UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q\A
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 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 o | Accelerated filer o |
Non-accelerated filer o | 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 |
Reason for Amendment
To provide the certifications required by Rule 13a-14(b) (17CFR 240.13a-(14(b)) or Rule 15d-14(b) (17) CFR 240.15d – 12(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
TABLE OF CONTENTS
Page No. | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Consolidated Financial Statements. | |
Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 | 1 | |
Consolidated Statements of Operations for the nine months ended | 2 | |
September, 30, 2009 and 2008 | ||
Consolidate Statements of Operations for the three months ended | ||
September 30, 2009 and 2008 | 3 | |
Consolidated Statements of Cash Flows for the nine months ended | 4 | |
September 30, 2009 and 2008 | ||
Notes to Consolidated Financial Statements | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition | 11 |
and Results of Operations. | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 18 |
Item 4. | Controls and Procedures. | 18 |
PART II. | OTHER INFORMATION | |
Item 3. | Legal Proceedings. | 19 |
Item 5. | Other Information. | 19 |
Item 6. | Exhibits. | 19 |
SIGNATURES |
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DGSE Companies, Inc. and Subsidiaries
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
September 2009 | December 31, 2008 | |||||||
Unaudited | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,186,204 | $ | 244,429 | ||||
Trade receivables | 1,409,770 | 2,326,337 | ||||||
Inventories | 15,603,916 | 16,052,833 | ||||||
Prepaid expenses | 561,838 | 533,318 | ||||||
Prepaid federal income tax | 544,769 | 639,372 | ||||||
Current assets of discontinued operations | —0— | 900,306 | ||||||
Total current assets | 19,306,497 | 20,696,595 | ||||||
Property and equipment, net | 4,920,153 | 4,868,306 | ||||||
Deferred income taxes | 1,887,994 | 1,908,032 | ||||||
Goodwill | 837,117 | 837,117 | ||||||
Intangible assets | 2,464,006 | 2,492,673 | ||||||
Other assets | 285,093 | 235,917 | ||||||
Non-current assets of discontinued operations | 305,275 | 305,275 | ||||||
$ | 30,006,135 | $ | 31,343,915 | |||||
LIABILITIES | ||||||||
Current Liabilities: | ||||||||
Notes payable | $ | 44,971 | $ | 191,078 | ||||
Current maturities of long-term debt | 328,162 | 599,972 | ||||||
Line of credit | 3,195,000 | 3,595,000 | ||||||
Accounts payable – trade | 252,879 | 734,906 | ||||||
Accrued expenses | 239,846 | 647,536 | ||||||
Customer deposits | 461,456 | 1,230,991 | ||||||
Current liabilities of discontinued operations | —0— | 33,144 | ||||||
Total current liabilities | 4,522,314 | 7,032,627 | ||||||
Long-term debt, less current maturities | 11,651,387 | 11,715,765 | ||||||
16,173,701 | 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 | 18,589,812 | 18,541,662 | ||||||
Retained deficit | (4,855,715 | ) | (6,044,476 | ) | ||||
13,832,434 | 12,595,523 | |||||||
$ | 30,006,135 | $ | 31,343,915 |
The accompanying notes are an integral part of these consolidated financial statements
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DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended September 30, | ||||||||
2009 | 2008 | |||||||
Unaudited | ||||||||
Revenue | ||||||||
Sales | $ | 63,254,038 | $ | 80,249,402 | ||||
Costs and expenses | ||||||||
Cost of goods sold | 53,677,847 | 70,461,581 | ||||||
Selling, general and administrative expenses | 6,770,875 | 7,507,411 | ||||||
Depreciation and amortization | 196,145 | 197,445 | ||||||
60,644,867 | 78,166,437 | |||||||
Operating income | 2,609,171 | 2,082,965 | ||||||
Other expense (income) | ||||||||
Other income | — | (11,635 | ) | |||||
Interest expense | 608,241 | 511,127 | ||||||
Earnings before income taxes | 2,000,930 | 1,583,473 | ||||||
Income tax expense | 430,385 | 444,346 | ||||||
Net earnings from continuing operations | 1,570,545 | 1,139,127 | ||||||
Discontinued operations: | ||||||||
Loss from discontinued operations (less applicable income tax (benefit) of ($180,552) and $36,930, respectively) | (381,784 | ) | (6,162 | ) | ||||
Net earnings | $ | 1,188,761 | 1,132,965 | |||||
Earnings per common share – basic | ||||||||
From continuing operations | $ | 0.16 | $ | 0.11 | ||||
From discontinued operations | $ | (0.04 | ) | $ | (0.00 | ) | ||
Net earnings per common share | $ | 0.12 | $ | 0.11 | ||||
Earnings per common share – diluted | ||||||||
From continuing operations | $ | 0.16 | $ | 0.12 | ||||
From discontinued operations | $ | (0.04 | ) | $ | (0.01 | ) | ||
Net earnings per common share | $ | 0.12 | $ | 0.11 | ||||
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
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DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September | ||||||||
2009 | 2008 | |||||||
Unaudited | ||||||||
Revenue | ||||||||
Sales | 16,280,397 | 23,491,946 | ||||||
16,280,397 | 23,491,946 | |||||||
Costs and expenses | ||||||||
Cost of goods sold | 13,286,097 | 20,417,850 | ||||||
Selling, general and administrative expenses | 2,185,049 | 2,530,171 | ||||||
Depreciation and amortization | 78,463 | 65,812 | ||||||
15,549,609 | 23,013,833 | |||||||
Operating income | 730,788 | 478,113 | ||||||
Other expense (income) | ||||||||
Other income | — | ——— | ||||||
Interest expense | 223,685 | 165,491 | ||||||
Earnings before income taxes | 507,103 | 312,622 | ||||||
Income tax expense | 197,202 | 111,229 | ||||||
Net earnings from continuing operations | 309,901 | 201,393 | ||||||
Discontinued operations: | ||||||||
Income from discontinued operations (less applicable income tax of $13,647 and $36,930, respectively) | (40,160 | ) | (35,607 | ) | ||||
Net earnings | $ | 269,741 | $ | 165,786 | ||||
Earnings per common share – basic and diluted | ||||||||
From continuing operations | $ | 0.03 | $ | 0.02 | ||||
From discontinued operations | $ | 0.00 | $ | 0.02 | ||||
Net earnings per common share | $ | 0.03 | $ | 0.02 | ||||
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
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DGSE COMPANIES, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September | ||||||||
2009 | 2008 | |||||||
Unaudited | ||||||||
Cash flows from operating activities | ||||||||
Net earnings | $ | 1,188,761 | $ | 1,132,965 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||
Depreciation and amortization | 196,145 | 281,654 | ||||||
Deferred income taxes | 20,038 | 88,074 | ||||||
Gain on marketable securities | — | 41,237 | ||||||
Loss on discontinued operations | (381,784 | ) | — | |||||
(Increase) decrease in operating assets and liabilities | ||||||||
Trade receivables | 916,567 | 253,500 | ||||||
Inventories | 448,917 | (2,123,751 | ) | |||||
Prepaid expenses and other current assets | ( 28,520 | ) | (263,925 | ) | ||||
Accounts payable and accrued expenses | (992,151 | ) | 799,884 | |||||
Customer deposits | (769,535 | ) | 258,895 | |||||
Federal income taxes payable | 94,603 | 116,133 | ||||||
Other assets | (49,176 | ) | 17,822 | |||||
Net cash provided by operating activities | 643,865 | 1,136,814 | ||||||
Cash flows from investing activities | ||||||||
Pawn loans made | — | (954,746 | ) | |||||
Pawn loans repaid | — | 463,188 | ||||||
Recovery of pawn loan principal through sale of forfeited collateral | — | 471,701 | ||||||
Proceeds from sale of discontinued operations | 1,324,450 | — | ||||||
Purchase of property and equipment | (290,352 | ) | (901,871 | ) | ||||
Merger cost paid | (61,699 | ) | ||||||
Net cash provided by (used in) investing activities | 1,034,098 | (983,497 | ) | |||||
Cash flows from financing activities | ||||||||
Proceeds from line of credit | — | 2,150,000 | ||||||
Payments of capital lease | — | — | ||||||
Repayments of notes payable | (736,188 | ) | (905,352 | ) | ||||
Net cash provided by (used in) financing activities | (736,188 | ) | 1,244,648 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 941,775 | 1,397,965 | ||||||
Cash and cash equivalents at beginning of period | 244,429 | 536,548 | ||||||
Cash and cash equivalents at end of period | $ | 1,186,204 | $ | 1,943,513 |
Supplemental disclosures:
Interest paid for the nine months ended September 30, 2009 and 2008 was $608,241 and $511,127, respectively.
Income taxes paid for the nine months ended September 30, 2009 and 2008 was $0 and $0, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
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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.
(2) 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 (ASC 350), 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.
· 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.
(3) 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:
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DGSE COMPANIES, Inc. and Subsidiaries
2009 | 2008 | |||||||||||||||||||||||
Three months ended September 30, | Three months ended September 30, | |||||||||||||||||||||||
Net Earnings | Shares | Per share | Net Earnings | Shares | Per share | |||||||||||||||||||
Basic earnings per common share | $ | 269,741 | 9,833,635 | $ | 0.03 | $ | 165,786 | 9,498,729 | $ | 0.02 | ||||||||||||||
Effect of dilutive stock options | — | — | — | — | 845,634 | 0.00 | ||||||||||||||||||
Diluted earnings per common share | $ | 269,741 | 9,833,635 | $ | 0.3. | $ | 165,786 | 10,344,363 | $ | 0.02 |
Earnings per common share from continuing operations: | 2009 | 2008 | ||||||||||||||||||||||
Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
Net Earnings | Shares | Per share | Net Earnings | Shares | Per share | |||||||||||||||||||
Basic earnings per common share | $ | 1,188,761 | 9,833,635 | $ | 0.12 | $ | 1,132,965 | 9,666,182 | $ | 0.11 | ||||||||||||||
Effect of dilutive stock options | — | — | — | — | 845,634 | — | ||||||||||||||||||
Diluted earnings per common share | $ | 1,188,761 | 9,833,635 | $ | 0.12 | $ | 1,132,965 | 10,344,363 | $ | 0.11 |
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DGSE COMPANIES, Inc. and Subsidiaries
(4) 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. Our operations by segment for the three months ended September 30 were as follows:
(In thousands) | Retail Jewelry | Wholesale Jewelry | Precious Metals | Rare Coins | Discontinued Operations | Corporate and Other | Consolidated | |||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
2009 | $ | 5,734 | $ | 872 | $ | 7,203 | $ | 2,471 | $ | — | $ | — | $ | 16,280 | ||||||||||||||
2008 | 6,035 | 1,148 | 11,399 | 4,909 | — | — | 23,491 | |||||||||||||||||||||
Net earnings (loss) | ||||||||||||||||||||||||||||
2009 | 207 | (22 | ) | 61 | 107 | (40 | ) | (43 | ) | 270 | ||||||||||||||||||
2008 | 67 | (14 | ) | 38 | 59 | (36 | ) | 52 | 166 | |||||||||||||||||||
Identifiable assets | ||||||||||||||||||||||||||||
2009 | 23,267 | 1,779 | 1,951 | 2,386 | 305 | 318 | 30,006 | |||||||||||||||||||||
2008 | 19,315 | 1,073 | 1,289 | 2,801 | 2,973 | 13,337 | 40,788 | |||||||||||||||||||||
Goodwill | ||||||||||||||||||||||||||||
2009 | — | 837 | — | — | — | — | 837 | |||||||||||||||||||||
2008 | — | 837 | — | 7,267 | 848 | — | 8,952 | |||||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||||||||||
2009 | 200 | — | — | — | — | — | 200 | |||||||||||||||||||||
2008 | 234 | — | — | — | 22 | — | 256 | |||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||||||
2009 | 78 | — | — | — | — | - | 78 | |||||||||||||||||||||
2008 | 38 | — | 14 | 13 | — | — | 65 | |||||||||||||||||||||
Income tax | ||||||||||||||||||||||||||||
2009 | $ | 169 | (12 | ) | (12 | ) | 77 | (12 | ) | (13 | ) | 197 | ||||||||||||||||
2008 | 66 | 1 | 42 | 27 | ( 3 | ) | (22 | ) | 111 | |||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||||
2009 | 66 | 26 | 66 | 66 | — | — | 224 | |||||||||||||||||||||
2008 | 136 | — | 29 | 165 | ||||||||||||||||||||||||
Significant non-cash items | ||||||||||||||||||||||||||||
Other than depreciation and | ||||||||||||||||||||||||||||
Amortization | ||||||||||||||||||||||||||||
2009 | — | — | — | — | — | — | — | |||||||||||||||||||||
2008 | — | — | — | — | — | — | — |
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DGSE COMPANIES, Inc. and Subsidiaries
Our operations by segment for the Nine months ended September 30 were as follows:
(In thousands) | Retail Jewelry | Wholesale Jewelry | Precious Metals | Rare Coins | Discontinued Operations | Corporate and Other | Consolidated | |||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
2009 | $ | 17,881 | $ | 2,672 | $ | 31,227 | $ | 11,474 | $ | — | $ | — | $ | 63,254 | ||||||||||||||
2008 | 20,306 | 3,645 | 40,256 | 16,042 | — | — | 80,249 | |||||||||||||||||||||
Net earnings (loss) | ||||||||||||||||||||||||||||
2009 | 689 | (99 | ) | 481 | 600 | (382 | ) | (100 | ) | 1,189 | ||||||||||||||||||
2008 | 682 | 34 | 410 | 71 | (6 | ) | (58 | ) | 1,133 | |||||||||||||||||||
Identifiable assets | ||||||||||||||||||||||||||||
2009 | 23,267 | 1,779 | 1,951 | 2,386 | 305 | 318 | 30,006 | |||||||||||||||||||||
2008 | 19,315 | 1,073 | 1,289 | 2,801 | 2,973 | 13,337 | 40,788 | |||||||||||||||||||||
Goodwill | ||||||||||||||||||||||||||||
2009 | — | 837 | — | 7,267 | 848 | — | 837 | |||||||||||||||||||||
2008 | — | 837 | — | — | — | 8,115 | 8,952 | |||||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||||||||||
2009 | 290 | — | — | — | — | — | 290 | |||||||||||||||||||||
2008 | 754 | — | — | — | — | 148 | 902 | |||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||||||
2009 | 196 | — | — | — | — | - | 196 | |||||||||||||||||||||
2008 | 115 | — | 41 | 41 | — | — | 197 | |||||||||||||||||||||
Income tax expense (benefit) | ||||||||||||||||||||||||||||
2009 | 421 | (27 | ) | 132 | 164 | (160 | ) | (100 | ) | 430 | ||||||||||||||||||
2008 | 428 | (4 | ) | 23 | 17 | ( 3 | ) | (17 | ) | 444 | ||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||||
2009 | 175 | 83 | 175 | 175 | — | — | 608 | |||||||||||||||||||||
2008 | 422 | — | 44 | 45 | 511 | |||||||||||||||||||||||
Significant non-cash items | ||||||||||||||||||||||||||||
Other than depreciation and | ||||||||||||||||||||||||||||
Amortization | ||||||||||||||||||||||||||||
2009 | — | — | — | — | — | — | — | |||||||||||||||||||||
2008 | — | — | — | — | — | — | — |
(5) Stock-based Compensation.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment , (SFAS No. 123(R)) (ASC 718) for all share-based payment awards to employees and directors including stock options related to our employee stock purchase plan. In addition, we applied the provisions of Staff Accounting Bulletin No. 107 (SAB No. 107), issued by the SEC, in our adoption of SFAS No. 123(R).
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DGSE COMPANIES, Inc. and Subsidiaries
We adopted SFAS No. 123(R) )) (ASC 718) using the modified-prospective-transition method. Under this transition method, stock-based compensation expense recognized after the effective date includes: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the measurement date fair value estimate in accordance with the original provisions of SFAS No. 123, and (2) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the measurement date fair value estimate in accordance with the provisions of SFAS No. 123(R) )) (ASC 718).
Stock-based compensation expense recognized each period is based on the greater of the value of the portion of share-based payment awards under the straight-line method or the value of the portion of share-based payment awards that is ultimately expected to vest during the period. In accordance with SFAS No. 123(R) )) (ASC 718), we estimate forfeitures at the time of grant and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Upon adoption of SFAS No. 123(R) )) (ASC 718), 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) )) (ASC 718). 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) )) (ASC 718). The tax effect of employee stock-based compensation has no APIC pool.
SFAS No. 123(R) )) (ASC 718) 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. There has been no excess tax benefit as of December 31, 2008, 2007 and 2006.
(6) 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 nine 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 September 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 September 30, 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. As a result, operating results from National Jewelry Exchange have been reclassified to discontinued operations for all periods presented. During the nine months ended September 30, 2009 the two pawn shops incurred a pre tax loss of $10,040. During the nine months ended September 30, 2008 the two pawn shops had pre tax income of $13,598.
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DGSE COMPANIES, Inc. and Subsidiaries
(7) | New Accounting Pronouncements. |
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (The Codification). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company’s references to U.S. GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”) (ASC850), 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) ASC850). 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) ASC850)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.
SFAS No. 165, Subsequent Events issued by the FASB in May 2008 [ASC 855], establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. SFAS No. 165 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date should be disclosed if the financial statements would otherwise be misleading. Disclosures should include the nature of the event and either an estimate of its financial effect or a statement that an estimate cannot be made. SFAS No. 165 is effective for interim and annual financial periods ending after June 15, 2009, and should be applied prospectively. The requirements under this standard did not impact our financial condition or results of operations because they are consistent with our current practice.
We evaluated subsequent events through November 16, 2009, the dated the financial statements were issued.
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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; |
· | interest rates; |
· | 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. |
Additionalimportant 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. 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.
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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.
Significant Accounting Policies
Inventory. Jewelry and other inventory is valued at lower-of-cost-or-market (specific identification). Bullion inventory is valued at lower-of-cost-or-market (average cost).
Accounts Receivable. We record trade receivables when revenue is recognized. No product has been consigned to customers. Our allowance for doubtful accounts is primarily determined by review of specific trade receivables. Those accounts that are doubtful of collection are included in the allowance. These provisions are reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms.
Impairment of Long-Lived Assets. Long-lived assets are periodically reviewed for impairment by comparing the carrying value of the assets with their estimated undiscounted future cash flows. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow method using a discount rate that is considered to be commensurate with the risk inherent in our current business model. Assumptions are made with respect to cash flows expected to be generated by the related assets based upon updated projections. Any changes in key assumptions, particularly store performance or market conditions, could result in an unanticipated impairment charge. Any impairment would be recognized in operating results.
Goodwill. In accordance with SFAS No. 142 (ASC350) and Other Intangible Assets," we test goodwill for impairment annually, at the time of a triggering event, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting unit's net assets below its carrying value. An impairment is deemed to exist if the estimated fair value is less than the net book value of a reporting unit. During the 4th quarter of 2008, there were a number of triggering events due to the significant operating losses of Superior and the impact of the economic downturn of Superiors’ 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. | |
· | 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 the Company believes has merit, and resulted in the determination that goodwill was impaired. Accordingly, to reflect the impairment, the Company recorded a non-cash charge of $8,185,443, which eliminated the value of the goodwill related to Superior.
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.
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DGSE COMPANIES, Inc. and Subsidiaries
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.
Revenues for monetary transactions (i.e., cash and receivables) with dealers are recognized when the merchandise is shipped to the related dealer.
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 (ASC845) 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.
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.
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DGSE COMPANIES, Inc. and Subsidiaries
Fair Value Measures. In September 2006, the FASB issued SFAS No. 157 (ASC820), “Fair Value Measures” (“SFAS No. 157”) (ASC820). SFAS No. 157(ASC820) defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 (ASC820) is effective for fiscal years beginning after November 15, 2007. Effective January 1, 2008, the Company has adopted the provisions of SFAS 157 (ASC820).
SFAS No. 157 (ASC820) emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 (ASC820) establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The adoption did not have any financial impact on the Company’s results of operations and financial position.
Adoption of Accounting Standards Codification (“ASC”)
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (The Codification). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company’s references to U.S. GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.
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DGSE COMPANIES, Inc. and Subsidiaries
Results of Operations
Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008
Sales decreased by $7,211,000 or 31.0%, during the three months ended September 30, 2009 as compared to 2008. This decrease was primarily the result of a $301,000, or 5.0%, decrease in retail jewelry sales, a 4,196,000, or 36.8%, decrease in the sale of precious metal products, a $2,438,000 or 49.7% decrease in the sale of rare coins and a $276,000, or 24.0%. The decreases in precious metals sales was due to a reduced availability of precious metal products and the reduction of activity at Superior as a result of the discontinuance of the auction business segment. The decrease in jewelry sales was due to the sluggish retail environment. Cost of goods as a percentage of sales decreased from 87.0% in 2008 to 81.6% 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 $345,122, or 13.6%, during the three months ended September 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 taxes are provided at the rate of 38.9 % and 35.6% for 2009 and 2008, 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.
Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008
Sales decreased by $16,995,364 or 21.2%, during the nine months ended September 30, 2009 as compared to 2008. This decrease was primarily the result of a $2,425,000, or 11.9%, decrease in retail jewelry sales, a 9,029,000, or 22.4%, decrease in the sale of precious metal products, a $4,568,000 or 28.5% decrease in rare coin sales and a $973,000, or 26.7% decrease in our wholesale jewelry sales during the first nine months of 2009 as compared to 2008. The decreases in precious metals and rare coin sales were due to a reduced availability of precious metal products and the reduction of activity at Superior as a result of the discontinuance of the auction business segment. The decrease in jewelry sales was due to the sluggish retail environment. Cost of goods as a percentage of sales decreased from 87.8% in 2008 to 84.8% 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 $736,536, or 9.8%, during the nine months ended September 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 taxes are provided at the rate of 21.5 % and 28.0% for 2009 and 2008, respectively.
Liquidity and Capital Resources
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 September 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 from a new facility or from short-term loans from individuals.
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DGSE COMPANIES, Inc. and Subsidiaries
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 $3,500,000 and has a maturity date of June 22, 2010. 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 June 30, 2009, approximately $3,500,000 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.
The covenants associated with our credit facility with Texas Capital Bank, N.A. exclude Superior Galleries are as follows:
As of September 30, 2009 | Requirement | Actual calculation | ||
Minimum tangible net worth | 10,500,000 | 12,995,317 | ||
Maximum total liabilities to tangible net worth | Not to exceed 1.00 | .52 | ||
Minimum debt service coverage | Must be greater than 1.40 | 2.31 |
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.
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 June 30, 2009, 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.
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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.
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.
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 or a portion of our investments in marketable securities may be liquidated in order to meet unforeseen working capital requirements.
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 | 11,979,549 | 328,162 | 9,403,271 | 469,381 | 1,778,735 | |||||||||||||||
Operating Leases | 2,326,732 | 332,490 | 1,237,026 | 757,216 | — | |||||||||||||||
Total | $ | 17,546,252 | $ | 705,623 | $ | 13,835,297 | $ | 1,226,597 | $ | 1,778,735 |
In addition, we estimate that we will pay approximately $600,000 in interest during the next twelve months.
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DGSE COMPANIES, Inc. and Subsidiaries
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 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 September 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.
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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 |
19
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 | |||||||
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 | |||||||
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 | |||||||
10.5 | Lease agreement dated November 18, 2004 by and between Hinkle Income Properties LLC and American Pay Day Centers, Inc. | × | 10-K | April 15, 2005 | 10.4 | |||||||
10.6 | Lease Agreement dated January 17, 2005 by and between Belle-Hall Development Phase III Limited Partnership and DGSE Companies, Inc. | × | S-4 | January 6, 2007 | 10.6 | |||||||
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 |
20
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 | 10.2 | |||||||
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 | |||||||
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 | |||||||
10.11 | Support Agreement, DGSE stockholders, dated as of January 6, 2007 | × | 8-K | January 9, 2007 | 99.1 | |||||||
10.12 | Securities Exchange Agreement, dated as of January 6, 2007 | × | 8-K | January 9, 2007 | 99.2 | |||||||
10.13 | Warrant to DiGenova, issued January 6, 2007 | × | 8-K | January 9, 2007 | 99.3 | |||||||
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 |
21
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 | |||||||
31.2 | 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.
22
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: January 29, 2010 |
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: January 29, 2010 |
L. S. Smith | ||
Chairman of the Board, | ||
Chief Executive Officer and | ||
Secretary | ||
By: | /s/ W. H. Oyster | Dated: January 29, 2010 |
W. H. Oyster | ||
Director, President and | ||
Chief Operating Officer | ||
By: | /s/ John Benson | Dated: January 29, 2010 |
John Benson | ||
Chief Financial Officer | ||
(Principal Accounting Officer) |