DGSE DGSE Companies Inc

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, 2018 (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 2017 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. The price of gold rebounded during 2017 to end at $1,303 an ounce, at year end according to the London PM Fix. The increase produced a 14% net gain in gold prices from December 31, 2016 to December 31, 2017. The volatility was still prevalent during the year but the general overall trend was upward during Fiscal 2017. Gold prices stabilized during the first quarter of 2018 but has given up some of the gains made in 2017 closing at $1,250 an ounce, at quarter ending June 30, 2018, showing a 4% net loss for the first six months of the year.

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 June 30, 2018 compared to Three Months Ended June 30, 2017

Revenues. Revenues declined by $4,013,665 or 24%, during the three months ended June 30, 2018, to $12,733,262, as compared to $16,746,927 during the same period in 2017. Bullion/rare coin, jewelry and scrap sales declined approximately 21%, 30% and 25%, respectively, compared to the prior year quarter. Other sales increased approximately 14%, compared to the prior year quarter. Revenues declined for the quarter ending June 30, 2018, compared to the quarter ending June 30, 2017, primarily due to falling wholesale revenue. During the prior year we were establishing our wholesale customers and those customers were stocking up on merchandise for their inventory. This year we still have the wholesale customers but they purchase as needed.

Gross Profit. For the three months ended June 30, 2018, gross profit declined by $623,155, or 22%, to $2,190,478, as compared to $2,813,633 during the same period in 2017. The decrease in gross profit was due to a decrease in sales and sales mix. Gross margin as a percentage of revenue increased to 17.2% compared to 16.8% during the same period for the prior year.

Selling, General and Administrative Expenses. For the three months ended June 30, 2018, Selling, General and Administrative (“SG&A”) expenses decreased by $662,842, or 27%, to $1,773,912, as compared to $2,436,754 during the same period in 2017. The decrease in SG&A was achieved through continued efforts to reduce expenses at all levels, including store-level operating expenses and corporate overhead.

Depreciation and Amortization . For the three months ended June 30, 2018, depreciation and amortization expense was $87,732 compared to $92,534 for the same period in 2017, a decrease of $4,802 or 5%.

Interest Expense . For the three months ended June 30, 2018, interest expense was $45,648, a decrease of $3,717, or 8%, compared to $49,365 during the same period in 2017. The decrease is due to the continual pay down of the accounts payable, related party outstanding balance of $3,378,960.

Six Months Ended June 30, 2018 compared to Six Months Ended June 30, 2017

Revenues. Revenues declined by $5,081,637, or 16%, during the six months ended June 30, 2018, to $26,789,135, as compared to $31,870,772 during the same period in 2017. Bullion/rare coin, jewelry and scrap sales declined approximately 20%, 11% and 13%, respectively, compared to the six months ended June 30, 2017. Other sales increased approximately 4%, compared to the prior year six months. Revenues declined for the six months ending June 30, 2018, compared to the quarter ending June 30, 2017, primarily due to falling wholesale revenue. During the prior year we were establishing our wholesale customers and those customers were stocking up on merchandise for their inventory. This year we still have the wholesale customers but they purchase as needed.

Gross Profit. For the six months ended June 30, 2018, gross profit declined by $615,390, or 12%, to $4,692,485, as compared to $5,307,875 during the same period in 2017. The decrease in gross profit was due to a decrease in sales and sales mix. As a percentage of revenue, gross margin increased to 17.5% compared to 16.7% in the same period compared to the prior year. An increase in the margin for bullion/rare coins and jewelry and was offset by a decline in margin for scrap and other sales during the six months ending June 30, 2018.

Selling, General and Administrative Expenses. For the six months ended June 30, 2018, Selling, General and Administrative (“SG&A”) expenses decreased by $741,639, or 16%, to $3,813,947, as compared to $4,555,586 during the same period in 2017. The decrease in SG&A was achieved through continued efforts to reduce expenses at all levels, including store-level operating and corporate overhead expenses.

Depreciation and Amortization . For the six months ended June 30, 2018, depreciation and amortization expense was $177,484 compared to $177,776 for the same period in 2017.

Interest Expense . For the six months ended June 30, 2018, interest expense was $92,530, a decrease of $6,675, or 7%, compared to $99,205 during the same period in 2017. The decrease is due to the continual pay down of the accounts payable, related party outstanding balance of $3,378,960.

Liquidity and Capital Resources

During the six months ended June 30, 2018 and 2017, cash flows used in operating activities totaled $226,785 and $846,120, respectively, a decrease of $619,335. Cash used in operating activities for the six months ended June 30, 2018, was driven largely by a reduction of accounts payable - trade, related party of $523,333, accounts payable and accrued expenses of $333,674, and the increase of inventory by $824,941, offset by the increase of customer deposits and other liabilities of $520,593, the decrease in trade receivables by $110,052, and the net income, without depreciation and amortization, of $797,870.

During the six months ended June 30, 2018 and 2017, cash flows used in investing activities totaled $145,825 and $94,521, respectively, an increase of $51,304. The use of cash in investing activities during the six months ended June 30, 2018 was the result of the continuing buildout expenses to the Midtown location at 13022 Preston Road, Dallas, Texas, continued payment on a new POS system and new signage .

During the six months ended June 30, 2018 and 2017, cash flows used in financing activities totaled $2,352 and $4,357, respectively, a decrease of $2,005. The use of cash in financing activities for the six months ending June 30, 2018 is the result of the final payments on our capital lease obligation. The six months ending June 30, 2017, was the result of the pay down on the same capital lease obligation.

We expect our capital expenditures to total approximately $50,000 during the next twelve months. These expenditures will be largely driven by the purchase of a new equipment to replace older outdated equipment.

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.

The Texas Comptroller conducted a sales and use tax audit of our Texas operations with respect to the period July 1, 2013 through December 31, 2016. The audit was finalized and a determination was made on April 2, 2018, that we owed a total of $17,294, which includes interest and penalties. An initial reserve of $70,000 was established at December 31, 2017 to cover any liability. That reserve was reduced to the amount owed of $17,294 for the accompanying consolidated balance sheet as of March 31, 2018. The balance due of $17,294 was paid in full on April 4, 2018.

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.