Item 1. Financial Statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
462,228
|
|
|
$
|
1,412,082
|
|
Trade receivables, net of allowances
|
|
|
84,712
|
|
|
|
245,095
|
|
Trade receivables, net of allowances, related party
|
|
|
108,612
|
|
|
|
40,627
|
|
Inventories
|
|
|
9,540,577
|
|
|
|
9,384,136
|
|
Prepaid expenses
|
|
|
319,326
|
|
|
|
55,029
|
|
Total current assets
|
|
|
10,515,455
|
|
|
|
11,136,969
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,613,611
|
|
|
|
1,665,103
|
|
Other assets
|
|
|
80,079
|
|
|
|
110,605
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,209,145
|
|
|
$
|
12,912,677
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of capital leases
|
|
$
|
9,427
|
|
|
$
|
12,590
|
|
Accounts payable - trade
|
|
|
890,511
|
|
|
|
1,103,022
|
|
Accounts payable - trade, related party
|
|
|
3,954,014
|
|
|
|
4,107,425
|
|
Accrued expenses
|
|
|
564,265
|
|
|
|
1,209,902
|
|
Customer deposits and other liabilities
|
|
|
665,090
|
|
|
|
572,362
|
|
Total current liabilities
|
|
|
6,083,307
|
|
|
|
7,005,301
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, less current maturities
|
|
|
-
|
|
|
|
1,074
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,083,307
|
|
|
|
7,006,375
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 60,000,000 shares authorized 26,905,631 and 12,328,956 shares issued and outstanding
|
|
|
269,056
|
|
|
|
269,056
|
|
Additional paid-in capital
|
|
|
40,162,177
|
|
|
|
40,162,177
|
|
Accumulated deficit
|
|
|
(34,305,395
|
)
|
|
|
(34,524,931
|
)
|
Total stockholders' equity
|
|
|
6,125,838
|
|
|
|
5,906,302
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
12,209,145
|
|
|
$
|
12,912,677
|
|
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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
15,123,845
|
|
|
$
|
11,774,516
|
|
Cost of goods sold
|
|
|
12,629,604
|
|
|
|
9,625,473
|
|
Gross margin
|
|
|
2,494,241
|
|
|
|
2,149,043
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,118,833
|
|
|
|
2,624,356
|
|
Depreciation and amortization
|
|
|
85,242
|
|
|
|
99,764
|
|
|
|
|
2,204,075
|
|
|
|
2,724,120
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
290,166
|
|
|
|
(575,077
|
)
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
|
4,931
|
|
|
|
(614
|
)
|
Interest expense
|
|
|
49,840
|
|
|
|
95,207
|
|
|
|
|
54,771
|
|
|
|
94,593
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
235,395
|
|
|
|
(669,670
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
15,859
|
|
|
|
20,564
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
219,536
|
|
|
|
(690,234
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations, net of taxes
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
219,536
|
|
|
$
|
(690,331
|
)
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
Income (loss) from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
Income (loss) from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,905,631
|
|
|
|
12,297,501
|
|
Diluted
|
|
|
27,416,909
|
|
|
|
12,297,501
|
|
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 Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
219,536
|
|
|
$
|
(690,331
|
)
|
Loss from discontinued operations, net of tax
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
|
219,536
|
|
|
|
(690,234
|
)
|
Adjustments to reconcile income (loss) from continuing operations to net cash used in
operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
85,242
|
|
|
|
99,764
|
|
Stock based compensation to employees, officers and directors
|
|
|
-
|
|
|
|
16,050
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
|
92,398
|
|
|
|
62,895
|
|
Inventories
|
|
|
(156,391
|
)
|
|
|
(684,498
|
)
|
Prepaid expenses
|
|
|
(264,297
|
)
|
|
|
(40,965
|
)
|
Other assets
|
|
|
30,526
|
|
|
|
60,675
|
|
Accounts payable and accrued expenses
|
|
|
(1,011,559
|
)
|
|
|
(201,346
|
)
|
Customer deposits and other liabilities
|
|
|
92,728
|
|
|
|
1,198,860
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities of continuing operations
|
|
|
(911,817
|
)
|
|
|
(178,799
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(33,750
|
)
|
|
|
(14,706
|
)
|
Net cash used in investing activities of continuing operations
|
|
|
(33,750
|
)
|
|
|
(14,706
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Repayment of debt
|
|
|
-
|
|
|
|
(34,141
|
)
|
Payments on capital lease obligations
|
|
|
(4,287
|
)
|
|
|
(2,970
|
)
|
Net cash used in financing activities of continuing operations
|
|
|
(4,287
|
)
|
|
|
(37,111
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Net cash used in operating activities of discontinued operations
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(949,854
|
)
|
|
|
(230,713
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,412,082
|
|
|
|
1,752,711
|
|
Cash and cash equivalents, end of period
|
|
$
|
462,228
|
|
|
$
|
1,521,998
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
49,840
|
|
|
$
|
64,599
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2016 (such fiscal year, “Fiscal 2016” and such Annual Report on Form 10-K, the “Fiscal 2016 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 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 carrying amount reported for
the Company’s capital lease approximate fair value because the underlying instrument has an interest rate with current market
rates. This instrument is not 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 and warrants
outstanding determined using the treasury stock method.
Recent Accounting Pronouncement
In May 2014,
the FASB 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. In August 2015, the FASB issued Accounting Standards Update No. 2015-14,
Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date
, which delays the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective
for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard
is to be applied retrospectively, with early application permitted for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period. The Company is evaluating the new standard, but does not anticipate
a material impact to the consolidated financial statements once implemented in 2018.
On February 25, 2016, the FASB issued its new
lease accounting guidance in Accounting Standards Update No. 2016-02 (“ASU 2016-02”),
Leases
(Topic 842). Under
the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor
accounting with the lessee accounting model and Topic 606,
Revenue from Contracts with Customers.
Under the new guidance,
lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from
a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to
use, or control the use of, a specified asset for the lease term for all leases (with the exception of short-term leases) at the
commencement date. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases)
must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any transition
accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective
transition approach. The Company is evaluating the financial statement implications of adopting ASU 2016-02.
A summary of inventories is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Jewelry
|
|
$
|
8,501,740
|
|
|
$
|
7,193,126
|
|
Scrap gold
|
|
|
552,267
|
|
|
|
885,194
|
|
Bullion
|
|
|
321,156
|
|
|
|
292,591
|
|
Rare coins and Other
|
|
|
165,414
|
|
|
|
1,013,225
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,540,577
|
|
|
$
|
9,384,136
|
|
|
(5)
|
Basic and Diluted Average Shares
|
A reconciliation of basic and diluted
weighted average common shares for the three months ended March 31, 2017 and 2016 is as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
26,905,631
|
|
|
|
12,297,501
|
|
Effect of potential dilutive securities
|
|
|
511,278
|
|
|
|
-
|
|
Diluted weighted average shares
|
|
|
27,416,909
|
|
|
|
12,297,501
|
|
For the three months ended March
31, 2017 and 2016 there were 1,148,250 and 5,108,530 common share options, warrants, and Restricted Stock Units (RSU’s) unexercised
respectively. For the three months ended March 31, 2016, there were 5,108,530 common share options, warrants, and RSUs not added
to the diluted average shares because inclusion of such shares would be antidilutive. On October 26, 2016, 5,000,000 stock option
shares expired unexercised by Elemetal at a price of $15 a share.
|
|
Outstanding Balance
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Current
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Interest Rate
|
|
|
Maturity
|
Capital leases (1)
|
|
$
|
9,427
|
|
|
$
|
13,664
|
|
|
|
4.20
|
%
|
|
May 1, 2018
|
Sub-Total
|
|
|
9,427
|
|
|
|
13,664
|
|
|
|
|
|
|
|
Less: Current maturities of capital leases
|
|
|
9,427
|
|
|
|
12,590
|
|
|
|
|
|
|
|
Long term debt, less current maturities
|
|
$
|
-
|
|
|
$
|
1,074
|
|
|
|
|
|
|
|
|
(1)
|
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. As of March 31, 2017, we are five payments ahead of
schedule and expect to pay off the capital lease early.
|
|
(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
for the three months ended March 31, 2017 and 2016 was $0 and $16,050, respectively relating to employee and director RSUs, and
included in selling, general and administrative expenses in the accompanying consolidated statements of 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 three months
ended March 31, 2017, 28% of sales and 24% of purchases were transactions with Elemetal, and in the same period of 2016, these
transactions represented 26% of DGSE’s sales and 27% of DGSE’s purchases. On December 9, 2016, DGSE and Elemetal closed
the transactions contemplated by the Elemetal Agreement whereby DGSE issued Elemetal 8,536,585 shares of its common stock and a
warrant to purchase an additional 1,000,000 shares to be exercised within two years after December 9, 2016, in exchange for the
cancellation and forgiveness of $3,500,000 of trade payables owed to Elemetal as a result of bullion-related transactions. As of
March 31, 2017, the Company was obligated to pay $3,954,014 to Elemetal as a trade payable, and had a $108,612 receivable
from Elemetal. As of December 31, 2016, the Company was obligated to pay $4,107,425 to Elemetal as a trade payable, and had a $40,627
receivable from Elemetal. In the three months ended March 31, 2017 and 2016, the Company paid Elemetal $49,840 and $56,811 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
carried 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 remained the same. As of March 31, 2017 and December 31, 2016, the outstanding balance
of the NTR loan was $0 and $0 respectively. In the three months ended March 31, 2017 and 2016, the Company paid NTR $0 and $11,388,
respectively, in interest on the Company’s line of credit.
On December 9, 2016, DGSE and NTR
Metals closed the transactions contemplated by the Elemetal Agreement whereby DGSE issued NTR 5,948,560 shares of common stock
for $0.41 per share in exchange for the cancellation and forgiveness of indebtedness and accrued interest totaling $2,438,910.
In April 2013, 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 leased space in the building subject to a lease that expired in December 2015.
The Company continued to pay this lease on a month-to-month basis with no increase in the rent until our new Midtown retail location
was completed in December 2016. The Midtown location is large enough to facilitate the retail space and our corporate offices.
In the three months ended March 31, 2017 and 2016, the Company recognized rent expense of $0 and $22,500, respectively, related
to the space rented from Elemetal.
In addition to what was disclosed
in our Annual Report on Form 10-K for the year ended December 31, 2016, in March we received notice from the Texas Comptroller
that we would have a sales and use tax audit for the time period July 1, 2013 through December 31, 2016. We expect the process
to take all of 2017 and at this time we are unable to determine if the Company has any sales tax exposure, therefore, we will not
reserve for the audit.
|
(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 months ended March 31, 2017 and 2016.
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
Gross margin
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
-
|
|
|
|
-
|
|
Depreciation
|
|
|
-
|
|
|
|
-
|
|
Total Expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income)
|
|
|
-
|
|
|
|
-
|
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
Interest (income) expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations after income taxes
|
|
|
-
|
|
|
|
(97
|
)
|
As of March 31, 2017, 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 March 31, 2017 (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 2016 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
We buy and sell jewelry, diamonds, fine watches,
rare coins and currency, precious metal bullion products, scrap gold, silver, platinum and palladium as well as collectibles and
other valuables. Our customers include individual consumers, dealers and institutions throughout the United States.
Many aspects of our business are impacted by
changes in precious metals pricing which rise and fall based upon global supply and demand dynamics, with the greatest impact relating
to gold. Fiscal 2016 saw the pricing of gold trending upward for the first half of the year and then falling losing seventy eight
percent (78%) of that gain by year’s end, according to the London PM Fix. During the first quarter of 2017, gold prices rose
again gaining ten percent (10%) by the end of the quarter. Despite this general unstableness in the price of gold, the demand for
physical gold bars and coins increased worldwide during Fiscal 2016 and the first quarter of 2017 while the demand for jewelry
firmed slightly. During the first quarter of 2017, gold prices started at $1,062 per ounce on January 1, 2017, and rose to a price
of $1,242 per ounce on March 31, 2017. This closing price represents an increase of approximately ten percent (10%) for the quarter.
The market for buying and selling pre-owned
or “scrap” gold has been negative during the past several years. Scrap gold purchases have historically been a critical
profit engine for all of our locations, and our marketing strategy is aiming at making this, once again, a significant impact on
our revenue, profitability and long-term growth plans.
Following a leadership change
in mid-December 2016, we eschewed the unsuccessful strategies of recent years and returned to our roots: buying and selling jewelry
and timepieces at exceptional prices. Our strategy is to be an information resource for clients, bringing transparency to purchase
and sale transactions, and offer value and liquidity to those seeking to buy, sell or trade jewelry, watches, diamonds or coins.
The following table represents our historical
operating results by categories:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Revenues
|
|
|
Gross Profit
|
|
|
Margin
|
|
|
Revenues
|
|
|
Gross Profit
|
|
|
Margin
|
|
Jewelry
|
|
$
|
4,586,936
|
|
|
$
|
1,350,370
|
|
|
|
29.4
|
%
|
|
$
|
3,281,551
|
|
|
$
|
1,046,633
|
|
|
|
31.9
|
%
|
Bullion/Rare Coin
|
|
|
8,866,561
|
|
|
|
799,079
|
|
|
|
9.0
|
%
|
|
|
7,307,959
|
|
|
|
667,200
|
|
|
|
9.1
|
%
|
Scrap
|
|
|
1,277,724
|
|
|
|
203,732
|
|
|
|
15.9
|
%
|
|
|
766,558
|
|
|
|
255,027
|
|
|
|
33.3
|
%
|
Other
|
|
|
392,624
|
|
|
|
141,060
|
|
|
|
35.9
|
%
|
|
|
418,448
|
|
|
|
180,183
|
|
|
|
43.1
|
%
|
|
|
$
|
15,123,845
|
|
|
$
|
2,494,241
|
|
|
|
16.5
|
%
|
|
$
|
11,774,516
|
|
|
$
|
2,149,043
|
|
|
|
18.3
|
%
|
Three Months Ended March 31, 2017 compared
to Three Months Ended March 31, 2016
Revenues.
Revenues related to continuing
operations increased by $3,349,329 or 28%, during the three months ended March 31, 2017, to $15,123,845, as compared to $11,774,516
during the same period in 2016. Every major sales category was up compared to the three months ended March 31, 2016, jewelry sales
increased 40%, bullion and rare coin was up 21%, scrap sales were up 67%, with other categories down slightly, compared with the
prior year quarter.
Gross Profit.
For the three months ended
March 31, 2017, gross profit increased by $345,198, or 16%, to $2,494,241, as compared to $2,149,043 during the same period in
2016. The increase in gross profit dollars was due primarily to increased sales. As a percentage of revenue, gross margin decreased
to 16.5% compared to 18.3% in the same period for the prior year.
Selling, General and Administrative Expenses.
For the three months ended March 31, 2017, Selling, General and Administrative (“SG&A”) expenses decreased
by $505,523, or 19%, to $2,118,833, as compared to $2,624,356 during the same period in 2016. The decrease in SG&A was achieved
through efforts to reduce expenses at all levels, including store-level operating expenses, and corporate overhead.
Depreciation and Amortization
.
For the three months ended March 31, 2017, depreciation and amortization expense was $85,242 compared to $99,764 for the same period
in 2016, a decrease of $14,522, or 15%. This decrease in depreciation is primarily associated with assets that are fully depreciated
although still in service.
Interest Expense
.
For the three months ended March 31, 2017, interest expense was $49,840, a decrease of $45,367, or 48%, compared to $95,207 during
the same period in 2016. The decrease is primarily due to the sale and subsequent payoff of the mortgage attached to the building
and land located on Reeder Road and the debt to equity exchange between DGSE and NTR Metals, LLC eliminating an outstanding debt
of $2,303,359 that bore an interest rate of two percent (2%) per annum. The Reeder Road mortgage bore an interest rate of six and
seventy one-hundredths of one percent (6.70%) per annum and when sold July 2016 eliminated a mortgage of $1,517,106.
Income (Loss) from Discontinued
Operations.
For the three months ended March 31, 2017, the Company incurred $0 income or loss related to discontinued operations.
The results for the three months ended March 31, 2016, the Company incurred state tax expense of $97 related to discontinued operations.
The expense related to the Southern Bullion locations closed in 2014.
Liquidity and Capital Resources
During the three months ended March 31, 2017
and 2016, cash flows used in operating activities totaled $911,817 and $178,799, respectively, an increase of $733,018. Cash used
in operating activities for the three months ended March 31, 2017, was driven largely by the reduction of accounts payable
and accrued expenses of $1,011,559, the increase of prepaid expenses of $264,297, and the increase of inventories of $156,391,
offset by an increase in customer deposits and other liabilities of $92,728, a reduction of trade account receivables of $92,398
and the net income from continuing operations of $219,536. Cash used in operating activities for the three months ended March 31,
2016, was driven largely by the net loss from continuing operations of $690,331, the increase in inventories of $684,498, offset
by an increase of customer deposits and other liabilities of $1,198,860.
During the three months ended March 31, 2017
and 2016, cash flows used in investing activities totaled $33,750 and $14,706, respectively, an increase of $19,044. The use of
cash in investing activities during the three months ended March 31, 2017 was the result of the continuing buildout expenses to
the Midtown location at 13022 Preston Road, Dallas, Texas.
During the three months ended March 31, 2017
and 2016, cash flows used in financing activities totaled $4,287 and $37,111 respectively, a reduction of $32,824. The use of cash
in financing activities during the period ending March 31, 2016 was primarily the result of repayment of debt and payments on capital
lease obligations.
We expect our capital expenditures to total
approximately $180,000 during the next twelve months. These expenditures will be largely driven by the purchase of a new point-of-sale
system. The new point-of-sale system is currently being designed and built specifically for DGSE and estimated to be implemented
by August 2017. As of March 31, 2017, there were no commitments outstanding, except for the POS system, for capital expenditures.
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 carried 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 were 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 remained the same. As of March 31, 2017 and December 31, 2016, we had
outstanding balances of $0 and $0, respectively, drawn on the NTR credit facility.
On December 9, 2016, DGSE and NTR Metals closed
the transactions contemplated by the Elemetal Agreement whereby DGSE issued NTR 5,948,560 shares of common stock for $0.41 per
share in exchange for the cancellation and forgiveness of indebtedness and accrued interest totaling $2,438,910.
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 Sales Tax Audit (the “Payment Agreement”). As more fully discussed
in the Legal Proceeding section of our Fiscal 2015 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 were to 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 made payments of $47,000 per month through all of 2015. The final payment
of $47,000 was submitted to the Texas Comptroller in January 2016 to fully satisfy the indebtedness associated with the 2010 Sale
Tax Audit.
The Texas Comptroller conducted a second sales
and use tax audit of our operations in Texas with respect to the period December 1, 2009 through June 30, 2013 and subsequently
sent us a final assessment in November 2016 asserting that we owed an amount of $220,007 plus penalties and interest of $ 66,645
for a total payment due of $286,652. On February 21, 2017, a Compromise and Settlement Agreement was reached between DGSE and the
Comptroller’s Office to pay a lump sum payment of $261,490 on or before March 23, 2017. We paid the negotiated amount on
March 2, 2017.
In March 2017, we received notice from the
Texas Comptroller’s Office that we would have a sales and use tax audit for the time period July 1, 2013 through December
31, 2016. We expect the process to take all of 2017 and at this time we are unable to determine if the Company has any sales tax
exposure, therefore, we will not reserve for the audit.
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.