Collectors Universe Inc (CLCT) SEC Quarterly Report (10-Q) for Q1 2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS

PART 1 – FINANCIAL INFORMATION

Item 1.     Financial Statements

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Forward-Looking Statements

The discussion in this Item 2 of this Quarterly Report on Form 10-Q (this "Report") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Those Sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their expected future financial performance so long as they provide cautionary statements identifying important factors that could cause their actual results to differ from projected or anticipated results. Other than statements of historical fact, all statements in this Report and, in particular, any projections of or statements as to our expectations or beliefs concerning our future financial performance or financial condition or as to trends in our business or in our markets, are forward-looking statements. Forward-looking statements often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." Our actual financial performance in future periods may differ significantly from the currently expected financial performance set forth in the forward-looking statements contained in this Report due to risks and uncertainties to which our business is subject and other circumstances or occurrences which are not presently predictable and over which we do not have control. Consequently, the forward-looking statements and information contained in this Report are qualified in their entirety by, and readers of this Report are urged to read the risk factors that are described in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (the "Fiscal 2014 10-K"), which we filed with the Securities and Exchange Commission (the "SEC") on August 28, 2014, and the section, entitled "Factors that Can affect our Results of Operations or Financial Position," below in this Item 2 below.

Due to these and other possible risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements that are contained or recent trends that we describe in this Report, which speak only as of the date of this Report, or to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update or revise any forward-looking statements contained in this Report or in our Fiscal 2014 10-K or any other prior filings with the SEC, except as may be required by applicable law or applicable NASDAQ rules.

Our Business

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

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

Overview of three and nine months ended March 31, 2015 Operating Results

The following table sets forth comparative financial data for the three and nine months ended March 31, 2015 and 2014 (in thousands):

Service revenues decreased by 2% to $16.0 million in this year's third quarter and increased 5% to $46.3 million in the nine months ended March 31, 2015, representing record nine months service revenues for our business. Coin service revenues decreased by 5.5% to $11.0 million in the third quarter of fiscal 2015 and increased by 5.0% to a coin nine-month record of $31.9 million in the nine months ended March 31, 2015. The lower coins services revenues in the third quarter of fiscal 2015, was primarily due to staging one less trade show in the quarter, but also reflects the challenge of generating on-going revenue growth when prior periods revenues were at record levels. Cards and autographs revenues increased by 4.7% and 6.6% in the three and nine months ended March 31, 2015, respectively, and the third quarter increase represented the 19 th quarter of quarter-on-quarter revenue growth in that business.

Operating income was essentially flat at $3.7 million in the three months ended March 31, 2015 and increased by 8% to a nine-month record of $9.3 million in the nine months ended March 31, 2015, as compared to the same periods of the prior year. The nine month increase was earned despite us incurring higher litigation related legal expenses of $0.4 million and higher non-cash stock based compensation of $0.4 million. As discussed in the Form 10Q for the three months ended December 31, 2014, we are focused on providing higher value services to our customers although the overall average service fee earned in any period reflects the mix of services in that period.

These, as well as other factors affecting our operating results in the three and nine months ended March 31, 2015, are described in more detail below. See "Factors that Can Affect our Operating Results and Financial Position" and "Results of Operations for the Three and Nine Months Ended March 31, 2015, Compared to the Three and Nine Months Ended March 31, 2014", below.

Factors That Can Affect our Operating Results and Financial Position

Factors T hat Can Affect our Revenues and Gross Profit Margins . Authentication and grading fees accounted for approximately 87% of our service revenues in the nine months ended March 31, 2015. The amount of those fees and our gross profit margins are primarily driven by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and the other high-value collectibles, that we authenticate and grade.

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

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

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

Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 22% and 17% of our total net revenues in the three and nine months ended March 31, 2015, respectively. As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, could cause our net revenues to decline and, therefore, could adversely affect our results of operations.

The following tables provide information regarding the respective numbers of coins, trading cards and autographs that we authenticated and graded in the three and nine months ended March 31, 2015 and 2014, and their estimated values, which are the amounts at which those coins and trading cards were declared for insurance purposes by the dealers and collectors who submitted them to us for grading and authentication:

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

Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the number of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, and uncertainties regarding the strength of the economic recovery in the United States, Western Europe and China, because conditions and uncertainties of this nature often lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; 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.

Fact ors That Can Affect our Liquidity and Financial Position . A substantial number of our authentication and grading customers pay our authentication and grading fees when they submit their collectibles to us for authentication and grading or prior to the shipment of the authenticated and graded 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 2015.

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

As previously reported, on January 22, 2015, we announced that the Board of Directors had authorized an increase in our quarterly cash dividend to $0.35 per share from $0.325 per share of common stock, to an annualized rate of $1.40 per share from $1.30 per share.

Critical Accounting Policies and Estimates

Except as discussed below, during the nine months ended March 31, 2015, there were no changes in our critical accounting policies or estimates that are described in Item 7 of our Annual Report on Form 10-K, filed with the SEC, for the fiscal year ended June 30, 2014. Readers of this report are urged to read that Section of that Annual Report for a more complete understanding and detailed discussion of our critical accounting policies and estimates.

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

During the quarter ended September 30, 2014, we completed the annual goodwill impairment assessment with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of their fair values over carrying value in previous years, and any material changes in the estimated cash flows of the reporting units, and determined that it was, more likely than not, that the fair values of CCE and CoinFacts were greater than their respective carrying values, including goodwill. Therefore, it was not necessary to proceed to the two-step impairment test.

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

Restricted Stock Awards

As previously reported, through June 30, 2014 the Company had issued 523,378 shares (net of forfeitures) under the Company's Long-Term Incentive Plan ("LTIP") with a grant date fair value of approximately $6,700,000. Based on the level of operating income before stock-based compensation ("OI") achieved in fiscal 2014, a determination was made that the Company had achieved the Threshold Performance Goal and the Intermediate Goal #1 and therefore in accordance with the terms of the LTIP up to 25% of the LTIP shares will vest, of which 12.5% vested upon the determination that the goals had been achieved and 12.5% will vest on June 30, 2015, assuming continuous service by the LTIP participants. Through March 31, 2015, $1,557,000 of expense has been recognized related to the Threshold Performance Goal and Intermediate Goal #1 and an additional $113,000 will be recognized through June 30, 2015 assuming continuous service, such that by June 30, 2015, $1,670,000 of expense will have been recognized related to those performance goals.

At September 30, 2014, based on the significantly improved level of operating income before stock based compensation 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 the Performance Goal #2 by June 30, 2015.

In the nine months ended March 31, 2015, an additional 18,957 restricted shares with a grant date fair value of $400,000 were issued, 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 as the LTIP participants through June 30, 2018, as indicated in the following table:

In the third quarter of fiscal 2015, the Company continued to recognize stock-based compensation expense on the assumption it was probable that the Company will achieve Performance Goal #2 by June 30, 2015. Therefore, the Company recognized stock-based compensation expense of approximately $169,000 and $991,000 in three and nine months ended March 31, 2015, respectively related to that performance goal, representing the expense required to be recognized from the respective service inception dates through March 31, 2015.

Through March 31, 2015 total stock based compensation recognized in respect of the LTIP shares, since inception of the LTIP program, was approximately $2,549,000.

At this time it is not considered probable that the Company will achieve additional Performance Goals beyond Performance Goal #2 in fiscal 2015 or future periods. Management will continue to reassess at each reporting date whether any additional stock-based compensation expense should be recognized based on the probability of achieving additional milestones under the LTIP, and the period over which such stock-based compensation expense should be recognized.

Warranty Costs

We offer a limited warranty covering the coins and trading cards that we authenticate and grade. Under the warranty, if any 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 that re-submittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible or, in the alternative, at the customer's option, pay the difference in value of the item at its original grade, as compared with its lower grade. However, this warranty is voided if the collectible, upon re-submittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded it. We accrue for estimated warranty costs based on historical trends and related experience. We monitor the adequacy of our warranty reserves on an ongoing basis and significant warranty claims resulting from resubmissions receiving lower grades, or deemed not to be authentic, could result in a material adverse impact on our results of operations. Effective July 1, 2014, the Company reduced its warranty accrual rate on coins and cards based upon a review of the overall level of the warranty reserves and the historical trends in warranty claims and payments.

Results of Operations for the Three and Nine Months Ended March 31 , 201 5 , Compared to the T hree and Nine M onths Ended March 31 , 201 4

Net Revenues. Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards and autographs, 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), CoinFacts and Collectors Club; and fees earned from promoting, managing and operating collectibles trade shows. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we purchase under our coin authentication and grading warranty policy. We do not consider such product sales to be an integral part of our ongoing revenue generating activities.

The following table sets forth the total net revenues for the three and nine months ended March 31, 2015 and 2014 between authentication and grading services revenues, other related services revenues and product sales (in thousands):

The following table sets forth certain information regarding the increases (decreases) in net revenues in our larger markets (which are inclusive of revenues from our other related services) and in the number of units authenticated and graded in the three and nine months ended March 31, 2015 and 2014 (in thousands):

Total service revenues were $15,987,000 and $46,304,000 for the three and nine months ended March 31, 2015, respectively, compared with $16,298,000 and $43,956,000 for the three and nine months ended March 31, 2014, respectively and represented record nine months service revenues for our business. In the three months ended March 31, 2015, our total service revenues decreased by $311,000 or 1.9% compared to the three months ended March 31, 2014, due to a $399,000 or 2.8% reduction in authentication and grading fees, partially offset by an increase in other related services of $88,000 or 4.1%. In the nine months ended March 31, 2015, our total services revenues increased by $2,348,000 or 5.3%, compared to the nine months ended March 31, 2014 and comprised an increase of $2,511,000 or 6.7% in authentication and grading fees partially offset by a $163,000 or 2.6% reduction in other related services.

The reduction in authentication and grading fees in the three months ended March 31, 2015 was comprised of a reduction in coin fees of $571,000 or 5.2% partially offset by an increase of $172,000 or 5.4% in cards and autographs fees. The increase in authentication and grading fees in the nine months ended March 31, 2015 comprised of increases of $1,795,000 or 6.4% in coins fees and $716,000 or 7.5% in cards and autographs fees.

Despite the net decrease in our coin fees in the third quarter we continue to experience a strong coin market that began in the second half of fiscal 2014 and the reduction in coin fees primarily reflects one less trade show in the third quarter of fiscal 2015 compared to third quarter of fiscal 2014. In the third quarter of fiscal 2015, the average service fees earned for coins were substantially unchanged from the third quarter of fiscal 2014, whereas for the nine months, the 5.2% increase in coin fees compared to a 0.3% increase in the number of coins authenticated and graded, reflecting higher average service fees earned due to the mix of services in the respective period, as we focus on providing higher value services to our customers.

The changes in our coin service fees, in each case in the three and nine months ended March 31, 2015, as compared to the same respective periods of the prior year, respectively, were comprised of : (i) increases in vintage fees of $542,000 or 19.2% and $1,414,000 or 17.0% (ii) a decrease of $57,000 or 1.2% and an increase of $1,297,000 or 12.8% in modern fees (iii) decreases in show fees of $912,000 or 38.6% and $881,000 or 15.4% and (iv) decreases in world fees (including our overseas operations) of $144,000 or 12.8% and a $35,000 or 0.9%. There was one less trade show in this year's third quarter. In addition, in both this year's three and nine months, we earned lower average authentication and grading fees on a per show basis, primarily, due to two larger customers submitting lesser numbers of coins for authentication and grading in the periods.

Coin fees in the three and nine months ended March 31, 2015 benefited from revenues of approximately $329,000 and $2,780,000, respectively, earned from the Baseball Hall of Fame and Kennedy anniversary coins programs. In addition, coin fees generated by our overseas operations, represented 4.1% and 6.4% of total service revenues in the three and nine months ended March 31, 2015, respectively, as compared to 5.1% and 6.6% for the three and nine months ended March 31, 2014, respectively.

As discussed above under "Factors That Can Affect our Revenues and Gross Profit Margins", and "Impact of Economic Conditions on our Financial Performance", the level of modern coin and trade show revenues can be volatile.

The increased other related services of $88,000 in the three months ended March 31, 2015, reflects higher Expos revenues in the third quarter of fiscal 2015 due to higher auction contract revenues. The reduction of $163,000 in other related services in the nine months ended March 31, 2015 reflects lower click-through commissions due to changes in affiliate revenue sharing programs and lower on-line advertising.

The 4.7% increase in revenues from our cards and autographs business in the three months ended March 31, 2015 represented the 19 th quarter of quarter-on-quarter of revenue growth for cards and autographs.

Prior to the third quarter of fiscal 2015, the Company had generated 8 quarters of quarter-on-quarter consolidated revenue growth and, therefore, as demonstrated by the reduction in revenues in the third quarter of fiscal 2015, future revenue growth may be challenging. We earned record revenues in the fourth quarter of fiscal 2014, and, therefore, it remains uncertain as to the level of revenue growth, if any, which the Company will be able to achieve in the fourth quarter of fiscal 2015.

Our coin revenues represented approximately 69% of total service revenues in both the three and nine months periods ended March 31, 2015, and reflect our continued dependence on and the importance of our coin authentication and grading business to our overall financial performance.

Gross Profit

Gross profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percent of net revenues. The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense and occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of 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 (primarily collectible coins) that we sold and any inventory related reserves, considered necessary.

Set forth below is information regarding our gross profit and gross profit margins in the three and nine months ended March 31, 2015 and 2014 (in thousands):

As indicated in the above table, our services gross profit margin was 63.3% and 64.0% for the three and nine months ended March 31, 2015, respectively, compared to and 62.8% and 62.4%, respectively, for the three and nine months ended March 31, 2014. The increase in the gross profit margin in the nine months ended March 31, 2015, was primarily attributable to an increase in the average service fees earned, as we continue to focus on providing higher value services to our customers. As discussed in prior filings, there can be variability in the services gross profit margin due to the mix of revenue in any quarter and the seasonality of our business. During the three years ended June 30, 2014, our quarterly services gross profit varied between 59% and 64%.

Selling and Marketing Expenses

Selling and marketing expenses include advertising and promotions costs, trade-show related expenses, customer service personnel costs, business development incentives, depreciation and outside services. Set forth below is information regarding our selling and marketing expenses in the three and nine months ended December 31, 2015 and 2014 (in thousands):

Sales and marketing expenses represented 14.3% and 14.7% of net revenues, in the three and nine months ended March 31, 2015, respectively, compared to 15.1% and 15.3% of net revenues in the three and nine months ended March 31, 2014, respectively. The dollar reduction of $180,000 in selling and marketing expenses in the three months ended March 31, 2015, compared to the third quarter of fiscal 2014, primarily reflected lower trade show costs due to staging one less trade show in the period. Selling and marketing expenses were substantially unchanged in the nine months ended March 31, 2015 compared to the same nine months of the prior year.

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 and information technology personnel, non-cash stock-based compensation, facilities management costs, depreciation, amortization and other miscellaneous expenses (in thousands):

G&A expenses increased by $109,000 and $1,475,000 in the three and nine months ended March 31, 2015, respectively, as compared to the same periods of fiscal 2014 and represented 26.0% and 29.0% of net revenues, in the three and nine months ended March 31, 2015, respectively, as compared to 24.8% and 27.2% of net revenues in the same periods of the prior year. These increases included (i) IT and general payroll and incentive related increases of $124,000 and $449,000, respectively, incurred to support the growth of the business and in the case of incentive increases, reflecting the improved performance of the business, and (ii) higher consulting and third party service fees of $88,000 and $65,000 in support of content initiatives, in each case in the three and nine months ended March 31, 2015 respectively compared to three and nine months ended March 31, 2014. Higher legal costs of $436,000 were incurred in the nine months ended March 31, 2015, primarily attributable to ligation related matters. In addition, G&A stock-based compensation decreased by $116,000 and increased by $365,000 due to the timing of LTIP costs recognized (see below), in the three and nine months ended March 31, 2015, respectively.

Stock-Based Compensation

The Company recognized stock-based compensation expense (in thousands), as follows:

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. When it becomes probable that a performance goal will be achieved, there is a catch-up of 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 which will lead to somewhat higher expense in that period. Thereafter, stock-based compensation expense is recognized over the expected remaining service period to vesting. The decrease in stock-based compensation expense in the three months ended March 31, 2015, of $104,000 and the increase of $405,000 in the nine months ended March 31, 2015, was due to management's assessment as to when the Company would achieve the Threshold and Performance Goal #1 in fiscal 2014 and Performance Goal #2 in fiscal 2015. See Criti cal Accounting Policies: Stock-Based C ompensation above.

The following table sets forth unrecognized non-cash stock-based compensation expense totaling $1,088,000 related to unvested stock-based awards at March 31, 2015 and represents the expense expected to be recognized through fiscal year 2018, on the assumption that the holders of the equity awards will remain in the Company's service through 2018 and the Company will achieve Performance Goal #2 in fiscal 2015. The amounts do not include the expense or effects of (i) possible grant of additional stock-based compensation awards in the future or, (ii) achieving any additional Performance Goals under the Company's LTIP (in thousands):

Income Tax Expense

The income tax provisions for the three and nine months ended March 31, 2015, respectively, represented estimated annual effective tax rates of approximately 40% and 39%, as compared to 43% and 42% in the three and nine months ended March 31, 2014, respectively. The reduction in the effective tax rates in the three and nine months ended March 31, 2015, reflects improved pre-tax results in our overseas operations.

Discontinued Operations

The losses from discontinued operations (net of income taxes) for both the three and nine months ended March 31, 2015 and 2014, respectively, represent accretion expense associated with the Company's ongoing obligations related to the New York City facilities, formerly occupied by our discontinued jewelry businesses, offset in the nine months ended March 31, 2015 by royalty income realized from our discontinued currency business.

Liquidity and Capital Resources

Cash and Cash Equivalent Balances .

Historically, we have been able to rely on internally generated funds, rather than borrowings, as our primary source of funds to support our operations, because many of our authentication and grading customers pay our fees at the time they submit their collectibles to us for authentication and grading or prior to the shipment of their authenticated and graded collectibles back to them.

At March 31 2015, we had cash and cash equivalents of approximately $17,329,000, as compared to cash and cash equivalents of $19,909,000 at June 30, 2014.

Cash Flows.

Cash Flows from Continuing Operations . During the nine months ended March 31, 2015 and 2014, our operating activities from continuing operations generated cash of $7,842,000 and $8,538,000, respectively, primarily attributable to the income generated from operations in those periods. The lower cash provided by operating activities in the nine months ended March 31, 2015, as compared to the same period of the prior year, despite the improved operating results, reflects the payment of higher annual incentives in the first nine months of the fiscal 2015 compared to the first nine months of fiscal 2014 and a lower level of accounts payable due to the timing of vendor payments.

Cash Flows of Discontinued Operations . Discontinued operations used cash of $471,000 and $429,000 in the nine months ended March 31, 2015 and 2014, respectively, which consisted primarily of payments of our ongoing obligations associated with the New York facilities, formerly occupied by our discontinued jewelry businesses.

Cash used by Investing Activities . Investing activities used cash of $1,032,000 in the nine months ended March 31, 2015 which included capital expenditures and capitalized software of $874,000 and $200,000 used for the purchase of the intangible assets of IQ partially offset by cash generated from royalties from our discontinued currency business. In the nine months ended March 31, 2014 investing activities used $1,227,000, primarily for capital expenditures.

Cash used in Financing Activities . In the nine months ended March 31, 2015, financing activities used cash of $8,919,000, which included $8,415,000 of cash dividends paid to our stockholders and $504,000 paid for the repurchase of common stock to satisfy employee tax withholdings on the vesting of restricted shares. In the nine months ended March 31, 2014, we used cash of $7,910,000 which included $8,046,000 of cash dividends paid to stockholders and $156,000 used to repurchase common stock to satisfy employee tax withholdings on the vesting of restricted shares, partially offset by $292,000 proceeds from the exercise of stock options.

Outstanding Financial Obligations

Continuing Operations . The following table sets forth the amounts of our financial obligations, consisting primarily of rent expense, offsetting sublease income, under operating leases for our continuing operations, in each of the years indicated below (in thousands):