UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 3
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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
BEVERLY HILLS, CALIFORNIA 90212
(Address of Principal Executive Offices) (Zip Code)
(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 October 15, 2004
- ----------------------------------- ----------------------------------
Common Stock, $0.001 par value 4,509,942
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
The purpose of this Amendment No. 1 is to amend information in Part I,
Items 1, 2 and 3 and Part II, Items 1, 2 and 6 of this company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 2004.
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets at September 30, 2004 (Unaudited) and June 30, 2004.
Statements of Operations (Unaudited) for the three months ended
September 30, 2004 and 2003.
Statements of Cash Flows (Unaudited) for the three months ended
September 30, 2004 and 2003.
Notes to Interim Financial Statements (Unaudited) at September 30,
2004.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Item 3. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K.
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUPERIOR GALLERIES, INC.
BALANCE SHEETS
September 30, June 30,
2004 2004
(Unaudited)
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 64,216 $ 446,530
Accounts receivable, net of allowance for uncollectible
accounts of $115,522 (Sep. '04) and $259,007 (Jun. '04) 3,373,010 3,712,866
Auction and customer advances 5,020,881 6,401,873
Inventories 7,430,539 6,106,593
Prepaid expense and other 105,080 50,574
------------ ------------
Total current assets 15,993,726 16,718,436
Property and equipment, net 129,739 135,361
Other assets -- 11,100
------------ ------------
TOTAL ASSETS $16,123,465 $16,864,897
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - related party $ 7,500,000 $ 6,600,000
Line of credit 2,500,000 2,500,000
Accounts payable and accrued expenses 5,440,966 7,260,814
Notes payable to a related party 350,000 300,000
Series A stock redemption payable 412,500 343,750
------------ ------------
Total current liabilities 16,203,466 17,004,564
------------ ------------
LONG-TERM LIABILITIES
Notes payable to a related party, net of current portion 550,000 600,000
Series A stock redemption payable, net of current portion 275,000 343,750
------------ ------------
Total long-term liabilities 825,000 943,750
------------ ------------
TOTAL LIABILITIES 17,028,466 17,948,314
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 6, 7 AND 9)
3
September 30, June 30,
2004 2004
(audited)
------------- -------------
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 2,966,500 2,966,500
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 1,931,456 1,931,456
Common stock, $0.001 par value, 12,500,000 shares
authorized; 4,509,942 outstanding as of September 30, 2004
and 4,485,942 outstanding as of June 30, 2004 4,510 4,486
Additional paid in capital 7,964,584 7,911,988
Accumulated deficit (13,772,051) (13,897,847)
------------- -------------
Total stockholders' equity (deficit) (905,001) (1,083,417)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 16,123,465 $ 16,864,897
============= =============
See accompanying notes to unaudited interim financial statements
4
SUPERIOR GALLERIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30, September 30,
2004 2003
------------ ------------
Net sales $ 8,512,805 $ 5,075,679
Commission income 756,791 840,679
------------ ------------
TOTAL REVENUE 9,269,596 5,916,358
COST OF SALES 7,216,095 4,625,524
------------ ------------
GROSS PROFIT 2,053,501 1,290,834
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,853,474 1,309,638
------------ ------------
Income (loss) from operations 200,027 (18,804)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 101,075 131,605
Interest expense (174,506) (160,819)
Other expense, net -- (19,524)
------------ ------------
Total other income (expense) (73,431) (48,738)
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR TAXES 126,596 (67,542)
INCOME TAX PROVISION 800 (1,798)
------------ ------------
NET INCOME (LOSS) $ 125,796 $ (65,744)
============ ============
Calculation of net income (loss) per share:
Net income (loss) $ 125,796 $ (65,744)
Preferred stock accretion -- (16,677)
Preferred stock dividend -- (12,500)
------------ ------------
Net income (loss) applicable to common shares $ 125,796 $ (94,921)
============ ============
NET INCOME (LOSS) PER SHARE
basic $ 0.03 $ (0.02)
============ ============
fully diluted $ 0.02 $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
basic 4,496,755 4,019,601
============ ============
fully diluted 8,169,985 4,019,601
============ ============
See accompanying notes to unaudited interim financial statements
5
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
September 30, September 30,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 125,796 $ (65,744)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 15,642 25,773
Loss on retirement of property and equipment -- 19,523
Fair value of common stock options granted 22,620 6,750
Fair value of common stock issued for services 30,000 --
Increase (decrease) in cash from changes in assets
and liabilities:
Accounts receivable 339,856 (1,721,812)
Auction and customer advances, net 1,380,992 1,702,350
Inventories (1,323,946) (1,457,935)
Prepaid expenses and other (54,506) (65,227)
Other assets 11,100 --
Accounts payable and accrued expenses (1,819,848) 373,571
------------ ------------
Net cash used in operating activities (1,272,294) (1,182,751)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (10,020) (15,732)
Proceeds from sale of property and equipment -- 1,174
------------ ------------
Net cash used in investing activities (10,020) (14,558)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under related party line of credit 1,400,000 --
Repayments under related party line of credit (500,000) --
Borrowings under lines of credit -- 3,300,000
Repayments under lines of credit -- (1,300,000)
Repayments under notes payable -- (53,125)
Issuance of common stock -- 1,845
Payment of dividends on preferred stock -- (12,500)
------------ ------------
Net cash provided by financing activities 900,000 1,936,220
------------ ------------
Net (decrease) increase in cash and equivalents (382,314) 738,911
Cash and cash equivalents, beginning of period 446,530 688,872
------------ ------------
Cash and cash equivalents, end of period $ 64,216 $ 1,427,783
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 174,506 $ 78,878
============ ============
Income taxes $ 800 $ --
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accretion of redemption value of Series A preferred stock $ -- $ 16,677
See accompanying notes to unaudited interim financial statements
6
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 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
three-month period ended September 30, 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 income (loss) and income (loss) per share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation for the three months periods ending September 30,
2004 and 2003:
2004 2003
---- ----
Net income (loss) applicable to common shares,
as reported $ 125,796 $ (94,921)
Add: Stock-based employee compensation included
in reported net income (loss) -- --
Less: Total stock-based employee compensation
Expense determined under Black-Scholes
option pricing model, net of tax effects 59,840 6,300
------------- ------------
Pro forma net income (loss) $ 65,956 $ (101,221)
============= ============
Earnings (loss) per share - as reported:
Basic $ 0.03 ($ 0.02)
Diluted $ 0.02 ($ 0.02)
Earnings (loss) per share - pro forma:
Basic $ 0.01 ($ 0.03)
Diluted $ 0.01 ($ 0.03)
2. DESCRIPTION OF BUSINESS
Superior is primarily a wholesaler, retailer and auctioneer of rare
coins. The Company is based in Beverly Hills, California.
7
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
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 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. As of September 30, 2004 and 2003,
inventory totals reflected the Company's total proportional ownership
and does not include any minority interest claims in regard to such
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.
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 the loan 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. Superior will retain
control of the assigned inventory until the customer repays the advance.
Auction and customer advances consist of the following:
September. 30, 2004 June 30, 2004
------------------- -------------
Auction advances $2,069,155 $4,453,873
Customer inventory advances 2,951,726 1,948,000
---------- ----------
$5,020,881 $6,401,873
========== ==========
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 (4.75% at September 30, 2004) and is
secured by substantially all of Superior's assets. The Commercial LOC
expires on October 1, 2005. As of September 30, 2004 the outstanding
balance was $7,500,000.
8
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 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 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 Company and to
consider the default cured at that time. The amendment also requires
monthly interest payments beginning on November 1, 2003. The executor of
the Lender Estate orally agreed to discuss repayment terms at a future
date, but the Line of Credit is callable with five days notice and there
is no guarantee that the Line of Credit will not be called for repayment
at any time. There can be no assurance that the Company will be able to
negotiate a repayment schedule for this obligation on terms acceptable
to the Company. As of September 30, 2004 the outstanding Line of Credit
balance was $2,500,000.
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 verbally agreed to delay these principal repayments until no
later than March 31, 2005. As of the September 30, 2004, the outstanding
balance was $900,000.
8. 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 three month period ended September 30, 2004, the Company
granted to employees and directors 165,000 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 three month period ended September 30, 2004, the
Company canceled 10,000 stock options to purchase common shares. The
Company records expenses for non-employee stock options using the
Black-Scholes option pricing model.
9
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
9. 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 $1,947,951 and $1,541,823 for the three
months ended September 30, 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, results of operations, liquidity or cash
flows.
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.
10. SUBSEQUENT EVENTS
On October 1 and 14, 2003, the Company executed two promissory notes
totaling $350,000 with a private lender for purposes of financing
inventory. The promissory notes bear interest at rate of 10% per annum
and are secured by specific inventory. The promissory notes are
repayable at any time at the option of either the private lender or the
Company.
11. 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 recorded net
income in the current quarter, the Company continues to have negative
cash flows from operations, significant debt that is callable on demand
by a lender and has limited working capital. These items raise doubt
about the Company's ability to continue as a going concern.
10
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
The Company has made and is continuing to make efforts to raise
additional permanent debt and equity and renegotiate debt.
In September 2003, the Company renegotiated a $2.5 million dollar line
of credit (Note 6) that was in default and callable by the lender. The
default was cured, but the line of credit is callable with 5 days
notice. Although management does not anticipate the lender calling the
loan, there can be no assurances that this obligation will not become
immediately due. Given the current cash position of the Company, it
would be unable to satisfy this obligation in cash. The Company is
continuing to seek opportunities to refinance the line of credit with
Stanford and is having on-going discussions with the lender to grant
extended payment terms. However there can be no assurance that this
obligation will be able to be refinanced on terms acceptable to the
Company.
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.
11
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 and in several foreign
countries. 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.
12
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.
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.
13
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.
(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, 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 sells 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 the our sales are retail credit sales. We have
limited-in-duration money back guaranty policies for our retail
customers only (as discussed below).
14
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, which is the amount of the winning bid at an auction
excluding the buyer's commission. 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.
15
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenue
represented by each item in our statement of operations for the periods
indicated:
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
--------------------- --------------------
Net Sales 91.8% 85.8%
Commission Income 8.2% 14.2%
--------------------- --------------------
Total Revenue 100.0% 100.0%
Cost of Sales 77.8% 78.2%
--------------------- --------------------
Gross Profit 22.2% 21.8%
Selling, general and administrative expenses 20.0% 22.1%
--------------------- --------------------
Income (loss) from operations 2.2% -0.3%
Other income (expense) -0.8% -0.8%
--------------------- --------------------
Income (loss) before income taxes 1.4% -1.1%
Income taxes 0.0% 0.0%
--------------------- --------------------
Net income (loss) 1.4% -1.1%
===================== ====================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Our net income for the three months ended September 30, 2004 was $125,796 or
$0.03 and $0.02 per share on a basic and diluted basis respectively as compared
to a loss of $65,744 or $0.02 per share on both a basic and diluted basis for
the three months ended September 30, 2003. Our improved performance for the
three months ended September 30, 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 Three Months Ended
September 30, 2004 September 30, 2003
-------------------------- ---------------------------
Net Sales
Rare Coins - Wholesale $ 6,564,854 71% $ 3,513,916 60%
Rare Coins - Retail 1,947,951 21 1,541,823 26
Art, Collectibles & Other - - 19,940 -
------------------------- --------------------------
Total Net Sales 8,512,805 92 5,075,679 86
Commission Income 756,791 8 840,679 14
------------------------- --------------------------
TOTAL REVENUE $9,269,596 100% $5,916,358 100%
========================= ==========================
Total revenue for the three months ended September 30, 2004 increased $3,353,238
or 57% to $9,269,596 from $5,916,358 for the three months ended September 30,
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 September 30,
2004 increased $3,050,938 or 87% to $6,564,854 from $3,513,916 for the
comparable period in 2003. This increase was primarily due to strong market
demand from other dealers and our increased levels of inventory. Retail rare
coin sales for the three months ended September 30, 2004 increased $406,128 or
26% to $1,947,951 from $1,541,823 for the comparable period in 2003. This
increase was primarily due to continued strength in the demand for rare coins.
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 September 30,
2004.
16
Commission income for the three months ended September 30, 2004 was
$756,791, a decrease of $83,888, or 10% as compared to $840,679 for the three
months ended September 30, 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) were $7,363,438 for the three months
ended September 30, 2004 as compared to $9,715,536 for the three months ended
September 30, 2003. Although our commission revenue and hammer prices realized
at auction decreased the average commission percentage earned increased
approximately 15% over the same period last year.
The second quarter of our fiscal year (ending December 31), has
traditionally been our weakest, due in part to the scheduling of fewer and
smaller trade shows, and to our participation in only one small live auction,
instead of two or more as in other quarters. We expect this trend will continue
in the quarter ending December 31, 2004, and that it will produce a quarterly
loss, although we expect that revenues for that quarter will exceed those for
the quarter ended December 31, 2003. To address this seasonality, we are looking
for additional live auction venues and are investigating both retail and direct
marketing opportunities. We also plan to upgrade the e-commerce functionality of
our website, increase the number and kinds of coins available for immediate sale
on our website and examine the potential advantages of television-based home
shopping. The upgrades to our e-commerce functionality will include integrating
third party 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 these upgrades will be approximately $40,000
and that annual maintenance costs associated with these upgrades will be
approximately $20,000.
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 supply and demand factors at
the time that we are purchasing coins. Cost of sales for the three months ended
September 30, 2004 increased $2,590,571 to $7,216,095 or 78% of total revenue,
from $4,625,524, or 78% of total revenue, for the three months ended September
30, 2003. The increase in cost of sales in the current period over the
comparable period in 2003 was primarily due to the increase in rare coin sales.
Commission income has minimal cost of sales associated with it. Although the
cost of sales as a percentage of total revenue was similar in the current and
comparable period last year, this resulted from a coincidental combination of
factors that are not always consistent. These factors, which we cannot predict
from year to year, 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 September 30, 2004 increased
$762,667 to $2,053,501 or 22% of total revenue from $1,290,834 or 22% of total
revenue for the three months ended September 30, 2003. The increase in gross
profit in the current period over the comparable period in 2003 was primarily
due 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.
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2004 increased $543,836 or 42% to $1,853,474 from $1,309,638 for
the three months ended September 30, 2003. These expenses represent 20% of total
revenue for the three months ended September 30, 2004 as compared to 22% of
total revenue for the three months ended September 30, 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.
We expect that the strategic plans that we have for the next fiscal
quarter, as described above, will result in higher selling, general and
administrative expenses for that quarter, and that these expenses will therefore
be significantly higher than they were for the December 31, 2003 quarter. We
expect the growth in these expenses over those for the September 30, 2004
quarter will be limited, however.
OTHER INCOME AND EXPENSES
Other expenses for the three months ended September 30, 2004 increased
$24,693 to $73,431 from $48,738 for the three months ended September 30, 2003.
This increase was primarily due to the decrease in interest income of $30,530
that resulted from the decline in interest rates charged to our customers and
the increased use of our lines of credit to finance our own inventory for the
three months ended September 30, 2004 as compared to the three months ended
September 30, 2003.
PROVISION FOR INCOME TAXES
Although we reported a net income the three months ended September 30,
2004, we have loss carryforwards that negate any income tax expense during the
current period with the exception of taxes due for state franchise and other
minimum taxes totaling $800. During the three months ended September 30, 2003,
we received a refund of overpaid state franchise taxes from a previous period
that resulted in a net income tax recovery for the period of $1,798.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had a working capital deficiency of $209,740
and used cash in operating activities of $1,272,294 for the three month period
ending September 30, 2004. Given our September 30, 2004 cash balance of $64,216
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. In addition, one of our lines of credit may be called by the lender
on demand, but we are continuing to seek an agreement for extended payment
terms. There is no guarantee the lender will agree to provide such extended
terms. 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, and (iv) liquidation of inventory. We
cannot assure you, though, that any of these financing alternatives will be
available to us.
OPERATING ACTIVITIES
Cash decreased $382,314 for the three months ended September 30, 2004
to $64,216 from $446,530 at June 30, 2004.
Cash used in our operating activities totaled $1,272,294 resulting
primarily from increases in inventories of $1,323,946 and decreases in accounts
payable of $1,819,848 offset net income of $125,796, by repayments of auction
and customer advances of $1,380,992 and decreases in accounts receivable of
$339,856.
18
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 September
30, 2004 was $10,020 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 $900,000 for three months
ended September 30, 2004 reflected by the following transactions:
FINANCING ACTIVITIES - DEBT
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 payments had been made through February 2003. 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 payments that were due March 31,
2004 and June 30, 2004, were deferred by verbal agreement with our CEO to
September 30, 2004. As of September 30, 2004 and June 30, 2004 the outstanding
balance was $900,000 and all interest payments were paid to date and continue to
be paid current on a monthly basis. During the year ended June 30, 2004, the
note was reduced by $100,000. The principal repayments that were due on
September 30, 2004, June 30, 2004 and March 31, 2004 totaling $150,000 were not
paid when due, but our CEO has agreed to further extend the due dates for these
payments to March 31, 2005. 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 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 (the "Private LOC") with the Lender
by executing a Secured Revolving Line of Credit Agreement. The Private LOC 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 Private LOC 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 Private
LOC was amended to extend the due date to October 15, 2002. In November 2002 the
Lender became deceased and the Private LOC became an asset of the Estate of the
Lender ("Lender Estate"). On September 30, 2003 we executed a Renewal and
Modification Agreement that amended the Private LOC. In exchange for 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 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. The executor of the Lender
Estate orally agreed to discuss repayment terms at a future date, but the Line
of Credit is callable with five days notice and there is no guarantee that the
Line of Credit will not be called for repayment at any time. There can be no
assurance that we will be able to negotiate a repayment schedule for this
obligation on terms acceptable to us. As of September 30, 2004 the outstanding
Line of Credit balance was $2,500,000, not including accrued interest, all of
which was paid to date. No payments were made to reduce the line of credit
during the three months ended September 30, 2004.
On October 13, 2003, we 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 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
19
Commercial LOC bears interest at the prime-lending rate (4.75% at September 30,
2004) and is secured by substantially all our assets. As of September 30, 2004
the outstanding Commercial LOC balance was $7,500,000. The net borrowing against
the Commercial LOC during the three months ended September 30, 2004 was
$900,000.
Since the Private LOC and Commercial LOC are secured by substantially
all of our assets, if we default in the performance of our obligations under
either 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. While we are in default of the redemption
requirements of our Series A Preferred Stock, this default has not affected our
liquidity, as there are no cross default provisions in our outstanding debt
instruments that are tied to such a default. Our future liquidity, however, will
be reduced by the amount that we are required to pay in order to redeem our
Series A Preferred Stock, once we are legally permitted to do so.
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.
CAPITAL EXPENDITURES
The Company did not incur any material capital expenditures for
property and equipment during the three months ended September 30, 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 net income of $125,796 for the three month
period ended September 30, 2004 and $552,266 for the year ended June 30, 2004,
we incurred a net loss of $3,491,003 for the year ended June 30, 2003 and have
incurred losses in prior fiscal years 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 September 30, 2004 was $209,740.
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 contain 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 and limited
working capital.
20
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 Globe 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 connections.
Additionally, other reputable companies that sell or auction rare coins and
other collectibles may decide to enter our markets to compete with us. These
companies have greater name recognition and have greater financial and marketing
resources 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.
THE HIGH LEVEL OF OUR DEBT MAY LIMIT OUR ABILITY TO IMPLEMENT BUSINESS
STRATEGIES TO GROW OUR REVENUE AND IMPROVE OUR PROFITABILITY.
At September 30, 2004, we had total indebtedness of $11,587,500, of
which $10,762,500 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 not renewed we would
have to seek new debt or equity financing to refinance our existing debt, or
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.
21
DECREASED DEMAND FOR RARE COINS COULD REDUCE OUR REVENUE AND PROFITABILITY.
We derive substantially all of our revenues 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 regulation of rare coin transactions, interest rates 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 coins sales could decrease, which could reduce
our revenues and profits, or cause us to incur losses.
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.
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 his
expertise and reputation in the rare coin market. 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;
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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; and
o our inability to expand our sales and distribution channels.
Additional factors that may negatively 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 other 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 costs of these efforts or overestimate our anticipated
growth in revenue, we will incur reduce profitability or even losses.
WE MAY INCUR LOSSES AS A RESULT OF ACCUMULATING INVENTORY.
In addition to auctioning rare coins on consignment, a substantial
portion of the 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.
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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 collectors, 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 negatively affect 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 item's sale price less sellers' commissions and other sellers' fees.
OUR PLANNED EXPANSION AND ENHANCEMENT 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.
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 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.
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OUR COMMON STOCK PRICE IS POTENTIALLY SUBJECT TO SIGNIFICANT VOLATILITY,
WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS.
Because we have low trading volume in our stock and we have several
shareholders who own very large blocks of our stock, the market price of our
common stock could fluctuate significantly in the future if one or more of these
shareholders attempted to sell a large number of shares.
Consequently, the price at which you purchase shares of our common
stock may not be indicative of the price that will prevail in the trading
market. You may be unable to sell your shares of common stock at or above your
purchase price, which may result in substantial losses to you.
BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY
FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.
Our common stock trades under the symbol "SPGR" on the OTC Bulletin
Board. Because our stock trades on the OTC Bulletin Board rather than on a
national securities exchange, you may find it difficult to either dispose of, or
to obtain quotations as to the price of, our common stock.
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 September 30, 2004 ("Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rules 13a-15(e) and 15d-15(e) under 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. There were no significant changes in our internal
controls or in other factors that could significantly affect our internal
controls subsequent to the Evaluation Date.
During the quarter ended September 30, 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, results of operations,
liquidity or cash flows.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 15, 2004 we issued options to purchase our common stock to 6
persons, each of whom was an officer or director of the company. A total of
150,000 shares were covered by such options. The options contain vesting
provisions that provide that they will become exercisable over a period of from
one to three years after the issuance date, and the option term expires five
years after the vesting date. The option exercise price was $2.00 per share. The
options were issued in a private transaction exempt from registration under
Section 4(2) of the Securities Act of 1933, with persons who had a preexisting
business relationship with us. No advertising or general solicitation was made
in connection with these issuances.
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On August 20, 2004, we issued 24,000 shares of our common stock to the
partners of an investor and public relations firm in exchange for services. The
value of these services was $30,000. There were no underwriters in this
transaction, and thus no underwriting discounts or commissions were paid in
connection with this issuance. The issuance of common stock described above was
exempt from registration under the Securities Act pursuant to Section 4(2) and
Regulation D thereunder. The common shares were issued to a small number of
persons, without general advertising or solicitation. Each of the purchasers was
a sophisticated investor with substantial experience in investing in small
companies.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
31 Certifications of the chief executive officer and chief
financial officer as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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.
(B) REPORTS ON FORM 8-K
On August 20, 2004 we filed a Current Report on Form 8-K dated August
20, 2004, reporting the updated description of our common stock in connection
with our intent to file Form S-8 to register our 2003 Omnibus Stock Option Plan.
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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: March 21, 2005 SUPERIOR GALLERIES, INC.
By /s/ Silvano A. DiGenova
----------------------------------
Silvano A. DiGenova
President and Chief Executive Officer
Dated: March 21, 2005 SUPERIOR GALLERIES, INC.
By /s/ Paul Biberkraut
----------------------------------
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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