PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,775,962
|
|
|
$
|
5,976,928
|
|
Trade receivables
|
|
|
1,439,394
|
|
|
|
1,578,892
|
|
Inventories
|
|
|
11,692,290
|
|
|
|
10,717,291
|
|
Prepaid expenses
|
|
|
225,068
|
|
|
|
84,971
|
|
Current assets related to continuing operations
|
|
|
16,132,714
|
|
|
|
18,358,082
|
|
|
|
|
|
|
|
|
|
|
Assets related to discontinued operations
|
|
|
64,678
|
|
|
|
1,311,929
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,197,392
|
|
|
|
19,670,011
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
4,856,470
|
|
|
|
4,420,704
|
|
Intangible assets, net
|
|
|
3,226,722
|
|
|
|
3,397,367
|
|
Other assets
|
|
|
208,049
|
|
|
|
160,491
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24,488,633
|
|
|
$
|
27,648,573
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
-
|
|
|
$
|
2,999,887
|
|
Current maturities of long-term debt
|
|
|
180,920
|
|
|
|
451,674
|
|
Current maturities of capital leases
|
|
|
27,094
|
|
|
|
21,184
|
|
Accounts payable-trade
|
|
|
2,612,258
|
|
|
|
1,497,492
|
|
Accrued expenses
|
|
|
787,244
|
|
|
|
3,017,394
|
|
Customer deposits and other liabilities
|
|
|
2,455,493
|
|
|
|
1,836,748
|
|
|
|
|
|
|
|
|
|
|
Current liabilities related to continuing operations
|
|
|
6,063,009
|
|
|
|
9,824,379
|
|
|
|
|
|
|
|
|
|
|
Liabilities related to discontinued operations
|
|
|
12,222
|
|
|
|
54,454
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,075,231
|
|
|
|
9,878,833
|
|
|
|
|
|
|
|
|
|
|
Line of credit, related party
|
|
|
3,583,358
|
|
|
|
-
|
|
Long-term debt, less current maturities
|
|
|
1,874,000
|
|
|
|
2,447,336
|
|
Capital leases, less current maturities
|
|
|
7,534
|
|
|
|
30,914
|
|
Total liabilities
|
|
|
11,540,123
|
|
|
|
12,357,083
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
121,755
|
|
|
|
121,639
|
|
Additional paid-in capital
|
|
|
34,045,654
|
|
|
|
33,942,579
|
|
Accumulated deficit
|
|
|
(21,218,899
|
)
|
|
|
(18,772,728
|
)
|
Total stockholders' equity
|
|
|
12,948,510
|
|
|
|
15,291,490
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
24,488,633
|
|
|
$
|
27,648,573
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
As Restated
|
|
|
|
|
|
As Restated
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
28,975,063
|
|
|
$
|
44,014,649
|
|
|
$
|
90,374,423
|
|
|
$
|
97,627,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
22,787,722
|
|
|
|
39,795,575
|
|
|
|
73,447,142
|
|
|
|
87,740,414
|
|
Selling, general and administrative expenses
|
|
|
6,431,750
|
|
|
|
3,101,560
|
|
|
|
18,030,768
|
|
|
|
7,712,328
|
|
Depreciation and amortization
|
|
|
152,337
|
|
|
|
5,899
|
|
|
|
448,260
|
|
|
|
165,993
|
|
|
|
|
29,371,809
|
|
|
|
42,903,034
|
|
|
|
91,926,170
|
|
|
|
95,618,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(396,746
|
)
|
|
|
1,111,615
|
|
|
|
(1,551,747
|
)
|
|
|
2,008,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on settlement of debt with related party
|
|
|
-
|
|
|
|
1,720,000
|
|
|
|
-
|
|
|
|
1,720,000
|
|
Other income, net
|
|
|
(41,202
|
)
|
|
|
-
|
|
|
|
(127,596
|
)
|
|
|
(1,745
|
)
|
Interest expense
|
|
|
72,677
|
|
|
|
174,296
|
|
|
|
253,796
|
|
|
|
437,889
|
|
|
|
|
31,475
|
|
|
|
1,894,296
|
|
|
|
126,200
|
|
|
|
2,156,144
|
|
Loss from continuing operations before income taxes
|
|
|
(428,221
|
)
|
|
|
(782,681
|
)
|
|
|
(1,677,947
|
)
|
|
|
(147,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(428,221
|
)
|
|
|
(782,681
|
)
|
|
|
(1,677,947
|
)
|
|
|
(147,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes of
$0
|
|
|
(107,669
|
)
|
|
|
(101,366
|
)
|
|
|
(768,225
|
)
|
|
|
(303,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(535,890
|
)
|
|
$
|
(884,047
|
)
|
|
$
|
(2,446,172
|
)
|
|
$
|
(450,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
(0.06
|
)
|
|
|
(0.03
|
)
|
Net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,175,287
|
|
|
|
10,441,418
|
|
|
|
12,175,287
|
|
|
|
10,441,418
|
|
Diluted
|
|
|
12,175,287
|
|
|
|
10,441,418
|
|
|
|
12,175,287
|
|
|
|
10,441,418
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,446,172
|
)
|
|
$
|
(450,772
|
)
|
Loss from discontinued operations
|
|
|
768,225
|
|
|
|
303,625
|
|
Loss from continuing operations
|
|
|
(1,677,947
|
)
|
|
|
(147,147
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile loss from continuing operations to net cash (used
in) provided by operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
448,260
|
|
|
|
165,993
|
|
Loss on settlement of debt with related party
|
|
|
-
|
|
|
|
1,720,000
|
|
Gain on marketable securities
|
|
|
(59,313
|
)
|
|
|
-
|
|
Stock based compensation
|
|
|
26,826
|
|
|
|
17,884
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
130,249
|
|
Stock issued as compensation for consulting services
|
|
|
76,365
|
|
|
|
207,648
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
139,498
|
|
|
|
351,414
|
|
Inventories
|
|
|
(974,998
|
)
|
|
|
2,425,929
|
|
Prepaid expenses
|
|
|
(140,097
|
)
|
|
|
(160,336
|
)
|
Other assets
|
|
|
(13,973
|
)
|
|
|
(76,180
|
)
|
Accounts payable and accrued expenses
|
|
|
(1,115,383
|
)
|
|
|
1,650,169
|
|
Customer deposits and other liabilities
|
|
|
618,745
|
|
|
|
430,362
|
|
Net cash (used in) provided by operating activities of continuing operations
|
|
|
(2,672,017
|
)
|
|
|
6,715,986
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Payments for property and equipment
|
|
|
(882,760
|
)
|
|
|
(239,265
|
)
|
Proceeds from sales of available-for-sale investments
|
|
|
154,313
|
|
|
|
7,500
|
|
Purchase of available-for-sale investments
|
|
|
(95,000
|
)
|
|
|
-
|
|
Cash acquired in SBT acquisition
|
|
|
-
|
|
|
|
456,015
|
|
Net cash (used in) provided by investing activities of continuing operations
|
|
|
(823,447
|
)
|
|
|
224,250
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Repayment of debt
|
|
|
(277,432
|
)
|
|
|
(344,407
|
)
|
Repayment of line of credit
|
|
|
(3,566,545
|
)
|
|
|
-
|
|
Proceeds from line of credit with related party
|
|
|
3,583,358
|
|
|
|
-
|
|
Payments on capital lease obligations
|
|
|
(17,471
|
)
|
|
|
-
|
|
Debt issue costs
|
|
|
(56,150
|
)
|
|
|
-
|
|
Net cash used in financing activities of continuing operations
|
|
|
(334,240
|
)
|
|
|
(344,407
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Discontinued Operations:
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of discontinued operations
|
|
|
628,738
|
|
|
|
(1,636,917
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(3,200,966
|
)
|
|
|
4,958,911
|
|
Cash, beginning of period
|
|
|
5,976,928
|
|
|
|
732,449
|
|
Cash, end of period
|
|
$
|
2,775,962
|
|
|
$
|
5,691,360
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
141,052
|
|
|
$
|
313,062
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non cash activities:
|
|
|
|
|
|
|
|
|
Stock issued to NTR for debt forgiveness
|
|
$
|
-
|
|
|
$
|
3,720,000
|
|
Stock issued for SBT acquisition
|
|
$
|
-
|
|
|
$
|
5,436,857
|
|
Stock issued upon conversion of convertible debt
|
|
$
|
-
|
|
|
$
|
133,875
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Basis of Presentation
|
The accompanying unaudited
condensed consolidated financial statements of DGSE Companies, Inc. and Subsidiaries (the “Company” or “DGSE”)
include the financial statements of DGSE Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, Inc., Charleston
Gold and Diamond Exchange, Inc., Superior Galleries, Inc. (“Superior Galleries”) and SBT, Inc. (“SBT”).
The interim financial statements
of DGSE Companies, Inc. included herein have been prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”). 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 the Company believes that the disclosures are adequate to make
the information presented not misleading. The Company suggests that these financial statements be read in conjunction with the
financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2011 (such fiscal year, “Fiscal 2011” and such annual Report on Form 10-K, the “Fiscal 2011 10-K”). In
the opinion of the management of the Company, 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.
|
(2)
|
Restatement of previously
issued financial statements
|
The Company previously issued
its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (“Fiscal 2010”) on April 15, 2011. The
Company was obligated to file its Fiscal 2011 10-K by March 30, 2012. On March 30, 2012, the Company filed a Form 12b-25 with
the SEC stating that that the Company was unable to file the Fiscal 2011 10-K by the prescribed filing date. On April 16,
2012, the Company filed a Current Report on Form 8-K disclosing that its Board of Directors had determined the existence of certain
accounting irregularities beginning approximately during the second calendar quarter of 2007 and continuing in periods subsequent
thereto (the “Accounting Irregularities”), which could affect financial information reported since that time. The
Company also announced that it had engaged forensic accountants to analyze the Accounting Irregularities, and that financial statements
and information reported since the inception of the Accounting Irregularities, believed to be the second calendar quarter of 2007,
should not be relied upon.
As part of the forensic accounting
review and the restatement process resulting from the Accounting Irregularities, the Company restated its Fiscal 2010 consolidated
financial statements, and made adjustments to its previously unaudited Fiscal 2011 consolidated financial statements, which are
presented in the Fiscal 2011 10-K filed with SEC on October 31, 2012. Also as a result of the restatement, numerous changes
were made to the Company’s previously filed unaudited quarterly financial statements for Fiscal 2011 as follows:
For the nine months ended September
30, 2011, the Company decreased inventory and increased cost of goods sold by $1,980,711, primarily related to the reconciliation
of book to physical inventory. Adjustments were also made to correct various other expenses including rent, salaries, property
taxes, consulting fees, advertising expense, miscellaneous expense, depreciation, amortization and interest. The result of these
adjustments was an overall decrease in selling, general and administrative expense of $235,507, a decrease in depreciation and
amortization of $22,405, an increase in interest expense of $111,828, an increase in other expense of $20,000, and a decrease
in income tax expense of $393,933, compared to previous reported quarterly results. These changes resulted in a net decrease of
$1,460,694 in net income, compared to previously reported amounts.
Additionally, for the nine
months ended September 30, 2011 unaudited consolidated financial statements included in this Form 10-Q, the Company has reclassified
the operations of Superior Galleries as discontinued operations (see Note 11). This reclassification includes $7,945,410
of revenue and $303,625 of net loss, as well as the assets and liabilities of the Company’s Superior Galleries subsidiary.
For the three months ended
September 30, 2011, the Company decreased inventory and increased cost of goods sold by $922,598. As noted above, adjustments
were also made to various expenses, resulting in overall increase in selling, general and administrative expense of $17,846, a
decrease in depreciation and amortization of $47,571, an increase in interest expense of $40,800, an increase in other expense
of $20,000, and a decrease in income tax benefit of $69,584, compared to previous reported quarterly results. These changes resulted
in a net decrease of $1,023,257 in net income, compared to previously reported amounts.
Additionally, for the three
months ended September 30, 2011 unaudited consolidated financial statements included in this Form 10-Q, the Company has reclassified
the operations of its Superior Galleries subsidiary as discontinued operations (see Note 11). This reclassification includes
$3,513,558 of revenue and $101,366 of net loss, as well as the assets and liabilities of the Company’s Superior Galleries
subsidiary.
|
(3)
|
Critical Accounting Policies
and Estimates
|
Income Taxes
The Company accounts for its
position in tax uncertainties in accordance with ASC 740,
Income Taxes
. The guidance establishes standards for accounting
for uncertainty in income taxes. The guidance provides several clarifications related to uncertain tax positions. Most notably,
a “more likely-than-not” standard for initial recognition of tax positions, a presumption of audit detection and a
measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent likelihood of realization.
The guidance applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First,
the Company must determine whether any amount of the tax benefit may be recognized. Second, the Company determines how much of
the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition). The Company has not
taken a tax position that, if challenged, would have a material effect on the financial statements or the effective tax rate during
the periods ended September 30, 2012 and 2011, respectively.
Fair Value Measures
The Company follows the Financial
Accounting Standards Board issued ASC 820,
Fair Value Measurements and Disclosure
. ASC 820 establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair values. These tiers include:
|
|
Level 1
|
|
—
|
|
Quoted prices for
identical
instruments in
active markets;
|
|
|
Level 2
|
|
—
|
|
Quoted prices for
similar
instruments in active markets;
quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant
inputs are observable; and
|
|
|
Level 3
|
|
—
|
|
Instruments whose significant inputs are
unobservable.
|
The Company utilizes fair value
techniques to evaluate the need for potential impairment losses related to goodwill and intangible assets not subject to amortization
pursuant to ASC 350,
Intangible—Goodwill and Other
and long-lived assets pursuant to ASC 360,
Property, Plant
and Equipment
. The Company calculates estimated fair value using Level 3 inputs, including the present value of future
cash flows expected to be generated using weighted average cost of capital, terminal values and updated financial projections.
The weighted average cost of capital is estimated using information from comparable companies and management's judgment related
to risks associated with the operations of each reporting unit.
Earnings Per Share
Basic earnings per common share
is computed by dividing net earnings available to holders of the Company’s common stock by the weighted average number of
common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted
earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants
outstanding determined using the treasury stock method.
A summary of inventories is
as follows:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Jewelry
|
|
$
|
6,060,910
|
|
|
$
|
4,357,724
|
|
Rare coins and collectibles
|
|
|
1,448,448
|
|
|
|
2,656,959
|
|
Bullion
|
|
|
2,015,765
|
|
|
|
1,521,550
|
|
Scrap
|
|
|
2,167,167
|
|
|
|
2,181,058
|
|
Total
|
|
$
|
11,692,290
|
|
|
$
|
10,717,291
|
|
The inventory amounts in the
chart above exclude discontinued operations.
A reconciliation of the earnings
and shares of the basic earnings per common share and diluted earnings per common share for the three and nine months ended September
30, 2012 and 2011 is as follows:
|
|
2012
|
|
|
2011
|
|
|
|
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
|
|
$
|
(535,890
|
)
|
|
|
12,175,287
|
|
|
$
|
(0.04
|
)
|
|
$
|
(884,047
|
)
|
|
|
10,441,418
|
|
|
$
|
(0.08
|
)
|
Effect of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
(535,890
|
)
|
|
|
12,175,287
|
|
|
$
|
(0.04
|
)
|
|
$
|
(884,047
|
)
|
|
|
10,441,418
|
|
|
$
|
(0.08
|
)
|
|
|
2012
|
|
|
2011
|
|
|
|
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
|
|
$
|
(2,446,172
|
)
|
|
|
12,175,287
|
|
|
$
|
(0.20
|
)
|
|
$
|
(450,772
|
)
|
|
|
10,441,418
|
|
|
$
|
(0.04
|
)
|
Effect of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
(2,446,172
|
)
|
|
|
12,175,287
|
|
|
$
|
(0.20
|
)
|
|
$
|
(450,772
|
)
|
|
|
10,441,418
|
|
|
$
|
(0.04
|
)
|
For the three months and the nine months ended September
30, 2012 and 2011, all of the outstanding Company options to purchase 5,392,500 and 1,493,134 shares of the common stock of the
Company, respectively, were not added to the denominator because inclusion of such shares would be antidilutive.
|
|
Outstanding Balance
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Current
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Interest Rate
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NTR line of credit (1)
|
|
$
|
3,583,358
|
|
|
$
|
-
|
|
|
2.0%
|
|
August 1, 2014
|
|
Texas Capital Bank note and line of credit (2)
|
|
|
-
|
|
|
|
3,683,214
|
|
|
6.0%
|
|
June 22, 2012
|
|
Mortgage payable
|
|
|
1,985,156
|
|
|
|
2,064,887
|
|
|
6.7%
|
|
August 1, 2016
|
|
Settlement payment (3)
|
|
|
59,135
|
|
|
|
136,860
|
|
|
8.0%
|
|
February 15, 2013
|
|
Notes payable
|
|
|
10,629
|
|
|
|
13,936
|
|
|
Various
|
|
Various
|
|
Capital leases (4)
|
|
|
34,628
|
|
|
|
52,098
|
|
|
17.4%
|
|
December 2013
|
|
Sub-Total
|
|
|
5,672,906
|
|
|
|
5,950,995
|
|
|
|
|
|
|
|
Less: Capital leases
|
|
|
34,628
|
|
|
|
52,098
|
|
|
|
|
|
|
|
Less: Current maturities
|
|
|
180,920
|
|
|
|
451,674
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
5,457,358
|
|
|
|
5,447,223
|
|
|
|
|
|
|
|
Less: Line of credit (1) (2)
|
|
|
3,583,358
|
|
|
|
2,999,887
|
|
|
|
|
|
|
|
Long term debt, less current maturities
|
|
$
|
1,874,000
|
|
|
$
|
2,447,336
|
|
|
|
|
|
|
|
|
(1)
|
On July 19, 2012, DGSE entered
into a Loan Agreement with NTR Metals, LLC, DGSE’s majority
stockholder (“NTR”), pursuant to which NTR, agreed
to provide the Company a guidance line of revolving credit
in an amount up to $7,500,000. The Loan Agreement will terminate–and
all amounts outstanding thereunder will be due and payable
(such amounts, the “Obligations”)–upon the
earlier of: (i) August 1, 2014; (ii) the date
that is twelve months after the Company receives notice from
NTR demanding the repayment of the Obligations; (iii) the date
the Obligations are accelerated in accordance with the terms
of the Loan Agreement; or (iv) the date on which the commitment
terminates under the Loan Agreement. In connection with the
Loan Agreement, the Company granted a security interest in
the respective personal property of each of its subsidiaries.
The loan carries an interest rate of two percent (2%) per annum
for all funds borrowed pursuant to the Loan Agreement. Proceeds
received by the Company pursuant to the terms of the Loan Agreement
were used for repayment of all outstanding financial obligations
incurred in connection with that certain Loan Agreement, dated
as of December 22, 2005, between the Company and Texas
Capital Bank, and additional proceeds are expected to be used
as working capital in the ordinary course of business. The
Company incurred debt issuance costs associated with the Loan
Agreement totaling $56,150. The debt issuance costs are included
in other assets in the accompanying consolidated balance sheet
and will be amortized to interest expense on a straight-line
basis over two years.
|
|
(2)
|
Based on the revolving promissory
notes payable to the bank, a note of $0 and $2,999,887 at September 30,
2012 and December 31, 2011, respectively, which bears
an interest rate of 6% or prime plus 1% (6.0% at September
2012), was due June 22, 2012. In addition, the Company held
another note of $566,658 which bears an interest rate of 6%
or prime plus 1% (6.0% at September 2012) and was due in equal
monthly payments of $16,667 through June 22, 2012. These notes
were secured by all accounts receivable, inventory, property
and equipment and intangible assets. The notes contained certain
covenants, restricting payment of dividends and requiring the
Company to maintain certain financial ratios. The outstanding
balance associated with the notes payable and line of credit
was repaid on July 19, 2012 in connection with the Loan Agreement
with NTR.
|
|
(3)
|
On February 26, 2010, Superior
Galleries entered into a settlement agreement for a lawsuit
filed by its previous landlord, DBKK, LLC for $385,000 to be
paid over three years bearing interest at 8%. The lawsuit
resulted from a lease transaction entered into by certain officers
of Superior Galleries.
|
|
(4)
|
On November 23, 2010, DGSE
entered into a capital lease for $78,450 with Direct Capital
Corporation for a radio-frequency identification (“RFID”)
inventory management solution. The non-cancelable lease agreement
required an advanced payment of $5,169 and monthly payments
of $2,584 for 36 months at an interest rate of 11.5% beginning
in January 2011. At the end of the lease in December 2013,
the equipment can be purchased for $1.
|
|
(7)
|
Stock-based
Compensation.
|
The Company accounts for share-based
compensation by measuring the cost of the employee services received in exchange for an award of equity instruments, including
grants of stock options, based on the fair value of the award at the date of grant. In addition, to the extent that the Company
receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in
the consolidated statement of cash flows. Stock-based compensation expense includes compensation expense for new share-based awards
and for share-based awards granted prior to, but not yet vested, as of January 1, 2006.
Stock-based compensation expense
for the nine months ended September 30, 2012 and 2011 was $26,826 and $17,884, respectively, relating to employee and director
stock options, and included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
|
(8)
|
Related
party transactions.
|
The Company purchases and sells
a substantial portion of precious metal and bullion to NTR. During the nine months ended September 30, 2012, the Company sold
approximately $38.5 million, or 39%, of precious metals and bullion to NTR. During the three months ended September 30,
2012, the Company sold approximately $13.5 million, or 39.7%, of precious metals and bullion to NTR. During the nine months
ended September 30, 2012, the Company purchased approximately $14.8 million, or 18.5%, in precious metal, bullion and other
products from NTR to fulfill customer orders. During the three months ended September 30, 2012, the Company purchased approximately
$2.9 million, or 11.8%, in precious metal, bullion and other products from NTR to fulfill customer orders. As of September 30,
2012, the Company was obligated to pay $966,121 to NTR as a trade payable. During the nine months ended September 30, 2011,
the Company sold approximately $41.5 million, or 38%, of precious metals and bullion to NTR. During the three months ended
September 30, 2011, the Company purchased approximately $10.9 million, or 25.4%, in precious metal, bullion and other
products from NTR to fulfill customer orders. During the nine months ended September 30, 2011, the Company purchased approximately
$21.6 million, or 22%, in precious metal and bullion from NTR to fulfill customer orders. During the three months ended September 30,
2011, the Company sold approximately $20.4 million, or 39.8%, of precious metals and bullion to NTR. As of December 31, 2011,
the Company was obligated to pay $677,000 to NTR as a trade payable.
On July 19, 2012, DGSE entered
into a Loan Agreement with NTR, pursuant to which NTR agreed to provide the Company a guidance line of revolving credit in an
amount up to $7,500,000. The Loan Agreement will terminate–and all Obligations outstanding thereunder will be due and payable–upon
the earlier of: (i) August 1, 2014; (ii) the date that is twelve months after the Company receives notice from NTR demanding the
repayment of the Obligations; (iii) the date the Obligations are accelerated in accordance with the terms of the Loan Agreement;
or (iv) the date on which the commitment terminates under the Loan Agreement. In connection with the Loan Agreement, the Company
granted a security interest in the respective personal property of each of its subsidiaries. The loan carries an interest rate
of two percent (2%) per annum for all funds borrowed pursuant to the Loan Agreement. Proceeds received by the Company pursuant
to the terms of the Loan Agreement were used for repayment of all outstanding financial obligations incurred in connection with
that certain Loan Agreement, dated as of December 22, 2005, between the Company and Texas Capital Bank, N.A., and additional proceeds
are expected to be used as working capital in the ordinary course of business. As of September 30, 2012 we had an outstanding
balance of $3,583,358 drawn on the NTR credit facility.
On September 14, 2011,
we announced that we had completed our acquisition of 100% of SBT, of which NTR was the majority owner. Under the terms of the
acquisition, we acquired SBT for 600,000 shares of our restricted common stock.
On September 14, 2011,
NTR forgave $2,000,000 of payables owed by us, and received 400,000 of our restricted shares of common stock. This transaction
resulted in a non-cash expense of $1,720,000 recorded as a loss on debt settlement.
The Audit Committee has reviewed
these transactions and deemed them to be on terms no less favorable than terms generally available to an unaffiliated third-party
under the same or similar circumstances.
Southern
Bullion Trading, LLC.
On September 14, 2011, the Company completed its acquisition of Southern Bullion Trading, LLC, in exchange
for the issuance of 600,000 restricted shares of the common stock of DGSE.
The total purchase price
has been allocated to the fair value of assets acquired and liabilities assumed as follows:
Intangible assets
|
|
$
|
3,412,896
|
|
Property and other assets
|
|
|
902,807
|
|
Inventory
|
|
|
3,429,711
|
|
Liabilities assumed
|
|
|
(2,308,557
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
5,436,857
|
|
The
operating results of SBT have been included in the consolidated financial statements since the acquisition date of September 14,
2011. The amount of SBT’s revenue and earnings has been estimated in the proforma below through the nine months ended 2011:
|
|
Revenue
|
|
|
Earnings
|
|
Actual from SBT 1/01/2011 to 9/13/2011
|
|
$
|
26,325,681
|
|
|
$
|
2,794,604
|
|
The
revenue and earnings of the combined entity had the acquisition date been January 1, 2011 are:
|
|
Revenue
|
|
|
Earnings
|
|
Nine months ended 2011 Combined entity proforma
|
|
$
|
123,953,413
|
|
|
$
|
2,343,832
|
|
(10) Legal proceedings.
On April 16, 2012, the Company
filed a Current Report on Form 8-K disclosing that its Board of Directors had determined the existence of the Accounting Irregularities
beginning approximately during the second calendar quarter of 2007 and continuing in periods subsequent thereto, which could affect
financial information reported since that time. On April 16, 2012, the Company also announced that it had engaged forensic accountants
to analyze the Accounting Irregularities, and that financial statements and information reported since the inception of the Accounting
Irregularities, believed to begin in the second calendar quarter of 2007, should not be relied upon. The Company brought the Accounting
Irregularities to the attention of the SEC in a letter dated April 16, 2012. On June 18, 2012, the Company received written
notice that the SEC had initiated a private investigation into the Accounting Irregularities, to determine whether any persons
or entities had engaged in any possible violations of the federal securities laws. The Company has cooperated fully, and continues
to cooperate fully, with the SEC staff in the investigation. This investigation is still pending as of the date of the filing
of this Form 10-Q, and there can be no certainty as to the outcome of this investigation, or to the findings of the SEC.
Also, in connection with the
Accounting Irregularities, and the subsequent halt in trading of our common stock on the NYSE MKT, the Company has received notice
of two lawsuits that have been filed. The first, Civil Action No. 3:12-cv-3664 filed in the United States District Court for the
Northern District of Texas, on September 7, 2012, entitled Grant Barfuss, on behalf of himself and all others similarly situated
vs. DGSE Companies, Inc.; L.S. Smith, John Benson and William Oyster. This is a complaint alleging violations of the securities
laws and seeks unspecified damages. Plaintiffs allege that certain public filings in 2010 and 2011 were false and misleading.
The second suit, Case No. 3:12-cv-03850 in the United States District Court for the Northern District of Texas, was filed
on September 21, 2012, by Jason Farmer, Derivatively on Behalf of Nominal Defendant DGSE Companies, Inc., Plaintiff, v. William
H. Oyster, James D. Clem, William Cordeiro, Craig Alan-Lee, David Rector, L.S. Smith, and John Benson, Defendants, and DGSE Companies,
Inc., Nominal Defendant. This suit has been filed against DGSE, as a nominal defendant, and against certain and former officers
and directors. The plaintiff asserts that certain proxy statements were false and misleading, that the defendants breached fiduciary
duties owed to DGSE, for abuse of control, and seeks unspecified compensatory and exemplary damages, along with certain corporate
governance changes, for the benefit of DGSE. The Company has not responded to either suit yet, but intends to defend itself
vigorously.
The Texas Comptroller of Public
Accounts (the “Comptroller”) conducted a sales and use tax audit of DGSE with respect to the period March 1, 2006
through November 30, 2009 and subsequently sent a Notification of Audit Results, by letter dated December 17, 2010, asserting
that the Company owes an amount of tax due, plus penalties and interest. The Company submitted a request for redetermination to
the Comptroller on January 13, 2011. Some of the issues have been resolved with the auditor, and the auditor’s tax adjustment
schedules currently show a lower amount of tax due than was previously stated in the assessment letter. By letter dated August
25, 2011, the Comptroller stated that the Company’s request for a redetermination hearing has been granted. The hearing
has not yet taken place.
The Company is currently discussing,
both internally among the members of its Board of Directors and with its outside counsel, whether it will take legal action against
those officers and providers of professional services who were involved in the Accounting Irregularities.
(11) Discontinued Operations
In March 2012, the Company
decided to discontinue the operations of its Superior Galleries subsidiary due to the lack of profitability and current management's
belief that it was unlikely that profitability would be reached in the foreseeable future. The Company officially discontinued
operations on June 8, 2012 but continued to incur losses in the first and second quarter of 2012 for the discontinued operations.
The operating results of the for the three and nine month periods ended September 30, 2012 and 2011 have been reclassified
as discontinued operations in the consolidated statements of operations as detailed in the table below.
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
59
|
|
|
$
|
3,513,557
|
|
|
$
|
3,168,438
|
|
|
$
|
7,945,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
559
|
|
|
|
3,095,122
|
|
|
|
2,861,477
|
|
|
|
6,911,958
|
|
S,G&A expenses
|
|
|
29,780
|
|
|
|
486,528
|
|
|
|
429,051
|
|
|
|
1,236,422
|
|
Depreciation and amortization
|
|
|
(23,727
|
)
|
|
|
33,273
|
|
|
|
220,384
|
|
|
|
100,655
|
|
|
|
|
6,612
|
|
|
|
3,614,923
|
|
|
|
3,510,912
|
|
|
|
8,249,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,553
|
)
|
|
|
(101,366
|
)
|
|
|
(342,474
|
)
|
|
|
(303,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)/income, net
|
|
|
(101,116
|
)
|
|
|
-
|
|
|
|
(420,389
|
)
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,362
|
)
|
|
|
-
|
|
|
|
|
(101,116
|
)
|
|
|
-
|
|
|
|
(425,751
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
|
(107,669
|
)
|
|
|
(101,366
|
)
|
|
|
(768,225
|
)
|
|
|
(303,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations after income taxes
|
|
$
|
(107,669
|
)
|
|
$
|
(101,366
|
)
|
|
$
|
(768,225
|
)
|
|
$
|
(303,625
|
)
|
For the period ended September
30, 2012 other (expense)/income, net primarily consists of a $263,035 write off of the deferred rent liability net of rent expense
for the nine months ended September 30, 2012 and a $158,093 expense related to a settlement paid in October 2012, which was accrued
in the three months ended March 31, 2012.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context indicates
otherwise, references to “we,” “us,” “our,” the Company” and “DGSE” refer
to the consolidated business operations of DGSE Companies, Inc., the parent, and all of its direct and indirect subsidiaries.
Forward-Looking Statements
This Quarterly
Report on Form 10-Q for the quarter ended September 30, 2012 (this “Form 10-Q”), including but not limited to:
(i) the section of this Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” (ii) information concerning our business prospects or future financial performance, anticipated revenues,
expenses, profitability or other financial items, including the outcome of the SEC investigation described elsewhere in this Form
10-Q or pending litigation, and (iii) our strategies, plans and objectives, together with other statements that are not historical
facts, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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 intend that all forward-looking statements be subject to the safe harbors
created by these laws. All statements other than statements of historical information provided herein are forward-looking statements
are based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability
to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ
materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed
in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person
that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ
from current expectations are described under the section of this Form 10-Q entitled “Risk Factors” and elsewhere
in this Form 10-Q as well as under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2011 (the “Fiscal 2011 10-K”). These factors are not intended to be an all-encompassing
list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers
are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake
no obligation to-release publicly the results of any revisions to these forward-looking statements, which may be made to reflect
events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital
expenditures, store growth plans, or to reflect the occurrence of unanticipated events.
Results of Operations
Three Months Ended
September 30, 2012 compared to Three Months Ended September 30, 2011
Sales.
Sales decreased
by $15,039,586, or 34%, during the three months ended September 30, 2012 to $28,975,063, as compared to $44,014,649 during the
same period in 2011. The decrease was primarily driven by a decrease in sales of bullion, with moderate decreases also across
other segments. In addition, revenue from discontinued operations for Superior Galleries, Inc. (“Superior Galleries”)
were excluded in the amount of $59 and $3,513,557 for the periods ended September 30, 2012 and 2011, respectively. These decreases
were partially offset by the acquisition of SBT, Inc. (“SBT”) in September 2011, which added revenues of $7,824,759
during the three months ended September 30, 2012, an increase of $4,537,538 over the same period in 2011.
Cost of Sales.
For the
three months ended September 30, 2012, cost of sales decreased by $17,007,853, or 43% to $22,787,722, as compared to $39,795,575
during the same period in 2011, driven by lower sales. Cost of sales as a percentage of revenue decreased from 90.4% in 2011 to
78.6% in 2012 primarily due to the higher margins on the newly-acquired SBT business, as well as reduced sales of bullion which
carry significantly lower margins than other categories.
Selling, General and Administrative
Expense
. For the three months ended September 30, 2012, Selling, General and Administrative (“SG&A”) expenses
increased by $3,330,190, or 107% to $6,431,750, as compared to $3,101,560 during the same period in 2011. $1,549,948 of this increase
is due to the addition of the SBT stores. The opening of four new non-SBT stores added $870,014 in the current period, due to
increased advertising costs, salaries, payroll taxes, building rent and other costs. In addition, the Company incurred $1,443,799
in professional fees associated with the restatement of our financial statements, and the related SEC investigation.
Depreciation and Amortization
.
For the three months ended September 30, 2012, the depreciation and amortization expense was $152,337 compared to $5,899 for the
same period in 2011, an increase of $146,438. The current period increase in depreciation and amortization over the same period
in 2011 is related to the amortization of intangibles acquired as part of the acquisition of SBT in September 2011 (See note 9
under Item 1 for details on the acquisition).
Loss on settlement of debt
with related party
. For the three months ended September 30, 2012, loss on settlement of debt with related party decreased
by $1,720,000 to $0 compared to $1,720,000 during the same period in 2011. The decrease is primarily related to the loss incurred
with the settlement of debt with a related party in the previous year in which we issued 400,000 shares of our common stock to
NTR Metals, LLC, our majority stockholder (“NTR”), in exchange for $2,000,000 in debt forgiveness, and incurred a
$1,720,000 non-cash loss.
Other income, net
. For
the three months ended September 30, 2012, other income, net was $41,200 compared to $0 during the same period in 2011. Other
income in the current period is driven by gains on available for sale securities.
Interest Expense
. For
the three months ended September 30, 2012, interest expense was $72,677, a decrease of $101,619 compared to $174,296 during the
same period in 2011. This decrease is primarily due to the early pay-off of two credit agreements in the fourth quarter of 2011
and conversion of a portion of the Company’s convertible debt instruments, which reduced quarterly interest payments.
Loss from Discontinued Operations.
The results for the three months ended September 30, 2012 are a net loss of $107,669 related to operations of Superior Galleries.
This loss included an operating loss of $6,552, and other expense of $101,116 consisting of the write off of the deferred rent
liability, net of rent expense.
Nine Months Ended
September 30, 2012 compared to Nine Months Ended September 30, 2011
Sales.
Sales decreased
by $7,253,309, or 7.4%, to $90,374,423 during the nine months ended September 30, 2012, as compared to $97,627,732 during
the same period in 2011. This decrease was primarily due to the decrease in sales of scrap, bullion and rare coins, offset by
the revenues from the acquisition of SBT. Overall, SBT added revenue of $22,247,355 for the nine months ended September 30,
2012 compared to $3,287,222 in the same period of the prior year.
Cost of Sales.
For the
nine months ended September 30, 2012, cost of sales decreased by $14,293,272, or 16.3%, to $73,447,142, as compared to $87,740,414
during the same period in 2011. Cost of sales as a percentage of revenue decreased from 89.9% in 2011 to 81.2% in 2012 primarily
due to the higher margins on the newly acquired SBT business, as well as reduced sales of bullion, which carry significantly lower
margins than other categories.
Selling, General and Administrative
Expense
. For the nine months ended September 30, 2012, SG&A expenses increased by $10,318,440, or 134%, to $18,030,768,
as compared to $7,712,328 during the same period in 2011. $5,355,274 of this increase is due to the addition of the SBT stores.
The opening of four new non-SBT stores added $2,206,614 in the current period, due to increased advertising costs, salaries, payroll
taxes, building rent and other costs. In addition, the Company incurred $2,740,263 in professional fees associated with the restatement
of our financial statements, and the related SEC investigation.
Depreciation and Amortization
.
For the nine months ended September 30, 2012, depreciation and amortization expense was $448,260 compared to $165,993 during
the same period in 2011, an increase of $282,267. The current period increase in depreciation and amortization over the same period
relates to the amortization of intangible assets acquired as part of the acquisition of SBT in September 2011 (See note 9 under
Item 1 for details on the acquisition).
Loss on settlement of debt
with related party
. For the nine months ended September 30, 2012, loss on settlement of debt with related party decreased
by $1,720,000 to $0 compared to $1,720,000 during the same period in 2011. The decrease is primarily related to the loss incurred
with the settlement of debt with a related party in the previous year in which we issued 400,000 shares of our common stock to
NTR in exchange for $2,000,000 in debt forgiveness, and incurred a $1,720,000 non-cash loss.
Other income, net
. For
the nine months ended September 30, 2012, other income, net increased to $127,596 compared to $1,745 during the same period in
2011, an increase of $125,851. Other income in the current period is driven by gains on available for sale securities.
Interest Expense
. For
the nine months ended September 30, 2012, interest expense was $253,796, a decrease of $184,093 from $437,889 during the same
period in 2011. This decrease is primarily due to the early pay-off of two credit agreements in the fourth quarter of 2011, and
conversion of a portion of the Company’s convertible debt instruments, which reduced quarterly interest payments.
Loss from Discontinued Operations.
The results for the nine month period ended September 30, 2012 are a net loss of $768,225 related to operations of Superior
Galleries. This loss included an operating loss of $342,474, and other expense of $420,389, which consists of the write off of
the deferred rent liability, and a $158,094 expense related to a litigation settlement paid in October 2012, which was accrued
for as of March 31, 2012.
Liquidity and Capital Resources
During the nine months ended
September 30, 2012 and 2011, cash flows (used in) provided by operating activities totaled ($2,672,017) and $6,715,986, respectively.
Cash flows used for the nine months ended September 30, 2012 were primarily a result of the $2,446,172 net loss, a $974,998 increase
in inventory and a decrease in accounts payables of $1,115,383. This decrease in accounts payable was due to payment of $1,608,028
related to the November 2011 settlement with FASNAP Corporation. Cash flow used in operating activities was partially offset by
a $618,745 increase in customer deposits and other liabilities and a $139,498 decrease in accounts receivable. During the same
period in 2011, there was a decrease in trade receivables of $351,414, an increase in accounts payable and accrued expenses of
$1,650,169, increase in prepaid expense of $160,336 and a decrease in inventory of $2,425,929.
During the nine months ended
September 30, 2012 and 2011, cash flows (used in) provided by investing activities totaled ($823,447) and $224,250, respectively.
The use of cash during both periods was primarily driven by purchases of property and equipment related to new store openings.
In the prior year period, cash used in investing activities was offset by $456,015 in cash acquired in the acquisition of SBT.
The 2012 period also includes $95,000 in purchases of available for sale investments and $154,313 in proceeds from the settlement
of the available for sale investments.
During the nine months ended
September 30, 2012 and 2011, cash flows used in financing activities totaled $334,240 and $344,407, respectively. The use of cash
during both periods was the result of repayment of notes payable, including repayment of the TCB line of credit in July of 2012.
Cash from financing activities also includes proceeds of $3,583,358 from a new line of credit with NTR in July 2012, and payments
on capital lease obligations.
During the nine months ended
September 30, 2012 and 2011, cash flows provided by (used in) discontinued operations totaled $628,738 and ($1,636,917), respectively.
We expect capital expenditures
to total approximately $1,000,000 during the next twelve months. These expenditures will be largely driven by new store openings.
It is anticipated that these expenditures will be funded from working capital. As of September 30, 2012, there were no commitments
outstanding for capital expenditures.
In the event of significant
growth in retail and or wholesale jewelry sales, our demand for additional working capital will increase 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. We are 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.
On November 2, 2011, we announced
that Texas Capital Bank agreed to renew our then-current credit facility Under that certain loan Agreement, dated as of December
22, 2005, between Texas Capital Bank and us (the “TCB Facility”). The TCB facility was composed of a $3.5 million
revolving note and a $1.0 million term loan. The renewal was finalized on November 2, 2011. The TCB facility matured in
June 2012.
On June 21, 2012, we entered
into an agreement with TCB to extend the maturity date of the credit facility to July 22, 2012. On July 19, 2012, we entered
into a Loan Agreement with NTR pursuant to which NTR agreed to provide to us a guidance line of revolving credit in an amount
up to $7,500,000. The Loan Agreement will terminate–and all amounts outstanding thereunder will be due and payable (such
amounts, the “Obligations”)–upon the earlier of: (i) August 1, 2014; (ii) the date that is twelve months after
the we receive notice from NTR demanding the repayment of the Obligations; (iii) the date the Obligations are accelerated in accordance
with the terms of the Loan Agreement; or (iv) the date on which the commitment terminates under the Loan Agreement. In connection
with the Loan Agreement, we granted a security interest in the respective personal property of each of our subsidiaries. The loan
carries an interest rate of two percent (2%) per annum for all funds borrowed pursuant to the Loan Agreement. Proceeds received
by us pursuant to the terms of the Loan Agreement were used for repayment of all outstanding financial obligations incurred in
connection with the TCB Facility, and additional proceeds are expected to be used as working capital in the ordinary course of
business. We incurred debt issuance costs associated with the Loan Agreement totaling $56,150. The debt issuance costs are included
in other assets in the accompanying consolidated balance sheet and will be amortized to interest expense on a straight-line basis
over two years. As of September 30, 2012 we had an outstanding balance of $3,583,358 drawn on the NTR credit facility.
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
.