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DGSE > SEC Filings for DGSE > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for DGSE COMPANIES INC

Form 10-Q for DGSE COMPANIES INC


31-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Form 10-Q including but not limited to the section of this Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," information concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items, including the outcome of the SEC investigation described elsewhere in this Form 10-Q or pending litigation, and our strategies, plans and objectives, together with other statements that are not historical facts, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (The "Exchange Act"). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may," "will," "would," "expect," "intend," "could," "estimate," "should," "anticipate" or "believe". We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements other than statements of historical information provided herein are forward-looking statements are based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ from current expectations are described under the section of this Form 10-Q entitled "Risk Factors" and elsewhere in this form 10-Q as well as under the section entitled "Risk Factors" in the Fiscal 2011 10-K. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to-release publicly the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital expenditures, store growth plans, or to reflect the occurrence of unanticipated events.

Results of Operations

Three Months Ended June 30, 2012 compared to Three Months Ended June 30, 2011

Sales. Sales decreased by $2,057,923, or 7%, during the three months ended June 30, 2012 to $28,584,697, as compared to $30,642,620 during the same period in 2011. The decrease was primarily due to a decrease in sales of bullion, jewelry and rare coins. In addition, revenue from discontinued operations for Superior Galleries, Inc. ("Superior") were excluded in the amount of $1,148,552 and $2,644,071 for the periods ended June 30, 2012 and 2011 respectively. These decreases were partially offset by the acquisition of SBT in September 2011 which added revenues of $6,642,789 during the three months ended June 30, 2012 over the same period in 2011.

Cost of Sales. For the three months ended June 30, 2012, cost of sales decreased by $2,949,156, or 11% to $24,572,269, as compared to $27,521,425 during the same period in 2011, driven by lower sales. Cost of goods as a percentage of sales decreased from 89.8% in 2011 to 86.0% in 2012 primarily due to the higher margins on the newly-acquired SBT business.

Selling, General and Administrative Expense. For the three months ended June 30, 2012, Selling, General and Administrative ("SG&A") expenses increased by $3,421,713, or 133%, to $5,989,724, as compared to $2,568,011 during the same period in 2011. $1,784,447 of this increase is due to the addition of the SBT stores. The opening of four new non-SBT stores added $692,183 in the current period, due to increased advertising costs, salaries, payroll taxes, building rent and other costs. In addition, the Company incurred $931,867 in professional fees associated with the restatement of our financial statements, and the related SEC investigation.

Depreciation and Amortization. For the three months ended June 30, 2012 the depreciation and amortization expense was $143,496 compared to $72,402 for the same period in 2011, an increase of 98%. The current period increase in depreciation and amortization over the same period in 2011 is related to the amortization of intangibles acquired as part of the acquisition of SBT in September 2011 (See note 9 under Item 1 for details on the acquisition).

Interest Expense. For the three months ended June 30, 2012, interest expense was $90,406, a decrease of $74,581 compared to $164,987 during the same period in 2011. This decrease is primarily due to the early pay-off of two credit agreements in the fourth quarter of 2011, and conversion of a portion of the Company's convertible debt instruments, which reduced quarterly interest payments.

Loss from Discontinued Operations. The results for the three months ended June 30, 2012 are a net loss of $200,654 related to operations of Superior. This loss included an operating loss of $98,129, and other expense of $100,158 consisting of the write off of the deferred rent liability, net of rent expense.

Six Months Ended June 30, 2012 compared to Six Months Ended June 30, 2011

Sales. Sales increased by $7,786,277, or 15%, to $61,399,360 during the six months ended June 30, 2012 as compared to $53,613,083 during to the same period in 2011. This increase was primarily due to increased scrap sales, which were up 57% over 2011, driven primarily by the acquisition of SBT, and partially offset by the decrease in sales of jewelry, bullion and rare coins. Overall SBT added revenue of $14,422,596 for the six months ended June 30, 2012.

Cost of Sales. For the six months ended June 30, 2012, cost of sales increased by $2,714,581, or 6%, to $50,659,420, as compared to $47,944,839 during the same period in 2011. Cost of goods as a percentage of sales decreased from 89.4% in 2011 to 86% in 2012 primarily due to the higher margins on the newly acquired SBT business.

Selling, General and Administrative Expense. For the six months ended June 30, 2012, SG&A expenses increased by $6,988,250, or 152%, to $11,599,018, as compared to $4,610,768 during the same period in 2011. $3,827,907 of this increase is due to the addition of the SBT stores. The opening of four new non-SBT stores added $1,336,591 in the current period, due to increased advertising costs, salaries, payroll taxes, building rent and other costs. In addition, the Company incurred $1,296,465 in professional fees associated with the restatement of our financial statements, and the related SEC investigation.

Depreciation and Amortization. For the six months ended June 30, 2012, depreciation and amortization expense was $295,923 compared to $160,094 during the same period in 2011, an increase of 85%. The current period increase in depreciation and amortization over the same period relates to the amortization of intangible assets acquired as part of the acquisition of SBT in September, 2011 (See note 9 under Item 1 for details on the acquisition).

Interest Expense. For the six months ended June 30, 2012, interest expense was $181,119, a decrease of $82,474 from $263,593 during the same period in 2011. This decrease is primarily due to the early pay-off of two credit agreements in the fourth quarter of 2011, and conversion of a portion of the Company's convertible debt instruments, which reduced quarterly interest payments.

Loss from Discontinued Operations. The results for the six month period ended June 30, 2012 are a net loss of $662,406 related to operations of Superior. This loss included an operating loss of $335,921, and other expense of $321,123, which consists of the write off of the deferred rent liability, and a $158,093 expense related to a litigation settlement paid in October 2012 which was accrued for as of March 31, 2012.

Liquidity and Capital Resources

During the six months ended June 30, 2012 and 2011, cash flows (used in) provided by operating activities totaled ($4,144,388) and $1,433,428, respectively. Cash flows used for the six months ended June 30, 2012 were primarily a result of the $1,910,282 net loss, a $2,200,484 increase in inventory and a decrease in accounts payables of $1,707,486 partially offset by a $318,591 increase in customer deposits and other liabilities and a $427,375 decrease in accounts receivable. During the same period in 2011, there was a decrease in trade receivables of $311,994, an increase in accounts payable and accrued expenses of $151,812, increase in prepaid expense of $103,160 and a decrease in inventory of $180,043.

During the six months ended June 30, 2012 and 2011, cash flows used in investing activities totaled $855,817 and $156,680, respectively. The use of cash during both periods was primarily driven by purchases of property and equipment related to new store openings. The 2012 period also includes $95,000 in purchases of available for sale investments.

During the six months ended June 30, 2012 and 2011, cash flows used in financing activities totaled $247,839 and $261,130 respectively. The use of cash during both periods was the result of repayment of notes payable and payments on capital lease obligations.

During the six months ended June 30, 2012 and 2011 cash flows provided by (used in) discontinued operations totaled $997,876 and ($1,404,158), respectively.

We expect capital expenditures to total approximately $1,000,000 during the next twelve months. These expenditures will be largely driven by new store openings. It is anticipated that these expenditures will be funded from working capital. As of June 30, 2012, there were no commitments outstanding for capital expenditures.

In the event of significant growth in retail and or wholesale jewelry sales, the demand for additional working capital will expand due to a related need to stock additional jewelry inventory and increases in wholesale accounts receivable. Historically, vendors have offered us extended payment terms to finance the need for jewelry inventory growth and our management believes that we will continue to do so in the future. Any significant increase in wholesale accounts receivable will be financed under a new bank credit facility or from short-term loans from individuals.

Our ability to finance our operations and working capital needs are dependent upon management's ability to negotiate extended terms or refinance its debt. We have historically renewed, extended or replaced short-term debt as it matures and management believes that we will be able to continue to do so in the near future.

From time to time, we have adjusted our inventory levels to meet seasonal demand or in order to meet working capital requirements. We are of the opinion that if additional working capital is required, additional loans can be obtained from individuals or from commercial banks. If necessary, inventory levels may be adjusted in order to meet unforeseen working capital requirements.

On November 2, 2011, we announced that Texas Capital Bank agreed to renew our then-current credit facility Under that certain loan Agreement, dated as of December 22, 2005, between Texas Capital Bank and us (the "TCB Facility"). The TCB facility was composed of a $3.5 million revolving note and a $1.0 million term loan. The renewal was finalized on November 2, 2011. The TCB facility matured in June 2012.

Subsequent to the period covered by this report, on June 21, 2012 the Company entered into an agreement with TCB to extend the maturity date of the credit facility to July 22, 2012. On July 19, 2012, DGSE entered into a Loan Agreement with NTR Metals, LLC, our majority shareholder ("NTR") pursuant to which NTR agreed to provide to us a guidance line of revolving credit in an amount up to $7,500,000. The Loan Agreement provides that the Loan Agreement will terminate-and all amounts outstanding thereunder will be due and payable (such amounts, the "Obligations")-upon the earlier of (i) August 1, 2014, (ii) the date that is twelve months after the we receive notice from NTR demanding the repayment of the Obligations, (iii) the date the Obligations are accelerated in accordance with the terms of the Loan Agreement or (iv) the date on which the commitment terminates under the Loan Agreement. In connection with the Loan Agreement, we granted a security interest in the respective personal property of each of our subsidiaries. The loan carries an interest rate of two percent (2%) per annum for all funds borrowed pursuant to the Loan Agreement. Proceeds received by us pursuant to the terms of the Loan Agreement were used for repayment of all outstanding financial obligations incurred in connection with the TCB Facility, and additional proceeds are expected to be used as working capital in the ordinary course of business.

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.

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