Friday, May 05, 2006

It's All About The Inventory:
Gallery of History

Ticker: HIST
Price: $1.648
Market Cap: $9.27 million
Avg. Volume: 1000
52 Week price range: $1.00-$6.50

What could there possibly be to like about a company that loses money quarter after quarter, that is so deep into micro-cap land, that its market cap is south of $10 million? This same company barely trades, has a sizable bid/ask spread, and recently came close to being delisted by the NASDAQ, but was able to work out a deal with its founder and major shareholder in order to maintain listing requirements. It has trouble generating $1 million in annual sales, and even this top line number has been falling from year to year. This truly sounds like a cigar butt, and it may turn out to be just that: a discarded cigar butt with no puffs left in it.

But your Cheap Stocks editor initiated a small position in this stock a couple months back anyway. Would you expect anything less from Cheap Stocks? We venture off the beaten path quite often, and this is no different.

Gallery of History
Galley of History is a Las Vegas based historic documents seller. The company sells letters and documents, and signatures of presidents, political figures, significant physicians, inventors, aviators, scientists, entertainers, authors, artists, musicians, military figures, and sports heros to name a few. If you've ever collected historic documents you know that its a very popular and expensive market. Documents and letters signed by US Pesidents, for instance, can command big bucks. I've dabbled in this market from time to time, and can attest to its strength and allure.

Gallery of History runs periodic auctions, but also sells direct on its History For Sale website. I am impressed by their inventory, especially in the Presidential area. I am not, however, impressed by their pricing. Their documents appear to be very high quality, which should command a premium, but HIST still prices these high. Which is probably why they don't generate much revenue.

So what's to like, and why did your CS editor sink any money into what appears to be a sinking ship? Gallery of History has a vast inventory of 182,000 autographs and documents, which are carried on the books at cost, not in excess of market value. Current inventory as of 12/31/05 was listed at $6.5 million. On a per document basis, that comes out to $35.71 each. We believe that the company's inventory is worth many times that amount, and thats why we hold a position, albeit a small one.

The Risks
The risks are great with this company. The large majority of shares are held by insiders, and Founder and Chairman Todd Axelrod holds about 2.25 million shares. The company was in debt to Axelrod (and his wife Pam, who is also involved in the company), and through a conversion of debt to preferred equity, the company was able to stay listed on NASDAQ.

Here's a brief description from the company's most recent 10K 10Q:
On August 18, 2005, The Nasdaq Stock Market informed the Company that the Staff of The Nasdaq Stock Market was reviewing the Company's eligibility for continued listing on The Nasdaq SmallCap Market. The Company did not have a minimum of $2,500,000 in stockholders' equity, $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In fact, the Company's stockholders equity was $2,361,681 as of the quarter ended June 30, 2005, the market value of its common stock was $9,676,692 as of August 1, 2005 and the Company reported losses from operations for the years ended September 30, 2004, 2003 and 2002. On September 7, 2005 the Company submitted a plan to The Nasdaq Stock Market detailing how the Company would attain and maintain compliance with the listing requirements for The Nasdaq SmallCap Market.

The Nasdaq Stock Market approved the Company's plan on September 20, 2005. Pursuant to the plan, Todd Axelrod, President of the Company, waived $564,000 of accrued but unpaid salary and Pamela Axelrod waived $140,000 of accrued but unpaid salary. Such waivers resulted in an immediate increase in stockholders equity of $704,000. The Company believes that it has regained compliance with the $2,500,000 stockholders equity requirement. Also, the Company intends to call a special meeting in which shareholders will be asked to approve a transaction in which $3,231,722 of indebtedness would be exchanged for a new series of preferred stock, thereby resulting in a further increase in stockholders equity of $3,231,722. The Company has scheduled a shareholders meeting to be held January 20, 2006.

And then from the most recent 10Q:

Subsequent Event
On January 20, 2006, the Company held a special meeting of shareholders for the following purpose: (1) to approve and authorize the amendment of the Company's Articles of Incorporation to authorize the issuance of up to 4,000,000 shares of Series A Preferred stock, par value $0.0005; and (2) to approve and authorize the issuance of 1,615,861 shares of Series A Preferred Stock, par value $0.0005, with an aggregate liquidation preference of $3,231,772, to Todd M. Axelrod, in consideration for cancellation of $3,231,772 in aggregate principal amount of indebtedness of the Company owed to Mr. Axelrod. The preferred stock will be entitled to a semi-annual dividend based on an annual rate of 3%. The remaining amount of this loan due Mr. Axelrod, $232,271 as of January 20, 2006, will continue with the same terms as previous including an interest rate of 3% annually.

In a nutshell, this gives Axelrod even greater control, but the upside is the stock is still listed.

Other Assets
Besides the document inventory, the company also owns a 33000+ square foot building in Las Vegas, carried on the books at less than $1 million. Part of this is leased out, and we are not sure of its market value.

Putting All Our Eggs In One Basket?
There's more negative here than positive, we admit. So why do we own it? Our ventures into the historic document arena tell us that HIST's inventory is much more valuable than $6.5 million. We also believe the stock is currently priced according to all the negatives we mentioned int his piece. Proceed with caution. Again, this is a thinly traded issue, with relatively wide bid/ask spreads.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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