Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q/A
(Amendment
number 2)
(Mark
One)
|
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2009
or
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___ to ___
Commission
File Number 1-11048
DGSE
Companies, Inc.
(Exact name of registrant as
specified in its charter)
Nevada
|
|
88-0097334
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
11311
Reeder Road
Dallas,
Texas 75229
(972) 484-3662
(Address,
including zip code, and telephone
number,
including area code, of registrant’s
principal
executive offices)
NONE
(Former
name, former address and former
fiscal
year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 þ NO o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company þ
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES o NO þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of August 10, 2009:
Class
|
|
Outstanding
|
Common
stock, $.01 par value per share
|
|
9,833,635
|
EXPLANATION
Reason
for amendment:
To
reflect correct dates on signature pages.
TABLE OF
CONTENTS
|
|
Page No.
|
PART
I.
|
FINANCIAL INFORMATION
|
|
|
|
|
Item 1.
|
Consolidated
Financial Statements.
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2009 and December 31, 2008
|
1
|
|
|
|
|
Consolidated
Statements of Operations for the six months ended
|
2
|
|
June
30, 2009 and 2008
|
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended
|
3
|
|
June
30, 2009 and 2008
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for six months ended
|
4
|
|
June
30, 2009 and 2008
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition
|
13
|
|
and
Results of Operations.
|
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
21
|
|
|
|
Item 4.
|
Controls
and Procedures.
|
21
|
|
|
|
PART
II.
|
OTHER INFORMATION
|
|
|
|
|
Item 3.
|
Legal
Proceedings.
|
22
|
|
|
|
Item 5.
|
Other
Information.
|
22
|
|
|
|
Item 6.
|
Exhibits.
|
22
|
|
|
|
SIGNATURES
|
|
DGSE
Companies, Inc. and Subsidiaries
PART
I. FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements.
CONSOLIDATED
BALANCE SHEETS
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
|
|
Unaudited
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,244,871 |
|
|
$ |
244,429 |
|
Trade
receivables
|
|
|
1,459,641 |
|
|
|
2,326,337 |
|
Inventories
|
|
|
15,773,614 |
|
|
|
16,052,833 |
|
Prepaid
expenses
|
|
|
675,888 |
|
|
|
533,318 |
|
Prepaid
federal income tax
|
|
|
536,599 |
|
|
|
639,372 |
|
Current
assets of discontinued operations
|
|
|
—0— |
|
|
|
900,306 |
|
Total
current assets
|
|
|
19,690,613 |
|
|
|
20,696,595 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,797,727 |
|
|
|
4,868,306 |
|
Deferred
income taxes
|
|
|
1,857,901 |
|
|
|
1,908,032 |
|
Goodwill
|
|
|
837,117 |
|
|
|
837,117 |
|
Intangible
assets
|
|
|
2,464,006 |
|
|
|
2,492,673 |
|
Other
assets
|
|
|
282,401 |
|
|
|
235,917 |
|
Non-current
assets of discontinued operations
|
|
|
305,275 |
|
|
|
305,275 |
|
|
|
$ |
30,235,040 |
|
|
$ |
31,343,915 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
44,971 |
|
|
$ |
191,078 |
|
Current
maturities of long-term debt
|
|
|
340,357 |
|
|
|
599,972 |
|
Line
of credit
|
|
|
3,195,000 |
|
|
|
3,595,000 |
|
Accounts
payable – trade
|
|
|
320,525 |
|
|
|
734,906 |
|
Accrued
expenses
|
|
|
108,461 |
|
|
|
647,536 |
|
Customer
deposits
|
|
|
982,748 |
|
|
|
1,230,991 |
|
Current
liabilities of discontinued operations
|
|
|
—0— |
|
|
|
33,144 |
|
Total
current liabilities
|
|
|
4,992,062 |
|
|
|
7,032,627 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
11,723,285 |
|
|
|
11,715,765 |
|
|
|
|
16,715,347 |
|
|
|
18,748,392 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; 30,000,000 shares authorized; 9,833,635 and
9,833,635 shares issued and outstanding at the end of each period in 2009
and 2008, respectively
|
|
|
98,337 |
|
|
|
98,337 |
|
Additional
paid-in capital
|
|
|
18,546,812 |
|
|
|
18,541,662 |
|
Retained
deficit
|
|
|
(5,125,456 |
) |
|
|
(6,044,476 |
) |
|
|
|
13,519,693 |
|
|
|
12,595,523 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,235,040 |
|
|
$ |
31,343,915 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
DGSE
Companies, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
Revenue
|
|
|
|
|
|
|
Sales
|
|
$ |
46,973,641 |
|
|
$ |
56,757,456 |
|
Consumer loan service charges
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
46,973,641 |
|
|
|
56,757,456 |
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
40,391,750 |
|
|
|
50,043,731 |
|
Selling, general and administrative expenses
|
|
|
4,585,826 |
|
|
|
4,977,240 |
|
Depreciation and amortization
|
|
|
117,682 |
|
|
|
131,633 |
|
|
|
|
45,095,528 |
|
|
|
55,152,604 |
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,878,383 |
|
|
|
1,604,852 |
|
|
|
|
|
|
|
|
|
|
Other
expense (income)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
— |
|
|
|
(11,635 |
) |
Interest expense
|
|
|
384,556 |
|
|
|
345,636 |
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
|
|
1,493,827 |
|
|
|
1,270,851 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
233,183 |
|
|
|
333,117 |
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
|
1,260,644 |
|
|
|
937,734 |
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Gain
(Loss) from discontinued operations (less applicable income tax expense
(benefit) of $(63,143) and $10,459, respectively)
|
|
|
(353,703 |
) |
|
|
29,425 |
|
Gain on sale of discontinued operations (less applicable income tax
expense of $2,671)
|
|
|
12,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
919,020 |
|
|
$ |
967,159 |
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.10 |
|
From discontinued operations
|
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
Net earnings per common
share
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
From discontinued operations
|
|
$ |
(0.03 |
) |
|
$ |
(0.00 |
) |
Net earnings per common
share
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,833,635 |
|
|
|
9,498,729 |
|
Diluted
|
|
|
9,833,635 |
|
|
|
10,344,363 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
DGSE
Companies, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Three months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
Revenue
|
|
|
|
|
|
|
Sales
|
|
$ |
21,633,859 |
|
|
$ |
25,145,908 |
|
Consumer loan service charges
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
21,633,859 |
|
|
|
25,145,908 |
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
18,206,607 |
|
|
|
21,927,979 |
|
Selling, general and administrative expenses
|
|
|
2,283,504 |
|
|
|
2,611,337 |
|
Depreciation and amortization
|
|
|
67,231 |
|
|
|
58,651 |
|
|
|
|
20,557,342 |
|
|
|
24,597,967 |
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,076,518 |
|
|
|
547,941 |
|
|
|
|
|
|
|
|
|
|
Other
expense (income)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
— |
|
|
|
(11,633 |
) |
Interest expense
|
|
|
237,472 |
|
|
|
175,197 |
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
|
|
839,046 |
|
|
|
384,377 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
179,138 |
|
|
|
17,360 |
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
|
659,908 |
|
|
|
367,017 |
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations (less applicable income tax benefit of $8,034
and $5,805, respectively)
|
|
|
17,517 |
|
|
|
122,907 |
|
|
|
|
|
|
|
|
|
|
Gain
on sale of discontinued operations (less applicable income tax expense of
$2,671)
|
|
|
12,079 |
|
|
|
|
|
Net earnings
|
|
$ |
689,504 |
|
|
$ |
489,924 |
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$ |
0.07 |
|
|
$ |
0.04 |
|
From discontinued operations
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
Net earnings per common
share
|
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$ |
0.07 |
|
|
$ |
0.04 |
|
From discontinued operations
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
Net earnings per common
share
|
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,833,635 |
|
|
|
9,498,729 |
|
Diluted
|
|
|
9,833,635 |
|
|
|
10,344,363 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
DGSE
COMPANIES, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
919,020 |
|
|
$ |
967,159 |
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
117,682 |
|
|
|
131,633 |
|
Deferred income taxes
|
|
|
50,131 |
|
|
|
88,074 |
|
Loss on marketable securities
|
|
|
— |
|
|
|
41,237 |
|
Gain on disposal of discontinued operations
|
|
|
(380,895 |
) |
|
|
— |
|
(Increase)
decrease in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
875,159 |
|
|
|
(1,526,674 |
) |
Inventories
|
|
|
279,219 |
|
|
|
(2,008,762 |
) |
Prepaid expenses and other current assets
|
|
|
(
142,570 |
) |
|
|
(254,250 |
) |
Accounts payable and accrued expenses
|
|
|
(1,098,890 |
) |
|
|
2,028,613 |
|
Customer deposits
|
|
|
(248,243 |
) |
|
|
876,197 |
|
Federal income taxes payable
|
|
|
102,773 |
|
|
|
254,810 |
|
Other assets
|
|
|
(46,484 |
) |
|
|
81,589 |
|
Net
cash provided by operating activities
|
|
|
426,902 |
|
|
|
679,626 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pawn loans made
|
|
|
(635,020 |
) |
|
|
(617,382 |
) |
Pawn loans repaid
|
|
|
328,074 |
|
|
|
291,528 |
|
Recovery of pawn loan principal through sale of forfeited
collateral
|
|
|
298,483 |
|
|
|
315,363 |
|
Proceeds from sale of discontinued
operations
|
|
|
1,324,450 |
|
|
|
— |
|
Merger costs paid
|
|
|
— |
|
|
|
(61,699 |
) |
Purchase of property and equipment
|
|
|
(90,352 |
) |
|
|
(644,825 |
) |
Net
cash provided by (used in) investing activities
|
|
|
1,225,635 |
|
|
|
(717,015 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from line of credit
|
|
|
— |
|
|
|
1,250,000 |
|
Payments
of capital lease
|
|
|
— |
|
|
|
(3,972 |
) |
Repayments
of notes payable
|
|
|
(652,095 |
) |
|
|
(811,136 |
) |
Net cash provided by (used in) financing
activities
|
|
|
(652,095 |
) |
|
|
434,892 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
1,000,442 |
|
|
|
397,503 |
|
Cash
and cash equivalents at beginning of period
|
|
|
244,429 |
|
|
|
536,548 |
|
Cash
and cash equivalents at end of period
|
|
$ |
1,244,871 |
|
|
$ |
934,051 |
|
Supplemental
disclosures:
Interest
paid for the six months ended June 30, 2009 and 2008 was $237,472 and $175,941,
respectively.
Income
taxes paid for the three months ended June 30, 2009 and 2008 was $0 and $0,
respectively.
The
accompanying notes are an integral part of these consolidated financial
statements.
DGSE
COMPANIES, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Basis of Presentation.
The
accompanying unaudited condensed consolidated financial statements of DGSE
Companies, Inc. and Subsidiaries include the financial statements of DGSE
Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, National
Jewelry Exchange, Inc., Charleston Gold and Diamond Exchange, Inc., Superior
Galleries, Inc. Superior Precious Metals, Inc., American Gold and Diamond
Exchange, Inc, and Superior Estate Buyers, Inc. In the opinion of management,
all adjustments consisting of normal recurring accruals considered necessary for
a fair presentation have been included.
The
interim financial statements of DGSE Companies, Inc. included herein have been
prepared by us pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the Commission's rules and regulations,
although we believe that the disclosures are adequate to make the information
presented not misleading. We suggest that these financial statements be
read in conjunction with the financial statements and notes included in our
Annual Report on Form 10-K for the year ended December 31, 2008. In our
opinion, the accompanying unaudited interim financial statements contain all
adjustments, consisting only of those of a normal recurring nature, necessary to
present fairly its results of operations and cash flows for the periods
presented. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications were made to the prior year's consolidated financial
statements to conform to the current year presentation.
In
December 2008, we decided to discontinue the live auction segment of our
business activities. This decision was based on the substantial losses
being incurred by this operating segment during 2008. As a result, certain
sections of the Consolidated Financial Statements and related notes have been
reclassified to present the results of the auction segment activities as
discontinued operations.
In June
2008 we sold the assets of National Jewelry Exchange, Inc. (our two pawn shops
to an unrelated third party for cash in the amount of $ 1,324.450. The proceeds
were used to retire $400,000 of our bank debt and the balance was used for
working capital. As a result, operating results from National Jewelry Exchange
have been reclassified to discontinued operations for all periods
presented.
(2)
Inventory.
A summary
of inventories is as follows:
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
Jewelry
|
|
$ |
9,939,555 |
|
|
$ |
10,925,247 |
|
Rare
coins
|
|
|
2,495,797 |
|
|
|
1,827,294 |
|
Bullion
|
|
|
2,875,684 |
|
|
|
1,931,925 |
|
Scrap
gold
|
|
|
462,578 |
|
|
|
636,843 |
|
Other
|
|
|
— |
|
|
|
731,524 |
|
Total
|
|
$ |
15,773,614 |
|
|
$ |
16,052,833 |
|
(3)
Goodwill.
During
the fourth quarter of 2008, we reflected $8,185,443 of goodwill relating to the
acquisition of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, we are
required to undertake an annual impairment test at our year end or when there is
a triggering event. In addition to the annual impairment review, there were a
number of triggering events in the fourth quarter due to the significant
operating losses of Superior and the impact of the economic downturn on
Superior’s operations and the decline in the Company’s share price resulting in
a substantial discount of the market capitalization to tangible net asset value.
An evaluation of the recorded goodwill was undertaken, which considered two
methodologies to determine the fair-value of the entity:
|
·
|
A
market capitalization approach, which measure market capitalization at the
measurement date.
|
DGSE
COMPANIES, Inc. and Subsidiaries
· A discounted
cash flow approach, which entails determining fair value using a discounted cash
flow methodology. This method requires significant judgment to estimate
the future cash flow and to determine the appropriate discount rates, growth
rates, and other assumptions.
Each of
these methodologies we believe has merit, and resulted in the determination that
goodwill was impaired. Accordingly, to reflect the impairment, we recorded a
non-cash charge of $8,185,443, which eliminated the value of the goodwill
related to Superior.
(5)
Earnings per share.
A
reconciliation of the earnings and shares of the basic earnings per common share
and diluted earnings per common share for the periods ended June 30, 2009 and
2008 is as follows:
|
|
2009
|
|
|
2008
|
|
|
|
Three months ended June 30,
|
|
|
Three months ended June 30,
|
|
|
|
Net Earnings
|
|
|
Shares
|
|
|
Per share
|
|
|
Net Earnings
|
|
|
Shares
|
|
|
Per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
689,504 |
|
|
|
9,833,635 |
|
|
$ |
0.07 |
|
|
$ |
489,924 |
|
|
|
9,498,729 |
|
|
$ |
0.05 |
|
Effect
of dilutive stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
845,634 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
689,504 |
|
|
|
9,833,635 |
|
|
$ |
0.07 |
|
|
$ |
489,924 |
|
|
|
10,344,363 |
|
|
$ |
0.05 |
|
|
|
2009
|
|
|
2008
|
|
|
|
Six months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
Net Earnings
|
|
|
Shares
|
|
|
Per share
|
|
|
Net Earnings
|
|
|
Shares
|
|
|
Per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
919,020 |
|
|
|
9,833,635 |
|
|
$ |
0.09 |
|
|
$ |
967,159 |
|
|
|
9,498,729 |
|
|
$ |
0.10 |
|
Effect
of dilutive stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
845,634 |
|
|
|
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
919,020 |
|
|
|
9,833,635 |
|
|
$ |
0.09 |
|
|
$ |
967,159 |
|
|
|
10,344,363 |
|
|
$ |
0. 9 |
|
DGSE
COMPANIES, Inc. and Subsidiaries
For the
six months and three months ended June 30, 2009 1.4 million shares related
to employee stock options were not added to the denominator because inclusion of
such shares would be antidilutive. For the six months and three months ended
June 30, 2009 438,672 related to warrants issued in conjunction with
an acquisition were not added to the denominator because inclusion of such
shares would be antidilutive
The
following table sets forth outstanding shares of common stock issued in the form
of stock purchase warrants and employee stock options as of June 30
:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in conjunction with financing
|
|
|
- |
|
|
|
3,982 |
|
|
|
|
Warrants
issued in conjunction with acquisitions
|
|
|
438,672 |
|
|
|
370,928 |
|
|
|
|
Common
stock options
|
|
|
1,423,134 |
|
|
|
1,393,134 |
|
|
|
- |
|
The
warrants issued in conjunction with financing were issued to expire on July 5,
2008 and were issued at an exercise price of $3.10. The warrants issued in
conjunction with acquisitions were issued to expire on May 29, 2014 at an
exercise price of $1.89.
DGSE
COMPANIES, Inc. and Subsidiaries
(6)
Business segment information.
Management
identifies reportable segments by product or service offered. Each segment
is managed separately. Corporate and other includes certain general and
administrative expenses not allocated to segments and pawn operations. The
Company had no significant non cash items other than depreciation and
amortization. Our operations by segment for the three months ended June 30
were as follows:
(In thousands)
|
|
Retail
Jewelry
|
|
|
Wholesale
Jewelry
|
|
|
Precious
Metals
|
|
|
Rare
Coins
|
|
|
Discontinued
Operations
|
|
|
Corporate
and Other
|
|
|
Consolidated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
5,597 |
|
|
$ |
848 |
|
|
$ |
10,329 |
|
|
$ |
4,860 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,634 |
|
2008
|
|
|
7,758 |
|
|
|
1,139 |
|
|
|
11,993 |
|
|
|
4,256 |
|
|
|
— |
|
|
|
— |
|
|
|
25,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
348 |
|
|
|
(30 |
) |
|
|
95 |
|
|
|
342 |
|
|
|
29 |
|
|
|
(94 |
) |
|
|
690 |
|
2008
|
|
|
397 |
|
|
|
15 |
|
|
|
35 |
|
|
|
12 |
|
|
|
123 |
|
|
|
(92 |
) |
|
|
490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
21,121 |
|
|
|
1,793 |
|
|
|
1,958 |
|
|
|
3,006 |
|
|
|
305 |
|
|
|
2,052 |
|
|
|
30,235 |
|
2008
|
|
|
20,478 |
|
|
|
2,177 |
|
|
|
1,180 |
|
|
|
3,790 |
|
|
|
3,131 |
|
|
|
10,606 |
|
|
|
41,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
— |
|
|
|
837 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
837 |
|
2008
|
|
|
— |
|
|
|
837 |
|
|
|
— |
|
|
|
7,337 |
|
|
|
848 |
|
|
|
— |
|
|
|
8,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
2008
|
|
|
248 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
111 |
|
|
|
— |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
67 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
- |
|
|
|
67 |
|
2008
|
|
|
32 |
|
|
|
— |
|
|
|
14 |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
49 |
|
|
|
0 |
|
|
|
94 |
|
|
|
94 |
|
|
|
— |
|
|
|
— |
|
|
|
237 |
|
2008
|
|
|
145 |
|
|
|
— |
|
|
|
15 |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
79 |
|
|
|
(10 |
) |
|
|
47 |
|
|
|
71 |
|
|
|
— |
|
|
|
(8 |
) |
|
|
179 |
|
2008
|
|
|
78 |
|
|
|
— |
|
|
|
(39 |
) |
|
|
15 |
|
|
|
— |
|
|
|
(37 |
) |
|
|
17 |
|
DGSE
COMPANIES, Inc. and Subsidiaries
Our
operations by segment for the Six months ended June 30 were as
follows:
(In thousands)
|
|
Retail
Jewelry
|
|
|
Wholesale
Jewelry
|
|
|
Precious
Metals
|
|
|
Rare
Coins
|
|
|
Discontinued
Operations
|
|
|
Corporate
and Other
|
|
|
Consolidated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
12,146 |
|
|
$ |
1,800 |
|
|
$ |
24,024 |
|
|
$ |
9,003 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
46,973 |
|
2008
|
|
|
14,271 |
|
|
|
2,497 |
|
|
|
28,856 |
|
|
|
11,133 |
|
|
|
— |
|
|
|
— |
|
|
|
56,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
508 |
|
|
|
(81 |
) |
|
|
435 |
|
|
|
510 |
|
|
|
(342 |
) |
|
|
(111 |
) |
|
|
919 |
|
2008
|
|
|
606 |
|
|
|
47 |
|
|
|
371 |
|
|
|
24 |
|
|
|
29 |
|
|
|
(110 |
) |
|
|
967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
21,121 |
|
|
|
1,793 |
|
|
|
1,958 |
|
|
|
3,006 |
|
|
|
305 |
|
|
|
2,052 |
|
|
|
30,235 |
|
2008
|
|
|
20,478 |
|
|
|
2,177 |
|
|
|
1,180 |
|
|
|
3790 |
|
|
|
31317 |
|
|
|
10,606 |
|
|
|
41,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
— |
|
|
|
837 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
837 |
|
2008
|
|
|
— |
|
|
|
837 |
|
|
|
— |
|
|
|
7,337 |
|
|
|
848 |
|
|
|
— |
|
|
|
8,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
105 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
105 |
|
2008
|
|
|
520 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
125 |
|
|
|
— |
|
|
|
645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
118 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
- |
|
|
|
118 |
|
2008
|
|
|
76 |
|
|
|
— |
|
|
|
28 |
|
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
109 |
|
|
|
57 |
|
|
|
109 |
|
|
|
110 |
|
|
|
— |
|
|
|
— |
|
|
|
385 |
|
2008
|
|
|
287 |
|
|
|
— |
|
|
|
30 |
|
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
94 |
|
|
|
(15 |
) |
|
|
80 |
|
|
|
88 |
|
|
|
— |
|
|
|
(14 |
) |
|
|
233 |
|
2008
|
|
|
215 |
|
|
|
17 |
|
|
|
138 |
|
|
|
4 |
|
|
|
— |
|
|
|
(41 |
) |
|
|
333 |
|
(7)
Stock-based Compensation.
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123(R) for all share based payment awards to employees and directors including
employee stock options granted under our employee stock option plan. In
addition, we have applied the provisions of Staff Accounting Bulletin No. 107
(SAB No. 107), issued by the Securities and Exchange Commission, in our adoption
of SFAS No. 123(R).
Stock-based
compensation expense under SFAS No. 123(R) for the months ended June 30, 2009
and 2008, respectively, was $0 and $15,200, relating to employee and director
stock options and our employee stock purchase plan.
Stock-based
compensation expense recognized each period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the
period. SFAS No. 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
DGSE
COMPANIES, Inc. and Subsidiaries
Upon
adoption of SFAS No. 123(R), we elected to use the Black-Scholes-Merton
option-pricing formula to value share-based payments granted to employees
subsequent to January 1, 2006 and elected to attribute the value of stock-based
compensation to expense using the straight-line single option
method.
On
November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for
Tax Effects of Share-Based Payment Awards”, which detailed an alternative
transition method for calculating the tax effects of stock-based compensation
pursuant to SFAS No. 123(R). This alternative transition method included
simplified methods to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects of employee stock-based
compensation and to determine the subsequent impact on the APIC pool and
Consolidated Statement of Cash Flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of SFAS No. 123(R).
As of June 30, 2009, we have not recorded the tax effects of employee
stock-based compensation and have made no adjustments to the APIC
pool.
SFAS No.
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows. As there have
been no stock options exercised, we have not reported these excess tax benefits
as of June 30, 2009.
(8)
Discontinued Operations.
In
November 2008 we decided to discontinue the live auction segment of the
Company’s business activities. This decision was based on the substantial losses
being incurred by this operating segment during 2008. As a result, the operating
results of the auction segment have been reclassified to discontinued operations
for both 2008 and 2009. During the first six months of 2009 and 2008 the
auction segment incurred pretax losses of $512,136 and $86,625,
respectively.
The
following summarizes the carrying amount of assets and liabilities of the
auction segment as of June 30, 2009:
Assets
|
|
|
|
Accounts receivable
|
|
$ |
0 |
|
Current assets
|
|
$ |
0
|
|
|
|
|
|
|
Long-term receivable
|
|
$ |
305,275 |
|
Total assets
|
|
$ |
305,275 |
|
Liabilities
|
|
|
|
|
Auctions payable
|
|
$ |
0 |
|
As a
result, operating results from the auction segment have been reclassified to
discontinued operations for all periods presented. As of June30, 2009,
there were no operating assets to be disposed of or liabilities to be paid in
completing the disposition of these operations.
In June
2009 the Company sold the assets of National Jewelry Exchange, Inc.(the
Company’s two pawn shops) to an unrelated third party for cash in the amount of
$ 1,324,450. The proceeds were used to retire $400,000 of our bank debt and the
balance was used for working capital. During the six months ended June 30, 2009
and 2008 National Jewelry Exchange incurred pretax losses of $10,040 and $5,911,
respectively. As a result, operating results from National Jewelry Exchange have
been reclassified to discontinued operations for all periods
presented.
DGSE
COMPANIES, Inc. and Subsidiaries
(9)
New Accounting Pronouncements.
In June
2009, the Financial Accounting Standards Board (“FASB:”) issued Statement
No. 168, “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB Statement No.
162” (“SFAS 168”). The codification will become the source of GAAP
recognized by the FASB. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. SFAS 168 is not intended to change existing GAAP and as
such, it will not have a significant impact on our consolidated financial
statements. SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009.
In May
2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”) which
establishes accounting and disclosure requirements for subsequent events.
SFAS 165 sets forth the period after the balance sheet date during which we
should evaluate events or transactions that occur for potential recognition or
disclosure in our financial statements, the circumstances under which we should
recognize events or transactions occurring after the balance sheet date in our
financial statements and the required disclosures for such events or
transactions. SFAS 165 is effective for interim or annual financial
periods ending after June 15, 2009, and as such, we adopted SFAS 165
prospectively beginning in our quarterly period ended June 30, 2009. We
have evaluated subsequent events through August 14, 2009, the filing date of
this report.
In April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP No. 142-3”), which amends the factors
that should be considered when developing renewal or extension assumptions used
to determine the useful life of an intangible asset under Statement of Financial
Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible
Assets”, in order to improve consistency between SFAS No. 142 and the period of
expected cash flows to measure the fair value of the asset under Statement of
Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”
and other U.S. generally accepted accounting practices. Effective January
1, 2009, we adopted FSP No. 142-3. The adoption of FSP No. 142-3 has not had and
is not expected to have a material impact our results of operations and
financial position.
In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 requires entities to proved enhanced disclosures
about (a) how and why an entity uses derivative instruments and that the
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities” and its related interpretations, including a
tabular format disclosure of the fair values of derivative instruments and their
gains and losses and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. SFAS 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We
adopted SFAS 161 on January 1, 2009 and it did not have an impact on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS No. 141(R)”), which establishes principles for how the acquirer
recognizes and measures in the financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree. This statement also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. Effective
January 1, 2009, we adopted SFAS No. 141(R). No business
combinations were completed in the first quarter of 2009. However, to the extent
that future business combinations are material, our adoption of
SFAS No. 141(R) will significantly impact our accounting and reporting
for future acquisitions, principally as a result of (i) expanded
requirements to value acquired assets, liabilities and contingencies at their
fair values; and (ii) the requirement that acquisition-related transaction
and restructuring costs be expensed as incurred rather than capitalized as a
part of the cost of the acquisition.
DGSE
COMPANIES, Inc. and Subsidiaries
We
adopted FIN 48, “Accounting for Uncertainty in Incomes Taxes – An Interpretation
of FASB Statement No. 109” (“FIN48”) on January 1, 2007. FIN 48 clarifies
the accounting for uncertainty in tax positions by prescribing the recognition
threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. We had no unrecognized tax benefits and no
accrued interest or penalties recognized as of the date of our adoption of FIN
48. During the three and six months ended June 30, 2009, there were no
changes in our unrecognized tax benefits, and we had no accrued interest or
penalties as of June 30, 2009.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115” (SFAS No. 159). SFAS No. 159 permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. Effective January 1, 2008, we adopted
the provisions of SFAS 159 except as it applies to those nonfinancial assets and
nonfinancial liabilities. Due to the fact that management has not elected
to use the fair value option for eligible items, the adoption has not resulted
in any financial impact on our results of operations and financial
position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No.
157”). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. On February 12, 2008, the FASB
issued FASB Staff Position FAS 157-2, which delayed the effective date of SFAS
157 for nonfinancial assets and nonfinancial liabilities, except for those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), to fiscal years beginning after November
15, 2008 and interim periods within those fiscal years. We adopted the
provisions of SFAS 157 partially on January 1, 2008 and on January 1, 2009
relating to nonfinancial assets and nonfinancial liabilities and it did not have
a significant impact on our results of operations or financial
position.
DGSE
COMPANIES, Inc. and Subsidiaries
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Forward-Looking
Statements
The
statements, other than statements of historical facts, included in this report
are forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
“would,” "expect," "intend," “could,” "estimate," “should,” "anticipate"
or "believe." We believe that the expectations reflected in such
forward-looking statements are accurate. However, we cannot assure you
that these expectations will occur. Our actual future performance could differ
materially from such statements. Factors that could cause or contribute to
these differences include, but are not limited to:
|
·
|
uncertainties
regarding price fluctuations in the price of gold and other precious
metals;
|
|
·
|
our
ability to manage inventory fluctuations and
sales;
|
|
·
|
changes
in governmental rules and regulations applicable to the specialty
financial services industry;
|
|
·
|
the
results of any unfavorable
litigation;
|
|
·
|
economic
pressures affecting the disposable income available to our
customers;
|
|
·
|
our
ability to maintain an effective system of internal
controls;
|
|
·
|
the
other risks detailed from time to time in our SEC
reports.
|
Additional
important factors that could cause our actual results to differ materially from
our expectations are discussed under “Risk Factors” in our Annual Report on Form
10-K for our fiscal year ended December 31, 2008. You should not unduly
rely on these forward-looking statements, which speak only as of the date of
this report. Except as required by law, we are not obligated to publicly release
any revisions to these forward-looking statements to reflect events or
circumstances occurring after the date of this report or to reflect the
occurrence of unanticipated events.
Our
Business
We buy
and sell jewelry, bullion products and rare coins. Our customers include
individual consumer, dealers and institutions throughout the United States. In
addition, we make collateralized loans to individuals in the State of Texas. Our
products and services are marketed through our facilities in Dallas and Euless,
Texas; Mt. Pleasant, South Carolina; Woodland Hills, California and through our
internet web sites DGSE.com; CGDEinc.com; SGBH.com; SuperiorPreciousMetals.com;
SuperiorEstateBuyers.com; USBullionExchange.com;
Americangoldandsilverexchange.com; and FairchildWatches.com.
We
operate eight primary internet sites and over 900 related landing sites on the
World Wide Web. Through the various sites we operate a virtual store, real-time
auction of rare coin and jewelry products, free quotations of current prices on
all commonly traded precious metal and related products, trading in precious
metals, a mechanism for selling unwanted jewelry, rare coins and precious metals
and wholesale prices and information exclusively for dealers on pre-owned fine
watches. Over 7,500 items are available for sale on our internet sites including
$2,000,000 in diamonds.
In June
2008, we moved Superior Galleries’ operations from Beverly Hills to Woodland
Hills, California. Superior’s principal line of business is the sale of rare
coins on a retail and wholesale basis. Superior’s retail and wholesale
operations are conducted in virtually every state in the United States.
Superior also conducted live and internet auctions for customers seeking to sell
their own coins prior to management’s decision to discontinue the live auction
operations. Superior markets its services nationwide through broadcast and
print media and independent sales agents, as well as on the internet through
third party websites, and through its own website at SGBH.com.
Americangoldandsilverexchange.com,
the over 900 proprietary Internet sites related to the home page of
Americangoldandsilverexchange.com along with our existing locations in Texas,
California and South Carolina, provide customers from all over the United States
with a seamless and secure way to value and sell gold, silver, rare coins,
jewelry, diamonds and watches.
DGSE
COMPANIES, Inc. and Subsidiaries
Superior
Estate Buyers brings our unique expertise in the purchase of gold, silver,
diamonds, rare coins and other collectibles to local markets with a team of
traveling professionals for short-term buying events. During 2008 Superior
Estate Buyers held approximately 24 such buying events. It is our
expectation that, over time, this activity will be expanded significantly with
the objective of having teams conducting events on a continuous
basis.
Superior
Precious Metals is the retail precious metals arm of DGSE. Professional account
managers provide a convenient way for individuals and companies to buy and sell
precious metals and rare coins. This activity is supported by the internally
developed account management and trading platform created as part of DGSE’s
USBullionExchange.com precious metals system.
Critical
Accounting Policies and Estimates
The
following discussion addresses our most critical accounting policies, which are
those that are both important to the portrayal of our financial condition and
results of operations and that require significant judgment or use of complex
estimates.
Inventories.
Jewelry and other inventories are valued at the lower of
cost or market. Bullion is valued at the lower-of-cost-or-market (average
cost). See also “Critical Accounting Estimates”.
Impairment of
Long-Lived and Amortized Intangible Assets. The Company performs
impairment evaluations of its long-lived assets, including property, plant and
equipment and intangible assets with finite lives, including the customer base
acquired in the Superior acquisition, whenever business conditions or events
indicate that those assets may be impaired. When the estimated future
undiscounted cash flows to be generated by the assets are less than the carrying
value of the long-lived assets, the assets are written down to fair market value
and a charge is recorded to current operations. Based on our
evaluations no impairment was required as of December 31, 2008.
Impairment of
Goodwill and Indefinite-Lived Intangible Assets. Goodwill and
indefinite-lived intangible assets are tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the assets might
be impaired. The Company performs its annual review at the beginning of
the fourth quarter of each fiscal year.
The
Company evaluates the recoverability of goodwill by estimating the future
discounted cash flows of the businesses to which the goodwill relates.
Estimated cash flows and related goodwill are grouped at the reporting unit
level. A reporting unit is an operating segment or, under certain
circumstances, a component of an operating segment that constitutes a
business. When estimated future discounted cash flows are less than the
carrying value of the net assets and related goodwill, an impairment test is
performed to measure and recognize the amount of the impairment loss, if
any. Impairment losses, limited to the carrying value of goodwill,
represent the excess of the carrying amount of a reporting unit’s goodwill over
the implied fair value of that goodwill. In determining the estimated
future cash flows, the Company considers current and projected future levels of
income as well as business trends, prospects and market and economic
conditions.
The
Company cannot predict the occurrence of certain events that might adversely
affect the carrying value of goodwill and indefinite-lived intangible assets.
Such events may include, but are not limited to, the impact of the economic
environment, a material negative change in relationships with significant
customers, or strategic decisions made in response to economic and competitive
conditions. See “Critical Accounting Estimates.”
Revenue
Recognition. Revenue is generated from wholesale and retail
sales of rare coins, precious metals, bullion and second-hand jewelry. 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. The Company recognizes sales on an F.O.B. shipping point basis.
The
Company sells rare coins to other wholesalers/dealers within its industry on
credit, generally for terms of 14 to 60 days, but in no event greater than one
year. The Company grants credit to new dealers based on extensive credit
evaluations and for existing dealers based on established business relationships
and payment histories. The Company generally does not obtain collateral with
which to secure its accounts receivable when the sale is made to a dealer.
The Company maintains reserves for potential credit losses based on an
evaluation of specific receivables and its historical experience related to
credit losses. See “Critical Accounting Estimates”.
Revenues
for monetary transactions (i.e., cash and receivables) with dealers are
recognized when the merchandise is shipped to the related dealer.
DGSE
COMPANIES, Inc. and Subsidiaries
The
Company also sells rare coins to retail customers on credit, generally for terms
of 30 to 60 days, but in no event greater than one year. The Company
grants credit to new retail customers based on extensive credit evaluations and
for existing retail customers based on established business relationships and
payment histories. When a retail customer is granted credit, the Company
generally collects a payment of 25% of the sales price, establishes a payment
schedule for the remaining balance and holds 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, the Company 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, revenues are recognized when the customer agrees to the
terms of the credit and makes the initial payment. We have a
limited-in-duration money back guaranty policy (as discussed
below).
In
limited circumstances, the Company exchanges merchandise for similar merchandise
and/or monetary consideration with both dealers and retail customers, for which
the Company recognizes revenue in accordance with SFAS 153, “ Exchanges of Nonmonetary Assets – An
Amendment of APB Opinion No. 29 .” When the Company exchanges merchandise
for similar merchandise and there is no monetary component to the exchange, the
Company does 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 the Company exchanges
merchandise for similar merchandise and there is a monetary component to the
exchange, the Company recognizes 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.
The
Company has a return policy (money-back guarantee). The policy covers
retail transactions involving graded rare coins only. 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, 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.
Any customer may return a coin if they can demonstrate that the coin is not
authentic, or there was an error in the description of a graded coin.
Revenues
from the sale of consigned goods are recognized as commission income on such
sale if the Company is acting as an agent for the consignor. If in the process
of selling consigned goods, the Company makes 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 the Company at that
payment date, the Company records that payment as a purchase and the sale of the
consigned good(s) to the buyer as revenue as the Company has assumed all
collection risk.
Pawn
loans (“loans”) are made with the collateral of tangible personal property for
one month with an automatic 60-day extension period. Pawn service charges
are recorded at the time of redemption at the greater of $15 or the actual
interest accrued to date. If the loan is not repaid, the principal amount
loaned plus accrued interest (or the fair value of the collateral, if lower)
becomes the carrying value of the forfeited collateral (“inventories”) which is
recovered through sales to customers.
Income
Taxes. Income taxes are estimated for each jurisdiction in
which we operate. This involves assessing the current tax exposure together with
temporary differences resulting from differing treatment of items for tax and
financial statement accounting purposes. Any resulting deferred tax assets are
evaluated for recoverability based on estimated future taxable income. To the
extent that recovery is deemed not likely, a valuation allowance is
recorded. See “Critical Accounting Estimates”.
Taxes
Collected From Customers
In June
of 2006, the FASB issued Emerging Issues Task Force 06-03, "How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement" ("EITF 06-03"). The consensus reached in EITF 06-03 allows
companies to adopt a policy of presenting taxes in the income statement on
either a gross basis (included in revenues and costs) or net basis (excluded
from revenues). Taxes within the scope of EITF 06-03 would include taxes that
are imposed on a revenue transaction between a seller and a customer, for
example, sales taxes, use taxes, value-added taxes and some types of excise
taxes. The Company has consistently recorded all taxes within the scope of EITF
06-03 on a net basis.
Inventories.
The Company acquires a majority of its retail jewelry inventory from
individuals that is pre-owned. The Company acquires the jewelry based on
its own internal estimate of the fair market value of the items offered for sale
considering factors such as the current spot market prices of precious metals
and current demand for the items offered for sale. Because the overall
market value for precious metals fluctuates, these fluctuations could have
either a positive or negative impact to the profitability of the Company.
The Company monitors these fluctuations to evaluate any impairment to its retail
jewelry inventory.
DGSE
COMPANIES, Inc. and Subsidiaries
Allowance
for Doubtful Accounts.
The allowance for doubtful accounts requires management to estimate a
customer’s ability to satisfy its obligations. The estimate of the
allowance for doubtful accounts is particularly critical in the Company’s
wholesale coin segment where a significant amount of the Company’s trade
receivables are recorded. The Company evaluates the collectability of
receivables based on a combination of factors. In circumstances where the
Company is aware of a specific customer’s inability to meet its financial
obligations, a specific reserve is recorded against amounts due to reduce the
net recognized receivable to the amount reasonably expected to be
collected. Additional reserves are established based upon the Company’s
perception of the quality of the current receivables, including the length of
time the receivables are past due, past experience of collectability and
underlying economic conditions. If the financial condition of the
Company’s customers were to deteriorate resulting in an impairment of their
ability to make payments, additional reserves would be required.
Impairment of
Goodwill and Indefinite-Lived Intangible Assets. In
evaluating the recoverability of goodwill, it is necessary to estimate the fair
value of the reporting units. The estimate of fair value of intangible
assets is generally determined on the basis of discounted future cash
flows. The estimate of fair value of the reporting units is generally
determined on the basis of discounted future cash flows supplemented by the
market approach. In estimating the fair value, management must make
assumptions and projections regarding such items as future cash flows, future
revenues, future earnings and other factors. The assumptions used in the
estimate of fair value are generally consistent with the past performance of
each reporting unit and are also consistent with the projections and assumptions
that are used in current operating plans. Such assumptions are subject to
change as a result of changing economic and competitive conditions. The
rate used to discount estimated cash flows is a rate corresponding to the
Company’s cost of capital, adjusted for risk where appropriate, and is dependent
upon interest rates at a point in time. There are inherent uncertainties
related to these factors and management’s judgment in applying them to the
analysis of goodwill impairment. It is possible that assumptions
underlying the impairment analysis will change in such a manner to cause further
impairment of goodwill, which could have a material impact on the Company’s
results of operations.
During
the 4th quarter
of 2008, given the sustained decline in the price of the Company’s Common Stock
during 2008 when its share price approximated book value, continued operating
losses within the auction segment, as well as further deterioration in credit
markets and the macro-economic environment, the Company determined that the
appropriate triggers had been reached to perform additional impairment testing
on goodwill and its indefinite-lived intangible assets.
To derive
the fair value of its reporting units, the Company performed extensive valuation
analyses, utilizing both income and market approaches. Under the income
approach, the Company determined fair value based on estimated future cash flows
discounted by an estimated weighted-average cost of capital, which reflects the
overall level of inherent risk of a reporting unit and the rate of return an
outside investor would expect to earn. Estimated future cash flows were
based on the Company’s internal projection models, industry projections and
other assumptions deemed reasonable by management. For the impairment
analysis, the Company used a weighted-average cost of capital of 20% and a
terminal growth rate of 3%. Under the market approach, the Company
evaluated the fair value of its reporting units based on the overall actual
market capitalization trend of the Company as compared to the net book value of
the Company. Changes in estimates or the application of alternative
assumptions could produce significantly different results.
As a
result of this analysis, $8,185,443 of goodwill was written off during the
4th
quarter of fiscal 2008 relating to the goodwill resulting from the Superior
Galleries acquisition. The evaluation of other long-lived intangible
assets relating to the Superior Galleries acquisition, including tradenames,
were not written off due to new business generated from the Superior Galleries,
Inc.’s acquired tradenames through the establishment of two new entities,
Superior Estate Buyers and Superior Precious Metals, which attracted
approximately $9.8 million and $1.8 million, respectively, in revenues in their
first full year of operations in 2008. These charges were driven by
current projections and valuation assumptions that reflected the Company’s
belief that the Superior Galleries, Inc. wholesale auction and coin segments
would not sustain adequate growth and profitability to generate cash flow,
especially in the current downtown in the economy.
The
analysis of the wholesale watch sales division resulting from the acquisition of
Fairchild with a carrying value of goodwill of $837,117 resulted in no
impairment as its estimated future discounted cash flows significantly exceeded
the net assets and related goodwill.
DGSE
COMPANIES, Inc. and Subsidiaries
Income
Taxes.
The Company records deferred income tax assets and liabilities for
differences between the book basis and tax basis of the related net assets. The
Company records a valuation allowance, when appropriate, to adjust deferred tax
asset balances to the amount management expects to realize. Management
considers, as applicable, the amount of taxable income available in carryback
years, future taxable income and potential tax planning strategies in assessing
the need for a valuation allowance. The Company has recorded the net present
value of the future expected benefits of the net operating loss (NOL)
carryforward related to its subsidiary Superior Galleries, Inc. due to IRS loss
limitation rules. The Company will require future taxable income to fully
realize the net deferred tax asset resulting from the NOL.
As of
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
Taxes (“FIN 48”). The adoption did not have a material impact on the
Company’s consolidated financial statements or effective tax rate and did not
result in any unrecognized tax benefits.
Interest
costs and penalties related to income taxes are classified as interest expense
and general and administrative costs, respectively, in the Company’s
consolidated financial statements. For the years ended December 31, 2008
and 2007, the Company did not recognize any interest or penalty expense related
to income taxes. It is determined not to be reasonably likely for the amounts of
unrecognized tax benefits to significantly increase or decrease within the next
12 months. The Company is currently subject to a three year statute of
limitations by major tax jurisdictions. The Company and its subsidiaries file
income tax returns in the U.S. federal jurisdiction.
DGSE
COMPANIES, Inc. and Subsidiaries
Results
of Operations
Three
Months Ended June 30, 2009 compared to Three Months Ended June 30,
2008
Sales
decreased by $3,512,000 or 14.0%, during the three months ended June 30, 2009 as
compared to 2008. This decrease was primarily the result of a $2,160,000,
or 27.8%, decrease in retail jewelry sales, a 1,664,000, or 13.9%, decrease in
the sale of precious metal products, and $291,000, or 25.5% decrease in our
wholesale jewelry sales during the second quarter of 2009 as compared to
2008. The decreases in precious metals sales were due to a decrease in
demand resulting from a less volatile gold market. The decrease in jewelry
sales was due to the sluggish retail environment. Cost of goods as a
percentage of sales decreased from 87.2% in 2008 to 84.2% in 2009. This
decrease was due to the decrease in precious metals revenue as a percentage of
total sales.
Selling,
general and administrative expenses decreased by $327,833, or 12.8%, during the
three months ended June 30, 2009 as compared to 2008. This decrease was
primarily due to an overhead cost saving program that we began in the first
quarter of 2009.
The
increase in interest expense is due to renewal charges on our line of
credit.
Income
tax expense is directly affected by the levels of pretax income and
non-deductible permanent differences. The Company’s effective tax rate for the
three months ended June 30, 2009 and 2008 were 15.6% and 26.2%,
respectively.
Historically, changes in the
market prices of precious metals have had a significant impact on both revenues
and cost of sales in the rare coin and precious metals segments in which we
operate. It is expected that due to the commodity nature of these products,
future price changes for precious metals will continue to be indicative of our
performance in these business segments. Changes in sales and cost of sales in
the retail and wholesale jewelry segments are primarily influenced by the
national economic environment. It is expected that this trend will continue in
the future due to the nature of these product.
Six
Months Ended June 30, 2009 compared to Six Months Ended June 30,
2008
Sales
decreased by $9,783,815 or 17.2%, during the six months ended June 30, 2009 as
compared to 2008. This decrease was primarily the result of a $2,125,000,
or 14.9%, decrease in retail jewelry sales, a 4,832,000, or 16.7%, decrease in
the sale of precious metal products, a $2,130,000 or 19.1% decrease in rare coin
sales and a $697,000, or 27.9% decrease in our wholesale jewelry sales during
the first half of 2009 as compared to 2008. The decreases in precious
metals and rare coin sales were due to a decrease in demand resulting from
a less volatile gold market. The decrease in jewelry sales was due to the
sluggish retail environment. Cost of goods as a percentage of sales
decreased from 88.1% in 2008 to 86.0% in 2009. This decrease was due to
the decrease in precious metals revenue as a percentage of total
sales.
Selling,
general and administrative expenses decreased by $391,417, or 8.0%, during the
six months ended June 30, 2009 as compared to 2008. This decrease was primarily
due to an overhead cost saving program that we began in the first quarter of
2009.
The
increase in interest expense is due to renewal charges on our line of
credit.
Income
tax expense is directly affected by the levels of pretax income and
non-deductible permanent differences. The Company’s effective tax rate for the
six months ended June 30, 2009 and 2008 were 34.0% and 35.61%,
respectively.
Liquidity
and Capital Resources
During
the six months ended June 30, 2009 and 2008 cash flows from operating activities
totaled $426,902 and $679,626, respectively. Cash flows from operating
activities during 2009 were primarily the result of a decrease in inventory
$279,219, a decrease in accounts payable and accrued expenses ($1,098,890), an
increase in federal income taxes payable $102,733,an increase in prepaid
expenses ($142,570), a decrease in customer deposits ($248,243) and a decrease
in trade receivables 875,159. The decrease in inventory and customer deposits
was due to a decrease in demand for precious metal products. The decrease in
trade receivables was a result of a decrease in the sales of wholesale jewelry
products. During 2008 the $679,626 cash flows from operating activities were
primarily used to fund the negative cash flows from investing
activities.
During
the six months ended June 30, 2009 and 2008 cash flows from investing activities
totaled $1,225,635 and ($717,015), respectively. During 2009 the primary
source of cash from investing activities was the result of cash received from
the sale of the Company’s pawn shops in June 2009. During 2008 the Company
invested $644,825 in property and equipment for it’s new facility in Dallas,
Texas.
DGSE
COMPANIES, Inc. and Subsidiaries
During
the six months ended June 30, 2009 and 2008 cash flows from financing activities
totaled ($652,095) and $434,892, respectively. The use of cash during 2009 was
the result of repayment of loans to Texas Capital Bank. These
sources of cash during 2008 were the result of borrowings against the Stanford
International Bank line of credit ($1,250,000). These funds were used to repay
notes payable.
We expect
capital expenditures to total approximately $100,000 during the next twelve
months. It is anticipated that these expenditures will be funded from
working capital. As of June 30,2009 there were no commitments outstanding
for capital expenditures.
In the
event of significant growth in retail and or wholesale jewelry sales, the demand
for additional working capital will expand due to a related need to stock
additional jewelry inventory and increases in wholesale accounts
receivable. Historically, vendors have offered us extended payment terms
to finance the need for jewelry inventory growth and our management believes
that we will continue to do so in the future. Any significant increase in
wholesale accounts receivable will be financed under a new bank credit facility
or from short-term loans from individuals.
Our
ability to finance our operations and working capital needs are dependent upon
management’s ability to negotiate extended terms or refinance its debt. We
have historically renewed, extended or replaced short-term debt as it matures
and management believes that we will be able to continue to do so in the near
future.
From time
to time, we have adjusted our inventory levels to meet seasonal demand or in
order to meet working capital requirements. Management is of the opinion that if
additional working capital is required, additional loans can be obtained from
individuals or from commercial banks. If necessary, inventory levels may
be adjusted in order to meet unforeseen working capital
requirements.
In
December 2005, we entered into a revolving credit facility with Texas
Capital Bank, N.A., which currently permits borrowings up to a maximum principal
amount of $4.03 million. Borrowings under the revolving credit facility are
collateralized by a general security interest in substantially all of our assets
(other than the assets of Superior). As of December 31, 2008, approximately
$4.0 million was outstanding under the term loan and revolving credit
facility. If we were to default under the terms and conditions of the revolving
credit facility, Texas Capital Bank would have the right to accelerate any
indebtedness outstanding and foreclose on our assets in order to satisfy our
indebtedness. Such a foreclosure could have a material adverse effect on our
business, liquidity, results of operations and financial position. This credit
facility matures in June 2009.
Upon the
consummation of our acquisition of Superior, and after the exchange by Stanford
of $8.4 million of Superior debt for shares of Superior common stock, Superior
amended and restated its credit facility with Stanford. The amended and restated
commercial loan and security agreement, which we refer to as the loan agreement,
decreased the available credit line from $19.89 million to $11.5 million,
reflecting the $8.4 million debt exchange. Interest on the outstanding principal
balance will continue to accrue at the prime rate, as reported in the Wall
Street Journal or, during an event of default, at a rate 5% greater than the
prime rate as so reported.
Loan
proceeds can only be used for customer loans inventory purchases and receivables
consistent with specified loan policies and procedures and for permitted
inter-company transactions. Permitted inter-company transactions are loans or
dividends paid to us or our other subsidiaries. We guaranteed the repayment of
these permitted inter-company transactions pursuant to a secured subordinated
guaranty in favor of Stanford. In connection with the secured guarantee,
Stanford and Texas Capital Bank, N.A., our primary lender, entered into an
intercreditor agreement with us, and we entered into a subordination agreement
with Superior, both of which subordinate Stanford's security interests and
repayment rights to those of Texas Capital Bank. As of December 31, 2008,
approximately $9.2 million was outstanding under this credit facility and
there were no intercompany transactions outstanding.
This
credit facility matures on May 1, 2011, provided that in case any of several
customary events of default occurs, Stanford may declare the entire principal
amount of both loans due immediately and take possession and dispose of the
collateral described below. An event of default includes, among others, the
following events: failure to make a payment when due under the loan agreement;
breach of a covenant in the loan agreement or any related agreement; a
representation or warranty made in the loan agreement or related agreements is
materially incorrect; a default in repayment of borrowed money to any person; a
material breach or default under any material contract; certain bankruptcy or
insolvency events; and a default under a third-party loan. Superior is
obligated to repay the first revolving loan from the proceeds of the inventory
or other collateral purchased with the proceeds of the loan.
The loans
are secured by a first priority security interest in substantially all of
Superior’s assets, including inventory, accounts receivable, promissory notes,
books and records and insurance policies, and the proceeds of the
foregoing. In addition, pursuant to the limited secured guaranty and
intercreditor arrangements described above, Stanford would have a second-order
security interest in all of our accounts and inventory to the extent of
intercompany transactions.
DGSE
COMPANIES, Inc. and Subsidiaries
The loan
agreement includes a number of customary covenants applicable to Superior,
including, among others: punctual payments of principal and interest under the
credit facility; prompt payment of taxes, leases and other indebtedness;
maintenance of corporate existence, qualifications, licenses, intellectual
property rights, property and assets; maintenance of satisfactory insurance;
preparation and delivery of financial statements for us and separately for
Superior in accordance with generally accepted accounting principles, tax
returns and other financial information; inspection of offices and collateral;
notice of certain events and changes; use of proceeds; notice of governmental
orders which may have a material adverse effect, SEC filings and stockholder
communications; maintenance of property and collateral; and payment of Stanford
expenses.
In
addition, Superior has agreed to a number of negative covenants in the loan
agreement, including, among others, covenants not to: create or suffer a lien or
other encumbrance on any collateral, subject to customary exceptions; incur,
guarantee or otherwise become liable for any indebtedness, subject to customary
exceptions; acquire indebtedness of another person, subject to customary
exceptions and permitted inter-company transactions; issue or acquire any shares
of its capital stock; pay dividends other than permitted inter-company
transactions or specified quarterly dividends, or directors’ fees; sell or
abandon any collateral except in the ordinary course of business or consolidate
or merge with another entity; enter into affiliate transactions other than in
the ordinary course of business on fair terms or permitted inter-company
transactions; create or participate in any partnership or joint venture; engage
in a new line of business; pay principal or interest on subordinate debt except
as authorized by the credit facility; or make capital expenditures in excess of
$100,000 per fiscal year
We have been informed that on February 19, 2009, a US district
court placed SIBL under
the supervision of a receiver and that the court enjoined SIBL's creditors and
other persons from taking certain actions related to SIBL or its
assets. In addition,
on the same date, Antiguan Financial Services Regulatory Commission appointed a
Receiver for Stanford International Bank Ltd. This action was subsequently
ratified by the High Court of Justice in Antigua and Barbuda. As a result
of SIBL's current status, we do not believe that Superior will be able to
borrow additional funds
under either revolving loan, including any amounts Superior is obligated to
repay to SIBL pursuant to the repayment provisions applicable to the first
revolving note. We believe that certain terms of
agreements entered into by us, Superior and/or
SIBL and its affiliates in connection with our acquisition of Superior
have been breached by SIBL or its
affiliates, and we are
evaluating available remedies, including but not limited to damages from
responsible parties. While Superior does not currently require additional funds
under the SIBL credit facility, should the need arise and Superior is unable to
replace this credit facility the operations and performance of Superior could be
materially adversely affected.
On
October 17, 2007, we closed on the purchase of our new headquarters
location. As a result, we assumed a new loan with a remaining principal
balance of $2,323,484 and an interest rate of 6.70%. The loan has required
monthly payments of $20,192 with the final payment due on August 1,
2016
The
covenants associated with our credit facility with Texas Capital Bank, N.A.
exclude Superior Galleries are as follows:
As
of June 30, 2009
|
|
Requirement
|
|
|
Actual
calculation
|
|
Minimum
tangible net worth
|
|
|
10,500,000
|
|
|
|
12,838,477
|
|
Maximum
total liabilities to tangible net worth
|
|
Not
to exceed 1.00
|
|
|
|
.53
|
|
Minimum
debt service coverage
|
|
Must
be greater than 1.40
|
|
|
|
2.06
|
|
|
|
Payments
due by period
|
|
Contractual Cash
Obligations
|
|
Total
|
|
|
2009
|
|
|
|
2010 - 2011
|
|
|
|
2012 – 2013
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
3,239,971 |
|
|
$ |
44,971 |
|
|
$ |
3,195,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Long-term
debt and capital leases
|
|
|
12,103,897 |
|
|
|
340,357 |
|
|
|
9,403,271 |
|
|
|
469,381 |
|
|
|
1,890,888 |
|
Operating
Leases
|
|
|
2,326,732 |
|
|
|
332,490 |
|
|
|
1,237,026 |
|
|
|
757,216 |
|
|
|
— |
|
Total
|
|
$ |
17,670,600 |
|
|
$ |
717,818 |
|
|
$ |
13,835,297 |
|
|
$ |
1,226,597 |
|
|
$ |
1,890,888 |
|
DGSE
COMPANIES, Inc. and Subsidiaries
In
addition, we estimate that we will pay approximately $600,000 in interest during
the next twelve months.
Off-Balance
Sheet Arrangements.
We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to stockholders.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
The
following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates and gold values. We are also exposed to regulatory risk in
relation to its pawn loans. We do not use derivative financial
instruments.
Our
earnings and financial position may be affected by changes in gold values and
the resulting impact on pawn lending and jewelry sales. The proceeds of scrap
sales and our ability to liquidate excess jewelry inventory at an acceptable
margin are dependent upon gold values. The impact on our financial position and
results of operations of a hypothetical change in gold values cannot be
reasonably estimated.
Item
4. Controls and Procedures.
Evaluation of disclosure controls
and procedures. An evaluation was performed under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this quarterly report. Our disclosure controls and procedures
are designed to ensure that information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934, as amended,
is (1) recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and (2)
accumulated and communicated to our management, including our Chief Executive
Officer, to allow timely decisions regarding required disclosure. Based on
that evaluation, our management, including our Chief Executive Officer and our
Chief Financial Officer, concluded that our disclosure controls and procedures
were effective.
Changes in internal
controls. For the quarter ended June 30, 2009, there have been
no changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
DGSE
COMPANIES, Inc. and Subsidiaries
PART
II- OTHER INFORMATION
Item
3. Legal Proceedings
We 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. Except as set
forth above, we are not currently involved in any such litigation which we
believe could have a material adverse effect on our financial condition or
results of operations, liquidity or cash flows.
Item
5. Other Information.
None.
Item
6. Exhibits and Reports
on Form 8-K.
Exhibits:
Exhibit
|
|
|
|
Filed
|
|
Incorporated
|
|
|
|
Date
Filed
|
|
Exhibit
|
|
No.
|
|
Description
|
|
Herein
|
|
by
Reference
|
|
Form
|
|
with
SEC
|
|
No.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Amended
and Restated Agreement and Plan of Merger and Reorganization, dated as of
January 6, 2007
|
|
|
|
×
|
|
8-K
|
|
January 9,
2007
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
Limited
Joinder Agreement, dated as of January 6, 2007
|
|
|
|
×
|
|
8-K
|
|
January 9,
2007
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation dated September 17, 1965
|
|
|
|
×
|
|
8-A12G
|
|
June 23,
1999
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Certificate
of Amendment to Articles of Incorporation, dated October 14,
1981
|
|
|
|
×
|
|
8-A12G
|
|
June 23,
1999
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Certificate
of Resolution, dated October 14, 1981
|
|
|
|
×
|
|
8-A12G
|
|
June 23,
1999
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Certificate
of Amendment to Articles of Incorporation , dated July 15,
1986
|
|
|
|
×
|
|
8-A12G
|
|
June 23,
1999
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Certificate
of Amendment to Articles of Incorporation, dated August 23,
1998
|
|
|
|
×
|
|
8-A12G
|
|
June 23,
1999
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
Certificate
of Amendment to Articles of Incorporation, dated June 26,
1992
|
|
|
|
×
|
|
8-A12G
|
|
June 23,
1999
|
|
|
3.6
|
|
DGSE
COMPANIES, Inc. and Subsidiaries
3.7
|
|
Certificate
of Amendment to Articles of Incorporation, dated June 26,
2001
|
|
|
|
×
|
|
8-K
|
|
July 3,
2001
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
Certificate
of Amendment to Articles of Incorporation, dated May 22,
2007
|
|
|
|
x
|
|
8-K
|
|
May
31, 2007
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9
|
|
By-laws,
dated March 2, 1992
|
|
|
|
×
|
|
8-A12G
|
|
June 23,
1999
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Specimen
Common Stock Certificate
|
|
|
|
×
|
|
S-4
|
|
January 6,
2007
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Renewal,
Extension And Modification Agreement dated January 28, 1994, by and among
DGSE Corporation and Michael E. Hall And Marian E. Hall
|
|
|
|
×
|
|
10-KSB
|
|
March
1995
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Lease
Agreement dated June 2, 2000 by and between SND Properties and
Charleston Gold and Diamond Exchange, Inc.
|
|
|
|
×
|
|
10-KSB
|
|
March 29,
2001
|
|
|
10.1
|
|
|
|
|
|
|
|
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|
10.3
|
|
Lease
agreement dated October 5, 2004 by and between Beltline Denton Road
Associates and Dallas Gold & Silver Exchange
|
|
|
|
×
|
|
10-K
|
|
April 15,
2005
|
|
|
10.2
|
|
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|
10.4
|
|
Lease
agreement dated December 1, 2004 by and between Stone Lewis Properties and
Dallas Gold & Silver Exchange
|
|
|
|
×
|
|
10-K
|
|
April 15,
2005
|
|
|
10.3
|
|
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10.5
|
|
Lease
agreement dated November 18, 2004 by and between Hinkle Income Properties
LLC and American Pay Day Centers, Inc.
|
|
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|
×
|
|
10-K
|
|
April 15,
2005
|
|
|
10.4
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|
10.6
|
|
Lease
Agreement dated January 17, 2005 by and between Belle-Hall Development
Phase III Limited Partnership and DGSE Companies, Inc.
|
|
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|
×
|
|
S-4
|
|
January 6,
2007
|
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|
10.6
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|
10.7
|
|
Sale
agreement dated executed July 5, 2007 by and between DGSE Companies,
Inc. and Texas Department of Transportation
|
|
|
|
×
|
|
8-K
|
|
July
11, 2007
|
|
|
10.1
|
|
DGSE
COMPANIES, Inc. and Subsidiaries
10.8
|
|
Purchase
agreement dated July 5, 2007 by and between DGSE Companies, Inc. and
11311 Reeder Road Holdings, LP
|
|
|
|
×
|
|
8-K
|
|
July
11, 2007
|
|
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10.2
|
|
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|
10.9
|
|
Loan
Agreement, dated as of December 22, 2005, between DGSE Companies,
Inc. and Texas Capital Bank, N.A.
|
|
|
|
×
|
|
8-K/A
|
|
August 17,
2006
|
|
|
10.1
|
|
|
|
|
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|
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|
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|
10.10
|
|
Third
Amendment to Loan Agreement, dated as of May 10, 2007, by and between DGSE
Companies, Inc. and Texas Capital Bank, N.A.
|
|
|
|
×
|
|
8-K
|
|
May
9, 2007
|
|
|
3.0
|
|
|
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|
|
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|
|
|
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|
|
10.11
|
|
Support
Agreement, DGSE stockholders, dated as of January 6,
2007
|
|
|
|
×
|
|
8-K
|
|
January 9,
2007
|
|
|
99.1
|
|
|
|
|
|
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|
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|
10.12
|
|
Securities
Exchange Agreement, dated as of January 6, 2007
|
|
|
|
×
|
|
8-K
|
|
January 9,
2007
|
|
|
99.2
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
10.13
|
|
Warrant
to DiGenova, issued January 6, 2007
|
|
|
|
×
|
|
8-K
|
|
January 9,
2007
|
|
|
99.3
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
10.14
|
|
Support
Agreement, Superior stockholders, dated as of January 6,
2007
|
|
|
|
×
|
|
8-K
|
|
January 9,
2007
|
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Asset
purchase agreement, dated May 9, 2007, by and between DGSE
Companies, Inc. and Euless Gold & Silver, Inc.
|
|
|
|
×
|
|
8-K
|
|
May
9, 2007
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Subordinated
Promissory Note dated May 9, 2007
|
|
|
|
×
|
|
8-K
|
|
May
9, 2007
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Registration
Rights Agreement with Stanford International Bank Ltd., dated as of May
30, 2007
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Corporate
Governance Agreement with Dr. L.S. Smith and Stanford International Bank
Ltd., dated as of May 30, 2007
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.2
|
|
DGSE
COMPANIES, Inc. and Subsidiaries
10.19
|
|
Escrow
Agreement with American Stock Transfer & Trust Company and Stanford
International Bank Ltd., as stockholder agent, dated as of May 30,
2007
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Form
of Warrants
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
Amended
and Restated Commercial Loan and Security Agreement, by and between
Superior Galleries Inc. and Stanford International Bank Ltd., dated as of
May 30, 2007
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
Employment
Agreement with L.S. Smith, dated as of May 30, 2007
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Employment
Agreement with William H. Oyster, dated as of May 30, 2007
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Employment
Agreement with John Benson, dated as of May 30, 2007
|
|
|
|
×
|
|
8-K
|
|
May
31, 2007
|
|
|
99.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Dr.
L.S. Smith
|
|
×
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John
Benson
|
|
×
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Dr. L.S.
Smith
|
|
×
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by John
Benson
|
|
×
|
|
|
|
|
|
|
|
|
|
|
Reports
on Form 8-K :
None.
SIGNATURES
In
accordance with Section 13 and 15(d) of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DGSE
Companies, Inc.
|
|
|
|
By:
|
/s/ L. S. Smith
|
Dated:
March 19, 2009
|
|
L.
S. Smith
|
|
|
Chairman
of the Board,
|
|
|
Chief
Executive Officer and
|
|
|
Secretary
|
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
By:
|
/s/ L. S. Smith
|
Dated:
March 19, 2009
|
|
L.
S. Smith
|
|
|
Chairman
of the Board,
|
|
|
Chief
Executive Officer and
|
|
|
Secretary
|
|
By:
|
/s/ W. H. Oyster
|
Dated:
March 19, 2009
|
|
W.
H. Oyster
|
|
|
Director,
President and
|
|
|
Chief
Operating Officer
|
|
By:
|
/s/ John Benson
|
Dated:
March 19, 2009
|
|
John
Benson
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Accounting Officer)
|
|