UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30,
2015
or
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o |
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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)
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Nevada |
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88-0097334 |
(State or other jurisdiction
of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
15850 Dallas Parkway, Suite 140
Dallas, Texas 75248
(972) 587-4049
(Address, including zip code, and telephone
number, including area code, of registrant’s
principal executive offices)
N/A
(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 x No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes x No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one)
Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨ |
Smaller reporting company x |
(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 ¨
No x
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of August 13, 2015:
Class |
|
Outstanding |
Common stock, $0.01 par value per share |
|
12,296,446 |
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,444,800 | | |
$ | 2,184,435 | |
Trade receivables, net of allowances | |
| 171,479 | | |
| 904,076 | |
Inventories | |
| 10,259,796 | | |
| 11,144,157 | |
Prepaid expenses | |
| 188,172 | | |
| 104,513 | |
Assets related to discontinued operations | |
| - | | |
| 49,729 | |
Total current assets | |
| 12,064,247 | | |
| 14,386,910 | |
| |
| | | |
| | |
Property and equipment, net | |
| 4,227,158 | | |
| 4,365,767 | |
Intangible assets, net | |
| 20,676 | | |
| 27,568 | |
Other assets | |
| 127,321 | | |
| 128,356 | |
Total assets | |
$ | 16,439,402 | | |
$ | 18,908,601 | |
| |
| | | |
| | |
LIABILITIES | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Current maturities of long-term debt | |
$ | 135,454 | | |
$ | 131,003 | |
Current maturities of capital leases | |
| 11,817 | | |
| 11,529 | |
Accounts payable-trade | |
| 4,569,895 | | |
| 5,831,736 | |
Accrued expenses | |
| 775,180 | | |
| 1,541,552 | |
Customer deposits and other liabilities | |
| 1,655,850 | | |
| 1,082,778 | |
Liabilities related to discontinued operations | |
| 212,485 | | |
| 303,564 | |
Total current liabilities | |
| 7,360,681 | | |
| 8,902,162 | |
| |
| | | |
| | |
Line of credit, related party | |
| 2,303,359 | | |
| 2,303,359 | |
Long-term debt, less current maturities | |
| 1,540,425 | | |
| 1,616,237 | |
Total liabilities | |
| 11,204,465 | | |
| 12,821,758 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY | |
| | | |
| | |
Common stock, $0.01 par value; 30,000,000 shares authorized;12,296,446 and 12,238,846 shares issued and outstanding | |
| 122,964 | | |
| 122,388 | |
Additional paid-in capital | |
| 34,267,577 | | |
| 34,231,271 | |
Accumulated deficit | |
| (29,155,604 | ) | |
| (28,266,816 | ) |
Total stockholders' equity | |
| 5,234,937 | | |
| 6,086,843 | |
| |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 16,439,402 | | |
$ | 18,908,601 | |
The accompanying notes are an integral part
of these consolidated financial statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
For the Three Months Ended June 30, | | |
For the Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenue: | |
| | | |
| | | |
| | | |
| | |
Sales | |
$ | 14,942,637 | | |
$ | 17,518,412 | | |
$ | 27,817,786 | | |
$ | 35,582,719 | |
Cost of goods sold | |
| 12,373,461 | | |
| 14,508,228 | | |
| 22,915,427 | | |
| 29,361,864 | |
Gross margin | |
| 2,569,176 | | |
| 3,010,184 | | |
| 4,902,359 | | |
| 6,220,855 | |
| |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 2,533,139 | | |
| 3,357,366 | | |
| 5,419,181 | | |
| 6,704,140 | |
Depreciation and amortization | |
| 81,708 | | |
| 91,230 | | |
| 222,332 | | |
| 181,815 | |
| |
| 2,614,847 | | |
| 3,448,596 | | |
| 5,641,513 | | |
| 6,885,955 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (45,671 | ) | |
| (438,412 | ) | |
| (739,154 | ) | |
| (665,100 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other expense (income): | |
| | | |
| | | |
| | | |
| | |
Other income, net | |
| (670 | ) | |
| (31,166 | ) | |
| (3,703 | ) | |
| (57,661 | ) |
Interest expense | |
| 88,893 | | |
| 88,330 | | |
| 172,661 | | |
| 169,143 | |
| |
| 88,223 | | |
| 57,164 | | |
| 168,958 | | |
| 111,482 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations before income taxes | |
| (133,894 | ) | |
| (495,576 | ) | |
| (908,112 | ) | |
| (776,582 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income tax (benefit) expense | |
| (1,921 | ) | |
| 43,491 | | |
| 24,923 | | |
| 47,070 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
| (131,973 | ) | |
| (539,067 | ) | |
| (933,035 | ) | |
| (823,652 | ) |
| |
| | | |
| | | |
| | | |
| | |
Discontinued operations: | |
| | | |
| | | |
| | | |
| | |
Income (loss) from discontinued operations, net of taxes | |
| 41,683 | | |
| (3,913,172 | ) | |
| 44,247 | | |
| (4,151,565 | ) |
Net loss | |
$ | (90,290 | ) | |
$ | (4,452,239 | ) | |
$ | (888,788 | ) | |
$ | (4,975,217 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic net loss per common share: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
$ | (0.01 | ) | |
$ | (0.04 | ) | |
$ | (0.07 | ) | |
$ | (0.07 | ) |
Loss from discontinued operations | |
| 0.00 | | |
| (0.32 | ) | |
| 0.00 | | |
| (0.34 | ) |
Net loss per share | |
$ | (0.01 | ) | |
$ | (0.36 | ) | |
$ | (0.07 | ) | |
$ | (0.41 | ) |
| |
| | | |
| | | |
| | | |
| | |
Diluted net loss per common share: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
$ | (0.01 | ) | |
$ | (0.04 | ) | |
$ | (0.07 | ) | |
$ | (0.07 | ) |
Loss from discontinued operations | |
| 0.00 | | |
| (0.32 | ) | |
| 0.00 | | |
| (0.34 | ) |
Net loss per share | |
$ | (0.01 | ) | |
$ | (0.36 | ) | |
$ | (0.07 | ) | |
$ | (0.41 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted-average number of common shares | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 12,262,741 | | |
| 12,210,397 | | |
| 12,254,257 | | |
| 12,202,214 | |
Diluted | |
| 12,262,741 | | |
| 12,210,397 | | |
| 12,254,257 | | |
| 12,202,214 | |
The accompanying notes are an integral part
of these consolidated financial statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
For the Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash Flows From Operating Activities: | |
| | | |
| | |
Net loss | |
$ | (888,788 | ) | |
$ | (4,975,217 | ) |
Income (loss) from discontinued operations, net of tax | |
| 44,247 | | |
| (4,151,565 | ) |
Loss from continuing operations, net of tax | |
| (933,035 | ) | |
| (823,652 | ) |
| |
| | | |
| | |
Adjustments to reconcile loss from continuing operations to net cash used in operating activities of continuing operations: | |
| | | |
| | |
Depreciation and amortization | |
| 222,332 | | |
| 181,815 | |
Stock based compensation to employees, officers and directors | |
| 36,882 | | |
| 39,358 | |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Trade receivables, net | |
| 732,597 | | |
| (20,963 | ) |
Inventories | |
| 884,361 | | |
| (667 | ) |
Prepaid expenses | |
| (83,659 | ) | |
| (78,821 | ) |
Other assets | |
| 1,035 | | |
| 59,679 | |
Accounts payable and accrued expenses | |
| (2,028,212 | ) | |
| (284,165 | ) |
Customer deposits and other liabilities | |
| 573,072 | | |
| (608,240 | ) |
Net cash used in operating activities of continuing operations | |
| (594,627 | ) | |
| (1,535,656 | ) |
| |
| | | |
| | |
Cash Flows From Investing Activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (76,831 | ) | |
| (109,627 | ) |
Net cash used in investing activities of continuing operations | |
| (76,831 | ) | |
| (109,627 | ) |
| |
| | | |
| | |
Cash Flows From Financing Activities: | |
| | | |
| | |
Repayment of debt | |
| (64,408 | ) | |
| (60,245 | ) |
Payments on capital lease obligations | |
| (6,666 | ) | |
| (5,487 | ) |
Repayment of line of credit with related party | |
| - | | |
| (80,000 | ) |
Net cash used in financing activities of continuing operations | |
| (71,074 | ) | |
| (145,732 | ) |
| |
| | | |
| | |
Cash Flows From Discontinued Operations: | |
| | | |
| | |
Net cash provided by operating activities of discontinued operations | |
| 2,897 | | |
| 1,297,019 | |
| |
| | | |
| | |
Net change in cash | |
| (739,635 | ) | |
| (493,996 | ) |
Cash, beginning of period | |
| 2,184,435 | | |
| 2,637,726 | |
Cash, end of period | |
$ | 1,444,800 | | |
$ | 2,143,730 | |
| |
| | | |
| | |
Supplemental Disclosures: | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 149,884 | | |
$ | 146,157 | |
Income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Noncash item: | |
| | | |
| | |
Transfer of inventory from discontinued operations | |
$ | - | | |
$ | 1,524,864 | |
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated interim financial
statements of DGSE Companies, Inc., a Nevada corporation, and its subsidiaries (the “Company” or “DGSE”),
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 (“U.S. GAAP”) 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, 2014 (such fiscal year, “Fiscal 2014” and such Annual Report on Form 10-K, the “Fiscal 2014 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)
Principles of Consolidation and Nature of Operations
DGSE buys and sells jewelry
and bullion products to both retail and wholesale customers throughout the United States through its facilities in Illinois, South
Carolina, and Texas, and through its various internet sites.
The interim consolidated financial
statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its subsidiaries. All
material intercompany transactions and balances have been eliminated.
(3) Critical Accounting Policies and
Estimates
Financial Instruments
The carrying amounts reported
in the consolidated balance sheets for cash equivalents, accounts receivable, accounts payable and accrued expenses approximate
fair value because of the immediate or short-term maturity of these financial instruments. The line of credit, related
party does not bear a market rate of interest. Management believes that, based on the Company’s situation at the time the
line was negotiated, it could not have obtained comparable financing, and as such cannot estimate the fair value of the line of
credit, related party. The carrying amounts reported for the Company’s long-term debt, and capital leases approximate fair
value because substantially all of the underlying instruments have variable interest rates, which adjust frequently, or the interest
rates approximate current market rates. None of these instruments are held for trading purposes.
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 outstanding
determined using the treasury stock method.
Recent Accounting Pronouncement
In May 2014, the Financial Accounting
Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”),
which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle
and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing
U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein,
using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard
in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the
cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).
In July 2015, the FASB voted to approve a one-year deferral to the effective date of ASU 2014-09 to be adopted by all public
companies for all annual periods and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating
the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method
by which the Company will adopt the standard in 2018.
(4) Inventories
A summary of inventories is as follows:
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Jewelry | |
$ | 8,926,631 | | |
$ | 9,755,580 | |
Scrap gold | |
| 616,256 | | |
| 536,181 | |
Bullion | |
| 386,589 | | |
| 493,368 | |
Rare coins and Other | |
| 330,320 | | |
| 359,028 | |
| |
$ | 10,259,796 | | |
$ | 11,144,157 | |
(5) Basic and Diluted Average Shares
A reconciliation of basic and
diluted weighted average common shares for the three months and six months ended June 30, 2015 and 2014, is as follows:
| |
For the Three Months Ended June 30, | | |
For the Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Basic weighted average shares | |
| 12,262,741 | | |
| 12,210,397 | | |
| 12,254,257 | | |
| 12,202,214 | |
Effect of potential dilutive securities | |
| - | | |
| - | | |
| - | | |
| - | |
Diluted weighted average shares | |
| 12,262,741 | | |
| 12,210,397 | | |
| 12,254,257 | | |
| 12,202,214 | |
For the three and six months
ended June 30, 2015 and 2014, options to purchase 5,030,000 and 5,347,500 shares of common stock, respectively, were not added
to the diluted average shares because inclusion of such shares would be antidilutive. For the three and six months ended June 30,
2015 and 2014, there were 30,000 and 46,500 unvested Restricted Stock Units (“RSUs”), respectively, not added to the
diluted average shares because inclusion of such shares would be antidilutive.
(6) Long-Term Debt
| |
Outstanding Balance | | |
| | |
|
| |
June 30,
2015 | | |
December 31,
2014 | | |
Current
Interest Rate | | |
Maturity |
| |
| | | |
| | | |
| | | |
|
NTR line of credit (1) | |
$ | 2,303,359 | | |
$ | 2,303,359 | | |
| 2.0 | % | |
August 1, 2017 |
Mortgage payable (2) | |
| 1,656,117 | | |
| 1,720,525 | | |
| 6.7 | % | |
August 1, 2016 |
Capital leases (3) | |
| 31,579 | | |
| 38,244 | | |
| 4.2 | % | |
May 1, 2018 |
Sub-Total | |
| 3,991,055 | | |
| 4,062,128 | | |
| | | |
|
Less: Current maturities of capital leases | |
| 11,817 | | |
| 11,529 | | |
| | | |
|
Less: Current maturities of mortgage payable | |
| 135,454 | | |
| 131,003 | | |
| | | |
|
Long-term debt | |
| 3,843,784 | | |
| 3,919,596 | | |
| | | |
|
Less: Line of credit (1) | |
| 2,303,359 | | |
| 2,303,359 | | |
| | | |
|
Long term debt, less current maturities | |
$ | 1,540,425 | | |
$ | 1,616,237 | | |
| | | |
|
| (1) | On July 19, 2012, DGSE entered into a loan agreement with NTR Metals, LLC (“NTR”), an affiliate of DGSE’s
largest stockholder Elemetal, LLC (“Elemetal”), 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”). The Loan Agreement anticipated termination–at
which point all amounts outstanding thereunder would 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
have been 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 were included in other assets in the accompanying consolidated balance
sheet, were amortized to interest expense on a straight-line basis over two years, and were completely amortized as of July 2014.
On February 25, 2014, we entered into a one-year extension of the Loan Agreement with NTR, extending the termination date to August
1, 2015, and on February 4, 2015, we entered into an additional two-year extension, extending the termination date to August 1,
2017, unless earlier terminated as described above. No debt issuance costs were incurred in relation to these extensions. All other
terms of the agreement remain the same. As of June 30, 2015 and December 31, 2014, the outstanding balance of the NTR loan
was $2,303,359. |
| (2) | On July 11, 2006, DGSE entered into a promissory note for $2,530,000 related to the mortgage on its largest retail location
in Dallas, Texas with The Ohio National Life Insurance Company. The note bears an interest rate of six and seventy one-hundredths
of one percent (6.70%) per annum, with a balloon payment of approximately $1.5 million on August 1, 2016 for the outstanding
balance. Monthly principal payment payments of $20,192 plus accrued interest are required. The note is secured by the land and
building. As of June 30, 2015 and December 31, 2014, the outstanding balance of the note was $1,656,117 and $1,720,525,
respectively. |
| (3) | On April 3, 2011, DGSE entered into a capital lease for $58,563 with Graybar Financial Services for phones at the new corporate
headquarters. The non-cancelable lease agreement required an advanced payment of $2,304 and monthly payments of $1,077 for 60 months
at an interest rate of 4.2% beginning in May 2011. At the end of the lease in May 2018, 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.
In January 2014, DGSE’s
Board of Directors (the “Board”) granted 112,000 RSUs to its officers and certain key employees. Each RSU is convertible
into one share of Common Stock without additional payment pursuant to the terms of the Restricted Stock Unit Award Agreement, dated
January 23, 2014, between the Company and each recipient (the “RSU Award Agreement”). One-fourth (or 28,000) of the
RSUs vested and were exercisable as of the date of the grant, and an additional one-fourth of the RSUs (calculated using the total
number of RSUs at the time of grant) vest and will be exercisable on each subsequent anniversary of the date of grant until 100
percent of the RSUs have vested, subject to the recipient’s continued status as an employee on each such date and other terms
and conditions of set forth in the RSU Award Agreement. Upon termination of service of the recipient to us, other than by reason
of death or disability, any RSUs that have not vested will be forfeited and the award of such units shall terminate. Pursuant to
these grants, an additional 15,000 RSUs vested in January 2015, and the recipients were subsequently issued common stock. Of the
RSUs granted in January 2014, only 30,000 remain unvested and outstanding as of June 30, 2015.
In September of 2014, the Board
granted 14,200 RSUs to each of its three outside directors, for a total of 42,600 RSUs issued. Each RSU is convertible into one
share of Common Stock without additional payment pursuant to the terms of the RSU Award Agreement, dated September 17, 2014, between
the Company and each recipient. All of the RSUs were to vest and become exercisable on the earlier of: (i) the one year anniversary
of the grant date, or (ii) the day prior to the next Annual Meeting of the Stockholders of DGSE Companies, Inc., subject to each
recipient’s continued status as a Director through such dates and other terms and conditions of set forth in the RSU Award
Agreement. Upon termination of service of the recipient to the Company, other than by reason of death or disability, any RSUs that
have not vested will be forfeited and the award of such units shall terminate. All 42,600 of these RSUs vested as of June 9, 2015,
the day prior to our 2015 Annual Meeting of Stockholders, which was held June 10, 2015, and subsequently 42,600 shares of common
stock were issued pursuant to these RSUs, on June 11, 2015.
Stock-based compensation (gain)
expense for the three months ended June 30, 2015 and 2014 was ($26,952) and $46,170, respectively, and for the six months ended
June 30, 2015 and 2014 was $10,232 and $106,370, respectively relating to employee and director RSUs, and included in selling,
general and administrative expenses in the accompanying consolidated statements of operations. The gain in stock compensation expense
during the recent quarter related to an adjustment to the stock compensation expense accrual due the recent decline in the price
of the company’s Common Stock. Certain stock compensation expenses related to the discontinued Southern Bullion Coin &
Jewelry (“Southern Bullion”) operations for the six months ended June 30, 2014, have been reclassified to discontinued
operations.
(8) Related Party Transactions
DGSE has a corporate policy
governing the identification, review, consideration and approval or ratification of transactions with related persons, as that
term is defined in the Instructions to Item 404(a) of Regulation S-K, promulgated under the Securities Act (“Related Party”).
Under this policy, all Related Party transactions are identified and approved prior to consummation of the transaction to ensure
they are consistent with DGSE’s best interests and the best interests of its stockholders. Among other factors, DGSE’s
Board considers the size and duration of the transaction, the nature and interest of the of the Related Party in the transaction,
whether the transaction may involve a conflict of interest and if the transaction is on terms that are at least as favorable to
DGSE as would be available in a comparable transaction with an unaffiliated third party. DGSE’s Board reviews all Related
Party transactions at least annually to determine if it is in DGSE’s best interests and the best interests of DGSE’s
stockholders to continue, modify, or terminate any of the Related Party transactions. DGSE’s Related Person Transaction Policy
is available for review in its entirety under the “Investors” menu of the Company’s corporate relations website
at www.DGSECompanies.com.
Elemetal is DGSE’s largest
shareholder. Elemetal and its affiliates are also DGSE’s primary refiner and bullion trading partner. In the six months ended
June 30, 2015, 20% of sales and 25% of purchases were transactions with Elemetal, and in the same period of 2014, these transactions
represented 26% of DGSE’s sales and 27% of DGSE’s purchases. As of June 30, 2015, the Company was obligated to pay
$3,755,970 to Elemetal as a trade payable, and had a $105,616 receivable from Elemetal. As of December 31, 2014, the Company
was obligated to pay $3,721,144 to Elemetal as a trade payable, and had a $34,343 receivable from Elemetal. In the six months ended
June 30, 2015 and 2014, the Company paid Elemetal $91,410 and $93,620, respectively, in interest on the Company’s outstanding
payable.
On July 19, 2012, the Company
entered into the Loan Agreement with NTR, pursuant to which NTR agreed to provide the Company with a guidance line of revolving
credit in an amount up to $7,500,000. The Loan Agreement anticipated termination–at which point all amounts outstanding thereunder
would be due and payable–upon the earlier of: (i) August 1, 2014; (ii) the date that is twelve months after DGSE
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, DGSE 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 DGSE 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 DGSE and Texas Capital Bank, N.A., and
additional proceeds are expected were used as working capital in the ordinary course of business. On February 25, 2014, we entered
into a one-year extension of the Loan Agreement with NTR, extending the termination date to August 1, 2015, and on February 4,
2015, we entered into an additional two-year extension, extending the termination date to August 1, 2017, unless earlier terminated
as described above. All other terms of the agreement remain the same. As of June 30, 2015 and December 31, 2014, the outstanding
balance of the NTR loan was $2,303,359. In the six months ended June 30, 2015 and 2014, the Company paid NTR $22,777 and $22,986,
respectively, in interest on the Company’s line of credit.
In April 2011, DGSE moved its
principal corporate offices to office space at 15850 Dallas Parkway, Suite 140, Dallas, Texas. This property is owned by an affiliate
of Elemetal and also serves as their headquarters. DGSE leases space in the building subject to a lease that will expire in December
2015. In the six months ended June 30, 2015 and 2014, the Company recognized rent expense of $24,250 and $26,250, respectively,
related to this lease.
In the fourth quarter of Fiscal
2011 the Company established a wholly owned subsidiary named Carbon Fund One, LLC to act as the general partner (the “General
Partner”) for Carbon Fund One, LP (the “Fund”), which was established at the same time. The Fund was an investment
fund specializing in the buying and selling of gemstones. The General Partner receives a one percent ownership interest of the
Fund, and is paid 2% carried interest on assets under management by the Fund, and 20% of net earnings before distributions to the
limited partners. The Fund was intended to provide an investment vehicle for individuals interested in investment opportunities
in diamonds and gemstones, and provide incremental value to the Company’s shareholders by utilizing the Company’s expertise,
infrastructure, and retail and wholesale customer base, to generate additional profit through earnings from its role as General
Partner. Ultimately DGSE’s management made the decision to end its involvement in the Fund, and the General Partner has wrapped
up the Fund’s activities and liquidated all remaining inventory. The Fund transacted business with the Company from time
to time, including buying gemstones from and selling gemstones to the Company. In the six months ended June 30, 2015, the Company
made no sales to the Fund, had purchases of $11,330 from the Fund, and owed the Fund nothing as of June 30, 2015 in trade payables.
In the six months ended June 30, 2014, the Company made sales of $31,543 to the Fund, had purchases of $95,446 from the Fund, and
owed the Fund $74,345 as of June 30, 2014 in trade payables. Additionally, in the six months ended June 30, 2015 the General Partner
generated net loss of $1,106 from its role with the Fund, while in the same quarter of 2014, the General Partner generated net
income of $37,263. The loss in the current year was driven by low activity within the Fund, combined with expenses related to the
shutdown of the Fund.
(9) Legal Proceedings
There have been no material changes with respect to the legal
proceedings disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
(10) Discontinued Operations
During
the first half of 2014, the Company elected to discontinue the operations of Southern Bullion, due to the lack of profitability
and management's belief that it was unlikely that profitability would be reached in the foreseeable future. The significant change
in the precious metals market in 2013, including a 30% decline in the spot price of gold since the acquisition of Southern Bullion
in 2011, had a disproportionately negative impact on the customer traffic, transactional volume and profitability of the Southern
Bullion operations. As a result, during 2013, the Southern Bullion operations generated a net loss of approximately $1.9 million.
The operating results for all Southern Bullion operations have been reclassified as discontinued operations in the consolidated
statements of operations for the three and six month periods ended June 30, 2015 and 2014.
| |
For the Three Months Ended June 30, | | |
For the Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenue: | |
| | | |
| | | |
| | | |
| | |
Sales | |
$ | - | | |
$ | 2,621,473 | | |
$ | 65 | | |
$ | 5,367,808 | |
Cost of goods sold | |
| - | | |
| 2,219,180 | | |
| - | | |
| 3,647,677 | |
Gross margin | |
| - | | |
| 402,293 | | |
| 65 | | |
| 1,720,131 | |
| |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| (41,683 | ) | |
| 1,111,954 | | |
| (44,142 | ) | |
| 2,555,127 | |
Depreciation and amortization | |
| - | | |
| 3,159,214 | | |
| - | | |
| 3,259,552 | |
Total expenses | |
| (41,683 | ) | |
| 4,271,168 | | |
| (44,142 | ) | |
| 5,814,679 | |
| |
| | | |
| | | |
| | | |
| | |
Operating income (loss) | |
| 41,683 | | |
| (3,868,875 | ) | |
| 44,207 | | |
| (4,094,548 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other expense (income): | |
| | | |
| | | |
| | | |
| | |
Other income, net | |
| - | | |
| (14,632 | ) | |
| - | | |
| (19,398 | ) |
Interest (income) expense | |
| - | | |
| 7,139 | | |
| (40 | ) | |
| 10,888 | |
| |
| - | | |
| (7,493 | ) | |
| (40 | ) | |
| (8,510 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) from discontinued operations before income taxes | |
| 41,683 | | |
| (3,861,382 | ) | |
| 44,247 | | |
| (4,086,038 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income tax expense | |
| - | | |
| 51,790 | | |
| - | | |
| 65,527 | |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) from discontinued operations after income taxes | |
$ | 41,683 | | |
$ | (3,913,172 | ) | |
$ | 44,247 | | |
$ | (4,151,565 | ) |
Discontinued operations for
the three and six months ended June 30, 2015, include adjustments of existing expense accruals related to winding down the operations
of Southern Bullion. The three and six months ended June 30, 2014, includes losses related to store operations, prior to all stores
being closed, as well as expenses for key Southern Bullion personnel involved in winding down the business, and expenses related
to cancellation of leases and other contracts. The Company believes it has now recognized all material expenses related to the
closure of Southern Bullion operations.
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 June 30, 2015 (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; 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
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 Fiscal 2014 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
General
Many aspects of our business
are impacted by changes in precious metals pricing, with the greatest impact relating to gold. Fiscal 2014 produced much more stability
in gold pricing (following a turbulent Fiscal 2013), albeit at significantly lower prices than were seen between 2010 and 2012.
During the first half of 2015 gold traded within a relatively narrow band, although recent weeks have seen increased downward pricing
pressure. While gold saw a brief run up in January, by June 30, 2015, prices were very close to where they began the year, with
London PM Fix closing at $1,174.25 per ounce. Subsequent to the end of the quarter, gold markets have seen increased volatility
and downward movement, even closing below $1,100 an ounce for the first time in over five years.
The market
for buying and selling pre-owned or “scrap” gold remains extremely negative. According to the World Gold Council, the
supply of recycled gold was down an additional 11% in 2014, and is now at its lowest point in seven years. Scrap gold purchases
have historically been a critical profit engine for all of our locations, and the downturn in this category has had significant
impact on our revenue, profitability and long-term growth plans.
We continue to believe that
the most successful locations will be those that can sustain our full retail “exchange” model: engaging in both buying
and selling of precious metals and related merchandise, while maintaining a robust and diverse inventory across all jewelry categories
and providing critical services such as watch and jewelry repair. Those locations that have historically been primarily scrap
buying shops simply no longer make economic sense in the current environment. In recent years, DGSE has had many small locations
spread across the DFW area in order to provide multiple scrap collection sites. We are now focusing on developing larger, full-service
stores, with broad inventory offerings across all categories, while also providing value-added services that help drive retail
traffic. During the quarter ended March 31, 2015, we closed our two most outlying stores in DFW, and signed a lease on a new larger
location in the western part of the area. During the recent quarter ended June 30, 2015, we closed an additional DFW location,
and subsequent to the end of the recent quarter, we closed one of our locations in the Charleston market. We will continue to
focus on evolving our business across all of our markets, in an effort to drive efficiency across our geographical footprint,
and maximize profitability.
Three Months Ended June
30, 2015 compared to Three Months Ended June 30, 2014
Sales. Sales related to continuing operations
decreased by $2,575,775, or 15%, during the three months ended June 30, 2015, to $14,942,637, as compared to $17,518,412 during
the same period in 2014. Bullion and scrap sales continued to trend downward, consistent with the industry, and DGSE’s jewelry,
watch and diamond lines were approximately in line with the prior year quarter.
Gross Profit. For the three months ended
June 30, 2015, gross profit decreased by $441,008, or 15%, to $2,569,176, as compared to $3,010,184 during the same period in
2014. The decrease in gross profit dollars was due to decreased sales. Gross margin as a percentage of revenue was consistent
compared to same period in the prior year, at 17.2%.
Selling, General and Administrative Expenses.
For the three months ended June 30, 2015, Selling, General and Administrative (“SG&A”) expenses decreased
by $824,226, or 25%, to $2,533,140, as compared to $3,357,366 during the same period in 2014. The overall decrease in SG&A
was achieved primarily through continued efforts to reduce expenses at all levels, including store-level operating expenses, corporate
overhead, and advertising expense.
Depreciation and Amortization.
For the three months ended June 30, 2015, depreciation and amortization expense was $81,708 compared to $91,230 for the same period
in 2014, a decrease of $9,522, or 10%. This decrease in depreciation is related to a reduction in the level of fixed assets deployed,
as the store count has decreased in recent months.
Interest Expense. For the
three months ended June 30, 2015, interest expense was $88,893, an increase of $563, or 1%, compared to $88,330 during the same
period in 2014. The increase is primarily due to a slightly higher balance in trade payables to Elemetal Capital, on which the
Company pays interest.
Income (loss) from Discontinued
Operations. The results for the three months ended June 30, 2015, were income of $41,683 related to the Southern Bullion locations
closed in 2014, compared to a loss of $3,913,172 related to operating losses, closure expenses, and asset write-offs of these
locations in the same quarter of 2014. The current quarter income relates to adjustments in accrued expenses related to the wind
down of all Southern Bullion operations.
Six Months Ended June
30, 2015 compared to Six Months Ended June 30, 2014
Sales. Sales related to continuing operations
decreased by $7,764,933, or 22%, during the six months ended June 30, 2015, to $27,817,786, as compared to $35,582,719 during
the same period in 2014. Bullion and scrap sales continued to trend downward, consistent with the industry, and DGSE’s jewelry,
watch and diamond lines saw slight decreases, as extreme weather had an especially negatively impact on the Company’s core
market during the first half of the year.
Gross Profit. For the six months ended June
30, 2015, gross profit decreased by $1,318,496, or 21%, to $4,902,359, as compared to $6,220,855 during the same period in 2014.
Gross margin as a percentage of revenue increased slightly to 17.6% for the six months ended June 30, 2015, compared to 17.5%
for the same period in the prior year.
Selling, General and Administrative Expenses.
For the six months ended June 30, 2015, SG&A expenses decreased by $1,284,959, or 19%, to $5,419,181, as compared to $6,704,140
during the same period in 2014. The decrease was achieved despite recognizing non-recurring expenses related to the closure of
three DFW area stores. These expenses were primarily comprised of accelerated lease expense and fees related to early lease termination.
The overall decrease in SG&A was achieved primarily through continued efforts to reduce expenses at all levels, including
store-level operating expenses, corporate overhead, and advertising expense.
Depreciation and Amortization.
For the six months ended June 30, 2015, depreciation and amortization expense was $222,332 compared to $181,815 for the same period
in 2014, an increase of $40,517, or 22%. This was increase was due to the one-time write off of assets formerly utilized in three
DFW area stores closed during the period.
Interest Expense. For the
six months ended June 30, 2015, interest expense was $172,661, an increase of $3,518, or 2%, compared to $169,143 during the same
period in 2014. The increase is primarily due to a slightly higher balance in trade payables to Elemetal Capital, on which the
Company pays interest.
Income (loss) from Discontinued
Operations. The results for the six months ended June 30, 2015, were income of $44,247 related to the Southern Bullion locations
closed in 2014, compared to a loss of $4,151,565 related to operating losses, closure expenses, and asset write-offs of these
locations in the same period of 2014. The current period income relates to adjustments in accrued expenses related to the wind
down of all Southern Bullion operations.
Liquidity and Capital Resources
During the six months ended
June 30, 2015 and 2014, cash flows used in continuing operating activities totaled $594,627 and $1,535,656, respectively. The use
of cash in continuing operating activities for the six months ended June 30, 2015, was a result of losses from continuing operations
of $933,035, combined with a $2,028,212 decrease in accounts payable and accrued expenses, and offset by a reduction in inventory
of $884,361 and a reduction in accounts receivable of $732,597.
During the six months ended
June 30, 2015 and 2014, cash flows used in investing activities totaled $76,831 and $109,627, respectively. The use of cash in
investing activities during both periods was the result of purchases of property and equipment.
During the six months ended
June 30, 2015 and 2014, cash flows used in financing activities totaled $71,074 and $145,732, respectively. The use of cash in
financing activities during both periods was primarily the result of repayment of debt, and payments on capital lease obligations.
During the six months ended
June 30, 2015 and 2014, cash flows provided by discontinued operations totaled $2,897 and $1,297,019, respectively. The cash flow
provided by discontinued operations in the prior year period was primarily related to the liquidation of inventory from Southern
Bullion.
We expect our capital expenditures
to total approximately $500,000 during the current fiscal year. These expenditures will be largely driven by the build out of new
locations in DFW, upgrades and repairs of existing facilities, and the re-launch of our website. As of June 30, 2015, 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 they will continue to do so in
the future.
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 believes 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 July 19, 2012, we entered
into the Loan Agreement with NTR, an affiliate of DGSE’s majority stockholder Elemetal, pursuant to which NTR, agreed to
provide us with a guidance line of revolving credit in an amount up to $7,500,000. The Loan Agreement anticipated termination–at
which point all amounts outstanding thereunder would be due and payable (such amounts, the “Obligations”)–upon
the earlier of: (i) August 1, 2014; (ii) the date that is twelve months after 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 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 us 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 DGSE and Texas Capital Bank, and additional proceeds have been 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 were amortized to interest expense on a straight-line
basis over two years, and have been completely amortized. On February 25, 2014, we entered into a one-year extension of the Loan
Agreement with NTR, extending the termination date to August 1, 2015, and on February 4, 2015, we entered into an additional two-year
extension, extending the termination date to August 1, 2017, unless earlier terminated as described above. No debt issuance costs
were incurred in relation to these extensions. All other terms of the agreement remain the same. As of June 30, 2015 and December
31, 2014, we had outstanding balances of $2,303,359 and $2,303,359, respectively, drawn on the NTR credit facility.
On July 15, 2014, we received
final notice from the Texas Comptroller of its consent to a payment agreement to pay amounts due by us under the Texas Comptroller’s
decision (the “Decision”) in connection with the 2010 Sale Tax Audit (the “Payment Agreement”). As more
fully discussed in the Legal Proceeding section of the Fiscal 2014 10-K, pursuant to the terms of the Payment Agreement, we agreed
to pay approximately $1.1 million in taxes, penalties and interest. Pursuant to the terms of the Payment Agreement, we will
pay the agreed amount provided in the Decision over an 18-month period, which began with an initial payment of $325,000 in June
2014, followed by monthly payments of $47,000 until all agreed tax amounts, penalty and accrued interest are paid. This expense
was fully accrued in Fiscal 2014, but based on the terms of the Payment Agreement, DGSE will make payments of $47,000 per month
for the balance of 2015. As of June 30, 2015, the balance of payments to the Texas Comptroller, related to the Decision, was approximately
$300,000.
Off-Balance Sheet Arrangements
We have
no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to stockholders.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.
Because
we are a “smaller reporting company,” we are not required to disclose the information required by this item.
Item 4. Controls and Procedures.
Disclosure Controls and
Procedures
Based upon the evaluation required
by Section 11a-15(b) of the Securities Exchange Act of 1934, as amended, our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures, as of June 30, 2015, were effective.
Changes in Internal Control over Financial
Reporting
There have been no changes in
our internal controls over financial reporting during the quarter ended June 30, 2015, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material
changes with respect to the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
Item 1A. Risk Factors.
For a full discussion of the
risk factors applicable to our business, financial condition or results of operations, please see the section entitled “Risk
Factors” in our Fiscal 2014 10-K. Other than as listed below, there have been no material changes in our risk factors from
those disclosed in our Fiscal 2014 10-K. The risk factors disclosed in our Fiscal 2014 10-K, in addition to the other information
set forth in this report, could materially affect our business, financial condition or results. Additional risks and uncertainties
not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition
or results
Our success depends on our ability to attract,
retain and motivate qualified directors, management and other skilled employees.
Our future success and growth depend on the continued
services of our directors, key management and employees. The loss of the services of any of these individuals or any other key
employee or contractor could materially affect our business. Subsequent to the end of our second fiscal quarter, two of our independent
directors resigned for personal reasons, and our Chief Executive Officer announced his intent to resign effective mid-September.
If we are unable to attract and retain a qualified chief executive officer, our business could suffer. Additionally, the resignation
of two of our independent directors causes us to be out of compliance with the continued listing requirements of the NYSE MKT regarding
independent directors and composition of the audit committee, as well as the governance reforms we agreed to make in connection
with our Agreed Final Judgment with the SEC. While we have started the process of searching for a new chief executive officer and
independent directors, we cannot guarantee that we will be able to attract and retain qualified candidates in a reasonable amount
of time. If we do not retain independent directors in a timely manner in order to regain compliance with the NYSE MKT continued
listing requirements, we would face possible delisting of our Common Stock. If we do not retain independent directors in a timely
manner to comply with our governance reforms, we may be the subject of additional enforcement actions and further lawsuits. Our
future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition for employees
in our industry is intense and we may not be successful in attracting or retaining them. There are a limited number of people with
knowledge of, and experience in, our industry. We do not have employment agreements with many of our key employees. We do not maintain
life insurance policies on any of our employees. Our loss of key personnel, especially without advance notice, or our inability
to hire or retain qualified personnel, could have a material adverse effect on sales and operations. We cannot guarantee that we
will continue to retain our key management and skilled personnel, or that we will be able to attract, assimilate and retain other
highly qualified personnel in the future. In addition, members of our management may be involved in business activities involving
our wholly-owned subsidiaries that may distract such members from our day-to-day operations. Such distractions could have a material
adverse effect on sales as a result of a failure to respond to market conditions on a timely basis.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit |
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Filed |
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Incorporated |
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Date Filed |
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Exhibit |
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No. |
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Description |
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Herein |
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by Reference |
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Form |
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with SEC |
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No. |
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3.1 |
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Articles of Incorporation dated September 17, 1965 |
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X |
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8-A12G |
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June 23, 1999 |
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3.1 |
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3.2 |
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Certificate of Amendment to Articles of Incorporation, dated October 14, 1981 |
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X |
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8-A12G |
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June 23, 1999 |
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3.2 |
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3.3 |
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Certificate of Resolution, dated October 14, 1981 |
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X |
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8-A12G |
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June 23, 1999 |
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3.3 |
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3.4 |
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Certificate of Amendment to Articles of Incorporation , dated July 15, 1986 |
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X |
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8-A12G |
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June 23, 1999 |
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3.4 |
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3.5 |
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Certificate of Amendment to Articles of Incorporation, dated August 23, 1998 |
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X |
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8-A12G |
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June 23, 1999 |
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3.5 |
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3.6 |
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Certificate of Amendment to Articles of Incorporation, dated June 26, 1992 |
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X |
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8-A12G |
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June 23, 1999 |
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3.6 |
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3.7 |
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Certificate of Amendment to Articles of Incorporation, dated June 26, 2001 |
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X |
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8-K |
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July 3, 2001 |
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1.0 |
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3.8 |
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Certificate of Amendment to Articles of Incorporation, dated May 22, 2007 |
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X |
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8-K |
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May 31, 2007 |
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3.1 |
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3.9 |
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By-laws, dated March 2, 1992 |
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X |
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8-A12G |
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June 23, 1999 |
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3.7 |
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4.1 |
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Specimen Common Stock Certificate |
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X |
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S-4 |
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January 6, 2007 |
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4.1 |
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10.1 |
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Second Amendment to Loan Agreement and Revolving Credit Note, dated January 26, 2015, by and between the Company and NTR |
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X |
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8-K |
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February 6, 2015 |
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10.1 |
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31.1 |
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Certification pursuant to Rule 11a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by James D. Clem |
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X |
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31.2 |
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Certification pursuant to Rule 11a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by C. Brett Burford |
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X |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1150 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by James D. Clem |
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X |
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32.2 |
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Certification pursuant to 18 U.S.C. Section 1150 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by C. Brett Burford |
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X |
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101.INS |
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XBRL Instance Document |
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X |
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101.SCH |
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XBRL Taxonomy Extension Schema |
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X |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase |
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X |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase |
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X |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase |
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X |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase |
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X |
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SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
DGSE COMPANIES, INC.
(Registrant)
|
|
Date: August 13, 2015 |
By: |
/s/ JAMES D. CLEM |
|
|
|
James D. Clem |
|
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Chief Executive Officer
(Principal Executive Officer) |
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Date: August 13, 2015 |
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/s/ C. BRETT BURFORD |
|
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|
C. Brett Burford |
|
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|
Chief Financial Officer
(Principal Financial Officer) |
|
EXHIBIT 31.1
CERTIFICATION
I, James D. Clem, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of DGSE Companies, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 11a-15(e) and 15d-15(e)), and internal control over financial
reporting (as defined in Exchange Act Rules 11a–15(f) and 15d–15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors: |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: August 13, 2015 |
By: |
/s/ JAMES D. CLEM |
|
|
James D. Clem |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, C. Brett Burford, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of DGSE Companies, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 11a-15(e) and 15d-15(e)), and internal control over financial
reporting (as defined in Exchange Act Rules 11a–15(f) and 15d–15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors: |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: August 13, 2015 |
By: |
/s/ C. BRETT BURFORD |
|
|
C. Brett Burford |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
EXHIBIT 32.1
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. § 1150)
The undersigned, as
the Chief Executive Officer of DGSE Companies, Inc., certifies, to the best of his knowledge, that the Quarterly Report on Form
10-Q for the quarter ended June 30, 2015, which accompanies this certification fully complies with the requirements of Section
11(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material
respects, the financial condition and results of operations of DGSE Companies, Inc. at the dates and for the periods indicated.
The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1150) and shall
not be relied upon for any other purpose.
Date: August 13, 2015 |
By: |
/s/ JAMES D. CLEM |
|
|
James D. Clem |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
EXHIBIT 32.2
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. § 1150)
The undersigned, as
the Chief Financial Officer of DGSE Companies, Inc., certifies, to the best of his knowledge, that the Quarterly Report on Form
10-Q for the quarter ended June 30, 2015, which accompanies this certification fully complies with the requirements of Section
11(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material
respects, the financial condition and results of operations of DGSE Companies, Inc. at the dates and for the periods indicated.
The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1150) and shall
not be relied upon for any other purpose.
Date: August 13, 2015 |
By: |
/s/ BRETT BURFORD |
|
|
C. Brett Burford |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
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