UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2004
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 0-27121
SUPERIOR GALLERIES, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 35-2208007
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
9478 WEST OLYMPIC BLVD 90212
BEVERLY HILLS, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)
(310) 203-9855
(Issuer's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] No [ ]
State the number of shares outstanding of each of the issuer's class of
common equity as of the latest practicable date:
Title of each class of Common Stock Outstanding as of January 14, 2005
- ----------------------------------- ----------------------------------
Common Stock, $0.001 par value 4,689,942
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements.
Balance Sheets at December 31, 2004 (Unaudited) and June 30, 2004. 3-4
Statements of Operations (Unaudited) for the six months and three
months ended December 31, 2004 and 2003. 5
Statements of Cash Flows (Unaudited) for the six months ended December
31, 2004 and 2003. 6
Notes to Interim Financial Statements (Unaudited) at December 31, 2004. 7
Item 2. Management's Discussion and Analysis or Plan of Operation. 13
Item 3. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities. 29
Item 4. Submission of Matters to a Vote of Security Holders. 29
Item 5. Other Information. 30
Item 6. Exhibits. 30
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUPERIOR GALLERIES, INC.
BALANCE SHEETS
(in thousands)
December
31, 2004 June 30,
(Unaudited) 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 286 $ 447
Accounts receivable, net of allowance for uncollectible
accounts of $115,522 (Dec. '04) and $259,007 (Jun. '04) 1,978 3,713
Auction and customer advances 4,454 6,402
Inventories 6,761 6,106
Prepaid expense and other 144 51
------------ ------------
Total current assets 13,623 16,719
Property and equipment, net 161 135
Other assets -- 11
------------ ------------
TOTAL ASSETS $ 13,784 $ 16,865
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - related party $ 6,250 $ 6,600
Line of credit 2,500 2,500
Accounts payable and accrued expenses 3,860 7,261
Notes payable to a related party 350 300
Notes payable 650 --
Series A stock redemption payable 481 344
------------ ------------
Total current liabilities 14,091 17,005
------------ ------------
LONG-TERM LIABILITIES
Notes payable to a related party, net of current portion 500 600
Series A stock redemption payable, net of current portion 206 344
------------ ------------
Total long-term liabilities 706 944
------------ ------------
TOTAL LIABILITIES 14,797 17,949
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 6, 7, 8 AND 10)
Page 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUPERIOR GALLERIES, INC.
BALANCE SHEETS
(in thousands)
December
31, 2004 June 30,
(unaudited) 2004
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, 3,193,000 shares undesignated,
none outstanding
Series B convertible preferred stock $1.00 par value
3,400,000 shares designated 3,400,000 shares issued
and outstanding with a liquidation preference of $ 3,400,000 2,967 2,967
Series D convertible preferred stock $1.00 par value
2,000,000 shares designated 2,000,000 shares issued
and outstanding with a liquidation preference of $2,000,000 1,931 1,931
Common stock, $0.001 par value, 12,500,000 shares
authorized; 4,509,942 outstanding as of December 31, 2004
and 4,485,942 outstanding as of June 30, 2004 4 4
Additional paid in capital 7,987 7,912
Accumulated deficit (13,902) (13,898)
----------- -----------
Total stockholders' equity (deficit) (1,013) (1,084)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 13,784 $ 16,865
=========== ===========
See accompanying notes to unaudited interim financial statements
Page 4
SUPERIOR GALLERIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Six Months Ended Three Months Ended
December December December December
31, 2004 31, 2003 31, 2004 31, 2003
------------- ------------- ------------- -------------
Net sales $ 16,768 $ 9,986 $ 8,255 $ 4,910
Commission income 905 1,085 148 244
------------- ------------- ------------- -------------
TOTAL REVENUE 17,673 11,071 8,403 5,154
COST OF SALES 14,003 8,868 6,787 4,242
------------- ------------- ------------- -------------
GROSS PROFIT 3,670 2,203 1,616 912
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,496 2,696 1,642 1,387
------------- ------------- ------------- -------------
Income (loss) from operations 174 (493) (26) (475)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 202 261 102 128
Interest expense (378) (282) (204) (121)
Other expense, net (2) (25) (2) (5)
------------- ------------- ------------- -------------
Total other income (expense) (178) (46) (104) 2
------------- ------------- ------------- -------------
LOSS BEFORE PROVISION FOR TAXES (4) (539) (130) (473)
INCOME TAX PROVISION 1 5 -- 6
------------- ------------- ------------- -------------
NET LOSS $ (5) $ (544) $ (130) $ (479)
============= ============= ============= =============
Calculation of net income (loss) per share:
Net loss $ (5) $ (544) $ (130) $ (479)
Preferred stock accretion -- (33) -- (17)
Preferred stock dividend -- (25) -- (13)
------------- ------------- ------------- -------------
Net income (loss) applicable to common shares $ (5) $ (602) $ (130) $ (509)
============= ============= ============= =============
NET LOSS PER SHARE
basic $ -- $ (0.14) $ (0.03) $ (0.11)
============= ============= ============= =============
fully diluted $ -- $ (0.14) $ (0.03) $ (0.11)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
basic 4,503 4,254 4,510 4,486
============= ============= ============= =============
fully diluted 4,503 4,254 4,510 4,486
============= ============= ============= =============
See accompanying notes to unaudited interim financial statements
Page 5
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended
December December
31, 2004 31, 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5) $ (544)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 32 49
Loss on retirement of property and equipment 2 25
Fair value of common stock options granted 45 7
Fair value of common stock issued for services 30 --
Increase (decrease) in cash from changes in assets
and liabilities:
Accounts receivable 1,735 1,512
Auction and customer advances, net 1,948 (1,696)
Inventories (654) (2,234)
Prepaid expenses and other (93) (70)
Other assets 11 --
Accounts payable and accrued expenses (3,401) (2,658)
---------- ----------
Net cash used in operating activities (350) (5,609)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (60) (18)
Proceeds from sale of property and equipment -- 1
---------- ----------
Net cash used in investing activities (60) (17)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under related party line of credit 1,400 6,350
Repayments under related party line of credit (1,750) (450)
Borrowings under lines of credit -- 3,300
Repayments under lines of credit -- (3,300)
Repayments under related party debt (50) (400)
Borrowings under notes payable 650 --
Repayments under notes payable -- (64)
Issuance of common stock -- 2
Payment of dividends on preferred stock -- (25)
---------- ----------
Net cash provided by financing activities 250 5,413
---------- ----------
Net decrease in cash and equivalents (160) (213)
Cash and cash equivalents, beginning of period 446 688
---------- ----------
Cash and cash equivalents, end of period $ 286 $ 475
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 378 $ 414
========== ==========
Income taxes $ 1 $ --
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accretion of redemption value of Series A preferred stock $ -- $ 33
See accompanying notes to unaudited interim financial statements
Page 6
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION. The accompanying unaudited
interim financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission for the
presentation of interim financial information, but do not include all
the information and footnotes required by accounting principles
generally accepted in the United States of America. The balance sheet
as of June 30, 2004 has been derived from the audited financial
statements of Superior Galleries, Inc. ("Superior" or the "Company") at
that date.
In the opinion of management, all adjustments considered necessary for
a fair presentation have been included. Operating results for the six
month and three-month periods ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2005. For further information, refer to the financial
statements for the year ended June 30, 2004 contained in Superior's
financial statements included in its Annual Report on Form 10-KSB filed
on August 12, 2004.
STOCK BASED COMPENSATION. The Company has a stock-based compensation
plan. The Company accounts for this plan under the recognition and
measurement principles of Accounting Principles Board Opinion No, 25,
Accounting for Stock Issued to Employees, and related interpretations.
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123. The following table illustrates the effect on
net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation for the six and three month periods ending December 31,
2004 and 2003:
Six Months Three Months
2004 2003 2004 2003
------- ------- ------- -------
(In thousands)
Net loss applicable to common shares,
as reported $ (5) $ (602) $ (130) $(544)
Add: Stock-based employee compensation included in
Reported net loss -- -- -- --
Less: Total stock-based employee compensation
Expense determined under Black-Scholes
option pricing model, net of tax effects 118 6 58 6
------- ------- ------- -------
Pro forma net loss $ (123) $ (608) $ (188) $ (550)
======= ======= ======= =======
Loss per share - as reported:
Basic $ 0.00 $(0.14) $(0.03) $(0.11)
Diluted $ 0.00 $(0.14) $(0.03) $(0.11)
Loss per share - pro forma:
Basic $ (0.03) $(0.14) $(0.04) $(0.11)
Diluted $ (0.03) $(0.14) $(0.04) $(0.11)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
SFAS No. 151
------------
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under
the guidance in ARB No. 43, Chapter 4,"Inventory Pricing". Paragraph 5
of ARB No. 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires
that those items be recognized as current-period charges regardless of
Page 7
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
whether they meet the criterion of "so abnormal." In addition, this
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not
expect adoption of SFAS No. 151 to have a material impact on the
Company's financial statements.
SFAS No. 152
------------
In December 2004, the FASB issued SFAS No. 152,"Accounting for Real
Estate Time-Sharing Transactions". The FASB issued this Statement as a
result of the guidance provided in AICPA Statement of Position (SOP)
04-2,"Accounting for Real Estate Time-Sharing Transactions". SOP 04-2
applies to all real estate time-sharing transactions. Among other
items, the SOP provides guidance on the recording of credit losses and
the treatment of selling costs, but does not change the revenue
recognition guidance in SFAS No. 66,"Accounting for Sales of Real
Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS
No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects", to state that SOP 04-2
provides the relevant guidance on accounting for incidental operations
and costs related to the sale of real estate time-sharing transactions.
SFAS No. 152 is effective for years beginning after June 15, 2005, with
restatements of previously issued financial statements prohibited. This
statement is not applicable to the Company.
SFAS No. 153
------------
In December 2004, the FASB issued SFAS No. 153,"Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29,"Accounting for
Nonmonetary Transactions". Statement No. 153 eliminates certain
differences in the guidance in Opinion No. 29 as compared to the
guidance contained in standards issued by the International Accounting
Standards Board. The amendment to Opinion No. 29 eliminates the fair
value exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in periods
beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occuring in periods beginning after
December 16, 2004. Management does not expect adoption of SFAS No. 153
to have a material impact on the Company's financial statements.
SFAS No. 123(R)
---------------
In December 2004, the FASB issued SFAS No. 123(R),"Share-Based
Payment". SFAS 123(R) amends SFAS No. 123,"Accountung for Stock-Based
Compensation", and APB Opinion 25,"Accounting for Stock Issued to
Employees." SFAS No.123(R) requires that the cost of share-based
payment transactions (including those with employees and non-employees)
be recognized in the financial statements. SFAS No. 123(R) applies to
all share-based payment transactions in which an entity acquires goods
or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP)
or by incurring liabilities (1) in amounts based (even in part) on the
price of the entity's shares or other equity instruments, or (2) that
require (or may require) settlement by the issuance of an entity's
shares or other equity instruments. This statement is effective (1) for
public companies qualifying as SEC small business issuers, as of the
first interim period or fiscal year beginning after December 15, 2005,
or (2) for all other public companies, as of the first interim period
or fiscal year beginning after June 15, 2005, or (3) for all nonpublic
entities, as of the first fiscal year beginning after December 15,
2005. Management is currently assessing the effect of SFAS 123(R) on
the Company's financial statement.
Page 8
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
2. DESCRIPTION OF BUSINESS
Superior is primarily a dealer and auctioneer of rare coins. The
Company is based in Beverly Hills, California.
3. INVENTORIES
The Company, from time to time, enters into informal partnerships with
third parties who are either vendors or customers for the purchase and
sale of specific rare coins. These arrangements include joint ownership
of the rare coin and equal participation in the profit or loss on
specific transactions adjusted for agreed upon expenses and interest
costs. When the rare coins are purchased the Company records its
proportional ownership as inventory and upon the sale of the rare
coins, the Company records its proportional sale and profit or loss. In
most instances, the Company elects to buy-out the partnership interest
in rare coins prior to its sale and the recording of a proportional
sale and profit or loss are no longer applicable. At any given time,
the Company may be involved in one to two of these agreements. The
entire inventory consists of rare coins. As of December 31, 2004 and
June 30, 2004, inventory totals reflected the Company's total
proportional ownership and does not include any minority interest
claims in regard to such joint venture or partnership arrangements.
4. AUCTION AND CUSTOMER ADVANCES
Superior has established two short-term lending programs consisting of
(i) advancing consignment customers cash based on consigned inventory
acquired for upcoming auctions, and (ii) advancing customers cash based
on the customer's assigning specific rare coins in their inventory to
Superior as collateral. Superior can advance a customer up to 70% of
consigned or assigned rare coin(s)' wholesale value. For auction
advances, Superior will advance cash to a customer and take control of
the inventory to be held on consignment for auction. The customer will
sign a note receivable for the funds advanced to be secured by the
consigned inventory. As consigned inventory is sold, the proceeds will
be collected, repaying Superior for the auction advance and any auction
fees, with the remaining amount due to the consignor. For customer
inventory advances, Superior will advance cash to a customer and take
control of the assigned inventory. The customer will sign a promissory
note for the funds advanced to be secured by the assigned inventory.
Superior will retain control of the assigned inventory until the
customer repays the advance. Auction and customer advances bear
interest at rates between 6% and 12% based primarily on the customer's
creditworthiness and the loan size. The average term of these loans is
approximately three months and no individual loan will exceed one year.
Customers may require minimum prices for their consigned coins, and if
the coin has not sold by the loan maturity date, the customer must
either refinance the loan, repay the loan, or permit us to liquidate
the coin. Auction and customer advances consist of the following:
December 31, 2004 June 30, 2004
----------------- -------------
Auction advances $ 3,187,000 $ 4,454,000
Customer inventory advances 1,267,000 1,948,000
----------------- -------------
$ 4,454,000 $ 6,402,000
================= =============
5. LINE OF CREDIT - RELATED PARTY
On October 13, 2003, Superior executed a Commercial Loan and Security
Agreement ("Commercial LOC") with Stanford Financial Group company, an
affiliate of a principal stockholder, Stanford Venture Capital Holdings,
Inc. to provide the Company with a $7.5 million line of credit for
purposes of financing inventory, auction advances and inventory loans to
other rare coin dealers and collectors. The Commercial LOC bears
interest at the prime-lending rate (5.25% at December 31, 2004) and is
secured by substantially all of Superior's assets. The Commercial LOC
expires on October 1, 2005. As of December 31, 2004 the outstanding
balance was $6,250,000 and there is no accrued interest payable.
Page 9
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
6. LINE OF CREDIT
On July 9, 2002 and July 26, 2002 the Company entered into temporary
working capital loan agreements with a private Lender ("Lender") in the
amounts of $1,500,000 and $1,000,000 respectively. These loans bore
interest at the prime lending rate plus 7% per annum, were secured by
the inventory of the Company and a personal guarantee of the Company's
CEO, and, were due to be repaid in 60 days. On August 8, 2002 the
Company converted the two loans from the Lender into a Line of Credit
with the Lender by executing a Secured Revolving Line of Credit
Agreement ("Line of Credit"). The Line of Credit bore interest at the
prime lending rate plus 7% per annum, was due on September 9, 2002, was
secured by substantially all the assets of the Company and a personal
guarantee of the Company's CEO. The Line of Credit provides for
interest payments to be made in cash, inventory or restricted common
shares of the Company at the sole discretion of the Lender. On
September 16, 2002 the Line of Credit was amended to extend the due
date to October 15, 2002. In November 2002 the Lender became deceased
and the aforementioned Line of Credit became an asset of the Estate of
the Lender ("Lender Estate"). On September 30, 2003 the Company and the
executor of the Lender Estate executed a Renewal and Modification
Agreement that amended the Line of Credit. In exchange for a payment of
$230,000 representing interest in arrears through September 30, 2003,
the Lender Estate agreed to reduce the interest rate to 6% effective
October 1, 2003, release its first priority lien position on all
accounts receivable of the Company and to consider the default cured at
that time. The amendment also requires monthly interest payments
beginning on November 1, 2003. On December 15, 2004, the Company and
the executor of the Lender Estate executed an amendment to the Renewal
and Modification Agreement above that provides for principal payments
of $100,000 per month for three months starting January 31, 2005 with
the remaining principal balance of $2,200,000 to be repaid on January
31, 2006. As of December 31, 2004 the outstanding Line of Credit
balance was $2,500,000 and there was no accrued interest payable.
7. NOTE PAYABLE TO A RELATED PARTY
On April 10, 2002 the Company executed a subordinated note payable in
the amount of $1,000,000 to the Company's Chief Executive Officer and a
principal stockholder ("CEO") bearing interest at 9% per annum with
quarterly installment payments of $150,000 plus interest. As the CEO
did not enforce the repayment obligation, the amount had been
classified as long term. On February 14, 2003, the terms of the note
were modified to provide for repayment of principal in the amount of
$50,000 per quarter commencing on September 30, 2003 and for interest
to be paid monthly. The Company is in arrears of $150,000 of principal
payments. However, the CEO agreed to delay these principal repayments
until no later than March 31, 2005. As of December 31, 2004, the
outstanding balance was $850,000 and there was no accrued interest
payable.
8. NOTES PAYABLE
During October 2004 the Company executed three demand notes payable
with a private lender totaling $650,000 bearing interest at 10% per
annum secured by specific inventory. Interest is payable monthly. As of
December 31, 2004, the outstanding balance was $650,000 and there was
no accrued interest payable
Page 10
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
9. EQUITY
On August 20, 2004, the Company issued 24,000 common shares to an
investor and public relations firm in exchange for services. The
services were valued at $30,000 and were based on the closing price of
the Company's common stock as listed on NASDAQ's Over-the-counter
Bulletin Board on the day the shares were issued.
During the six month period ended December 31, 2004, the Company
granted to employees and directors 195,000 stock options to purchase
common shares with exercise prices ranging from $1.01 to $2.20. The
options vest over various periods of time ranging from one to four
years. During the six month period ended December 31, 2004, the Company
canceled 75,000 stock options to purchase common shares. The Company
records expenses for non-employee stock options using the Black-Scholes
option pricing model.
10. CONTINGENCIES
GUARANTEED LIQUIDITY AND BUY BACK
The Company provides a Guaranteed Liquidity and Buy Back at Grade
warranty (the "Guarantee") to its retail rare coin customers. Retail
rare coin sales amounted to $4,968,000 and $3,238,000 for the six
months ended December 31, 2004 and 2003 respectively. The policy grants
the customer the opportunity to sell their coins back to the Company at
the prevailing market "bid" (below the current wholesale price). The
Company determines the "bid" price based on the prevailing market price
at which the Company believes it could readily liquidate the coin. The
"bid" price may be substantially below what the customer originally
paid for the coin.
The values of the rare coins sold to retail customers continually
fluctuate. Furthermore, retail customers continually resell or trade
coins purchased from the Company with third parties. Once retail
customers resell the rare coins to third parties, the Guarantee is
void. Lastly, the Company has had minimal historical experience with
customers exercising the Guarantee. As a result, it is not possible for
the Company to determine the potential repurchase obligation pursuant
to the Guarantee that it may be subject to as a result of previous
sales of retail rare coins.
LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations of
discrimination, or breach of contract actions incidental to the
operation of its business. The Company is not currently involved in any
such litigation which it believes could have a material adverse effect
on its financial condition or results of operations.
STATE SALES AND USE TAXES
The Company does not collect sales and use taxes for interstate sales.
Management believes that the Company's sales to interstate customers
are generally tax-exempt due to varying state exemptions relative to
the definitions of being engaged in business in particular states and
the lack of current internet taxation. While the Company has not been
contacted by any state authorities seeking to enforce sales or use tax
regulations, there is no assurance that the Company will not be
contacted by authorities in the future with inquiries relative to
compliance with current statutes, nor is there any assurance that
future statutes will not be enacted that affect the sales and use
aspects of the Company's business.
Page 11
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
11. SUBSEQUENT EVENTS
On January 4, 2005, the Company issued 180,000 common shares to an
investor relations firm in exchange for services. The services were
valued at $270,000 and were based on the closing price of the Company's
common stock as listed on NASDAQ's Over-the-counter Bulletin Board on
the day the shares were issued. .
12. GOING CONCERN
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going
concern. However, although the Company had returned to profitability in
the last six months of the year ended June 30, 2004 and has recorded a
substantial reduction in its loss for the six months ended December 31,
2004 as compared to the six months ended December 31, 2003, the Company
continues to have negative cash flows from operations, significant
short-term debt and has limited working capital. These items raise
doubt about the Company's ability to continue as a going concern.
The Company has made and is continuing to make efforts to raise
additional permanent debt and equity and renegotiate debt.
In October 2003, the Company completed negotiations with Stanford to
provide a line of credit of $7.5 million (see Note 5) for auction
advances, inventory financing and inventory loans to other dealers and
collectors. The Company is intending to request an expansion of the
line of credit over the current limit of $7.5 million. There can be no
assurance that the Stanford line of credit will be expanded on terms
acceptable to the Company.
In December 2004, the Company renegotiated the repayment terms on a
$2.5 million dollar line of credit (see Note 6) that was callable on
demand by the lender. The lender agreed to modify the line of credit
terms to provide for principal repayments of $100,000 per month for
three months starting January 31, 2005 with the remaining principal
balance of $2,200,000 to be repaid on January 31, 2006. The Company
intends to seek further extensions to the repayment terms in the
future, however there can be no assurance that this obligation will be
able to be refinanced on terms acceptable to the Company.
Page 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend that such
forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly, to
the extent that this Quarterly Report contains forward-looking statements
regarding our financial condition, operating results, business prospects or any
other information or aspect of our company, you are advised that our actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by us in forward-looking statements.
The differences may be caused by a variety of factors, including but not limited
to:
o those identified under "Risk Factors" below,
o adverse economic conditions,
o unexpected costs and operating deficits,
o lower sales and revenues than forecast,
o loss of customers,
o litigation and administrative proceedings involving our
company,
o the possible acquisition of new businesses that result in
operating losses or that do not perform as anticipated,
resulting in unanticipated losses,
o adverse publicity and news coverage,
o inability to carry out our marketing and sales plans,
o changes in interest rates and inflationary factors, and
o other specific risks that may be referred to in this Quarterly
Report or in other reports that we have issued.
In addition, our business and operations are subject to substantial
risks that increase the uncertainty inherent in the forward-looking statements.
The inclusion of forward-looking statements in this Quarterly Report should not
be regarded as a representation by us or any other person that we will achieve
our objectives or plans.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, our Financial Statements and related notes thereto
included elsewhere in this Quarterly Report. Historical results of operations,
percentage margin fluctuations and any trends that may be inferred from the
discussion below are not necessarily indicative of the operating results for any
future period.
COMPANY OVERVIEW
Our principal line of business is the sale of rare coins on a
wholesale, retail and auction basis. Our wholesale and retail operations are
conducted in virtually every state in the United States. We also provide auction
services for customers seeking to sell their own rare coins. We market our
services nationwide through broadcasting and print media and independent sales
agents, as well as on the Internet through third party websites such as eBay and
through our own website at SGBH.com. Our headquarters are in Beverly Hills,
California.
We were originally organized as a Nevada corporation in 1995. On June
30, 2003, our stockholders approved and we completed a reincorporation of our
company in the State of Delaware and changed our corporate name from Tangible
Asset Galleries, Inc. to Superior Galleries, Inc. These changes were effective
at the close of business on June 30, 2003.
TRENDS AND UNCERTAINTIES
As a dealer and auctioneer of rare coins, our revenue and profitability
can be materially affected by economic factors such as interest rates,
inflation, stock market performance, the price of gold and other precious metals
and world political stability. The demand for and therefore the price of rare
coins tends to increase with the price of gold. During times of unstable stock
market performance and low interest rates rare coins may become more attractive
as an investment as compared to the stock market or interest bearing securities.
Page 13
In times of strong stock market returns and high interest rates, rare coins may
be viewed as a less favorable investment. Political instability may also
increase the demand for rare coins as individuals may perceive the security and
portability of rare coins more favorably as compared to other financial assets
such as stocks, bonds or cash. While we are currently experiencing economic
conditions that have increased the demand for rare coins, resulting in higher
revenue and profitability for us, future changes in the economy such as rapid
increases in interest rates, a decrease in the price of gold or strong growth in
the stock market could materially reduce our revenue, margins and profitability
and affect our liquidity as inventory turns would diminish.
Furthermore, certain types of rare coins, as is the case with other
collectibles, may become more or less popular based on market trends that we
cannot predict. Although we carry a diverse range of categories of rare coins, a
decrease in popularity in a particular category could result in diminished
liquidity as inventory turns decrease for the affected category.
Within the rare coin industry many of our customers and suppliers are
other dealers. We may be materially affected by both external and internal
factors that could affect the financial stability and liquidity of other dealers
with whom we conduct business. Our revenues and profitability could
significantly decrease if several dealers faced financial difficulties that
curtailed their ability to sell or purchase rare coins either directly or at our
auctions.
Prior to the year ended June 30, 2004, we incurred substantial losses
that severely diminished our capital base and our liquidity. Although we have
returned to profitability, we have a shareholders' deficit, limited working
capital and most our debt is short-term. Any significant unfavorable change in
the economic environment or in our industry could quickly result in declining
revenue and a return to operating losses. Our challenge is to both raise
additional permanent equity capital and restructure our debt to include a larger
long-term portion. Although we cannot assure you that we will be able to
accomplish these objectives, we believe that the achievement of these goals
would permit us to increase the levels of inventory that we have available for
sale and increase the funds available to loan to our consignment customers, thus
enhancing our revenues. Accordingly, it is our hope that if we are able to
restructure our debt and the raise additional equity we will mitigate some of
the impact of a future negative economic environment and conversely will benefit
more sharply from a positive environment.
CRITICAL ACCOUNTING POLICIES
Our Financial Statements are based on the selection and application of
significant accounting policies, which require our management to make estimates
and assumptions that affect the amounts reported in the Balance Sheets and the
Statements of Operations. We believe that the following are the most critical
areas that may affect our financial condition and results of operations.
(1) Accounts Receivable
We are required to estimate the collectibility of our accounts
receivable. A considerable amount of judgment is required in
assessing the collectibility of these receivables, including
judgments about the current creditworthiness and financial
condition of each client and related aging of past due
balances. We evaluate specific accounts receivable balances
when we become aware of a situation where a client may not be
able to meets its financial obligations to us. The amount of
the required allowance is based on the facts available to us
and is reevaluated and adjusted as additional information is
available. Allowances are also established for probable loss
inherent in the remainder of the accounts receivable based on
our historical bad debt loss information. As a result of
expansion of our rare coin auction business, we may attract
new customers that may adversely affect our estimates of
accounts receivable collectibility, and, the creditworthiness
of our clients may deteriorate. These factors would require
the reassessment of our estimates and additional allowances
resulting in a reduction of our operating results.
Page 14
(2) Auction and Customer Advances
We are required to estimate the collectibility of our auction
and customer advances. All of our advances are secured by rare
coins. Although we make our decision to advance funds based on
customers' creditworthiness, business history, and collateral
valuation, the collectibility of advances is primarily based
on our estimate of sale of customers' rare coin collateral on
a whole liquidation basis. We evaluate specific advance
balances when we become aware of situations where a client may
not be able to meet its financial obligations to us or the
value of collateral securing the advance is impaired. Due to
the availability of a line of credit from Stanford Financial
Group Company, an affiliate of our principal shareholder,
Stanford Venture Capital Holdings, Inc. ("Stanford"), we have
recently and significantly expanded our auction and customer
advance activities and we do not have historical data to
estimate probable loss nor have we had any significant history
of losses. It is difficult to assess future performance of the
rare coin market. A rapid adverse change in the rare coin
market could diminish the value of the collateral and the
creditworthiness of our clients may deteriorate. These factors
would require the reassessment of our estimates and additional
allowances resulting in a reduction of our operating results.
(3) Revenue Recognition
We generate revenue from wholesale and retail sales of rare
coins and precious metals bullion. The recognition of revenue
varies for wholesale and retail transactions and is, in large
part, dependent on the type of payment arrangements made
between the parties.
We sell rare coins to other wholesalers/dealers within our
industry on credit, generally for terms of 15 to 60 days, but
in no event greater than one year. We grant credit to new
dealers based on extensive credit evaluations and for existing
dealers based on established business relationships and
payment histories. We generally do not obtain collateral with
which to secure our accounts receivable when the sale is made
to a dealer. We maintain reserves for potential credit losses
based on an evaluation of specific receivables and the
Company's historical experience related to credit losses. We
recognize revenue for monetary transactions (i.e., cash and
receivables) with dealers when the merchandise is shipped to a
dealer.
We also sell rare coins to retail customers on credit,
generally for terms of 30 to 60 days, but in no event greater
than one year. We grant credit to retail customers based on
credit evaluations and for existing retail customers based on
established business relationships and payment histories. When
a retail customer is granted credit, we generally collect a
payment of 25% of the sales price, establish a payment
schedule for the remaining balance and hold the merchandise as
collateral as security against the customer's receivable until
all amounts due under the credit arrangement are paid in full.
If the customer defaults in the payment of any amount when
due, we may declare the customer's obligation in default,
liquidate the collateral in a commercially reasonable manner
using such proceeds to extinguish the remaining balance and
disburse any amount in excess of the remaining balance to the
customer.
Under this retail arrangement, we recognize revenue when our
customer agrees to the terms of the credit and makes the
initial payment. Less than 5% of our sales are retail credit
sales. We have limited-in-duration money back guaranty
policies for our retail customers only (as discussed below).
Page 15
In limited circumstances, we exchange merchandise for similar
merchandise and/or monetary consideration with both dealers
and retail customers, for which we recognize revenue in
accordance with APB No. 29, "ACCOUNTING FOR NON-MONETARY
TRANSACTIONS." When we exchange merchandise for similar
merchandise and there is no monetary component to the
exchange, we do not recognize any revenue. Instead, the basis
of the merchandise relinquished becomes the basis of the
merchandise received, less any indicated impairment of value
of the merchandise relinquished. When we exchange merchandise
for similar merchandise and there is a monetary component to
the exchange, we recognize revenue to the extent of monetary
assets received and determine the cost of sale based on the
ratio of monetary assets received to monetary and non-monetary
assets received multiplied by the cost of the assets
surrendered.
We have a return policy (money-back guarantee). The policy
covers retail transactions involving graded rare coins only.
Our customers may return graded rare coins purchased within 7
days of the receipt of the rare coins for a full refund as
long as the rare coins are returned in exactly the same
condition as they were delivered. In the case of rare coin
sales on account, our customers may cancel the sale within 7
days of making a commitment to purchase the rare coins. The
receipt of a deposit and a signed purchase order evidences the
commitment.
Historically, our retail customers have not exercised their
rights to money-back guarantees and as such, we have not
provided a reserve for sales returns in the accompanying
financial statements. Revenues from the sale of consigned
goods are recognized as commission income on such sale if we
are acting as an agent for the consignor. If in the process of
selling consigned goods, we make an irrevocable payment to a
consignor for the full amount due on the consignment and the
corresponding receivable from the buyer(s) has not been
collected by us at that payment date, then we record that
payment as a purchase and the sale of the consigned good(s) to
the buyer as revenue as we have assumed all collection risk.
Our auction business generates revenue in the form of
commissions charged to buyers and sellers of auction lots.
Auction commissions include buyers' commissions, sellers'
commissions, and buyback commissions, each of which are
calculated based on a percentage of the hammer price. Buyers'
and sellers' commissions are recognized upon the confirmation
of the identification of the winning bidders. Funds charged to
winning bidders include the hammer price plus the commission.
Only the commission portion of the funds received by winning
bidders is recorded as revenue. Buyback commissions represent
an agreed upon rate charged by us for goods entered in the
auction and not sold. Goods remain unsold when an auction lot
does not meet the consignor reserve, which is the minimum
sales price as determined prior to auction, and when items
sold at auction are returned subsequent to the winning bidder
taking possession. Buyback commission is recognized along with
sellers' commission or at the time an item is returned.
Returns from winning bidders are very limited and primarily
occur when a rare coin sold auction has an error in its
description which the winning bidder relied upon to purchase
the item.
(4) Inventory Valuation
We value our inventory at the lower of cost or market. On a
periodic basis our numismatic staff will review market data to
determine whether or not the cost of our inventory is above or
below market price. If the market value of a coin is
significantly less than its cost to us, we will establish a
reserve against inventory to reflect that the market value of
our rare coin inventory in the aggregate is below cost, which
results in reflecting the value of our inventory at the lower
of cost or market.
Page 16
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
The following table sets forth the percentage of net revenue
represented by each item in our statement of operations for the periods
presented and the net changes and percentage of change for each item in our
statement of operations between the periods indicated:
Six Months Ended
(in thousands)
December December %
31, 2004 % 31, 2003 % Change Change
--------- --------- --------- --------- --------- ---------
Net sales $ 16,768 95% $ 9,986 90% $ 6,782 68%
Commission Income 905 5% 1,085 10% (180) -17%
--------- --------- --------- --------- --------- ---------
Total revenue 17,673 100% 11,071 100% 6,602 60%
Cost of sales 14,003 79% 8,868 80% 5,135 58%
--------- --------- --------- --------- --------- ---------
Gross profit 3,670 21% 2,203 20% 1,467 67%
Selling, general and administrative expenses 3,496 20% 2,696 24% 800 30%
--------- --------- --------- --------- --------- ---------
Income (loss) from operations 174 1% (493) -4% 667 -136%
Other income (expense) (178) -1% (46) 0% (132) 287%
--------- --------- --------- --------- --------- ---------
Income (loss) before provision for taxes (4) 0% (539) -5% 535 -100%
Income tax provision 1 0% 5 0% (4) -80%
--------- --------- --------- --------- --------- ---------
Net Income (loss) $ (5) 0% $ (544) -5% $ 539 -99%
========= ========= ========= ========= ========= =========
Our net loss for the six months ended December 31, 2004 was $5,000 or
$0.00 per share on both a basic and diluted basis as compared to a loss of
$544,000 or $0.14 per share on both a basic and diluted basis for the six months
ended December 31, 2003. Our improved performance for the six months ended
December 31, 2004 was primarily due to the continued strength of rare coin
sales.
REVENUES
The table below reflects the comparative breakdown of the Company's
aggregate sales:
Six Months Ended
(in thousands)
December December %
31, 2004 % 31, 2003 % Change Change
-------- -------- -------- -------- -------- --------
Net Sales
Rare Coin - Wholesale $11,800 67% $ 6,372 58% $ 5,428 85%
Rare Coin - Retail 4,968 28% 3,238 29% 1,730 53%
Art, Collectibles and Other -- 0% 376 3% (376) -100%
-------- -------- -------- -------- -------- --------
Total Net Sales 16,768 95% 9,986 90% 6,782 68%
Commission Income 905 5% 1,085 10% (180) -17%
-------- -------- -------- -------- -------- --------
Total Revenue $17,673 100% $11,071 100% $ 6,602 60%
======== ======== ======== ======== ======== ========
Page 17
Total revenue for the six months ended December 31, 2004 increased
$6,602,000 or 60% to $17,673,000 from $11,071,000 for the six months ended
December 31, 2003. This increase in revenues is primarily due to the increase in
sales of rare coins. Wholesale rare coin sales for the six months ended December
31, 2004 increased $5,428,000 or 85% over the comparable period in 2003. This
increase was primarily due to strong market demand from other dealers which was
caused, we believe, by an increase in the price of gold, low interest rates and
uncertainty in the stock market and due to our higher levels of inventory
available for sale, which resulted from the availability to us of new financing
to purchase that inventory. Retail rare coin sales for the six months ended
December 31, 2004 increased $1,730,000 or 53% over the comparable period in
2003. This increase was primarily due to continued strength in the demand for
rare coins as stated above. We completed our exit of the Art business in October
2003 and a result we had no sales of art, collectibles and other for the six
months ended December 31, 2004. Commission income for the six months ended
December 31, 2004 decreased $180,000 or 17% over the comparable period in 2003.
This decrease was primarily due to entry of additional auction houses into the
rare coin market and the aggressive pricing by our competitors. Both of these
factors served to reduce our market share. Auction sales (hammer prices
realized, which are the aggregate amount of winning bids at our auctions
excluding the buyer's commission) were $9,618,000 for the six months ended
December 31, 2004 as compared to $11,924,000 for the six months ended December
31, 2003.
We believe that for our revenue to continue to grow in the future we
must continue to expand and diversify our distribution channels. We have
recently begun to consider, test and implement several growth strategies.
To expand our wholesale sales efforts we began to supply a television
home shopping channel with rare coins in October 2004. We will be evaluating our
arrangement with this supplier through March 2005, when we will determine
whether to continue this arrangement and what the parameters of the arrangement
should be. In January 2005, we began to supply internet retailer Amazon.com with
rare coins on a test basis and we are in negotiations to do the same with
Overstock.com. We have yet to determine the length of the test period with
either supplier. Over the medium and long-term our growth strategy for wholesale
type distribution channels includes hiring of additional numismatic traders,
acquiring small rare coin dealers and supplying rare coins to gift and catalog
retailers. We have yet to determine the associated costs of our medium and
long-term growth strategies in the areas discussed above. We may extend or
terminate any of these arrangements at any time.
To expand our retail distribution channels, we began a significant
upgrade of our web-site in late December 2004. This upgrade includes software
tools to improve the ease of use of our internet shopping cart, enhance the
presentation of items for sale, increase traffic to our web-site and improve
on-line bidding and customer want-list capabilities. We estimate that the
one-time cost for this upgrade will be approximately $40,000 and that annual
maintenance cost associated with this upgrade will be approximately $20,000. We
anticipate that the web-site upgrade will be completed in March 2005. Other
growth plans include the expansion of our direct mail advertising targeting high
net worth collectors who are currently buying rare coins or other fine
collectibles.
We plan to expand our auction operations to include weekly
internet-only auctions through our strategic relationship with e-Bay.com. This
will complement the seven major live auctions that we currently hold during a
year. We anticipate ramping toward weekly internet-only auctions by April 2005.
We would not hold an internet-only auction during the week that we held a live
auction as our live auctions are simultaneously broadcast over the internet. We
are considering adding an additional live auction event in the fiscal quarter
ending December 2005 so that we can have two live auctions per quarter.
Our ability to expand our wholesale, retail and auction operations is
dependent in part upon the success of these strategies, which we have not yet
evaluated. The implementation of these strategies may not result in increased
revenues. We will seek to determine whether the expected benefits from these
strategies, measured principally in terms of increased revenue, justifies the
costs of implementing them. If we determine that any of these strategies is not
cost-effective, we will terminate or amend the strategy. We cannot assure you
that our growth plans will generate enough revenue to cover the additional
operating costs associated with these growth plans.
Page 18
We also believe that over the long-term there are opportunities to
expand our collateralized customer lending activities. Currently, our primary
focus is to provide auction advances to our customers. However, we believe that
the potential exists to provide non-auction financing for rare coins and other
fine collectibles that we estimate will yield significantly higher interest
rates over what we currently charge our customers.
Our ability to expand our revenue is significantly contingent on the
availability of additional permanent equity and debt financing. As indicated in
our "Other Liquidity Plans" below we have plans to raise additional equity and
debt, but there is no assurances the we will successful in doing so on terms and
conditions that are acceptable to us.
COST OF SALES
Cost of sales is primarily comprised of the acquisition price we pay
for coins, and is dependent on our skill in identifying coins that may be
offered for sale at advantageous prices, as well as the supply and demand
factors at the time that we are purchasing coins. Commission income has minimal
cost of sales associated with it. Cost of sales for the six months ended
December 31, 2004 increased $5,135,000 or 58% to $14,003,000 or 79% of total
revenue, from $8,868,000 or 80% of total revenue for the six months ended
December 31, 2003. The increase in aggregate cost of sales in the current period
over the comparable period in 2003 was primarily due to the increase in rare
coin sales as discussed in "Total Revenue" above, rather than factors that might
influence the cost of any particular item of inventory. During the two periods
we had comparable success in purchasing coins at advantageous prices, which
resulted in our cost of sales as a percentage of revenue remaining similar.
Although the cost of sales as a percentage of total revenue may be similar from
the current and comparable period from the previous year, this may result from a
coincidental combination of factors that are not always consistent. These
factors, which we cannot predict from period to period, include our success in
buying coins that generate substantial margin, the supply of coins that our
customers wish to purchase, and the level of auction sales and the percentage of
commission on these sales that we earn.
GROSS PROFIT
Gross profit for the six months ended December 31, 2004 increased
$1,467,000 or 67% to $3,670,000 or 21% of total revenue from $2,203,000 or 20%
of total revenue for the six months ended December 31, 2003. The increase in
gross profit in the current period over the comparable period in 2003 was
primarily due to the increase in rare coin sales. The gross profit as a
percentage of revenue will vary from period to period due to variations in the
factors discussed in "Cost of Sales" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended
December 31, 2004 increased $800,000 or 30% to $3,496,000 from $2,696,000 for
the six months ended December 31, 2003. These expenses represent 20% of total
revenue for the six months ended December 31, 2004 as compared to 24% of total
revenue for the six months ended December 31, 2003. The increase in these
expenses was primarily due to the hiring of new employees to enhance our
operational infrastructure as we anticipate continued growth in our revenue.
Additionally, we incurred higher commission and travel costs that resulted from
higher wholesale sales and increased marketing expenses in support of our retail
sales efforts.
OTHER INCOME AND EXPENSES
Other expenses for the six months ended December 31, 2004 increased
$132,000 to $178,000 from $46,000 for the six months ended December 31, 2003.
This increase was primarily due to: (i) The decrease in interest income of
$58,000 that resulted from the decline in interest rates charged to our
customers; (ii) Increases in interest expenses of $96,000 that resulted from the
combination of increased use of our lines of credit to finance our own inventory
and increases in rates charged to us by our lenders for the six months ended
December 31, 2004 as compared to the six months ended December 31, 2003.
PROVISION FOR INCOME TAXES
Although we reported net losses the six months ended December 31, 2004
and 2003, we incurred income taxes for state franchise and other minimum taxes
totaling $1,000 and $5,000 respectively.
Page 19
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
The following table sets forth the percentage of net revenue
represented by each item in our statement of operations for the periods
presented and the net changes and percentage of change for each item in our
statement of operations between the periods indicated:
Three Months Ended
(in thousands)
December December %
31, 2004 % 31, 2003 % Change Change
-------- -------- -------- -------- -------- -------
Net Sales $ 8,255 98% $ 4,910 95% $ 3,345 68%
Commission Income 148 2% 244 5% (96) -39%
-------- -------- -------- -------- -------- -------
Total revenue 8,403 100% 5,154 100% 3,249 63%
Cost of sales 6,787 81% 4,242 82% 2,545 60%
-------- -------- -------- -------- -------- -------
Gross profit 1,616 19% 912 18% 704 77%
Selling, general and administrative
expenses 1,642 19% 1,387 27% 255 18%
-------- -------- -------- -------- -------- -------
Income (loss) from operations (26) 0% (475) -9% 449 -95%
Other income (expense) (104) -1% 2 0% (106) -5300%
-------- -------- -------- -------- -------- -------
Income (loss) before provision for taxes (130) -2% (473) -9% 343 -73%
Income tax provision -- 0% 6 0% (6) -100%
-------- -------- -------- -------- -------- -------
Net Income (loss) $ (130) -2% $ (479) -9% $ 349 -73%
======== ======== ======== ======== ======== =======
Our net loss for the three months ended December 31, 2004 was $130,000
or $0.03 per share on both a basic and diluted basis as compared to a loss of
$479,000 or $0.11 per share on both a basic and diluted basis for the three
months ended December 31, 2003. Our improved performance for the three months
ended December 31, 2004 was primarily due to the continued strength of rare coin
sales.
REVENUES
The table below reflects the comparative breakdown of the Company's
aggregate sales:
Three Months Ended
(in thousands)
December December %
31, 2004 % 31, 2003 % Change Change
-------- -------- -------- -------- -------- --------
Net Sales
Rare Coin - Wholesale $ 5,235 62% $ 2,858 55% $ 2,377 83%
Rare Coin - Retail 3,020 36% 1,696 33% 1,324 78%
Art, Collectibles and Other -- 0% 356 7% (356) -100%
-------- -------- -------- -------- -------- --------
Total Net Sales 8,255 98% 4,910 95% 3,345 68%
Commission Income 148 2% 244 5% (96) -39%
-------- -------- -------- -------- -------- --------
Total Revenue $ 8,403 48% $ 5,154 47% $ 3,249 63%
======== ======== ======== ======== ======== ========
Page 20
Total revenue for the three months ended December 31, 2004 increased
$3,249,000 or 63% to $8,403,000 from $5,154,000 for the three months ended
December 31, 2003. This increase in revenues is primarily due to the increase in
sales of rare coins. Wholesale rare coin sales for the three months ended
December 31, 2004 increased $2,377,000 or 83% over the comparable period in
2003. This increase was primarily due to strong market demand from other dealers
which was caused, we believe, by an increase in the price of gold, low interest
rates and uncertainty in the stock market and due to our higher levels of
inventory available for sale, which resulted from the availability to us of new
financing to purchase that inventory. Retail rare coin sales for the three
months ended December 31, 2004 increased $1,324,000 or 78% over the comparable
period in 2003. This increase was primarily due to continued strength in the
demand for rare coins as stated above. We completed our exit of the Art business
in October 2003 and a result we had no sales of art, collectibles and other for
the three months ended December 31, 2004. Commission income for the three months
ended December 31, 2004 decreased of $96,000 or 39% over the comparable period
in 2003. This decrease was primarily due to entry of additional auction houses
into the rare coin market and the aggressive pricing by our competitors. Both of
these factors served to reduce our market share and resulted in a reduction in
our average commission percentage. Auction sales (hammer prices realized, which
are the aggregate amount of winning bids at our auctions excluding the buyer's
commission) were $2,254,000 for the three months ended December 31, 2004 as
compared to $2,208,000 for the three months ended December 31, 2003. Although
our hammer prices realized at auction slightly increased in 2004 as compared to
the same period in 2003, we had to adjust our commission rates in order to
remain competitive which resulted in lower commissions on similar levels of
auction sales.
COST OF SALES
Cost of sales is primarily comprised of the acquisition price we pay
for coins, and is dependent on our skill in identifying coins that may be
offered for sale at advantageous prices, as well as the supply and demand
factors at the time that we are purchasing coins. Commission income has minimal
cost of sales associated with it. Cost of sales for the three months ended
December 31, 2004 increased $2,545,000 or 60% to $6,787,000 or 81% of total
revenue, from $4,242,000, or 82% of total revenue for the three months ended
December 31, 2003. The increase in aggregate cost of sales in the current period
over the comparable period in 2003 was primarily due to the increase in rare
coin sales as discussed in "Total Revenue" above, rather than factors that might
influence the cost of any particular item of inventory. During the two periods,
we had comparable success in purchasing coins at advantageous prices, which
resulted in our cost of sales as a percentage of revenue remaining similar.
Although the cost of sales as a percentage of total revenue may be similar from
the current period to the comparable period of the previous year, this may
result from a coincidental combination of factors that are not always
consistent. These factors, which we cannot predict from period to period,
include our success in buying coins that generate substantial margin, the supply
of coins that our customers wish to purchase, and the level of auction sales and
the percentage of commission on these sales that we earn.
GROSS PROFIT
Gross profit for the three months ended December 31, 2004 increased
$704,000 or 77% to $1,616,000 or 19% of total revenue from $912,000 or 18% of
total revenue for the three months ended December 31, 2003. The increase in
gross profit in the current period over the comparable period in 2003 was
primarily due to the increase in rare coin sales. The gross profit as a
percentage of revenue will vary from period to period due to variations in the
factors discussed in "Cost of Sales" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
December 31, 2004 increased $255,000 or 18% to $1,642,000 from $1,387,000 for
the three months ended December 31, 2003. These expenses represent 19% of total
revenue for the three months ended December 31, 2004 as compared to 27% of total
revenue for the three months ended December 31, 2003. The increase in these
expenses was primarily due to the hiring of new employees to enhance our
operational infrastructure as we anticipate continued growth in our revenue.
Additionally, we incurred higher commission and travel costs that resulted from
higher wholesale sales and increased marketing expenses in support of our retail
sales efforts.
Page 21
OTHER INCOME AND EXPENSES
Other expenses for the three months ended December 31, 2004 increased
$106,000 to $104,000 from a net other income of $2,000 for the three months
ended December 31, 2003. This increase was primarily due to a decrease in
interest income of $27,000 that resulted from a decline in interest rates
charged to our customers, and increases in interest expense of $82,000 that
resulted from the combination of increased use of our lines of credit to finance
our own inventory and increases in rates charged to us by our lenders for the
three months ended December 31, 2004 as compared to the three months ended
December 31, 2003.
PROVISION FOR INCOME TAXES
Although we reported net losses for the three months ended December 31,
2004 and 2003, we incurred income taxes for state franchise and other minimum
taxes totaling $0 and $6,000 respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had a working capital deficiency of $468,000
and used cash in operating activities of $350,000 for the six month period
ending December 31, 2004. Given our December 31, 2004 cash balance of $286,000
and our projected operating cash requirements, we anticipate that our existing
capital resources may not be adequate to satisfy our cash flow requirements
through June 30, 2005. We may require additional funding. Our cash flow
estimates are based upon achieving certain levels of sales and maintaining
operating expenses at current levels. Should sales be less than forecast,
expenses be higher than forecast or the liquidity not be available through
financings of debt and/or equity, we will not have adequate resources to fund
operations. We do not expect future fixed obligations through June 30, 2005 to
be paid by cash generated from operating activities. We intend to pursue the
following options, among others, to provide cash to satisfy fixed obligations:
(i) additional debt/equity financings; (ii) extending vendor payments; (iii) an
expanded line of credit with Stanford Financial Group Company, and (iv)
liquidation of inventory. We cannot assure you, though, that any of these
financing alternatives will be available to us. If we are unable to satisfy our
fixed obligations as they become due, our creditors will be entitled to take
legal action against us. If they do, our business could be materially harmed.
OPERATING ACTIVITIES
Cash decreased $160,000 for the six months ended December 31, 2004 to
$286,000 from $446,000 at June 30, 2004.
Cash used in our operating activities totaled $350,000 resulting
primarily from increases in inventories of $654,000 and decreases in accounts
payable of $3,401,000 that were offset by repayments of auction and customer
advances of $1,948,000 and decreases in accounts receivable of $1,735,000.
We will continue to strive to gain operating efficiencies by turning
our coin inventory more quickly, through competitive pricing, although there is
no assurance we will achieve these efficiencies.
INVESTING ACTIVITIES
Cash used in investing activities for the three months ended December
31, 2004 was $60,000 consisting of purchases of property and equipment.
FINANCING ACTIVITIES
Until the quarter ended March 31, 2004, we incurred losses since July
1999 and financed these losses through short-term and long-term borrowings, by
issuing shares in various private placement transactions and by liquidating
assets. Cash provided by financing activities totaled $250,000 for three months
ended December 31, 2004 reflected by the following transactions:
Page 22
FINANCING ACTIVITIES - DEBT
On July 9, 2002 and July 26, 2002 we entered into temporary working
capital loan agreements with a private Lender ("Lender") in the amounts of
$1,500,000 and $1,000,000 respectively. On August 8, 2002 we converted the two
loans from the Lender into a Line of Credit with the Lender by executing a
Secured Revolving Line of Credit Agreement ("Line of Credit"). The Line of
Credit bore interest at the prime lending rate plus 7% per annum, was due on
September 9, 2002, and was secured by substantially all the assets of the
Company and a personal guarantee of the Company's CEO. The Line of Credit
provided for interest payments to be made in cash, inventory or restricted
common shares of the Company at the sole discretion of the Lender. On September
16, 2002 the Line of Credit was amended to extend the due date to October 15,
2002. In November 2002 the Lender became deceased and the Line of Credit became
an asset of the Estate of the Lender ("Lender Estate"). On December 31, 2003 we
executed a Renewal and Modification Agreement that amended the Line of Credit.
In exchange for payment of $230,000 representing interest in arrears through
December 31, 2003, the Lender Estate agreed to reduce the interest rate to 6%
effective October 1, 2003, release its priority lien position on all our
accounts receivable and to consider the default cured at that time. The
amendment also required monthly interest payments that began on November 1,
2003. On December 15, 2004, the Company and the executor of the Lender Estate
executed an amendment to the Renewal and Modification Agreement described above
that provides for principal payments of $100,000 per month for three months
starting January 31, 2005 with the remaining principal balance of $2,200,000 to
be repaid on January 31, 2006. As of December 31, 2004 the outstanding Line of
Credit balance was $2,500,000. No payments were made to reduce the line of
credit during the six months ended December 31, 2004.
On April 10, 2002 we executed a subordinated note payable to our CEO
bearing interest at 9% per annum with quarterly installment payments of $150,000
plus interest. No principal payment had been made through February 2003. On
February 14, 2003, the terms of the note were modified to provide for repayments
of principal in the amount of $50,000 per quarter commencing December 31, 2003
and for interest to be paid monthly. As of December 31, 2004 the outstanding
balance was $850,000 and all interest payments were paid to date and continue to
be paid current on a monthly basis. The principal repayments that were due on
December 31, 2004, September 30, 2004 and June 30, 2004 were not paid when due,
but our CEO has agreed to further extend the due dates for these payments to
March 31, 2005. During the six months ended December 31, 2004, we made principal
repayments of $50,000. If we desire to obtain a further extension of the
deferred portion of this loan in March 2005, but our CEO is unwilling to provide
such an extension, we will be required to liquidate sufficient inventory to make
this payment.
On October 13, 2003, we executed a Commercial Loan and Security
Agreement ("Commercial LOC"') with Stanford Financial Group Company to provide
us with a $7.5 million line of credit for purposes of financing its inventory,
auction advances and inventory loans to other rare coin dealers. The Commercial
LOC bears interest at the prime-lending rate (5.25% at December 31, 2004) and is
secured by substantially all our assets. As of December 31, 2004 the outstanding
Commercial LOC balance was $6,250,000. The net principal repayments against the
Commercial LOC during the six months ended December 31, 2004 was $350,000.
During October 2004, we executed three demand notes payable with a
private lender totaling $650,000 for the purpose of financing inventory. These
notes payable bear interest at 10% per annum secured by specific inventory.
Interest is payable monthly. As of December 31, 2004, the outstanding balance
was $650,000.
Since the Line of Credit and the Commercial LOC are secured by
substantially all of our assets, if we default in the performance of our
obligations under any of these loans the lender could foreclose its security
interest, which could lead to a termination of our business or require us to
file a bankruptcy petition.
We are currently in compliance with all of the financial covenants
contained in our credit agreements.
OTHER LIQUIDITY PLANS
We have plans to secure additional financing and/or to raise additional
capital, but there are no assurances that we will be successful in completing
these critical tasks. If we are unable to successfully complete these critical
tasks, we may be forced to significantly and materially reduce our operations
and/or liquidate inventory at amounts below current carrying value to generate
the necessary working capital to fund any ongoing operations.
Page 23
CAPITAL EXPENDITURES
The Company did not incur any material capital expenditures for
property and equipment during the six months ended December 31, 2004 and does
not presently have any plans to make material capital expenditures through the
current fiscal year ending June 30, 2005.
RISK FACTORS
WE HAVE A RECENT HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.
We may not be able to sustain profitability or significantly increase
our revenues. Although we recorded a net income of $552,000 for the year ended
June 30, 2004, we incurred a net loss of $5,000 for the six months ended
December 31, 2004 and a net loss of $3,491,000 for the year ended June 30, 2003,
and had incurred losses since July 1999. We cannot assure you that we will be
profitable in the future.
BECAUSE WE HAVE LIMITED WORKING CAPITAL, IT MAY BE DIFFICULT TO MAINTAIN OR
EXPAND OUR OPERATIONS.
Our working capital deficiency at December 31, 2004 was $468,000. There
can be no assurance that our revenue or results of operations will not decline
in the future, that we will not have losses in the future, or that we will be
able to continue funding such losses if they occur. Our limited capital could
adversely affect our ability to continue our operations.
OUR AUDIT OPINION COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our auditors have expressed an opinion on our financial statements for
the years ended June 30, 2004 and 2003 that contains an explanatory paragraph
that expresses doubt about our ability to continue as a going concern due to
recurring negative cash flows from operations, significant debt that is
short-term, and limited working capital.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR REVENUE AND PROFITABILITY WILL
DECREASE.
The business of selling coins and other collectibles is highly
competitive. We compete with a number of comparably sized and smaller firms, as
well as a number of larger firms throughout the United States. Our primary
competitors are Heritage Rare Coins, a large scale coin dealer and auctioneer,
the Spectrum Numismatic unit of Greg Manning Auctions, a large scale coin dealer
and auctioneer, National Gold Exchange, a large scale coin dealer and American
Numismatic Rarities, a comparably-sized coin auctioneer. Many of our competitors
have the ability to attract customers as a result of their reputation and the
quality collectibles they obtain through their industry relationships.
Additionally, other reputable companies that sell or auction rare coins and
collectibles may decide to enter our markets to compete with us. These companies
have greater name recognition and have greater financial and marketing recourses
than we do. If these auction companies are successful in entering the
specialized market for premium collectibles in which we participate or if
dealers and sellers participate less in our auctions, we may attract fewer
buyers and our revenue could decrease.
THE VOTING POWER OF SUPERIOR GALLERIES, INC. IS SUBSTANTIALLY CONTROLLED BY
STANFORD VENTURE CAPITAL HOLDINGS, INC. AND A GROUP OF AFFILIATED PERSONS. THIS
CONCENTRATION OF VOTING POWER MAY, AMONG OTHER THINGS, DELAY OR FRUSTRATE THE
REMOVAL OF INCUMBENT DIRECTORS OR A TAKEOVER ATTEMPT, EVEN IF SUCH EVENTS MAY BE
BENEFICIAL TO OUR SHAREHOLDERS.
Stanford Venture Capital Holdings, Inc., or "Stanford," and certain of
its affiliates collectively hold 57% of our voting securities. Consequently,
Stanford and its affiliates have sufficient voting power to control the outcome
of virtually all corporate matters submitted to the vote of our common
shareholders. Those matters could include the election of directors, changes in
the size and composition of the board of directors, and mergers and other
business combinations involving Superior. In addition, through this control of
the board of directors and voting power, Stanford is able to control certain
decisions, including decisions regarding the qualification and appointment of
officers, dividend policy, access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), and our
acquisition or disposition of assets. Also, the concentration of voting power in
the hands of Stanford could have the effect of delaying or preventing a change
in control of our company, even if the change in control would benefit our
shareholders, and may adversely affect the market price of our common stock.
Page 24
THE HIGH LEVEL OF OUR DEBT MAY LIMIT OUR ABILITY TO IMPLEMENT BUSINESS
STRATEGIES TO GROW OUR REVENUE AND IMPROVE OUR PROFITABILITY.
At December 31, 2004, we had total indebtedness of $10,937,500, of
which $10,231,250 was short-term debt. Our high level of debt limits the amount
of additional funds we can borrow, which in turn limits our ability to increase
inventory or make additional customer advances, thus restricting our ability to
grow our revenues. We do not have sufficient cash flow from operations to
rapidly repay this debt, and therefore if this debt was called or not renewed we
would have to liquidate inventory, possibly on unfavorable terms. In the past,
we have renegotiated or renewed the terms of our indebtedness on various
occasions, but we cannot assure you that we will be able to do so in the future
or that new debt or equity financing will be available for this purpose. This
could result in losses from operations, or could even require us to seek
protection under the bankruptcy laws.
IF WE ARE UNABLE TO PAY OUR SECURED DEBT ON A TIMELY BASIS, THE LENDERS COULD
REQUIRE THAT OUR ASSETS BE SOLD IN A FORECLOSURE SALE, WHICH COULD RESULT IN OUR
BANKRUPTCY.
We have borrowed funds from Stanford Venture Capital Group and another
private party, each of which has been granted a security interest in
substantially all of our assets. If we default in the repayment of these debts,
these lenders could, among other things, foreclose on their security interests,
which could result in the sale of substantially all of our assets, the proceeds
of which would be applied to repay our debts to them. If this were to occur, we
could be forced to file a bankruptcy petition, or could go out of business.
DECREASED DEMAND FOR RARE COINS COULD REDUCE OUR REVENUE AND PROFITABILITY.
We derive substantially all of our revenue from commissions paid to us
on the sale of rare coins in our auctions and sales of rare coins from our own
inventory. Sales of rare coins depend on discretionary consumer spending and are
affected by general market conditions including perceived scarcity, subjective
value, general consumer trends, changes in the prices of precious metals,
government regulations of rare coin transactions, interest rare and other
general economic conditions. Many factors affect discretionary consumer
spending, including the unemployment rate, business conditions, interest rates,
inflation and tax rates. Spending on the types of luxury items that we typically
sell and auction are impacted by these factors more than sales of consumer
products in general.
Some of the market conditions that could cause the dollar volume spent
in our auctions to decrease include the following:
o fewer rare coins offered for sale;
o a decline in the prices buyers are willing to pay; and
o shifts in consumer trends
As buyers' tastes change and economic conditions fluctuate, the supply,
demand and dollar volume of rare coin sales could decrease, which could have a
material adverse effect on our business, operating results and financial
condition.
WE COULD BE SUBJECT TO SALES TAXES, INTEREST AND PENALTIES ON INTERSTATE SALES
FOR WHICH WE HAVE NOT COLLECTED TAXES.
We do not collect California sales tax on mail-order sales to
out-of-state customers, nor do we collect use tax on our interstate mail order
sales. We believe that our sales to interstate customers are generally
tax-exempt due to varying state exemptions relative to the definitions of being
engaged in business in particular states and the lack of current Internet
taxation. While we have not been contacted by any state authorities seeking to
enforce sales or use tax regulations, we cannot assure you that we will not be
contacted by authorities in the future with inquiries concerning our compliance
with current statutes, nor can we assure you that future statutes will not be
enacted that affect the sales and use tax aspects of our business.
Page 25
THE LOSS OF THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER COULD SIGNIFICANTLY
REDUCE OUR REVENUE AND PROFITABILITY.
Our success and future performance depends on the continued services of
our Chief Executive Officer, Silvano DiGenova, on whom we rely heavily for
expertise and reputation in the rare coin market. The loss of the services of
any of our senior management or other key personnel could harm our business.
Specifically, Mr. DiGenova is a substantial buyer, appraiser and seller of rare
coins on our behalf as well as a substantial draw to potential auction
consigners. Mr. DiGenova's services would be difficult to replace and the loss
of these services could cause significant harm to our business. While we have an
employment agreement with Mr. DiGenova that expires on March 31, 2005, this
employment agreement may not provide us with meaningful assurance that we will
continue to have his services available to us through that date.
OUR QUARTERLY OPERATING RESULTS MAY VARY, WHICH MAY CAUSE VOLATILITY OR A
DECLINE IN THE PRICE OF OUR COMMON STOCK.
Our revenue, expenses and operating results may vary significantly from
quarter to quarter due to a number of factors, some of which are beyond our
control. These factors include the following:
o potential unfavorable supply of or demand for rare coins;
o quarter-to-quarter variations due to the timing of coin
auctions;
o potential changes in consumer trends negatively affecting the
popularity of rare coins that we auction and sell from time to
time;
o unfavorable fluctuations in the prices of precious metals;
o costs associated with unanticipated personnel changes;
o our inability to maintain customer satisfaction;
o quarter-to-quarter variations due to the size and timing of
capital expenditures and other costs associated with the
expansion of our business and infrastructure;
o our inability to resell our inventory of rare coins in a
timely manner;
o unexpected or severe price competition:
o our inability to maintain gross margins;
o our inability to expand our sales and distribution channels.
Additional factors that may affect our quarterly operating results
generally include technical difficulties or network downtime and general
economic conditions and economic conditions specific to our industries.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL, OUR ABILITY TO INCREASE REVENUE
AND PROFITABILITY WILL BE LIMITED.
Since our business involves the financing of inventory, receivables and
auction and customer advances, we may require substantial amounts of capital in
order to achieve and accomplish our future business plans. However, to the
extent we are in need of any additional financing, we cannot assure you that any
such additional financing will be available to us on acceptable terms, or at
all. If we raise additional funds through the issuance of equity securities,
further dilution to our existing shareholders may result.
THE COSTS ASSOCIATED WITH OUR GROWTH PLANS MAY RESULT IN REDUCED PROFITABILITY.
We have experienced significant periods of growth and increased
personnel, marketing and operational costs, and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities. This expansion has placed, and we expect it will continue
to place, a significant strain on our management and our operational and
financial resources. To manage this growth we must do the following:
o establish and develop operational, financial and management
systems;
o train, manage and motivate our employee base;
o hire additional technology and operations personnel; and
o hire additional rare coin specialists and appraisers.
We expect to incur significant costs in connection with these efforts.
If we underestimate the cost of these efforts or overestimate our anticipated
growth in revenue, we will incur reduced profitability or even losses.
Page 26
FROM TIME TO TIME, WE MAY DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS FOR A
SUBSTANTIAL PORTION OF OUR REVENUE. THE LOSS OF A KEY CUSTOMER COULD REDUCE OUR
REVENUE AND PROFITABILITY.
During the six months ended December 31, 2004, none of our customers
accounted for more than 10% of our sales, however, at times, we may depend on a
small number of key customers for a substantial portion of our sales and
revenue. The loss of any of these key customers would reduce our revenue and
could negatively impact our profitability.
WE MAY INCUR LOSSES AS A RESULT OF ACCUMULATING INVENTORY.
In addition to auctioning rare coins on consignment, a substantial
portion of the aggregate sales price of rare coins that we sell are from our own
inventory. We purchase these rare coins from dealers and collectors and assume
the inventory and price risks of these items until they are sold. If we are
unable to resell the rare coins that we purchase when we want or need to, or at
prices sufficient to generate a profit from their resale, or if the market value
of our inventory of purchased rare coins were to decline, our revenue would
likely decline.
IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF RARE COINS FOR RESALE AND FOR
SALE AT AUCTIONS, WE WILL BE UNABLE TO SUSTAIN OR INCREASE OUR REVENUES.
Our business depends substantially on our ability to obtain rare coins
for appraisal, sale and auction. We depend on the availability of rare coins
through dealers and collectibles, and we cannot assure you that rare coins will
continue to be available as before. Although we deal with numerous dealers and
collectors from whom we are able to obtain rare coins for resale and for our
auctions, only a limited number of dealers exist with the capacity to supply
rare coins for resale and auction on a regular basis. A change in our
relationships with suppliers or dealers could impact negatively our ability to
obtain, resell or auction rare coins in the quantities and at the times we
desire. A shortage in the supply of rare coins could impair our ability to
attract customers, which would harm our business, operating results and
financial condition.
IF WE ARE UNABLE TO ATTRACT SUFFICIENT CONSIGNMENT MERCHANDISE FOR SALE AT OUR
AUCTIONS, OUR AUCTION OPERATIONS MAY INCUR A LOSS.
We incur certain fixed costs in connection with each auction. Our
auction operations generate commission revenue based on the successful sale of
consigned merchandise. If the volume of sales at our auctions does not generate
sufficient commission revenue to cover fixed costs, our auction operations will
generate a loss.
IF WE EXPERIENCE AN INCREASE IN THE RESCISSION OF SALES, OUR REVENUE AND
PROFITABILITY COULD DECREASE.
Our operating results could suffer if we experience a significant
increase in the number of sales that are rescinded due to questions about title,
provenance or authenticity of an item. We warrant the title, provenance and
authenticity of each item that we sell, including items sold at auction. If a
buyer believes that any of these characteristics is in doubt, he or she must
notify us in writing within a certain number of days after the date of sale of
the property. If we cannot substantiate the questioned characteristics, the
buyer may rescind his or her purchase and we will refund the price paid at
auction to the buyer. When a purchase is rescinded, the seller is required to
refund the hammer (the price for which an item sells) less sellers' commissions
and other sellers' fees.
OUR PLANNED EXPANSION AND ENHANCEMENTS OF OUR WEBSITE AND INTERNET OPERATIONS
MAY NOT RESULT IN INCREASED PROFITABILITY.
The satisfactory performance, reliability and availability of our
website and network infrastructure are and will be critical to our reputation
and our ability to attract and retain customers and technical personnel and to
maintain adequate customer service levels. Any system interruptions or reduced
performance of our website could materially adversely affect our reputation and
our ability to attract new customers and technical personnel. We are in the
process of development and/or enhancement of several portions of our website
that will offer content and auctions for rare coins that may have a lower
average selling price than many of the rare coins in the markets we currently
serve. Continued development of our website will require significant resources
and expense. If the planned expansion of our website does not result in
increased revenue, we may experience decreased profitability.
Page 27
OUR WEBSITE MAY BE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS WHICH
COULD RESULT IN OUR LIABILITY FOR DAMAGES AND HARM TO OUR REPUTATION.
Despite the implementation of network security measures, our website is
vulnerable to computer viruses, break-ins and similar disruptive problems caused
by Internet users. These occurrences could result in our liability for damages,
and our reputation could suffer. The circumvention of our security measures may
result in the misappropriation of such proprietary information. Any such
security breach could lead to interruptions and delays and the cessation of
service to our customers and could result in a decline in revenue and income.
DUE TO ALL OF THE FOREGOING FACTORS, IT IS POSSIBLE THAT IN SOME FUTURE QUARTER,
OUR OPERATING RESULTS MAY BE BELOW THE EXPECTATIONS OF THE PUBLIC MARKET,
ANALYSTS AND INVESTORS. IN SUCH EVENT, OUR COMMON STOCK WOULD LIKELY BE
MATERIALLY ADVERSELY AFFECTED.
ITEM 3 - CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of December 31, 2004 ("Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange
Act")), are effective to ensure that information required to be disclosed by us
in reports filed or submitted by us under the Exchange Act is accumulated,
recorded, processed, summarized and reported to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.
During the quarter ended December 31, 2004, there were no changes in
our "internal controls over financial reporting" (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We may from time to time be involved in various claims, lawsuits or
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. We are
not currently involved in any litigation which we believe could have a
materially adverse effect on our financial condition or results of operations.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) RECENT SALES OF UNREGISTERED SECURITIES. On January 4, 2005, we
issued 180,000 shares of our common stock to an investor relations firm in
exchange for services. The value of these services was $270,000. There were no
underwriters in this transaction, and thus no underwriting discounts or
commissions were paid in connection with this issuance. This issuance and sale
was exempt from registration under the Securities Act pursuant to Section 4(2)
and Regulation D thereunder. The common shares were issued to a single
purchaser, without general advertising or solicitation. The purchaser was a
sophisticated investor with substantial experience in investing in small
companies.
(b) DIVIDENDS. We have never paid cash dividends on our common stock
and do not currently intend to pay cash dividends on our common stock in the
foreseeable future. We are restricted from paying dividends on our common stock
under state law as a result of our accumulated deficit as of December 31, 2004.
The terms of our Series A Redeemable 8% Convertible Preferred Stock, or Series A
Preferred Stock, prohibit us from paying dividends on shares of our common stock
unless dividends in such amount shall have been simultaneously paid or declared
and set apart for payment to the holders of our Series A Preferred Stock. In
addition, the terms of our Series B Preferred Stock prohibit us from making any
distributions on our common stock without the vote or written consent of the
holders of a majority of the outstanding shares of the Series B Preferred Stock,
voting as a separate class.
Page 28
We currently anticipate that we will retain any earnings for use in the
continued development of our business.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Our Series A Preferred Stock contains redemption provisions that
require us, upon request by the holders, to redeem one tenth of the holders'
shares of such securities each quarter for ten consecutive quarters, commencing
March 31, 2004. All of the holders of the Series A Preferred Stock have
requested redemption of their shares. However, because our liabilities currently
exceed our assets, we are prohibited under Delaware corporation law from
commencing this redemption, and have informed the stockholders of this
redemption prohibition. We intend to begin the redemption once we are legally
allowed to do so. We have reflected the Series A Preferred Stock redemption
payable as a liability on our Balance Sheet. As of December 31, 2004 the balance
payable with respect to the Series A Preferred Stock redemption is $687,500.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 30, 2004 at our Annual Meeting of Shareholders, the
stockholders voted on the following matters:
o the re-election of directors,
o the ratification of the selection of Singer Lewak Goldstein &
Greenbaum LLP as our independent registered public accounting
firm,
o To approve a form of indemnification agreement for our
officers and directors.
As of the close of business on November 5, 2004, the record date for
the meeting, we had outstanding 4,509,942 shares of common stock, 3,400,000
shares of Series B Preferred Stock, and 2,000,000 shares of Series D Preferred
Stock. Each share of Series B Preferred Stock was entitled to 0.5 votes, and
each share of Series D Preferred Stock was entitled to 0.833 votes. A total of
2,836,617 shares of common stock, 3,400,000 shares of Series B Preferred Stock
(representing 1,700,000 votes), and 2,000,000 Shares of Series D Preferred Stock
(representing 1,666,667 votes) were represented in person or by proxy at the
meeting and constituted a quorum.
All of the nominees as directors were elected and all of the other
matters presented to the shareholders were approved. The votes for and against,
and abstentions from voting, on the matters presented were as follows:
Proposal 1: To elect five directors:
Withhold
Nominee For Authority Abstain
------- --- --------- -------
Silvano DiGenova 6,202,276 1,008 0
Paul Biberkraut 6,202,276 1,008 0
James Gollihugh 6,202,276 1,008 0
Lee Ittner 6,202,276 1,008 0
David Rector 6,202,276 1,008 0
Proposal 2: To ratify the selection of Singer Lewak Goldstein &
Greenbaum LLP as our independent certified public accountants to audit our
financial statements for the fiscal ending June 30, 2005:
For: 6,203,284
Against: 0
Abstain: 0
Proposal 3: To approve the form of indemnification agreement for our
officers and directors:
For: 6,192,753
Against: 9,523
Abstain: 1,008
Page 29
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
10.1 Investor Relations Agreement dated December 30, 2004 between
American Capital Ventures, Inc. and Superior Galleries, Inc.
(incorporated herein by this reference to Exhibit 10.20 to
Amendment No. 2 to the registrant's Registration Statement on
Form SB-2 filed January 11, 2005)
31 Certifications Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirement of the Exchange Act, the registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: January 14, 2005 SUPERIOR GALLERIES, INC.
By /s/ Silvano A. DiGenova
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Silvano A. DiGenova
President and Chief Executive Officer
Dated: January 14, 2005 SUPERIOR GALLERIES, INC.
By /s/ Paul Biberkraut
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Paul Biberkraut, Chief Financial Officer
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EXHIBITS FILED WITH THIS REPORT ON FORM 10-QSB
Exhibit 31 Certifications of chief executive officer and chief financial
officer as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 Certifications of chief executive officer and chief
financial officer pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, are furnished herewith pursuant to SEC Release No.
33-8238.
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