flows from Continuing Operations. In fiscal years ended June 30, 2016, 2015, and 2014, our operating activities from continuing operations generated cash of $9,172,000, $11,219,000, and $12,685,000, respectively. The decrease in cash provided by operating activities in fiscal 2016 as compared to fiscal 2015, reflects lower operating income before non-cash stock based compensation of $12,966,000 in fiscal 2016, as compared to $14,347,000 in fiscal 2015 and working capital changes, primarily an increase in accounts receivable due to the timing of receipts in fiscal 2016. Cash provided by operating activities in fiscal 2015 decreased as compared to fiscal 2014, despite the operating income being about the same level in each year and reflects a cash benefit realized in fiscal 2014, arising from the timing of the payment of increased annual incentives, as a result of the significant growth and increased profitability of the business in fiscal 2014 compared to fiscal 2013. As the business did not grow significantly in fiscal 2015 as compared to fiscal 2014, there was no such cash benefit in fiscal 2015.
Cash Flows of Discontinued Operations. Discontinued operations used cash of $440,000, $615,000, and $569,000, in fiscal years ended June 30, 2016, 2015, and 2014, respectively, related primarily to the payment of ongoing obligations for the New York facilities. As discussed under Outstanding Financial Obligations: Discontinued Operations below, one of the lease obligations expired during fiscal 2016.
Cash from or Used in Investing Activities. In fiscal years ended June 30, 2016, 2015, and 2014, investing activities used net cash of $2,011,000, $1,340,000, and $1,355,000, respectively, primarily reflecting capital expenditures for IT and authentication and grading equipment and capitalized software costs for Collectors.com.
Cash Used in Financing Activities. In the fiscal years ended June 30, 2016, 2015 and 2014, financing activities used net cash of $12,008,000, $11,919,000, and $9,563,000, respectively. In fiscal 2016 we used $12,008,000 for the payment of dividends to stockholders. In fiscal 2015, we used $11,361,000 to pay cash dividends to stockholders and $558,000 to buyback shares to satisfy tax withholding obligations for employee vested shares. In fiscal 2014, we received $1,354,000 from the exercise of stock options offset by $10,731,000 of cash used to pay dividends to stockholders and $186,000 used to buyback shares to satisfy tax withholdings obligations for employee vested stock.
Overall, the Company used cash of $5,287,000 in fiscal 2016 as compared to cash usage of $2,655,000 in fiscal 2015 and cash generation of $1,198,000 in fiscal 2014.
Outstanding Financial Obligations
Continuing Operations
At June 30, 2016, we did not have any material financial obligations in connection with our continuing operations, except for the operating lease payments for our corporate headquarters and for offices in New Jersey, Paris, Hong Kong and Shanghai.
At June 30, 2016, future minimum lease payments under the lease agreements associated with our continuing operations were as follows (in thousands):
Year Ending June 30, |
Gross Payment |
Sublease |
|
|||||||||
2017 |
$ | 1,846 | $ | 84 | $ | 1,762 | ||||||
2018 |
1,856 | 87 | 1,769 | |||||||||
2019 |
1,243 | 67 | 1,176 | |||||||||
2020 |
193 | - | 193 | |||||||||
2021 |
95 | - | 95 | |||||||||
Thereafter |
12 | - | 12 | |||||||||
$ | 5,245 | $ | 238 | $ | 5,007 |
Discontinued Operations
At December 31, 2015, one of the facility obligations, related to our discontinued jewelry business expired. At June 30, 2016, the remaining financial obligation for the second facility in New York City, that had been occupied by our discontinued jewelry authentication and grading businesses that expires on December 31, 2017, is as follows (in thousands):
Year Ending June 30, |
Remaining Obligation |
|||
2017 |
$ | 470 | ||
2018 |
245 | |||
$ | 715 | |||
Less: Discounted estimated fair value of minimum lease payments |
(687 | ) | ||
Accretion expense to be recognized in future years |
$ | 28 |
These cash payment obligations are to be paid on a monthly basis in accordance with the above schedule.
With the exception of these lease obligations for continuing and discontinued operations, we do not have any material financial obligations, such as long-term debt or capital lease or purchase obligations.
Dividends. Since the third quarter of fiscal 2015, our dividend policy has been to pay $0.35 per share per quarter up from $0.325 in prior quarters. As a result, we paid dividends of $12,008,000, $11,361,000, and $10,731,000, in fiscals 2016, 2015 and 2014, respectively.
The declaration and payment of cash dividends in the future, pursuant to the Company’s dividend policy, is subject to final determination each quarter by the Board of Directors based on a number of factors, including the Company’s financial performance and its available cash resources, its cash requirements and alternative uses of cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company and its stockholders. Accordingly, there is no assurance that, in the future, the amount of the quarterly cash dividend will not be reduced or that the payment of dividends will not be suspended or altogether discontinued.
Share Buyback Program. In December 2005, our Board of Directors approved a stock buyback program that authorized us to make up to $10,000,000 of stock repurchases in the open market or privately negotiated transactions, in accordance with applicable Securities Exchange Commission (“SEC”) rules, when opportunities to make such repurchases, at attractive prices, become available. There were no share repurchases under this program in fiscals 2016, 2015 and 2014. At June 30, 2016, we have a total of $3.7 million available for share purchases under the share buyback program.
Future Uses and Sources of Cash. We plan to use our cash resources, consisting of available cash and cash equivalent balances, together with internally generated cash flows, to (i) introduce new collectibles related services for our customers, including providing services at our overseas operations and investing in Collectors.com; (ii) fund working capital requirements; (iii) fund acquisitions; (iv) fund obligations associated with our discontinued businesses; (v) fund the payment of cash dividends and (vi) for other general corporate purposes which may include additional repurchases of common stock.
Although we have no current plans to do so, we also may seek borrowings and we may issue additional shares of our stock to finance the growth of our collectibles businesses. However, there is no assurance that we would be able to obtain such borrowings or generate additional capital on terms acceptable to us, if at all.
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 September 2015, FASB issued Accounting Standards Update 2015-16, on Business Combinations and Simplifying the Accounting for measurement-period adjustments. Under this guidance an acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, the guidance requires an entity to present separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. 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, 2015 and interim periods thereafter.
In November 2015, FASB issued Accounting Standards Update 2015-17, on Income Taxes and the Balance Sheet Classification of Deferred Taxes. Under this updated guidance, deferred tax assets and liabilities are required to be classified as noncurrent asset or liabilities in the Company’s balance sheet. The guidance is effective for financial years beginning after December 15, 2016 and interim periods within those annual periods. The Company implemented this guidance at June 30, 2016 and retrospectively restated its comparable balance sheet at June 30, 2015. Deferred tax assets of $1,599,000 classified as part of current assets at June 30, 2015 were reclassified to noncurrent deferred tax assets, such that noncurrent deferred tax assets increased from $1,945,000 to $3,544,000 June 30, 2015. There was no change to total assets at June 30, 2015 arising from this guidance.
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 March 2016, FASB issued Accounting Standards Update 2016-09 Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Under this updated guidance all excess tax benefits and tax deficiencies, should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements. The guidance is effective for annual periods beginning after December 5, 2016 and interim periods within those annual periods. Early adoption is permitted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk and other relevant market rate or price risks.
Due to the cash and cash equivalent balances that we maintain, we are exposed to risk of changes in short-term interest rates. At June 30, 2016, we had approximately $11,967,000 in cash and cash equivalents, of which approximately $7,619,000 was invested in money market accounts. Reductions in short-term interest rates could result in reductions in the amount of income we are able to generate on available cash. However, any adverse impact on our operating results of reductions in interest rates is not expected to be material.
We do not engage in any activities that would expose us to significant foreign currency exchange rate risk or commodity price risks. Our overseas operations are not significant but when considered appropriate, we repatriate excess cash from foreign operations. Overseas cash balances were approximately $1,249,000 at June 30, 2016, of which $611,000 was in China.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page | |
Report of Independent Registered Public Accounting Firm |
49 |
Consolidated Balance Sheets at June 30, 2016 and 2015 |
50 |
Consolidated Statements of Operations for the Years Ended June 30, 2016, 2015 and 2014 |
51 |
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2016, 2015 and 2014 |
52 |
Consolidated Statements of Cash Flows for the Years Ended June 30, 2016, 2015 and 2014 |
53 |
Notes to Consolidated Financial Statements |
55 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Collectors Universe, Inc.
We have audited the accompanying consolidated balance sheets of Collectors Universe Inc. (a Delaware Corporation) and subsidiaries (the “Company”) as of June 30, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15 (a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Collectors Universe Inc. and subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 30, 2016 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Irvine, California
August 30, 2016
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30, |
||||||||
|
2016 |
2015 |
||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 11,967 | $ | 17,254 | ||||
Accounts receivable, net of allowance of $35 in 2016 and $33 in 2015 |
3,883 | 2,460 | ||||||
Inventories, net |
1,835 | 1,619 | ||||||
Prepaid expenses and other current assets |
1,273 | 940 | ||||||
Total current assets |
18,958 | 22,273 | ||||||
Property and equipment, net |
2,839 | 2,326 | ||||||
Goodwill |
2,083 | 2,083 | ||||||
Intangible assets, net |
1,762 | 1,558 | ||||||
Deferred income tax assets |
2,229 | 3,544 | ||||||
Other assets |
240 | 236 | ||||||
Non-current assets of discontinued operations |
79 | 182 | ||||||
$ | 28,190 | $ | 32,202 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,728 | $ | 1,961 | ||||
Accrued liabilities |
2,491 | 2,898 | ||||||
Accrued compensation and benefits |
3,414 | 3,890 | ||||||
Income taxes payable |
782 | 521 | ||||||
Deferred revenue |
2,563 | 2,621 | ||||||
Current liabilities of discontinued operations |
619 | 778 | ||||||
Total current liabilities |
12,597 | 12,669 | ||||||
Deferred rent |
381 | 422 | ||||||
Non-current liabilities of discontinued operations |
217 | 642 | ||||||
Commitments and contingencies (Note 14) |
||||||||
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; shares outstanding: 8,898 in 2016 and 8,882 in 2015 |
9 | 9 | ||||||
Additional paid-in capital |
80,642 | 79,848 | ||||||
Accumulated deficit |
(65,656 | ) | (61,388 | ) | ||||
Total stockholders’ equity |
14,995 | 18,469 | ||||||
$ | 28,190 | $ | 32,202 |
The accompanying notes are an integral part of these consolidated financial statements.
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Grading, authentication and related services revenues |
$ | 60,954 | $ | 61,684 | $ | 60,571 | ||||||
Cost of grading, authentication and related services |
22,902 | 23,053 | 22,663 | |||||||||
Gross profit |
38,052 | 38,631 | 37,908 | |||||||||
Operating expenses: |
||||||||||||
Selling and marketing expenses |
8,635 | 8,896 | 9,106 | |||||||||
General and administrative expenses |
17,047 | 17,627 | 16,326 | |||||||||
Total operating expenses |
25,682 | 26,523 | 25,432 | |||||||||
Operating income |
12,370 | 12,108 | 12,476 | |||||||||
Interest income, net |
22 | 38 | 36 | |||||||||
Other income (expense), net |
(73 | ) | (80 | ) | 3 | |||||||
Income before provision for income taxes |
12,319 | 12,066 | 12,515 | |||||||||
Provision for income taxes |
4,720 | 4,682 | 5,081 | |||||||||
Income from continuing operations |
7,599 | 7,384 | 7,434 | |||||||||
Income (loss) from discontinued operations, (net of income taxes) |
41 | 17 | (75 | ) | ||||||||
Net income |
$ | 7,640 | $ | 7,401 | $ | 7,359 | ||||||
Net income per basic share: |
||||||||||||
Income from continuing operations |
$ | 0.90 | $ | 0.88 | $ | 0.91 | ||||||
Income (loss) from discontinued operations, (net of income taxes) |
- | 0.01 | (0.01 | ) | ||||||||
Net income per share |
$ | 0.90 | $ | 0.89 | $ | 0.90 | ||||||
Net income per diluted share: |
||||||||||||
Income from continuing operations |
$ | 0.89 | $ | 0.87 | $ | 0.90 | ||||||
Income (loss) from discontinued operations, (net of income taxes) |
- | - | (0.01 | ) | ||||||||
Net income per share |
$ | 0.89 | $ | 0.87 | $ | 0.89 | ||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
8,445 | 8,345 | 8,167 | |||||||||
Diluted |
8,545 | 8,518 | 8,247 | |||||||||
Dividends declared per common share |
$ | 1.40 | $ | 1.35 | $ | 1.30 |
The accompanying notes are an integral part of these consolidated financial statements.
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
|
Additional |
Accumulated |
||||||||||||||||||
Shares |
Amount |
Capital |
Deficit |
Total |
||||||||||||||||
Balance at June 30, 2013 |
8,509 | $ | 9 | $ | 74,578 | $ | (54,025 | ) | $ | 20,562 | ||||||||||
Exercise of stock options |
114 | - | 1,354 | - | 1,354 | |||||||||||||||
Forfeiture of restricted stock |
(13 | ) | - | (186 | ) | - | (186 | ) | ||||||||||||
Issuance of common stock |
10 | - | 147 | - | 147 | |||||||||||||||
Stock-based compensation – restricted stock |
241 | - | 1,799 | - | 1,799 | |||||||||||||||
Excess tax benefits related to stock-based compensation |
- | - | 319 | - | 319 | |||||||||||||||
Net income |
- | - | - | 7,359 | 7,359 | |||||||||||||||
Dividends paid and accrued |
- | - | - | (10,714 | ) | (10,714 | ) | |||||||||||||
Balance at June 30, 2014 |
8,861 | 9 | 78,011 | (57,380 | ) | 20,640 | ||||||||||||||
Exercise of stock options |
12 | - | - | - | - | |||||||||||||||
Forfeiture of restricted stock |
(27 | ) | - | (558 | ) | - | (558 | ) | ||||||||||||
Stock-based compensation – restricted stock |
36 | - | 2,239 | - | 2,239 | |||||||||||||||
Excess tax benefits related to stock-based compensation |
- | - | 156 | - | 156 | |||||||||||||||
Net income |
- | - | - | 7,401 | 7,401 | |||||||||||||||
Dividends paid and accrued |
- | - | - | (11,409 | ) | (11,409 | ) | |||||||||||||
Balance at June 30, 2015 |
8,882 | 9 | 79,848 | (61,388 | ) | 18,469 | ||||||||||||||
Stock-based compensation – restricted stock |
16 | - | 596 | - | 596 | |||||||||||||||
Excess tax benefits related to stock-based compensation |
- | - | 198 | - | 198 | |||||||||||||||
Net income |
- | - | - | 7,640 | 7,640 | |||||||||||||||
Dividends paid and accrued |
- | - | - | (11,908 | ) | (11,908 | ) | |||||||||||||
Balance at June 30, 2016 |
8,898 | $ | 9 | $ | 80,642 | $ | (65,656 | ) | $ | 14,995 |
The accompanying notes are an integral part of these consolidated financial statements.
COLLECTORS UNIVERSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 7,640 | $ | 7,401 | $ | 7,359 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
(Income) Loss from discontinued operations |
(41 | ) | (17 | ) | 75 | |||||||
Depreciation and amortization expense |
1,528 | 1,293 | 1,256 | |||||||||
Stock-based compensation expense |
596 | 2,239 | 1,946 | |||||||||
Provision for bad debts |
5 | 8 | 25 | |||||||||
Provision for inventory write-down |
168 | 336 | 94 | |||||||||
Provision for warranty |
(145 | ) | 535 | 791 | ||||||||
Loss (gain) on sale of property and equipment |
5 | 19 | 4 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(1,480 | ) | (391 | ) | (95 | ) | ||||||
Inventories |
(384 | ) | (67 | ) | (326 | ) | ||||||
Prepaid expenses and other |
(333 | ) | 427 | (402 | ) | |||||||
Deferred income taxes |
1,513 | 533 | (272 | ) | ||||||||
Other assets |
(5 | ) | 146 | 15 | ||||||||
Accounts payable and accrued liabilities |
420 | (604 | ) | 379 | ||||||||
Accrued compensation and benefits |
(476 | ) | (249 | ) | 1,459 | |||||||
Income taxes payable |
260 | (327 | ) | 90 | ||||||||
Deferred revenue |
(58 | ) | (24 | ) | 300 | |||||||
Deferred rent |
(41 | ) | (39 | ) | (13 | ) | ||||||
Net cash provided by operating activities of continuing operations |
9,172 | 11,219 | 12,685 | |||||||||
Net cash used in operating activities of discontinued operations |
(440 | ) | (615 | ) | (569 | ) | ||||||
Net cash provided by operating activities |
8,732 | 10,604 | 12,116 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Capital expenditures |
(1,299 | ) | (777 | ) | (1,166 | ) | ||||||
Capitalized software development costs |
(752 | ) | (441 | ) | (191 | ) | ||||||
Proceeds from sale of property and equipment |
- | 19 | 7 | |||||||||
Patents and other intangibles |
(13 | ) | (57 | ) | (23 | ) | ||||||
Proceeds from sale of business |
53 | 116 | 18 | |||||||||
Purchase of business |
- | (200 | ) | - | ||||||||
Net cash used in investing activities |
(2,011 | ) | (1,340 | ) | (1,355 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Dividends paid to common stockholders |
(12,008 | ) | (11,361 | ) | (10,731 | ) | ||||||
Proceeds from exercise of stock options |
- | - | 1,354 | |||||||||
Payments for retirement of common stock |
- | (558 | ) | (186 | ) | |||||||
Net cash used in financing activities |
(12,008 | ) | (11,919 | ) | (9,563 | ) | ||||||
Increase (decrease) in cash and cash equivalents |
(5,287 | ) | (2,655 | ) | 1,198 | |||||||
Cash and cash equivalents at beginning of year |
17,254 | 19,909 | 18,711 | |||||||||
Cash and cash equivalents at end of year |
$ | 11,967 | $ | 17,254 | $ | 19,909 |
The accompanying notes are an integral part of these consolidated financial statements.
COLLECTORS UNIVERSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Year ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||||||
Income taxes paid, net |
$ | 2,971 | $ | 4,556 | $ | 5,217 | ||||||
Interest paid |
$ | - | $ | - | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1. |
Nature of Business |
Collectors Universe, Inc. (“we,” “us,” the “Company,” “management” or “Collectors Universe”) is engaged in the business of providing third-party authentication, grading and related services for rare and high-value collectibles consisting of coins, trading cards, sports memorabilia and autographs. We authenticate and grade the quality of such collectibles for dealers, collectors and retail buyers and sellers of these collectibles. We also publish magazines that provide market prices and information for certain collectibles and high-value assets that are accessible on our websites. We sell advertising and earn commissions on those websites, and sell advertising in the magazines that we publish; own the CCE subscription business, which operates an online market for graded collectible coins for dealers who subscribe to this service; and promote, manage and operate the Long Beach Coin shows.
|
2. |
Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Collectors Universe, Inc. and its wholly owned subsidiaries. At June 30, 2016, such operating subsidiaries were Certified Asset Exchange, Inc. (CAE), Collectors Universe (Hong Kong) Limited, Collectors Universe (Shanghai) Limited, and Expos Unlimited, LLC. (Expos), all of which are ultimately 100% owned by Collectors Universe, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year presentation. See Recent Accounting Pronouncements which discuss the reclassification of certain deferred tax assets classified as current assets at June 30, 2015 to long-term deferred tax assets at June 30, 2015 to conform to the 2016 presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures 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 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 related stock-based compensation expense, the valuation of coin inventory, the amount and assessment of goodwill for impairment, the sufficiency of warranty reserves, the provisions or benefit for income taxes and related valuation allowances and adjustment to the fair value of our remaining lease obligations for our discontinued jewelry businesses.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents.
At June 30, 2016, substantially all of our cash was deposited at two FDIC insured financial institutions. Those deposits exceeded the banks’ FDIC insured deposit limits of approximately $9,800,000 at June 30, 2016. Cash in overseas bank accounts was approximately $1,249,000 at June 30, 2016.
Concentrations
Credit Risks. Financial instruments that potentially subject the Company to significant concentrations of credit risk at June 30, 2016 and 2015 consisted primarily of cash and cash equivalents and accounts receivables.
Cash Balances. At June 30, 2016 and 2015, the Company had funds of approximately $7,600,000 and $13,400,000 respectively, in money market accounts and money market funds. In addition, at June 30, 2016 and 2015, the Company had approximately $4,300,000 and $3,800,000 respectively, in a non-interest bearing bank account for general day-to-day operations.
Accounts Receivable. A substantial portion of our accounts receivable are due from collectibles dealers. At June 30, 2016, no individual customer’s account receivable exceeded 10% of the Company’s total gross accounts receivable balance. The Company performs 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 the debtors to pay their accounts receivable balances. Based on that review, management establishes an allowance for doubtful accounts, when deemed necessary. The allowance for doubtful accounts receivable was $35,000 and $33,000 at June 30, 2016 and June 30, 2015, respectively. Management will write-off accounts receivable balances when it is determined that there is no possibility of collection.
Customers. The authentication and grading of collectible coins and related services accounted for approximately 66%, 68%, and 69% of our net revenues for the years ended June 30, 2016, 2015 and 2014, respectively. In fiscal 2016, 2015 and 2014, five customers accounted for 16%, 17% and 14% of our net authentication and grading services, respectively.
Suppliers. We purchase substantially all of the injection-molded parts, holograms and printed labels for our grading services from two suppliers. We typically concentrate the purchase of holders through one supplier when developing new holders. There are, however, numerous suppliers for these items and, as a result, it is possible to change suppliers without significant delay or cost to the Company. While there are numerous sources for injection-molded parts, these parts require a die to fabricate the part. The manufacturing of high-value precision dies can be a lengthy process and requires considerable expertise in their fabrication. Although we do not have back-up dies for some of our high-volume injection-molded parts and we primarily rely on two suppliers for these requirements, we own the dies used to manufacture the parts, and we believe that the Company maintains sufficient inventory of parts to allow time for us to alternate between our two suppliers or to have a new supplier build parts, should the need to do so arise.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their estimated fair values due to the short-term nature of such instruments.
Inventories
Our inventories consist primarily of (i) collectible coin inventories, and (ii) consumable supplies that we use in our authentication and grading businesses. Collectible coin inventories are recorded at 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 loss is recognized, as necessary. The allowance for inventory losses was $739,000 and $613,000 at June 30, 2016 and 2015, respectively. It is possible that our estimates of market value could change in the near term due to market conditions in the various collectibles markets served by the Company, which could require us to increase that allowance.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the term of the related lease. Coin reference sets are non-depreciable assets. Repair and maintenance costs are expensed as incurred.
Goodwill and Other Intangible Assets
The Company evaluates the carrying value of its goodwill and certain indefinite-lived intangible assets at least annually for impairment, or more frequently if facts and circumstances indicate that impairment may have occurred. Management formally evaluates the carrying value of its goodwill and other indefinite-lived intangible assets for impairment on the anniversary date of each of the acquisitions that gave rise to the recording of such assets or more frequently if a triggering event has occurred. We considered qualitative factors as part of the formal evaluation of the carrying value of goodwill. If qualitative factors are not applicable and the carrying value of a “reporting unit,” defined as an operating segment of an entity that contains goodwill, is determined to be less than the fair value of the reporting unit, there exists the possibility of impairment of goodwill. An impairment loss of goodwill is measured in two steps by first allocating the current fair value of the reporting unit to net assets and liabilities, including recorded and unrecorded other intangible assets to determine the implied carrying value of goodwill. The next step is to measure the difference between the carrying value of goodwill and the implied fair value of goodwill, and, if the implied fair value of goodwill is less than the carrying value of goodwill, we would record an impairment loss of goodwill calculated as the difference between the implied and carrying values on the Consolidated Statements of Operations in the period in which the impairment is determined. No goodwill impairment was recorded in the three years ended June 30, 2016.
Capitalized Software
Software development costs are capitalized as part of intangible assets and amortized on a straight-line basis over its useful life of three years. Through June 30, 2016 and 2015, we had capitalized approximately $4,281,000 and $3,529,000 respectively, as capitalized software and recognized related accumulated amortization of $3,261,000 and $2,989,000. During fiscal years 2016, 2015 and 2014, the Company recorded amortization expense for capitalized software of approximately $272,000, $122,000 and $115,000, respectively. Planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a project are recognized as expense in the period in which they occur. Management evaluates the carrying value of capitalized software to determine if the carrying value is impaired, and, if necessary, an impairment loss is recorded in the period in which the impairment is determined to have occurred.
Long-Lived Assets
The Company regularly reviews property and equipment and other long-lived assets, including certain identifiable intangibles, for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in full. If there is an indication of impairment to property, equipment or definite lived intangible assets, then management prepares an estimate of future undiscounted cash flows expected to result from the use of that asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss would be recognized to write-down the asset to its estimated fair value. Fair value is estimated using the present value of the future cash flows discounted at a rate commensurate with management’s estimate of the business risks. As a result of the impairment of the Expos tradename recorded at June 30, 2011, the tradename was determined to have a finite life and effective July 1, 2011; the tradename is being amortized over a period of 10 years. No impairment loss was recorded in 2014 to 2016.
Revenue Recognition
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 services. We recognize revenue for 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 in the periods in which the shows take place.
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. We recognize revenue attributed to the free grading vouchers on a specific basis, and classify those revenues as part of authentication and grading fees. The balance of the membership fees is recognized over the life of the membership.
We recognize revenues from coin sales when they are shipped to customers. Coin sales consist primarily of sales of collectible coins that we have purchased 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.
Shipping and Handling Costs
Shipping and handling costs incurred to return to our customers their collectibles property submitted to us for grading or authentication are recorded as costs of revenues, net of amounts received from such customers.
Warranty Costs
We offer a warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if any 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, or there is evidence that the holder was tampered with. 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. Effective July 1, 2014, the Company reduced its warranty accrual rate on coins and cards based on a review of the overall level of warranty reserves and trends in warranty payments over an extended period of time. In the third quarter fiscal 2016, the Company performed a detailed analysis of our coin warranty payments and related reserve requirements made possible by improved operational systems, which enabled us to better match warranty payments to the periods in which the coins were originally authenticated and graded by us. We concluded that, although there is no time limitation on our warranty obligation, the majority of our warranty claims arise within five years of the coin being authenticated and graded by us. Therefore, we deemed it appropriate to reduce our warranty reserve, which resulted in a warranty credit of $145,000 in fiscal 2016 as compared to a warranty expense of $535,000 in fiscal 2015. Significant claims for coins and trading cards, resulting from resubmissions receiving lower grades, or deemed not to be authentic, could result in a material adverse effect on our results of operations (see Note 8 below).
Advertising Costs
Advertising costs are expensed as incurred and amounted to approximately $725,000, $401,000 and $394,000 in the fiscal years ended June 30, 2016, 2015 and 2014, respectively.
Income Taxes
Deferred tax assets and liabilities are recorded for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. Measurement of the deferred tax items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, we evaluate the probability of realizing the future benefits comprising that asset and record a valuation allowance if considered necessary.
Accounting standards prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of the positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. A "more likely than not" tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, or else a full reserve is established against the tax asset or a liability is recorded. Interest and penalties accrued on uncertain tax positions are recorded in income tax expense. See Recent Accounting Pronouncements which discussed the classification of deferred tax balances as of June 30, 2016 and 2015 respectively, and Note 9 for further information concerning income taxes.
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 those 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 respective current periods, were not material.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date fair value of an equity-incentive award, and is recognized as expense over the employee or non-employee director’s requisite service period, which is generally the vesting period of the award. However, if the vesting of a stock-based compensation award is subject to satisfaction of a performance requirement or condition, the stock-based compensation expense is recognized if, and when, management determines that the achievement of the performance requirement or condition (and therefore the vesting of the award) has become probable. If stock-based compensation is recognized due to a determination that a performance condition is probable, and it is subsequently determined that the performance condition was not met in the expected vesting period, then if the shares can vest in future periods, management will refine the period over which the remaining expense would be recognized. If the shares ultimately fail to vest, or management concludes that it is not probable the share will vest, then all expense previously recognized with respect to the performance condition would be reversed.
We recognized stock-based compensation expense for service-based stock option awards, using the Black-Scholes option-pricing model. No stock options were granted in fiscal years 2014 through 2016 and all options previously granted had become fully vested and had been fully expensed by June 30, 2012.
Net Income Per Share
Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding during the periods presented. Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common and common equivalent shares outstanding during the period presented assuming the exercise of all outstanding stock options and other dilutive securities. However, options with exercise prices that exceeded the average market price of the Company’s common shares for the period for which the calculation of diluted net income per share was made, were disregarded because they are non-dilutive in their effect.
The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands except per share data):
Year Ended June 30, |
||||||||||||
2016 |
2015 |
2014 |
||||||||||
Income from continuing operations |
$ | 7,599 | $ | 7,384 | $ | 7,434 | ||||||
Income (loss) from discontinued operations (net of income taxes) |
41 | 17 | (75 | ) | ||||||||
Net income |
$ | 7,640 | $ | 7,401 | $ | 7,359 | ||||||
Net income per basic share: |
||||||||||||
From continuing operations |
$ | 0.90 | $ | 0.88 | $ | 0.91 | ||||||
From discontinued operations (net of income taxes) |
- | 0.01 | (0.01 | ) | ||||||||
Net income per share |
$ | 0.90 | $ | 0.89 | $ | 0.90 | ||||||
Net income per diluted share: |
||||||||||||
From continuing operations |
$ | 0.89 | $ | 0.87 | $ | 0.90 | ||||||
From discontinued operations (net of income taxes) |
- | - | (0.01 | ) | ||||||||
Net income per share |
$ | 0.89 | $ | 0.87 | $ | 0.89 | ||||||
Weighted-average shares outstanding: |
||||||||||||
Basic |
8,445 | 8,345 | 8,167 | |||||||||
Effect of dilutive shares |
100 | 173 | 80 | |||||||||
Diluted |
8,545 | 8,518 | 8,247 |
Options to purchase shares of common stock and unvested restricted shares of common stock totaling 57,000 for the year ended June 30, 2014, respectively, were excluded from the computation of diluted income per share, as they would have been anti-dilutive. At June 30, 2016, there were no outstanding options to purchase shares of common stock. In addition, approximately 267,000, 263,000 and 393,000 performance-based restricted shares were excluded from the computation of diluted earnings per share for the years ended June 30, 2016, 2015, 2014, respectively because we had not reached the Performance Goals for those shares at June 30, 2016.
Comprehensive Income
The Company does not have any items of other comprehensive income requiring separate disclosure.
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 September 2015, FASB issued Accounting Standards Update 2015-16, on Business Combinations and Simplifying the Accounting for measurement-period adjustments. Under this guidance an acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, the guidance requires an entity to present separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The adoption of this guidance is not expected to have a material effect on the Company’s Condensed Consolidated Financial Statements and related disclosures. The guidance is effective for fiscal years beginning after December 15, 2015 and interim periods thereafter.
In November 2015, FASB issued Accounting Standards Update 2015-17, on Income Taxes and the Balance Sheet Classification of Deferred Taxes. Under this updated guidance, deferred tax assets and liabilities are required to be classified as noncurrent asset or liabilities in the Company’s balance sheet. The guidance is effective for financial years beginning after December 15, 2016 and interim periods within those annual periods. The Company implemented this guidance at June 30, 2016 and retrospectively restated its comparable balance sheet at June 30, 2015. Deferred tax assets of $1,599,000 classified as part of current assets at June 30, 2015 were reclassified to noncurrent deferred tax assets, such that noncurrent deferred tax assets increased from $1,945,000 to $3,544,000 June 30, 2015. There was no change to total assets at June 30, 2015 arising from this guidance.
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 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 March 2016, FASB issued Accounting Standards Update 2016-09 Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Under this updated guidance all excess tax benefits and tax deficiencies, should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements. The guidance is effective for annual periods beginning after December 5, 2016 and interim periods within those annual periods. Early adoption is permitted.
3. |
Asset Acquisition |
In November 2014, we acquired the tradename, software and related assets (historical data and a non-compete with the previous owner) of Intelliquote (“IQ”), a brand name for pricing for the numismatic community, for cash of $200,000. The acquisition of IQ enhances the Company’s CCE Quickprice offering and adding to the Company’s positon as a leading service provider of valuable information and content to coin market participants.
Due to the immateriality of the consideration paid, no formal purchase price allocation was conducted although we attribute most of the value to the IQ tradename. Based on this preliminary evaluation, the amount of $200,000 has been classified as intangible assets in the accompanying condensed consolidated balance sheet at June 30, 2016.
Acquisition related costs of $3,000 were incurred and have been included in general and administrative expenses in the year ended June 30, 2015.
Approximately $90,000, and $48,000 in IQ revenue is included in net revenues for the years ended June 30, 2016 and 2015, respectively, representing the revenues generated since the date of this acquisition.
|
4. |
Discontinued Operations |
During fiscal 2009, the Board of Directors authorized the divesture and sale of GCAL, Gemprint and AGL (the “Jewelry Businesses”) and the currency grading business, the remaining assets and liabilities of which have been reclassified as assets and liabilities of discontinued operations on the Consolidated Balance Sheets as of June 30, 2016 and 2015. The Consolidated Statements of Operations for the fiscal years ended June 30, 2016, 2015 and 2014 present the results of operations as discontinued operations and the Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2016, 2015 and 2014 segregate the cash flows from discontinued operations from all other cash flow activities.
In fiscal 2009, the Company recorded loss accruals of $3,925,000 in connection with two leased laboratory facilities for its discontinued jewelry business that were leased through December 31, 2015 and 2017, respectively. The remaining obligations at June 30, 2016 and 2015 totaled approximately $687,000 and $1,233,000, respectively, of which $470,000 is classified as a current liability, and the balance of $217,000 is classified as a non-current liability in the Company’s consolidated balance sheet. We will continue to review and, if necessary, make adjustments to the accrual on a quarterly basis.
The operating results of the discontinued businesses, which are included in the accompanying Consolidated Statements of Operations, were not material. At June 30, 2016 and 2015, the net liabilities of discontinued operations consist primarily of the above-described lease obligations payable through December 31, 2017.
|
5. |
Inventories |
Inventories consist of the following (in thousands):
June 30, |
||||||||
2016 |
2015 |
|||||||
Coins |
$ | 437 | $ | 504 | ||||
Other collectibles |
292 | 168 | ||||||
Grading raw materials consumable inventory |
1,845 | 1,560 | ||||||
2,574 | 2,232 | |||||||
Less inventory reserve |
(739 | ) | (613 | ) | ||||
$ | 1,835 | $ | 1,619 |
The inventory reserve represents a valuation allowance on certain items of our coins and other collectibles inventories based upon our review of the current market value of such coins and collectibles.
Estimated market values 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.
6. |
Property and Equipment |
Property and equipment consist of the following at June 30 (in thousands):
2016 |
2015 |
|||||||
Coin reference sets |
$ | 263 | $ | 263 | ||||
Computer hardware and equipment |
2,777 | 2,301 | ||||||
Computer software |
1,202 | 1,148 | ||||||
Equipment |
5,134 | 4,465 | ||||||
Furniture and office equipment |
1,116 | 1,079 | ||||||
Leasehold improvements |
1,138 | 1,024 | ||||||
Trading card reference library |
52 | 52 | ||||||
11,682 | 10,332 | |||||||
Less accumulated depreciation and amortization |
(8,843 | ) | (8,006 | ) | ||||
Property and equipment, net |
$ | 2,839 | $ | 2,326 |
Depreciation and amortization expense relating to property and equipment for fiscal 2016, 2015 and 2014 was $968,000, $883,000, and $837,000, respectively.
|
7. |
Goodwill and Intangible Assets |
During the first quarter of fiscal year 2016, we completed our annual review of the carrying value of the goodwill acquired with the acquisitions of CoinFacts, Inc. (“CFI”) and Certified Coin Exchange (“CCE”), and, on the basis of those reviews, management determined that no impairments had occurred.
In fiscal 2011, the Expos tradename was determined to have a finite life and is being amortized over a period of 10 years. At June 30, 2016, we performed our annual review of the carrying value of the goodwill of Expos and concluded that no further impairment had occurred.
The following table sets forth the carrying values of goodwill for those acquired businesses that are classified as continuing operations as of June 30 (in thousands):
2016 |
2015 |
|||||||
CoinFacts |
$ | 515 | $ | 515 | ||||
Expos Unlimited |
458 | 458 | ||||||
CCE |
1,110 | 1,110 | ||||||
$ | 2,083 | $ | 2,083 |
Approximately $1.0 million classified as goodwill on the consolidated balance sheets at June 30, 2016 and 2015, respectively, is amortizable and deductible for income tax purposes over a period of 15 years.
The following table sets forth, by asset class, the amounts classified as other intangible assets, net, on the consolidated balance sheets as of June 30, 2016 and 2015 (in thousands):
As of June 30, 2016 |
As of June 30, 2015 |
|||||||||||||||||||||||
Gross Book Value |
Accumulated Amortization |
Net Book Value |
Gross Book Value |
Accumulated Amortization |
Net Book Value |
|||||||||||||||||||
Amortized Intangible Assets: |
||||||||||||||||||||||||
CUI: |
||||||||||||||||||||||||
Coinflation.com website |
$ | 740 | $ | (703 | ) | $ | 37 | $ | 740 | $ | (555 | ) | $ | 185 | ||||||||||
Patents and Trademarks |
159 | (21 | ) | 138 | 144 | (14 | ) | 130 | ||||||||||||||||
899 | (724 | ) | 175 | 884 | (569 | ) | 315 | |||||||||||||||||
Expos Unlimited: |
||||||||||||||||||||||||
Auctioneer relationships |
150 | (150 | ) | - | 150 | (135 | ) | 15 | ||||||||||||||||
Covenant not to compete |
130 | (130 | ) | - | 130 | (130 | ) | - | ||||||||||||||||
Customer database |
230 | (230 | ) | - | 230 | (184 | ) | 46 | ||||||||||||||||
Tradename |
280 | (140 | ) | 140 | 280 | (112 | ) | 168 | ||||||||||||||||
790 | (650 | ) | 140 | 790 | (561 | ) | 229 | |||||||||||||||||
CCE: |
||||||||||||||||||||||||
Customer lists |
676 | (488 | ) | 188 | 676 | (443 | ) | 233 | ||||||||||||||||
Capitalized Software |
4,281 | (3,261 | ) | 1,020 | 3,529 | (2,987 | ) | 542 | ||||||||||||||||
Indefinite life Intangible Assets: |
||||||||||||||||||||||||
CCE:Tradename |
39 | - | 39 | 39 | - | 39 | ||||||||||||||||||
CCE:CoinNexus(IQ) |
200 | - | 200 | 200 | - | 200 | ||||||||||||||||||
$ | 6,885 | $ | (5,123 | ) | $ | 1,762 | $ | 6,118 | $ | (4,560 | ) | $ | 1,558 |
Amortization expense was $560,000, $410,000, and $419,000, for the fiscal years ended June 30, 2016, 2015 and 2014, respectively. Estimated amortization expense for each of the five succeeding years and thereafter relating to intangible assets with definite lives, is as follows (in thousands):
Fiscal Year Ending June 30, |
||||
2017 |
566 | |||
2018 |
477 | |||
2019 |
281 | |||
2020 |
89 | |||
2021 |
51 | |||
Thereafter |
59 | |||
$ | 1,523 |
The weighted average amortization period remaining as of June 30, 2016, is approximately 3 years.
Intangible assets with finite lives are being amortized on a straight-line basis over their estimated useful lives, as follows:
CUI (in years) |
CCE (in years) |
Expos (in years) |
Capitalized Software (in years) |
|||||||||||||
Website |
5 | - | - | - | ||||||||||||
Patents and tradenames |
10 | - | - | - | ||||||||||||
Customer relationships |
- | 15 | 10 | - | ||||||||||||
Covenant not to compete |
- | - | 8 | - | ||||||||||||
Auctioneer relationships |
- | - | 10 | - | ||||||||||||
Tradename |
- | - | 10 | - | ||||||||||||
Capitalized software |
- | - | - | 3 |
There have been no fair value re-measurements of financial assets or liabilities on a recurring or non-recurring basis at June 30, 2016 and 2015.
8. |
Accrued Liabilities |
Accrued liabilities consisted of the following at June 30 (in thousands):
2016 |
2015 |
|||||||
Warranty reserve |
$ | 892 | $ | 1,492 | ||||
Professional fees |
484 | 160 | ||||||
Other |
1,115 | 1,246 | ||||||
$ | 2,491 | $ | 2,898 |
Warranty reserve activity and balances related to fiscal years 2016, 2015 and 2014, were as follows (in thousands):
Warranty reserve at June 30, 2013 |
$ | 1,155 | ||
Charged to cost of revenues |
791 | |||
Payments |
(377 | ) | ||
Warranty reserve at June 30, 2014 |
1,569 | |||
Charged to cost of revenues |
535 | |||
Payments |
(612 | ) | ||
Warranty reserve at June 30, 2015 |
1,492 | |||
Charged to cost of revenues |
511 | |||
Change in estimate |
(656 | ) | ||
Payments |
(455 | ) | ||
Warranty reserve at June 30, 2016 |
$ | 892 |
We conducted a detailed review of our warranty reserves in the third quarter of fiscal 2016 and the resulting change in estimate reduced warranty expense by $656,000 in the third quarter.
|
9. |
Taxes |
For fiscal years ended June 30, 2016, 2015 and 2014, pre-tax income (loss) was attributed to the following jurisdictions (in thousands):
2016 |
2015 |
2014 |
||||||||||
Domestic operations |
$ | 12,604 | $ | 12,463 | $ | 13,782 | ||||||
Foreign operations |
(285 | ) | (397 | ) | (1,267 | ) | ||||||
$ | 12,319 | $ | 12,066 | $ | 12,515 |
Set forth below is the (benefit) provision for income taxes for continuing operations for the years ended June 30 (in thousands):
2016 |
2015 |
2014 |
||||||||||
Current: |
||||||||||||
Federal |
$ | 3,415 | $ | 4,237 | $ | 5,233 | ||||||
State |
(10 | ) | 65 | 441 | ||||||||
3,405 | 4,302 | 5,674 | ||||||||||
Deferred: |
||||||||||||
Federal |
1,040 | 170 | (627 | ) | ||||||||
State |
275 | 210 | 34 | |||||||||
1,315 | 380 | (593 | ) | |||||||||
Total provision for income taxes |
$ | 4,720 | $ | 4,682 | $ | 5,081 |
The reconciliation of the provision (benefit) for income taxes computed at federal statutory rates to the provision for income taxes for the years ended June 30 was as follows (in thousands):
2016 |
2015 |
2014 |
||||||||||
Provision at federal statutory rates |
$ | 4,336 | $ | 4,223 | $ | 4,381 | ||||||
State income taxes, net |
171 | 179 | 313 | |||||||||
Meals and entertainment |
122 | 135 | 123 | |||||||||
Stock-based compensation |
- | - | (102 | ) | ||||||||
Other |
42 | 57 | 64 | |||||||||
Excess tax basis of subsidiary |
- | - | - | |||||||||
Valuation allowances |
49 | 88 | 302 | |||||||||
$ | 4,720 | $ | 4,682 | $ | 5,081 |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes as of June 30, 2016 and 2015 were as follows (in thousands):
2016 |
2015 |
|||||||
Deferred tax assets: |
||||||||
Stock compensation costs |
$ | 686 | $ | 1,050 | ||||
Reserves and accruals |
1,461 | 1,840 | ||||||
Net operating loss carryforward |
792 | 852 | ||||||
Credits |
624 | 629 | ||||||
Intangible assets |
109 | 309 | ||||||
Other |
91 | 147 | ||||||
3,763 | 4,827 | |||||||
Less: valuation allowance |
(871 | ) | (822 | ) | ||||
Total deferred tax assets |
2,892 | 4,005 | ||||||
Deferred tax liabilities: |
||||||||
Property and equipment |
(500 | ) | (304 | ) | ||||
Other |
(163 | ) | (157 | ) | ||||
Total deferred tax liabilities |
(663 | ) | (461 | ) | ||||
Net deferred tax assets |
$ | 2,229 | $ | 3,544 |
Realization of the above deferred tax assets is dependent on generating sufficient taxable income in future periods and, in the case of the net operating losses, we must generate sufficient income prior to their expiration. For the California Enterprise Zone Credits, we must continue to generate taxable income in the California Enterprise Zone. The valuation allowances of $871,000 and $822,000 at June 30, 2016 and 2015, respectively, primarily relate to the Company’s foreign operations, and such valuation allowances have been established due to the uncertainty of realizing our foreign tax benefits.
The Company files, or will file, income tax returns in the U.S. federal jurisdiction, various states and overseas in France, Hong Kong and China and has open tax periods for federal taxes for the years ended June 30, 2013 through June 30, 2015 and for certain state tax jurisdictions for the years ended June 30, 2000 through June 30, 2015.
As of June 30, 2016 and June 30, 2015, the Company had $943,000 and $949,000, respectively, of California Enterprise Zone Credits. These credits can only be utilized to offset taxable income generated in the California Enterprise Zone. Carryovers of existing California Enterprise Zone Credits (earned before June 30, 2015) expire in tax year 2024. The Company also has state net operating losses of $1,493,000, which will primarily begin to expire in 2017, of which the benefit of $1,493,000 will be credited to additional paid in capital when fully utilized. The Company has foreign net operating loss carryforwards in France, Hong Kong and China of $1,021,000, $1,644,000 and $984,000, respectively.
As of June 30, 2016, the liability for income taxes associated with uncertain tax positions was $435,000, including accrued penalties and interest of $147,000. If recognized, $337,000 of the liability for uncertain tax positions would favorably affect the Company’s effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):
Unrecognized tax benefits balance at June 30, 2014 |
$ | 289 | ||
Gross increases for tax positions of prior years |
||||
Gross decreases for tax positions of prior years |
- | |||
Gross increases for tax positions of current year |
- | |||
Settlements |
- | |||
Lapse of statute of limitations |
- | |||
Unrecognized tax benefits balance at June 30, 2015 |
289 | |||
Gross increases for tax positions of prior years |
- | |||
Gross decreases for tax positions of prior years |
(1 | ) | ||
Gross increases for tax positions of current year |
- | |||
Settlements |
- | |||
Lapse of statute of limitations |
- | |||
Unrecognized tax benefits balance at June 30, 2016 |
$ | 288 |
The liability for uncertain tax positions is reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations with taxing authorities, identification of new issues, and enactment of new legislation, regulations or promulgation of new case law. Management believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations of uncertain tax positions. The Company does not expect the liability for uncertain tax positions to change significantly over the next year.
10. |
Employee Benefit Plans |
We have an employee benefit plan that features a 401(k) salary reduction provision covering all employees who meet the eligibility requirements of the plan. Eligible employees are able to defer up to the lesser of 75% of their base compensation or the statutorily prescribed annual limit. The Company does not provide any employer-matching contribution.
|
11. |
Stockholders’ Equity |
Dividends
During the fiscal years ended June 30, 2016, 2015 and 2014, the Company paid cash dividends to our stockholders in the aggregate amounts of approximately $12,008,000, $11,361,000 and $10,731,000, respectively.
The declaration of cash dividends in the future, pursuant to the Company’s dividend policy, are 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.
Stock Buyback Program
On December 6, 2005, we announced that our Board of Directors had approved a stock buyback program authorizing the repurchase of up to $10,000,000 of common stock in the open market or private transactions, in accordance with applicable SEC rules. There were no repurchases of stock under this program in fiscals 2014, 2015 and 2016.
At June 30, 2016, $3.7 million remained available for share repurchases under the stock buyback programs. However, we are under no obligation to repurchase any additional shares under this program, and the timing, actual number and value of any additional shares that may be repurchased under this program will depend on a number of factors, including the Company’s future financial performance, the Company’s available cash resources and competing uses for the cash, prevailing market prices of the Company’s common stock and the number of shares that become available for sale at prices that the Company believes are attractive.
12. |
Stock Incentive Plans |
On December 9, 2013, the Board of Directors adopted and our stockholders approved the 2013 Equity Incentive Plan (“2013 Plan”), which provides for the issuance of up to of 650,000 shares of common stock for the grant of stock options, stock appreciation rights (commonly referred to as “SARS”), restricted stock and restricted stock units (collectively, “stock awards”), to officers and other employees and non-employee directors or consultants to the Company or its subsidiaries. At the time of the adoption of the 2013 Plan, a total of 554,000 of stock options and restricted shares were outstanding under prior plans. However, in the event any of the stock awards under the prior plans were to terminate or any shares that were subject to outstanding restricted stock grants under the Existing Plans were to be reacquired by the Company, a maximum 385,000 of those would become available for future grants of stock awards under the 2013 Plan.
Stock Options
Although no options have been granted since fiscal 2007, the only condition for vesting of options was continued employment or service during the specified vesting periods. For employees, usually the vesting period was four years and one year for director awards. The term of an option grant could not exceed ten years. There were no options outstanding at June 30, 2016 and 2015.
The following is a summary of stock option activity in the fiscal years 2015 and 2014 under the 2006 Plan (in thousands, except per share data):
Number of Shares |
Exercise Price Per Share |
Weighted Average Exercise Price Per Share |
||||||||||||||||||
Options outstanding at June 30, 2013 |
178 | $ | 6.91 | to | $ | 17.82 | $ | 13.81 | ||||||||||||
Cancelled |
(14 | ) | 6.91 | to | 6.91 | 6.91 | ||||||||||||||
Exercised |
(114 | ) | 6.91 | to | 17.82 | 12.96 | ||||||||||||||
Options outstanding at June 30, 2014 |
50 | 17.82 | to | 17.82 | 17.82 | |||||||||||||||
Cancelled |
(38 | ) | 17.82 | to | 17.82 | 17.82 | ||||||||||||||
Exercised |
(12 | ) | 17.82 | to | 17.82 | 17.82 | ||||||||||||||
Options outstanding at June 30, 2015 |
- | - | - | - |
The total pre-tax intrinsic value of options exercised during fiscal years ended June 30, 2015 and 2014, $360,000, and $828,000, respectively.
Restricted Shares
Annual Director Grants. In fiscal years 2016, 2015, and 2014 each of our six outside directors was granted service-based restricted stock with a grant date fair value of $45,000, $40,000 and $40,000, for a total of fair value of $270,000, $240,000 and $240,000.
Other Service-Based Awards. There was no grants of restricted stock in fiscal 2016. In fiscal 2015 and 2014, the Company granted 4,000, and 11,300 service-based restricted shares, respectively, with grant date fair values of $86,000, and $224,000 respectively, and vesting periods ranging from three to four years. Stock-based compensation expense for those shares is recognized over the respective vesting period.
Fiscal 2013 Long-Term Performance-Based Equity Incentive Program. As previously disclosed, on December 28, 2012, the Compensation Committee of the Board of Directors adopted a Long-Term Performance-Based Equity Incentive Program (“LTIP”) for the Company’s executive officers (including the Company’s Chief Executive Officer, Mr. Deuster, and the Chief Financial Officer, Mr. Wallace) and certain other key management employees (collectively, “Participants”). As of June 30, 2014 there were 523,378 restricted shares outstanding under the LTIP, (including 200,000 shares for Mr. Deuster and 75,000 for Mr. Wallace), with a total grant date fair value of approximately $6,700,000.
The vesting of the restricted shares is conditioned on the Company’s achievement of increasing annual operating income before stock-based compensation (“OI”) levels during any fiscal year within a six-year period through the fiscal year ending June 30, 2018, as indicated in the following table:
Cumulative Percent of Shares Vested |
||||
If in any fiscal year during the term of the Program: |
||||
The Threshold Performance Goal is Achieved |
10 | % | ||
Intermediate Performance Goal #1 is Achieved |
25 | % | ||
Intermediate Performance Goal #2 is Achieved |
45 | % | ||
Intermediate Performance Goal #3 is Achieved |
70 | % | ||
The Maximum Performance Goal is Achieved |
100 | % |
Upon a determination that a performance goal or goals have been achieved for a fiscal year, 50% of the shares related to achieving that performance goal or goals will vest immediately and the remaining 50% will vest on June 30 of the following fiscal year, provided that the Participant is still in the service of the Company.
If performance goals are not achieved during the term of the Program, all of the restricted shares attributed to those performance goals that have not been achieved, will be forfeited effective June 30, 2018.
Based on the level of OI achieved in fiscal 2014, a determination was made that the Company had achieved the Threshold Performance Goal and the Intermediate Performance Goal #1 and therefore in accordance with the terms of the LTIP 25% of the LTIP shares were fully vested through June 30, 2015.
In November, 2014, an additional 18,957 performance-based restricted shares with similar terms as the other LTIP shares and a grant date fair value of $400,000 were issued to a new participant, with a service inception date of November 19, 2014. The vesting of those shares is conditioned on the Company’s achievement of the same levels of OI before stock based compensation as the LTIP participants through June 30, 2018, as indicated in the following table:
Cumulative Percent of LTIP Shares Vested |
||||
If in any fiscal year during the term of the Program: |
||||
Intermediate Performance Goal #2 is Achieved |
20 | % | ||
Intermediate Performance Goal #3 is Achieved |
45 | % | ||
The Maximum Performance Goal is Achieved |
100 | % |
At September 30, 2014, based on the significantly improved level of OI in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, we concluded that it was probable that the Company would achieve Intermediate Performance Goal #2 by June 30, 2015 and therefore the Company began accruing stock-based compensation expense for that performance goal in the first and subsequent quarters of fiscal 2015. However, based on the actual OI achieved in fiscal 2015, we did not achieve Intermediate Performance Goal #2 in fiscal 2015. Nevertheless, we still consider that it is probable that we will achieve that goal prior to the expiration of the Company’s LTIP in fiscal 2018. Therefore in 2016, we began accruing the remaining stock-based compensation expense for Performance Goal #2, through the expected later vesting date.
At this time it is considered too early to determine if it is probable that the Company will achieve additional Performance Goals beyond Performance Goal #2 in fiscal 2017 or 2018. Management will continue to reassess at each reporting date whether it has become probable that any additional shares will vest and if so, additional stock-based compensation expense will be recognized based on the expected vesting period.
The following table shows total stock-based compensation expense included as part of continuing operations in the Consolidated Statements of Operations, as follows (in thousands):
Year Ended June 30, |
||||||||||||
|
2016 |
2015 |
2014 |
|||||||||
Included in: | ||||||||||||
Cost of grading, authentication and related services |
$ | 36 | $ | 45 | $ | 45 | ||||||
Selling and marketing expenses |
31 | 48 | 11 | |||||||||
General and administrative expenses |
529 | 2,146 | 1,890 | |||||||||
$ | 596 | $ | 2,239 | $ | 1,946 |
A total of $409,000 of compensation expense related to unvested stock-based compensation awards remained unrecognized as of June 30, 2016, based on the assumption that the holders of the equity awards will remain in the Company’s service through 2019, and it will not become probable that the Company will achieve any additional performance goals under the Company’s LTIP. This expense will be recognized as compensation expense in future periods, as follows (in thousands):
Year Ending June 30, |
||||
2017 |
$ | 254 | ||
2018 |
135 | |||
2019 |
20 | |||
Total |
$ | 409 |
The $409,000 of unrecognized compensation expense does not include expense that would result from the grant of any additional stock-based compensation awards that may be granted in future periods.
The following table presents the non-vested status of the restricted shares for the fiscal years ended June 30, 2016, 2015 and 2014 and their respective weighted average grant date fair values (in thousands, except per share data):
Non-Vested Shares: |
Number of Shares (in thousands) |
Weighted Average Grant-Date Fair Value (per share) |
||||||
Non-vested at June 30, 2013 |
387 | $ | 10.77 | |||||
Granted |
278 | 15.90 | ||||||
Vested |
(106 | ) | 12.98 | |||||
Cancelled |
(39 | ) | 11.41 | |||||
Non-vested at June 30, 2014 |
520 | 13.03 | ||||||
Granted |
34 | 21.13 | ||||||
Vested |
(96 | ) | 13.84 | |||||
Cancelled |
(9 | ) | 16.40 | |||||
Non-vested at June 30, 2015 |
449 | 13.40 | ||||||
Granted |
16 | 16.63 | ||||||
Vested |
(39 | ) | 15.62 | |||||
Non-vested at June 30, 2016 |
426 | $ | 13.32 |
13. |
Related-Party Transactions |
DHRCC, which is wholly owned by David Hall (who is our President, a director and a holder of approximately 7% of our outstanding shares) and Van Simmons (who is a director and a stockholder of the Company) has subleased from the Company, through March 31, 2019, approximately 4,260 square feet of office space in fiscal 2016, 2015 and 2014, respectively, located at the Company’s offices in Santa Ana, California, The current rent is consistent with amounts being paid by the Company under its lease agreement. Rent received under the DHRCC sublease, totaled $81,800, $79,400, and $72,000 in fiscal 2016, 2015 and 2014, respectively.
During fiscal years 2016, 2015 and 2014, the Company charged, and DHRCC paid to the Company, advertising fees of approximately $30,700, $29,900, and $38,700, authentication and grading fees of approximately $16,300, $12,200 and $9,700, and the Company paid to DHRCC, approximately $4,100, $96,400, and $6,500 of warranty claims, respectively. During fiscal years 2016, 2015, and 2014 DHRCC attended the Expos Long Beach shows and paid approximately $4,200, $4,200, and $5,200, respectively, in fees to Expos and also paid CCE $6,900, $6,800, and $6,700 in monthly subscription and listing fees.
During fiscal years 2016, 2015, and 2014, David Hall paid approximately $6,600, $13,600, and $15,000, respectively, in authentication and grading fees to us for personally owned trading cards submitted. Also, an adult member of Mr. Hall’s immediate family paid $2,038,000, $1,344,000, and $1,376,000 in coin authentication and grading fees to us during fiscal years 2016, 2015, and 2014 and owed the Company approximately $92,000, and $145,000 at June 30, 2016 and 2015, respectively, for services provided during those years.
An affiliate of Richard Kenneth Duncan Sr., who until the first quarter of fiscal 2015 was the beneficial owner of more than 5% of our outstanding shares, paid us authentication and grading fees of $1,188,000, $1,024,000, and $1,181,000 in fiscal 2016, 2015 and 2014, respectively. The amount owed to the Company for these services was approximately $101,000 at June 30, 2016 and $118,000 at June 30, 2015.
The grading fees charged by the Company to these individuals were comparable to the fees charged by the Company in the ordinary course of business to unaffiliated customers for similar services.
|
14. |
Commitments and Contingencies |
Leases
The Company has various operating lease commitments for facilities and equipment some of which contain renewal options. The most significant lease is our corporate headquarters facility lease that expires in March 2019. In fiscal 2009, the Company exited its jewelry businesses and accrued the fair value of the remaining minimum lease obligations for two facilities. One of the lease obligations expired during fiscal 2016. The remaining balances on these obligations are reported as part of current and non-current liabilities of discontinued operations in the Consolidated Balance Sheets at June 30, 2016 and 2015.
The Company’s rent expense is recognized on a straight-line basis over the lease period. Total rent expense for the fiscal years ended June 30, 2016, 2015 and 2014 for those operations classified as continuing operations was approximately $2,060,000, $1,914,000, and $1,860,000, respectively.
Continuing Operations
Future minimum lease payments under those agreements associated with our continuing operations at June 30, 2016, are as follows (in thousands):
Year Ending June 30, |
Gross Payment |
Sublease |
|
|||||||||
2017 |
$ | 1,846 | $ | 84 | $ | 1,762 | ||||||
2018 |
1,856 | 87 | 1,769 | |||||||||
2019 |
1,243 | 67 | 1,176 | |||||||||
2020 |
193 | - | 193 | |||||||||
2021 |
95 | - | 95 | |||||||||
Thereafter |
12 | - | 12 | |||||||||
$ | 5,245 | $ | 238 | $ | 5,007 |
Discontinued Operations
At June 30, 2016, the remaining financial obligations for leased facilities, that had been occupied by our discontinued jewelry authentication and grading businesses, that will expire on December 31, 2017, are as follows (in thousands):
Year Ending June 30, |
Remaining Obligation |
|||
2017 |
470 | |||
2018 |
245 | |||
$ | 715 | |||
Less: Discounted estimated fair value of minimum lease payments |
(687 | ) | ||
Accretion expense to be recognized in future years |
$ | 28 |
With the exception of facility obligations for continuing and discontinued operations, we do not have any material financial obligations, such as long-term debt, capital leases or purchase obligations.
Employment Agreements
The Company has entered into employment agreements with certain executive officers and other key employees. The employment agreements provide for minimum salary levels, incentive compensation and severance benefits, among other items.
Indemnification Obligations
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to (i) agreements pursuant to which the Company has sold its discontinued collectibles sales businesses and which require the Company to indemnify the purchasers from certain contingent liabilities that might arise from the operation of those businesses prior to their sale by the Company, which is customary in business sale transactions such as these; (ii) certain real estate leases under which the Company may be required to indemnify property owners for environmental or other liabilities and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their relationships as officers or directors of the Company. The terms of such indemnification obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Historically, the Company has not been obligated to make significant payments under, and no liabilities have been recorded in the accompanying consolidated balance sheets for these indemnification obligations.
Legal Actions and Settlements
The Company is named from time to time, as a defendant in lawsuits that arise in the ordinary course of business. Management currently believes that none of the lawsuits currently pending against it is likely to have a material adverse effect on the Company.
15. |
Business Segments |
The operating segments of the Company are organized based on the respective services that they offer to customers of the Company. 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 high-end collectibles. Services provided by these segments include authentication, grading, publication and web-based advertising, subscription-based revenues and product sales. The other collectibles segment includes the CCE subscription business, the Coinflation.com business and our collectibles conventions business.
We allocate operating expenses to each service segment based upon activity levels. The following tables set forth on a business segment basis, (i) external revenues, (ii) amortization and depreciation; (iii) impairment losses; (iv) stock-based compensation expense as significant other non-cash transactions; and (v) operating income (loss) for the fiscal years ended June 30, 2016, 2015 and 2014. Net identifiable assets and goodwill are provided by business segment as of June 30, 2016 and 2015.
Year Ended June 30, |
||||||||||||
Net revenues from external customers(1): |
2016 |
2015 |
2014 |
|||||||||
Coins |
$ | 40,267 | $ | 42,192 | $ | 42,100 | ||||||
Trading cards and autographs |
15,917 | 14,925 | 14,090 | |||||||||
Other |
4,770 | 4,567 | 4,381 | |||||||||
Total revenue |
$ | 60,954 | $ | 61,684 | $ | 60,571 | ||||||
Depreciation and Amortization: |
||||||||||||
Coins |
$ | 502 | $ | 506 | $ | 478 | ||||||
Trading cards and autographs |
227 | 203 | 142 | |||||||||
Other |
509 | 335 | 327 | |||||||||
Total |
1,238 | 1,044 | 947 | |||||||||
Unallocated amortization and depreciation |
290 | 249 | 309 | |||||||||
Consolidated amortization and depreciation |
$ | 1,528 | $ | 1,293 | $ | 1,256 | ||||||
Stock-based compensation: |
||||||||||||
Coins |
$ | 80 | $ | 445 | $ | 309 | ||||||
Trading cards and autographs |
11 | 238 | 195 | |||||||||
Other |
7 | 165 | 138 | |||||||||
Total |
98 | 848 | 642 | |||||||||
Unallocated stock-based compensation |
498 | 1,391 | 1,304 | |||||||||
Consolidated stock-based compensation |
$ | 596 | $ | 2,239 | $ | 1,946 | ||||||
Operating income: |
||||||||||||
Coins |
$ | 13,048 | $ | 13,367 | $ | 13,936 | ||||||
Trading cards and autographs |
3,631 | 3,090 | 2,424 | |||||||||
Other |
316 | 1,119 | 1,368 | |||||||||
Total |
16,995 | 17,576 | 17,728 | |||||||||
Unallocated operating expenses |
(4,625 | ) | (5,468 | ) | (5,252 | ) | ||||||
Consolidated operating income |
$ | 12,370 | $ | 12,108 | $ | 12,476 |
____________________
(1) |
Includes revenues of $5.0 million, $4.1 million, and $3.8 million, generated outside the United States in fiscal years 2016, 2015 and 2014, respectively. |
At June 30, |
||||||||
|
2016 |
2015 |
||||||
Identifiable Assets: | ||||||||
Coins |
$ | 7,824 | $ | 5,961 | ||||
Trading cards and autographs |
1,451 | 1,436 | ||||||
Other |
3,360 | 2,859 | ||||||
Total |
12,635 | 10,256 | ||||||
Unallocated assets |
15,555 | 21,946 | ||||||
Consolidated assets |
$ | 28,190 | $ | 32,202 | ||||
Goodwill: |
||||||||
Coins |
$ | 515 | $ | 515 | ||||
Other |
1,568 | 1,568 | ||||||
Consolidated goodwill |
$ | 2,083 | $ | 2,083 |
|
16. |
Quarterly Results (unaudited) |
The following table sets forth the unaudited consolidated financial results for quarterly periods in fiscal years 2016 and 2015:
Quarterly Results of Operations |
Quarter Ended (In thousands, except per share data) |
|||||||||||||||||||||||||||||||
Sept. 30, |
Dec. 31, |
Mar. 31, |
June 30, |
Sept. 30, |
Dec.31, 2015 |
Mar.31, |
June 30, 2016 |
|||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||
Net revenues |
$ | 16,178 | $ | 14,148 | $ | 15,987 | $ | 15,371 | $ | 14,618 | $ | 12,636 | $ | 17,329 | $ | 16,371 | ||||||||||||||||
Cost of revenues* |
5,796 | 5,067 | 5,875 | 6,315 | 5,147 | 5,010 | 6,288 | 6,457 | ||||||||||||||||||||||||
Gross profit |
10,382 | 9,081 | 10,112 | 9,056 | 9,471 | 7,626 | 11,041 | 9,914 | ||||||||||||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||||||||||
SG&A expenses |
7,357 | 6,435 | 6,440 | 6,291 | 6,276 | 5,937 | 6,636 | 6,833 | ||||||||||||||||||||||||
Operating income |
3,025 | 2,646 | 3,672 | 2,765 | 3,195 | 1,689 | 4,405 | 3,081 | ||||||||||||||||||||||||
Interest and other income, net |
6 | (7 | ) | (40 | ) | (1 | ) | (26 | ) | (15 | ) | 3 | (13 | ) | ||||||||||||||||||
Income before provision for income taxes |
3,031 | 2,639 | 3,632 | 2,764 | 3,169 | 1,674 | 4,408 | 3,068 | ||||||||||||||||||||||||
Provision for income taxes |
1,249 | 971 | 1,450 | 1,012 | 1,226 | 679 | 1,695 | 1,120 | ||||||||||||||||||||||||
Income from continuing operations |
1,782 | 1,668 | 2,182 | 1,752 | 1,943 | 995 | 2,713 | 1,948 | ||||||||||||||||||||||||
Income (loss) from discontinued operations, (net of income taxes) |
22 | (13 | ) | (12 | ) | 20 | (12 | ) | (6 | ) | 65 | (6 | ) | |||||||||||||||||||
Net income |
$ | 1,804 | $ | 1,655 | $ | 2,170 | $ | 1,772 | $ | 1,931 | $ | 989 | $ | 2,778 | $ | 1,942 | ||||||||||||||||
Net income per basic share: |
||||||||||||||||||||||||||||||||
From continuing operations |
$ | 0.21 | $ | 0.20 | $ | 0.26 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.32 | $ | 0.23 | ||||||||||||||||
From discontinued operations, (net of income taxes) |
0.01 | - | - | - | - | - | 0.01 | - | ||||||||||||||||||||||||
Net income per share |
$ | 0.22 | $ | 0.20 | $ | 0.26 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.33 | $ | 0.23 | ||||||||||||||||
Net income per diluted share: |
||||||||||||||||||||||||||||||||
From continuing operations |
$ | 0.21 | $ | 0.20 | $ | 0.26 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.32 | $ | 0.23 | ||||||||||||||||
From discontinued operations, (net of income taxes) |
- | (0.01 | ) | (0.01 | ) | - | - | - | ||||||||||||||||||||||||
Net income per share |
$ | 0.21 | $ | 0.19 | $ | 0.25 | $ | 0.21 | $ | 0.23 | $ | 0.12 | $ | 0.32 | $ | 0.23 | ||||||||||||||||
Weighted average shares outstanding |
||||||||||||||||||||||||||||||||
Basic |
8,326 | 8,339 | 8,353 | 8,361 | 8,434 | 8,441 | 8,447 | 8,459 | ||||||||||||||||||||||||
Diluted |
8,502 | 8,519 | 8,531 | 8,519 | 8,534 | 8,549 | 8,549 | 8,548 |
*Cost of revenues in the third quarter of fiscal 2016, benefited by approximately $656,000 due to a reduction in the Company’s warranty reserves at March 31, 2016.
|
17. |
Subsequent Events |
Dividends
On July 26, 2016, the Company announced its quarterly cash dividend of $0.35 per share of common stock for the first quarter of fiscal 2017. The cash dividend will be paid on August 26, 2016 to stockholders of record on August 12, 2016.
Schedule II Valuation and Qualifying Accounts |
||||||||||||||||||||||||
Description |
Balance at Beginning of Period |
Charged to Operating Expenses |
Charged to Cost of Revenues |
Charged to Tax Provision |
Net (Deductions) Recovery |
Balance at End of Period |
||||||||||||||||||
Allowance for doubtful accounts |
||||||||||||||||||||||||
Year ended June 30, 2014 |
$ | 27,000 | $ | 25,000 | $ | - | $ | - | $ | (26,000 | ) | $ | 26,000 | |||||||||||
Year ended June 30, 2015 |
$ | 26,000 | $ | 8,000 | $ | - | $ | - | $ | (1,000 | ) | $ | 33,000 | |||||||||||
Year ended June 30, 2016 |
$ | 33,000 | $ | 4,000 | $ | - | $ | - | $ | (2,000 | ) | $ | 35,000 | |||||||||||
Inventory Reserve |
||||||||||||||||||||||||
Year ended June 30, 2014 |
$ | 201,000 | $ | - | $ | 94,000 | $ | - | $ | (9,000 | ) | $ | 286,000 | |||||||||||
Year ended June 30, 2015 |
$ | 286,000 | $ | - | $ | 336,000 | $ | - | $ | (9,000 | ) | $ | 613,000 | |||||||||||
Year ended June 30, 2016 |
$ | 613,000 | $ | - | $ | 168,000 | $ | - | $ | (42,000 | ) | $ | 739,000 | |||||||||||
Valuation allowances for deferred tax assets |
||||||||||||||||||||||||
Year ended June 30, 2014 |
$ | 432,000 | $ | - | $ | - | $ | 302,000 | $ | - | $ | 734,000 | ||||||||||||
Year ended June 30, 2015 |
$ | 734,000 | $ | - | $ | - | $ | 88,000 | $ | - | $ | 822,000 | ||||||||||||
Year ended June 30, 2016 |
$ | 822,000 | $ | - | $ | - | $ | 49,000 | $ | - | $ | 871,000 |
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
ITem 9a. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of June 30, 2016, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2016, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Collectors Universe, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures which:
■ |
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
■ |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America; |
■ |
provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and |
■ |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our consolidated financial statements. |
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.
Management’s Assessment and Determination
Our management assessed the effectiveness of Collectors Universe’s internal control over financial reporting as of June 30, 2016, based on criteria for effective internal control over financial reporting described in the 2013 Internal Control – Integrated Framework (“the 2013 Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an updated evaluation of the design and the testing of the operational effectiveness of Collectors Universe’s internal control over financial reporting based on the 2013 Framework. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on that assessment, management determined that, as of June 30, 2016, Collectors Universe, Inc. maintained effective internal control over financial reporting.
Grant Thornton LLP, independent registered public accounting firm, which audited and reported on our consolidated financial statements for the fiscal year ended June 30, 2016 included in this Annual Report on Form 10-K, has audited the effectiveness of our internal control over financial reporting as of June 30, 2016 as stated in their report set forth below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Collectors Universe, Inc.
We have audited the internal control over financial reporting of Collectors Universe, Inc. (a Delaware Corporation) and subsidiaries (“the Company”) as of June 30, 2016 based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company for the year ended June 30, 2016, and our report dated August 30, 2016 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Irvine, California
August 30, 2016
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except for information concerning the Company's executive officers, which is included in Part I of this Annual Report, the information required by Item 10 is incorporated by reference from the Company's definitive proxy statement, expected to be filed with the Commission on or before October 28, 2016 for the Company’s 2016 annual stockholders' meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from the Company's definitive proxy statement, expected to be filed with the Commission on or before October 28, 2016 for the Company’s 2016 annual stockholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information below regarding our equity compensation plans, the information required by this Item 12 is incorporated herein by reference from the Company's definitive proxy statement, expected to be filed with the Commission on or before October 28, 2016 for the Company’s 2016 annual stockholders' meeting.
The following table provides information relating to our equity compensation plans as of June 30, 2016.
Column A |
Column B |
Column C |
||||||||||
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |
Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column A) |
||||||||||
Equity compensation plans approved by stockholders |
- | $ | - | $ | 332,000 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference from the Company's definitive proxy statement, expected to be filed with the Commission on or before October 28, 2016 for the Company’s 2016 annual stockholders’ meeting.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference from the Company's definitive proxy statement, expected to be filed with the Commission on or before October 28, 2016 for the Company’s 2016 annual stockholders’ meeting.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) |
Financial Statements |
The following financial statements are included in Item 8 of Form 10-K: | |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of June 30, 2016 and 2015 | |
Consolidated Statements of Operations for the years ended June 30, 2016, 2015 and 2014 | |
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2016, 2015 and 2014 | |
Consolidated Statements of Cash Flows for the years ended June 30, 2016, 2015 and 2014 | |
Notes to the Consolidated Financial Statements |
(a)(2) |
Financial Statement Schedule |
Schedule II Valuation and Qualifying Accounts included in Item 8 of Form 10-K. | |
Other schedules are omitted because the required information is either inapplicable or has been disclosed in the consolidated financial statements and notes thereto. |
(a)(3) |
Exhibits |
Please see Index to Exhibits immediately following the Signature Page of this Annual Report for a list of the Exhibits required, pursuant to Item 601 of Regulation S-K, to be filed with this Annual Report. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned thereunto duly authorized.
COLLECTORS UNIVERSE, INC. | |
Date:August 30, 2016 |
By: /s/ JOSEPH J. WALLACE |
Joseph J. Wallace, Chief Financial Officer |
POWER OF ATTORNEY
Each person whose signature to this Annual Report appears below hereby appoints Robert G. Deuster and Joseph J. Wallace, and each of them, individually, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for each of the undersigned persons, to sign on his or her behalf, individually and in the capacities stated below, and to file, any and all amendments to this Annual Report, which amendment or amendments may make changes and additions to this Annual Report as such attorneys-in-fact or either of them may deem necessary or appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date | ||
/s/ A. CLINTON ALLEN |
Chairman of the Board and Director |
August 30, 2016 | ||
A. Clinton Allen |
||||
/s/ ROBERT G. DEUSTER |
Chief Executive Officer and Director |
August 30, 2016 | ||
Robert G. Deuster |
(Principal Executive Officer) |
|||
/s/ DAVID HALL |
President and Director |
August 30, 2016 | ||
David G. Hall |
||||
/s/ JOSEPH J. WALLACE |
Chief Financial Officer |
August 30, 2016 | ||
Joseph J. Wallace |
(Principal Financial and Accounting Officer) |
|||
/s/ DEBORAH A. FARRINGTON |
Director |
August 30, 2016 | ||
Deborah A. Farrington |
||||
/s/ JOSEPH R. MARTIN |
Director |
August 30, 2016 | ||
Joseph R. Martin |
||||
/s/ A.J. BERT MOYER |
Director |
August 30, 2016 | ||
A.J. Bert Moyer |
||||
/s/ BRUCE A. STEVENS |
Director |
August 30, 2016 | ||
Bruce A. Stevens |
||||
/s/ VAN D. SIMMONS |
Director |
August 30, 2016 | ||
Van D. Simmons |
||||
INDEX TO EXHIBITS
Exhibit No. |
| |
3.2 |
Amended and Restated Certificate of Incorporation of Collectors Universe. Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-3 (File No. 333-122129), filed on January 19, 2005. | |
3.2.1 |
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Collectors Universe. Incorporated by reference to Exhibit 3.2.1 to the Company’s Registration Statement on Form S-3 (File No. 333-122129), filed on January 19, 2005. | |
3.3A |
Second Amended and Restated Bylaws of Collectors Universe, Inc. as adopted and effective February 27, 2015. Incorporated by reference to Exhibit 3.3A to the Current Report on Form 8-K filed with the SEC on March 4, 2015. | |
10.6 |
Form of Indemnification Agreement. Incorporated by reference to the same numbered exhibit to the Company’s Registration Statement (No. 333-86449) on Form S-1 filed with the Commission on September 2, 1999 | |
10.27 |
Collectors Universe 2003 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (File No. 333-121035), filed on December 6, 2004.* | |
10.28 |
Form of Stock Option Agreement for 2003 Stock Incentive Plan. Incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8 (File No. 333-121035), filed on December 6, 2004.* | |
10.29 |
Form of Restricted Stock Purchase Agreement for 2003 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-8 (File No. 333-121035), filed on December 6, 2004.* | |
10.47 |
Collectors Universe 2006 Equity Incentive Plan. Incorporated by reference from Appendix A to the Company’s 2006 Proxy Statement filed with the Commission on October 27, 2006* | |
10.51 |
Employment Agreement dated October 10, 2012 between the Company and Robert Deuster, CEO. Incorporated by reference to Exhibit 10.99 to the Company’s Current Report on Form 8-K, dated October 15, 2012.* | |
10.52 |
Collectors Universe 2013 Equity Incentive Plan. Incorporated by reference from Appendix A to the Company’s 2013 Proxy Statement filed with the commission on October, 2013.* | |
10.53 |
Third Amendment, dated October 6, 2015, to the Company’s October 10, 2012 Employment Agreement with Robert Deuster, CEO. Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 13, 2015.* | |
10.54 |
Collectors Universe Fiscal 2016 Cash Incentive Plan. Incorporated by reference to the Company’s Current Report on Form 8-K files with the SEC on December 11, 2015.* | |
10.55** |
Key Services Agreement, dated as of June 18, 2016, between Collectors Universe (Shanghai) Co., Ltd, a wholly owned subsidiary of the Company and Guojin Gold Co. Ltd. | |
21.1** |
Subsidiaries of Registrant | |
23.1** |
Consent of Independent Registered Public Accounting Firm | |
31.1** |
Certifications of CEO Under Section 302 Of The Sarbanes-Oxley Act | |
31.2** |
Certifications of CFO Under Section 302 Of The Sarbanes-Oxley Act | |
32.1† |
CEO Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley Act | |
32.2† |
CFO Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley Act | |
101.INS |
XBRL Instance Document | |
101.SCH |
XBRL Taxonomy Extension Schema Document | |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB |
XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document | |
|
* |
Management contract or compensatory plan or arrangement. |
|
** |
Filed herewith. |
|
† |
Furnished herewith but not filed. |
E-1