"Grading Scandal" in a nutshell, please

[ejharrington]

In an nutshell, PSA is an example of a company that grew faster than it could effectively manage. It can still recover as many successful companies have had growing pains but had management that was able to adapt and overcome the problems associated with fast growth.

However, if they don't adjust, their reputation may be ruined and they could go bankrupt settling warranty claims. The following two risk factors are included in their Annual Report among all the boilerplate risk factors.

I hope the Board of Directors makes the right decisions for the sake of shareholders, card holders, and the hobby generally...




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 dealerto-
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 holders are later
determined by us not to have been genuine, we would have to purchase the collectible at its current market value had
it been genuine; or
▪ if a coin or trading card that we graded and sealed in one of our tamper-evident plastic holders later receives a lower
grade upon resubmission to us for grading, we would be obligated either to purchase the collectible at the market
value at its original assigned grade or to pay the difference between that value as compared to the 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
the past. 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.