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Envela Corp - Annual Report: 2009 (Form 10-K)

Unassociated Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-11048

DGSE COMPANIES, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
88-0097334
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

11311 Reeder Road
Dallas, Texas 75229
972-484-3662
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $.01 per share

(Title of Class)
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ¨            NO þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
YES ¨            NO þ
 
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 þ             NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company.  See definitions of “larger accelerated filer,” “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller Reporting Company  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨            NO þ

Aggregate market value of the 3,774,762 shares of Common Stock held by non-affiliates of the registrant at the closing sales price as reported on the NYSE Amex on June 30, 2009.
  $ 4,152,238  
         
Number of shares of Common Stock outstanding as of the close of business on March 27, 2010:
    9,863,635  
 
Documents incorporated by reference:

Portions of the definitive proxy statement relating to the 2010 Annual Meeting of Stockholders of DGSE Companies, Inc. are incorporated by reference into Part III of this report.

 
 

 

TABLE OF CONTENTS

     
Page
       
 
PART I
   
       
Item 1.
Business
 
1
Item 1A.
Risk Factors
 
8
Item 1B.
Unresolved Staff Comments
 
15
Item 2.
Properties
 
15
Item 3.
Legal Proceedings
 
15
       
 
PART II
   
       
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
16
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
18
Item 7A.
Quantitative and Qualitative Disclosure about Market Risk
 
27
Item 8.
Financial Statements and Supplementary Data
 
27
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
27
Item 9A.
Controls and Procedures
 
27
Item 9B.
Other Information
 
28
       
 
PART III
   
       
Item 14.
Principal Accountant Fees and Services
  
 
       
 
PART IV
   
       
Item 15.
Exhibits and Financial Statement Schedules
 
29
 
 
 

 

PART I
 
ITEM 1.  BUSINESS.

Overview

Unless the context indicates otherwise, references to "we," "us", "our"and”DGSE” refers to the consolidated business operations of DGSE Companies, Inc., the parent, and all of its direct and indirect subsidiaries.

We buy and sell jewelry, bullion products and rare coins.  Our customers include individual consumer, dealers and institutions throughout the United States.  In addition, we make collateralized loans to individuals in the State of Texas prior to the sale of our pawn shops.  Our products and services are marketed through our facilities in Dallas and Euless, Texas; Mt. Pleasant, South Carolina; Woodland Hills, California and through our internet web sites DGSE.com; CGDEinc.com; SGBH.com; SuperiorPreciousMetals.com; SuperiorEstateBuyers.com; USBullionExchange.com; Americangoldandsilverexchange.com; and FairchildWatches.com.

We operate eight primary internet sites and over 900 related landing sites on the World Wide Web.  Through the various sites we operate a virtual store, real-time auction of rare coin and jewelry products, free quotations of current prices on all commonly traded precious metal and related products, trading in precious metals, a mechanism for selling unwanted jewelry, rare coins and precious metals and wholesale prices and information exclusively for dealers on pre-owned fine watches. Over 7,500 items are available for sale on our internet sites including $2,000,000 in diamonds.
 
On May 9, 2007 we purchased all of the tangible assets of Euless Gold and Silver, Inc., located in Euless, Texas.  We opened a new retail store in the former Euless Gold & Silver facility and it operates under the name of Dallas Gold & Silver Exchange.
 
On May 30, 2007, we completed the acquisition of Superior Galleries, Inc. located in Beverly Hills, California.  In June 2008, we moved Superior Galleries operations from Beverly Hills to Woodland Hills, California.  Superior’s principal line of business is the sale of rare coins on a retail and wholesale basis. Superior’s retail and wholesale operations are conducted in virtually every state in the United States.  Superior also conducted live and internet auctions for customers seeking to sell their own coins prior to management’s decision to discontinue the live auction operations.  Superior markets its services nationwide through broadcast and print media and independent sales agents, as well as on the internet through third party websites, and through its own website at SGBH.com.
 
On July 13, 2007, we sold the loan balances from our American Pay Day Center locations and discontinued operations in those locations.
 
On August 3, 2007 we announced the launch of Americangoldandsilverexchange.com along with the simultaneous activation of over 900 proprietary Internet sites related to the home page of Americangoldandsilverexchange.com.  This site, along with our existing locations in Texas, California and South Carolina, provides customers from all over the United States with a seamless and secure way to value and sell gold, silver, rare coins, jewelry, diamonds and watches.
 
Late in 2007, Superior Estate Buyers was launched to bring our unique expertise in the purchase of gold, silver, diamonds, rare coins and other collectibles to local markets with a team of traveling professionals for short-term buying events.
 
Superior Precious Metals was also launched in late 2007 and functions as a retail precious metals arm of DGSE. Professional account managers provide a convenient way for individuals and companies to buy and sell precious metals and rare coins. This activity is supported by the internally developed account management and trading platform created as part of DGSE’s USBullionExchange.com precious metals system.
 
In June 2009 we sold the assets of National Jewelry Exchange, Inc. (our two pawn shops) to an unrelated third party.

 
2

 
 
Products and Services

Our jewelry operations include sales to both wholesale and retail customers. We sell finished jewelry, gem stones, and findings (gold jewelry components) and make custom jewelry to order.  Jewelry inventory is readily available from wholesalers throughout the United States.  In addition, we purchase inventory from pawn shops and individuals.  Jewelry repair is also available to our customers in our Dallas and Euless, Texas, Woodland Hills, California and Mt. Pleasant, South Carolina locations.

Our bullion and rare coin trading operations buy and sell all forms of precious metals products including United States and other government coins, medallions, art bars and trade unit bars.  Bullion and rare coin transactions are conducted at all of our store locations.

Bullion and rare coin products are purchased and sold based on current market price.  The availability of precious metal products is a function of price as virtually all bullion items are actively traded.  Precious metals sales amounted to 50% of total revenues 2009, 43.2% of total revenues for 2008, and 33.6% in 2007.

During December 2000 we opened a jewelry super store located in Mt. Pleasant, South Carolina. The store operates through a wholly owned subsidiary, Charleston Gold and Diamond Exchange, Inc. (“CGDE”). CGDE operates in a leased facility located in Mt. Pleasant, South Carolina.

Our primary presence on the internet is through our websites DGSE.com, CGDEinc.com, SGBH.com, Superiorpreciousmetals.com, Superiorestatebuyers.com, USBullionexchange.com, Americangoldandsilvereschange.com, and Fairchildwatches.com.  The DGSE.com web site serves as a corporate information site, a retail store where we sell our products and an auction site for jewelry and other products. The internet store functions as a CyberCashTm authorized site which allows customers to purchase products automatically and securely on line.  Auctions close at least five times per week.

The SGBH.com website services as a primary rare coin marketing site and includes a retail store and conducts regular online auctions.

Americangoldandsilverexchange.com provides customers from all over the United States with a simple and secure method to sell unwanted valuables by sending them directly to our corporate facilities for evaluation.  Customers are provided with a firm purchase price which they can reject or accept for immediate payment.

Our internet activity also includes a web site, USBullionExchange.com, which allows customers unlimited access to current quotations for prices on approximately 200 precious metals, coins and other bullion related products.  This web site allows customers to enter immediate real-time buy and sell orders in dozens of precious metal products. This functionality allows our customers to fix prices in real time and to manage their precious metals portfolios in a comprehensive way.

We also offer wholesale customers a virtual catalog of our fine watch inventory through our web site Fairchildwatches.com.

All of the Company’s websites are being  redesigned, expanded and integrated. It is expected that all of the new websites will be ready for launch in early 2010.

We did not have any customer or supplier that accounted for more than 10% of total sales or purchases during 2009, 2008 or 2007.

 
3

 

Sales and Marketing

All of our activities rely heavily on local television, radio and print media advertising.  Marketing activities emphasize our broad and unusual array of products and services and the attractiveness of its pricing and service.

We market our bullion and rare coin trading services through a combination of advertising in national coin publications, local print media, coin and bullion wire services and our internet web site.  Trades are primarily with coin and bullion dealers on a "cash on confirmation" basis which is prevalent in the industry.  Cash on confirmation means that once credit is approved the buyer remits funds by mail or wire concurrently with the mailing of the precious metals.  Customer orders for bullion or rare coin trades are customarily delivered within three days of the order or upon clearance of funds depending on the customer's credit standing.   Our backlogs for fabricated jewelry products were not significant as of December 31, 2009, 2008 and 2007.

Seasonality

The retail and wholesale jewelry business is seasonal.  We realized  25.9%, 22.2% and 37.2%  of our annual sales in the fourth quarters of 2009, 2008 and 2007, respectively.

While our bullion and rare coin business is not seasonal, management believes it is directly impacted by the perception of inflation trends.  Historically, anticipation of increases in the rate of inflation has resulted in higher levels of interest in precious metals as well as higher prices for such metals. Our other business activities are not seasonal.

Competition

We operate in a highly competitive industry where competition is based on a combination of price, service and product quality.  Our jewelry and consumer loan activities compete with numerous other retail jewelers and consumer lenders in Dallas and Euless, Texas; Woodland Hills, California; and Mt. Pleasant, South Carolina and the surrounding areas.

The bullion and rare coin industry in which we compete is dominated by substantially larger enterprises which wholesale bullion, rare coin and other precious metal products.

We attempt to compete in all of our activities by offering high quality products and services at prices below that of our competitors and by maintaining a staff of highly qualified employees.

Employees

As of December 31, 2009, we employed 82 individuals, 81 of whom were full time employees.

Available Information

Our website is located at www.dgse.com. Through this website, we make available free of charge all of our Securities and Exchange Commission filings.  In addition, a complete copy of our Code of Ethics is available through this website.

 
4

 

Discontinued Operations and Acquisitions

Discontinued Operations.

In December 2008 we decided to discontinue the live auction segment of the Company’s business activities. This decision was based on the substantial losses being incurred by this operating segment during 2008 and 2007. As a result, the operating results of the auction segment have been reclassified to discontinued operations for  2009, 2008 and 2007. During 2008 the auction segment incurred a pretax loss of $2,379,151 and during 2009 the auction segment incurred a pretax loss of $ 795,328. The 2009 loss is the last of the charges from the auction segment.

On July 13, 2007, we sold the loan balances from our American Pay Day Center locations for $77,496 and discontinued operations in those locations.   The receivables sold, including interest due, had a balance of $120,573 at the time of the sale.  The sales price was determined based on the age of the outstanding receivables.  As a result of the sale and discontinued operations, we recognized a pretax loss of $107,838 on the disposal and a pretax loss on discontinued operations of $51,938 for the year ended December 31, 2007.

In June 2009 we sold the assets of National Jewelry Exchange, Inc. (our two pawn shops) to an unrelated third party for cash in the amount of $ 1,324.450. The proceeds were used to retire $400,000 of our bank debt and the balance was used for working capital.

In December we discontinued the operations of Superior Estate Buyers due to operating loss incurred during the first half of the year  in the amount of $ 87,120.

As a result, operating results from these business segments have been reclassified to discontinued operations for all periods presented.  As of December 31, 2009 there were no operating assets to be disposed of or liabilities to be paid in completing the disposition of these operations.

Acquisitions.

Superior Galleries, Inc.  On May 30, 2007, we completed our acquisition of Superior Galleries, Inc., which we refer to as Superior, pursuant to an amended and restated agreement and plan of merger and reorganization dated as of January 6, 2007, which we refer to as the merger agreement, with Superior and Stanford International Bank Ltd., then Superior’s largest stockholder and its principal lender, which we refer to as Stanford, as stockholder agent for the Superior stockholders, whereby Superior became a wholly owned subsidiary of DGSE Companies, Inc.  Superior operated a store in Beverly Hills, CA.  The total purchase price of approximately $13.6 million was broken down as follows:

   
Shares
   
Stock Price
   
Extended Price
 
Common stock
    3,669,067     $ 2.55     $ 9,356,121  
A warrants
    845,634       1.27
(1)
    1,073,955  
B warrants
    863,000       2.55       2,220,650  
Exercise Price B warrants
    863,000     $ .001       (863 )
Direct transaction costs
                    1,176,290  
Total purchase price
                  $ 13,806,153  
(1)
The $1.27 is the fair value of the warrants calculated under the Black Sholes method as of the acquisition date.
 
The total purchase price has been allocated to the fair value of assets acquired and liabilities assumed as follows:
 
Goodwill
  $ 8,203,448  
Intangible assets
    2,521,340  
Deferred tax asset
    1,860,475
(1)
Property and other assets
    1,068,958  
Inventory
    3,260,766  
Liabilities assumed
    (3,108,834 )
         
Total purchase price
  $ 13,806,153  
 
5

 
(1)
 Subsequent to date of acquisition the Company recorded an adjustment to reduce goodwill and increase deferred tax assets to reflect the change in estimated fair value of the net operating loss carryforwards acquired in the Superior acquisition.

In accordance with SFAS 142, the goodwill will not be amortized but instead tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events.

During 2008, the Company reflected $8,185,443 of goodwill relating to the acquisition of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, the Company is required to undertake an annual impairment test at its year end or when there is a triggering event. In addition to the annual impairment review, there were a number of triggering events in the fourth quarter due to the significant operating losses of Superior and the impact of the economic downturn on Superior’s operations and the decline in the Company’s share price resulting in a substantial discount of the market capitalization to tangible net asset value. An evaluation of the recorded goodwill was undertaken and it was determined that it was impaired. Accordingly, to reflect the impairment, the Company recorded a non-cash charge of $8,185,443, which eliminated the value of the goodwill related to Superior.
 
The operating results of Superior have been included in the consolidated financial statements since the acquisition date of May 30, 2007. The following unaudited condensed consolidated financial information reflects the pro forma results of operations for the year ended December 31, 2007 as if the acquisition of Superior had occurred on January 1 of 2007 after giving effect to purchase accounting adjustments as compared to actual results of operations for the year ended December 31, 2008 and the effects of the discontinued operations related to the live auction segment.  The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place at the beginning of the period, and may not be indicative of future operating results (in thousands, except per share data):  

   
Year Ended December 31,
 
(In thousands, except per share data)
 
2008
   
2007
 
   
(Unaudited)
 
         
Pro Forma
 
Total revenue
  $ 105,219     $ 73,565  
Net earnings (loss)
  $ (7,851 )   $ (2,920 )
Net earnings per share — basic
  $ (.80 )   $ (.33 )
Net earnings per share — diluted
  $ (.80 )   $ (.33 )
Weighted average shares — basic
    9,708       8,582  
Weighted average shares — diluted
    9,708       10,353  

In relation to the acquisition, as of June 29, 2007, Stanford and Dr. L.S. Smith, our chairman and chief executive officer, collectively had the power to vote approximately 63% of our voting securities, and beneficially owned approximately 56.4% of our voting securities on a fully-diluted basis (after giving effect to the exercise of all options and warrants held by them which are exercisable within sixty days of December 31, 2007 but not giving effect to the exercise of any other options or warrants). Consequently, these two stockholders  have sufficient voting power to control the outcome of virtually all corporate matters submitted to the vote of our common stockholders. Those matters could include the election of directors, changes in the size and composition of our board of directors, mergers and other business combinations involving us, or the liquidation of our company. In addition, Stanford and Dr. Smith have entered into a corporate governance agreement with us, which entitles Stanford and Dr. Smith to each nominate two “independent” directors to our board and entitles Dr. Smith, our chairman and chief executive officer, and William H. Oyster, our president and chief operating officer, to be nominated to our board for so long as each remains an executive officer.

 
6

 
 
Through this control of company nominations to our board of directors and through their voting power, Stanford and Dr. Smith are able to exercise substantial control over certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), a merger or consolidation with another company, and our acquisition or disposition of assets. Also, the concentration of voting power in the hands of Stanford and Dr. Smith could have the effect of delaying or preventing a change in control of our company, even if the change in control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Euless Gold & Silver, Inc.

On May 9, 2007 we purchased all of the tangible assets of Euless Gold and Silver, Inc., located in Euless, Texas.  The purchase price paid for these assets totaled $1,000,000 including $600,000 in cash and a two year note in the amount of $400,000.  This note was paid in full in May 2009. We opened a new retail store in the former Euless Gold & Silver facility and operate under the name of Dallas Gold & Silver Exchange.  Of the assets received, $990,150 was inventory and the remainder was fixed assets.

We entered into these transactions seeing them as opportunistic acquisitions that would allow us to expand our operations and provide a platform for future growth.

 
7

 

ITEM 1A.  RISK FACTORS.

You should carefully consider the risks described below before making an investment decision. We believe these are all the material risks currently facing our business.  Our business, financial condition or results of operations could be materially adversely affected by these risks.  The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.  You should also refer to the other information included or incorporated by reference in this report, including our financial statements and related notes.

Changes in customer demand for our products and services could result in a significant decrease in revenues.
 
Although our customer base commonly uses our products and services, our failure to meet changing demands of our customers could result in a significant decrease in our revenues.
 
Changes in governmental rules and regulations applicable to the specialty financial services industry could have a negative impact on our lending activities.
 
Our lending is subject to extensive regulation, supervision and licensing requirements under various federal, state and local laws, ordinances and regulations. New laws and regulations could be enacted that could have a negative impact on our lending activities.
 
Fluctuations in our inventory turnover and sales.
 
We regularly experience fluctuations in our inventory balances, inventory turnover and sales margins, yields on loan portfolios and pawn redemption rates. Changes in any of these factors could materially and adversely affect our profitability and ability to achieve our planned results.
 
Changes in our liquidity and capital requirements could limit our ability to achieve our plans.
 
We require continued access to capital, and a significant reduction in cash flows from operations or the availability of credit could materially and adversely affect our ability to achieve our planned growth and operating results. Similarly, if actual costs to build new stores significantly exceeds planned costs, our ability to build new stores or to operate new stores profitably could be materially restricted. The DGSE credit agreement also limits the allowable amount of capital expenditures in any given fiscal year, which could limit our ability to build new stores.
 
Changes in competition from various sources could have a material adverse impact on our ability to achieve our plans.
 
We encounter significant competition in connection with our retail and lending operations from other pawnshops, cash advance companies and other forms of financial institutions and other retailers, many of which have significantly greater financial resources than us. Significant increases in these competitive influences could adversely affect our operations through a decrease in the number or quality  pawn loans or our ability to liquidate forfeited collateral at acceptable margins.
 
In the coins and other collectibles business, we will compete with a number of comparably sized and smaller firms, as well as a number of larger firms throughout the United States. Our primary competitors are American Numismatic Rarities, a comparably-sized coin auctioneer. Many of our competitors have the ability to attract customers as a result of their reputation and the quality collectibles they obtain through their industry connections. Additionally, other reputable companies that sell  rare coins and other collectibles may decide to enter our markets to compete with us. These companies have greater name recognition and have greater financial and marketing resources than we do. If these auction companies are successful in entering the specialized market for premium collectibles in which we participate or if dealers and sellers participate less in our auctions, we may attract fewer buyers and our revenue could decrease.

 
8

 
 
Our earnings could be negatively impacted by an unfavorable outcome of litigation, regulatory actions, or labor and employment matters.
 
From time to time, we are involved in litigation, regulatory actions and labor and employment matters arising from our normal operations. There can be no assurance as to the ultimate outcome of any future actions and that they will not have a material adverse effect on our financial condition, results of operation or liquidity.
 
A failure in our information systems could prevent us from effectively managing and controlling our business or serving our customers.
 
We rely on our information systems to manage and operate our stores and business. Each store is part of an information network that permits us to maintain adequate cash inventory, reconcile cash balances daily and report revenues and expenses timely. Any disruption in the availability of our information systems could adversely affect our operation, the ability to serve our customers and our results of operations.
 
A failure of our internal controls and disclosure controls and procedures in accordance with the requirements of section 404 of the Sarbanes-Oxley Act could have a material adverse impact on us and our investors’ confidence in our reported financial information.
 
Effective internal controls and disclosure controls and processes are necessary for us to provide reliable financial reports and to detect and prevent fraud. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on this assessment, management has concluded that, as of December 31, 2009, the Company’s internal control over financial reporting was effective 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 based on such criteria.
 
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
 
If there is a failure in any of our controls as required by Section 404 of the Sarbanes-Oxley Act that leads to a material misstatement of our financial condition, investors could lose confidence in our reported financial information.

 
9

 
 
Changes in general economic conditions could negatively affect loan performance and demand for our products and services.
 
A sustained deterioration in the economic environment could adversely affect our operations by reducing consumer demand for the products we sell.
 
Interest rate fluctuations could increase our interest expense.
 
Although the U.S. Federal Reserve halted a sustained period of regular interest rate hikes in August 2006, interest rates could rise which would, in turn, increase our cost of borrowing.
 
Our success depends on our ability to attract, retain and motivate management and other skilled employees.
 
Our future success and growth depend on the continued services of our 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. 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 polices on many 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 our ability to maintain our technological edge. 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.
 
The voting power in our company is substantially controlled by a small number of stockholders, which may, among other things, delay or frustrate the removal of incumbent directors or a takeover attempt, even if such events may be beneficial to our stockholders.
 
As of June 29, 2007, Stanford International Bank Ltd. (SIBL), which we refer to as Stanford, and Dr. L.S. Smith, our chairman and chief executive officer, collectively had the power to vote approximately 63% of our voting securities, and beneficially owned approximately 56.4% of our voting securities on a fully-diluted basis (after giving effect to the exercise of all options and warrants held by them which are exercisable within sixty days of December 31, 2007 but not giving effect to the exercise of any other options or warrants). Consequently, these two stockholders may have sufficient voting power to control the outcome of virtually all corporate matters submitted to the vote of our common stockholders. Those matters could include the election of directors, changes in the size and composition of our board of directors, mergers and other business combinations involving us, or the liquidation of our company. In addition, Stanford and Dr. Smith have entered into a corporate governance agreement with us, which entitles Stanford and Dr. Smith to each nominate two “independent” directors to our board and entitles Dr. Smith, our chairman and chief executive officer, and William H. Oyster, our president and chief operating officer, to be nominated to our board for so long as he remains an executive officer.

Rule 704 of the NYSE:Amex rules requires that listed companies hold annual meeting no later than 12 months after the close of the fiscal year.

As a result of the Receivership involving Stanford International Bank , The Company did not hold an annual meeting in 2009 and therefore may not be incompliance with the requirements of the Exchange. The Company has scheduled an annual meeting April of 2010.

 
10

 
 
Through this control of company nominations to our board of directors and through their voting power, Stanford and Dr. Smith are able to exercise substantial control over certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), a merger or consolidation with another company, and our acquisition or disposition of assets. Also, the concentration of voting power in the hands of Stanford and Dr. Smith could have the effect of delaying or preventing a change in control of our company, even if the change in control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.
 
We could be subject to sales taxes, interest and penalties on interstate sales for which we have not collected taxes.
 
Superior has not collected California sales tax on mail-order sales to out-of-state customers, nor has it collected use tax on its interstate mail order sales. We believe that our sales to interstate customers are generally tax-exempt due to varying state exemptions relative to the definitions of being engaged in business in particular states and the lack of current Internet taxation. While we have not been contacted by any state authorities seeking to enforce sales or use tax regulations, we cannot assure you that we will not be contacted by authorities in the future with inquiries concerning our compliance with current statutes, nor can we assure you that future statutes will not be enacted that affect the sales and use tax aspects of our business.
 
We may incur losses as a result of accumulating inventory.
 
A substantial portion of the products that we sell comes from our own inventory. We purchased these products from dealers and collectors and assume the inventory and price risks of these items until they are sold. If we are unable to resell the products that we purchase when we want or need to, or at prices sufficient to generate a profit from their resale, or if the market value of the inventory of purchased products were to decline, our revenue would likely decline.
 
Our planned expansion and enhancement of our websites and internet operations may not result in increased profitability.
 
The satisfactory performance, reliability and availability of our website and network infrastructure are and will be critical to our reputation and our ability to attract and retain customers and technical personnel and to maintain adequate customer service levels. Any system interruptions or reduced performance of our website could materially adversely affect our reputation and our ability to attract new customers and technical personnel. We are in the process of development and/or enhancement of several portions of our websites that will offer content and auctions for rare coins that may have a lower average selling price than many of the rare coins in the markets we currently serve, and in the future we plan to integrate various of our websites. Continued development of our websites will require significant resources and expense. If the planned expansion of our websites does not result in increased revenue, we may experience decreased profitability.

 
11

 
 
Our websites may be vulnerable to security breaches and similar threats which could result in our liability for damages and harm to our reputation.
 
Despite the implementation of network security measures, our websites are vulnerable to computer viruses, break-ins and similar disruptive problems caused by internet users. These occurrences could result in our liability for damages, and our reputation could suffer. The circumvention of our security measures may result in the misappropriation of customer or other confidential information. Any such security breach could lead to interruptions and delays and the cessation of service to our customers and could result in a decline in revenue and income.
 
Changes to financial accounting standards and new exchange rules could make it more expensive to issue stock options to employees, which would increase compensation costs and may cause us to change our business practices.
 
We prepare our financial statements to conform with generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the Public Company Accounting Oversight Board, the SEC and various other bodies. A change in those policies could have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced.
 
We are subject to new corporate governance and internal control reporting requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements could adversely affect our business.
 
We face new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently adopted by the SEC, the Public Company Accounting Oversight Board and the NYSE Amex. These laws, rules and regulations continue to evolve and may become increasingly stringent in the future. In particular, we’re required to include management’s report on internal controls as part of our annual report for the year ending December 31, 2009 pursuant to Section 404 of the Sarbanes-Oxley Act.  We are in the process of evaluating our control structure to help ensure that we will be able to comply with Section 404 of the Sarbanes-Oxley Act. We cannot assure you that we will be able to fully comply with these laws, rules and regulations that address corporate governance, internal control reporting and similar matters. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition and the value and liquidity of our securities.

 
12

 
 
The revolving credit facilities with Stanford International Bank Ltd. and Texas Capital Bank, N.A. is each collateralized by a general security interest in our assets. If we were to default under the terms of either credit facility, the lender would have the right to foreclose on our assets.
 
In December 2005, we entered into a revolving credit facility with Texas Capital Bank, N.A., which  permits borrowings up to a maximum principal amount of $4.3 million. Borrowings under the revolving credit facility are collateralized by a general security interest in substantially all of our assets (other than the assets of Superior). As of December 31, 2009, approximately $3.3 million was outstanding under the term loan and revolving credit facility. If we were to default under the terms and conditions of the revolving credit facility, Texas Capital Bank would have the right to accelerate any indebtedness outstanding and foreclose on our assets in order to satisfy our indebtedness. Such a foreclosure could have a material adverse effect on our business, liquidity, results of operations and financial position.
 
In October 2003, Superior entered into a revolving credit facility with Stanford Financial Group Company, which we refer to as SFG, which has assigned the facility to Stanford. The facility currently permits borrowings up to a maximum principal amount of $11.5 million, up to $6.5 million of which Superior may upstream to DGSE. Borrowings under the revolving credit facility are collateralized by a general security interest in substantially all of Superior’s assets and, to the extent of money to DGSE, substantially all of DGSE’s assets. As of December 31, 2009, approximately $9.7 million was outstanding under the revolving credit facility. If Superior were to default under the terms and conditions of the revolving credit facility, Stanford would have the right to accelerate any indebtedness outstanding and foreclose on Superior’s assets, and, subject to intercreditor arrangements with Texas Capital Bank and other limitations, our assets, in order to satisfy Superior’s indebtedness. Such a foreclosure could have a material adverse effect on our business, liquidity, results of operations and financial position.
 
We have been informed that on February 19, 2009, a US district court placed SIBL under the supervision of a receiver and that the court enjoined SIBL's creditors and other persons from taking certain actions related to SIBL or its assets.  In addition, on the same date, Antiguan Financial Services Regulatory Commission appointed a Receiver for Stanford International Bank Ltd. This action was subsequently ratified by the High Court of Justice in Antigua and Barbuda.  As a result of SIBL's current status, we do not believe that Superior will be able to borrow additional  funds under either revolving loan, including any amounts Superior is obligated to repay to SIBL pursuant to the repayment provisions applicable to the first revolving note.   We believe that certain terms of agreements entered into by us, Superior and/or SIBL and its affiliates in connection with our acquisition of Superior have been breached by SIBL or its affiliates, and we are evaluating available remedies, including but not limited to damages from responsible parties. While Superior does not currently require additional funds under the SIBL credit facility, should the need arise and Superior is unable to replace this credit facility the operations and performance of Superior could be materially adversely affected.

On January 27, 2010, DGSE Companies, Inc.(“DGSE”) and Stanford International Bank, LTD (‘SIBL”), which is the beneficial owner of a significant equity interest in DGSE, a primary lender to a wholly owned subsidiary of DGSE and subject to certain agreements with DGSE and its Chairman,  entered into definitive agreements whereby  SIBL will terminate all agreements, will convert all of its debt, interest and other expenses and  will sell all of its equity interests including common stock and warrants to DGSE or its assignees.

Stanford and its affiliates, including SIBL are under receivership, and, accordingly, the transaction is subject to the approval of the United States District Court for the Northern District of Texas which has jurisdiction for the assets of SIBL. The agreements also contain other closing conditions including, but not limited to the receipt of all United States governmental and regulatory approvals, if any, the receipt of third party approvals, consents and/or waivers as may be required in connection with the transaction and compliance with United States regulatory and governmental requirements, including proof acceptable to the Company, that upon transfer to the purchaser or its assignees that they will receive title to the Securities free and clear of all liens. It is anticipated that additional 8-K’s may be filed upon the occurrence of material events related to this matter.

 
13

 
 
As a result of the transaction, it is anticipated that the immediate shares outstanding of the Company will be reduced by all or part of approximately 3,400,000 held by SIB and over $9,000,000 in obligations owed by a subsidiary of DGSE to SIBL will be eliminated.
 
We have not paid dividends on our common stock in the past and do not anticipate paying dividends on our common stock in the foreseeable future.
 
We have not paid common stock dividends since our inception and do not anticipate paying dividends in the foreseeable future. Our current business plan provides for the reinvestment of earnings in an effort to complete development of our technologies and products, with the goal of increasing sales and long-term profitability and value. In addition, our revolving credit facility with Texas Capital Bank currently restricts, and any other credit or borrowing arrangements that we may enter into may in the future restrict or limit, our ability to pay dividends to our stockholders.

 
14

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.   PROPERTIES.

We own a 20,000 square foot facility at 11311 Reeder Rd, Dallas, Texas which houses retail and wholesale jewelry, bullion and rare coin trading operations and our principal executive offices. The land and buildings are subject to a mortgage maturing in August 2016, with a balance outstanding of approximately $2,251,387 as of December 31, 2009.

Our Euless, TX location is a 2,158 square foot facility which houses retail jewelry, bullion and rare coin trading operations.  Our monthly lease payments at December 31, 2009 are $2,248 and the lease is due to expire June 30, 2015.

CGDE operates in a leased 2,367 square foot facility in Mt. Pleasant, South Carolina. The lease expires in May 2015 and requires monthly lease payments in the amount of $4,575.

Our Superior Galleries operations are located in an approximately 9,265 square foot storefront facility located at 20011 Ventura Boulevard, Woodland Hills, California. This facility includes administrative, customer support, auction, gallery and retail space.  The lease for this facility expires March 31, 2013.  The combined monthly rental rate is $30,045 including parking fees and rent of storage space.

We also maintain a resident agent office in Nevada at the office of our Nevada counsel, McDonald, Carano, Wilson, McClure, Bergin, Frankovitch and Hicks, 241 Ridge Street, Reno, Nevada 89505.

ITEM 3.   LEGAL PROCEEDINGS.

From time to time, be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract actions incidental to the operation of its business.  Except as set forth above, we are not currently involved in any such litigation which we believe could have a material adverse effect on our financial condition or results of operations, liquidity or cash flows.

 
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PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

On October 31, 2007, our Common Stock began trading on the NYSE Amex under the symbol “DGC” and is currently trading under the symbol “DGSE”.  Previously, our Common Stock was traded on the NASDAQ Small CAP Market under the symbol “DGSE”.  The following table sets forth for the period indicated, the per share high and low bid quotations as reported by NASDAQ or actual closing sale prices as reported on NYSE Amex for our common stock.  During the past three years, we have not declared any dividends with respect to our common stock. We intend to retain all earnings to finance future growth; accordingly, it is not anticipated that cash dividends will be paid to holders of common stock in the foreseeable future.

The following quotations reflect inter-dealer prices without retail mark-ups, mark-downs or commissions and may not reflect actual transactions. High and low bid quotations for the last two years were:

2009
 
High
   
Low
 
Fourth Quarter
  $ 1.750     $ 1.16  
Third Quarter
    1.50       0.780  
Second Quarter
    1.20       0.76  
First Quarter
    1.95       0.76  
2008
 
High
   
Low
 
Fourth Quarter
  $ 2.600     $ 0.760  
Third Quarter
    3.800       2.420  
Second Quarter
    5.040       2.920  
First Quarter
    5.45       4.000  
 
On March 26, 2010, the closing sales price for our common stock was $2.06 and there were 558 shareholders of record.

Securities authorized for issuance under equity compensation plans.

We have granted options to certain officers, directors and key employees to purchase shares of our common stock.  Each option vests according to a schedule designed by our board of directors, not to exceed four years. Each option expires 180 days from the date of termination of the employee or director. The exercise price of each option is equal to the market value of our common stock on the date of grant. These option grants have been approved by security holders.

The following table summarizes options outstanding as of December 31, 2009:

Plan Category
 
Number of securities to
be issued upon exercise of
options, warrants & rights
   
Weighted average exercise
price of outstanding
options, warrants & rights
   
Number of securities
remaining available for
future issuance under
equity compensation plans
 
Equity compensation plans approved by security holders
    1,544,134     $ 2.34       700,000  
Equity compensation plans not approved by security holders
 
None
         
None
 
Total
    1,543,134     $ 2.34       700,000  

 
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Stock Performance Table

The following table represents a comparison of the five year total return of our common stock to the NASDAQ Composite Index, the S&P 600 Small Cap Index and the S&P Retail Index for the period from January 1, 2004 to December 31, 2009.  The comparison assumes $100 was invested on December 31, 2004 and dividends, if any, were reinvested for all years ending December 31.
 
Comparison of Five Year Cumulative Return

Date:
 
DGSE
Common Stock
   
NASDAQ
Composite Index
   
S&P Retail Index
   
S&P 600 Small 
Cap Index
 
2004
  100     100     100     100  
2005
  83     111     136     142  
2006
  59     113     134     142  
2007
  75     124     146     172  
2008
  490     197     143     199  
2009
  42     78     73     73  

On June 27, 2006 stockholders of the Company approved the adoption of the 2006 Equity Incentive Plan (the “2006 Plan). During the year ended December 31, 2007, there were 130,000 options granted to our non-employee directors under this plan and, as a result, there are 700,000 shares available for future grants under the 2006 Plan.

 
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ITEM 7. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

Forward-Looking Statements

This Annual Report on Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  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 and may contain information about financial results, economic conditions, trends, and known uncertainties. All 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 “Risk Factors” and elsewhere in this report. 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 hereon, including without limitation, changes in our business strategy or planned capital expenditures, store growth plans, or to reflect the occurrence of unanticipated events.
 
Critical Accounting Policies and Estimates
 
Our significant accounting policies are disclosed in Note 1 of our consolidated financial statements. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
 
Inventories.    Jewelry and other inventories are valued at the lower of cost or market.  Bullion is valued at the lower-of-cost-or-market (average cost).  See also “Critical Accounting Estimates”.
 
Impairment of Long-Lived and Amortized Intangible Assets.  The Company performs impairment evaluations of its long-lived assets, including property, plant and equipment and intangible assets with finite lives, including the customer base acquired in the Superior acquisition, whenever business conditions or events indicate that those assets may be impaired.  When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, the assets are written down to fair market value and a charge is recorded to current operations.   Based on our evaluations no impairment was required as of December 31, 2009.
 
Impairment of Goodwill and Indefinite-Lived Intangible Assets.   Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired.  The Company performs its annual review at the beginning of the fourth quarter of each fiscal year.
 
The Company evaluates the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates.  Estimated cash flows and related goodwill are grouped at the reporting unit level.  A reporting unit is an operating segment or, under certain circumstances, a component of an operating segment that constitutes a business.  When estimated future discounted cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any.  Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill.  In determining the estimated future cash flows, the Company considers current and projected future levels of income as well as business trends, prospects and market and economic conditions.
 
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The Company cannot predict the occurrence of certain events that might adversely affect the carrying value of goodwill and indefinite-lived intangible assets. Such events may include, but are not limited to, the impact of the economic environment, a material negative change in relationships with significant customers, or strategic decisions made in response to economic and competitive conditions.  See “Critical Accounting Estimates.”

 Revenue Recognition.     Revenue is generated from wholesale and retail sales of rare coins, precious metals, bullion and second-hand jewelry. The recognition of revenue varies for wholesale and retail transactions and is, in large part, dependent on the type of payment arrangements made between the parties. The Company recognizes sales on an F.O.B. shipping point basis.
 
The Company sells rare coins to other wholesalers/dealers within its industry on credit, generally for terms of 14 to 60 days, but in no event greater than one year.  The Company grants credit to new dealers based on extensive credit evaluations and for existing dealers based on established business relationships and payment histories. The Company generally does not obtain collateral with which to secure its accounts receivable when the sale is made to a dealer.  The Company maintains reserves for potential credit losses based on an evaluation of specific receivables and its historical experience related to credit losses.   See “Critical Accounting Estimates”.
 
Revenues for monetary transactions (i.e., cash and receivables) with dealers are recognized when the merchandise is shipped to the related dealer.  
 
The Company also sells rare coins to retail customers on credit, generally for terms of 30 to 60 days, but in no event greater than one year.  The Company grants credit to new retail customers based on extensive credit evaluations and for existing retail customers based on established business relationships and payment histories. When a retail customer is granted credit, the Company generally collects a payment of 25% of the sales price, establishes a payment schedule for the remaining balance and holds the merchandise as collateral as security against the customer’s receivable until all amounts due under the credit arrangement are paid in full.  If the customer defaults in the payment of any amount when due, the Company may declare the customer’s obligation in default, liquidate the collateral in a commercially reasonable manner using such proceeds to extinguish the remaining balance and disburse any amount in excess of the remaining balance to the customer.
 
Under this retail arrangement, revenues are recognized when the customer agrees to the terms of the credit and makes the initial payment.  We have a limited-in-duration money back guaranty policy (as discussed below).
 
In limited circumstances, the Company exchanges merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which the Company recognizes revenue in accordance with SFAS 153, “ Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29.” When the Company exchanges merchandise for similar merchandise and there is no monetary component to the exchange, the Company does not recognize any revenue. Instead, the basis of the merchandise relinquished becomes the basis of the merchandise received, less any indicated impairment of value of the merchandise relinquished. When the Company exchanges merchandise for similar merchandise and there is a monetary component to the exchange, the Company recognizes revenue to the extent of monetary assets received and determine the cost of sale based on the ratio of monetary assets received to monetary and non-monetary assets received multiplied by the cost of the assets surrendered.
 
The Company has a return policy (money-back guarantee).  The policy covers retail transactions involving graded rare coins only. Customers may return graded rare coins purchased within 7 days of the receipt of the rare coins for a full refund as long as the rare coins are returned in exactly the same condition as they were delivered. In the case of rare coin sales on account, customers may cancel the sale within 7 days of making a commitment to purchase the rare coins. The receipt of a deposit and a signed purchase order evidences the commitment. Any customer may return a coin if they can demonstrate that the coin is not authentic, or there was an error in the description of a graded coin.
 
19

 
Revenues from the sale of consigned goods are recognized as commission income on such sale if the Company is acting as an agent for the consignor. If in the process of selling consigned goods, the Company makes an irrevocable payment to a consignor for the full amount due on the consignment and the corresponding receivable from the buyer(s) has not been collected by the Company at that payment date, the Company records that payment as a purchase and the sale of the consigned good(s) to the buyer as revenue as the Company has assumed all collection risk.
 
Pawn loans (“loans”) were made with the collateral of tangible personal property for one month with an automatic 60-day extension period.  Pawn service charges were recorded at the time of redemption at the greater of $15 or the actual interest accrued to date.  If the loan was not repaid, the principal amount loaned plus accrued interest (or the fair value of the collateral, if lower) became the carrying value of the forfeited collateral (“inventories”) which was recovered through sales to customers.
 
Income Taxes.   Income taxes are estimated for each jurisdiction in which we operate. This involves assessing the current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent that recovery is deemed not likely, a valuation allowance is recorded.  See “Critical Accounting Estimates”.
 
Inventories.  The Company acquires a majority of its retail jewelry inventory from individuals that is pre-owned.  The Company acquires the jewelry based on its own internal estimate of the fair market value of the items offered for sale considering factors such as the current spot market prices of precious metals and current demand for the items offered for sale.  Because the overall market value for precious metals fluctuates, these fluctuations could have either a positive or negative impact to the profitability of the Company.  The Company monitors these fluctuations to evaluate any impairment to its retail jewelry inventory.
 
Allowance for Doubtful Accounts. The allowance for doubtful accounts requires management to estimate a customer’s ability to satisfy its obligations.  The estimate of the allowance for doubtful accounts is particularly critical in the Company’s wholesale coin segment where a significant amount of the Company’s trade receivables are recorded.  The Company evaluates the collectability of receivables based on a combination of factors.  In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected.  Additional reserves are established based upon the Company’s perception of the quality of the current receivables, including the length of time the receivables are past due, past experience of collectability and underlying economic conditions.  If the financial condition of the Company’s customers were to deteriorate resulting in an impairment of their ability to make payments, additional reserves would be required.
 
Impairment of Goodwill and Indefinite-Lived Intangible Assets.  In evaluating the recoverability of goodwill, it is necessary to estimate the fair value of the reporting units.  The estimate of fair value of intangible assets is generally determined on the basis of discounted future cash flows.  The estimate of fair value of the reporting units is generally determined on the basis of discounted future cash flows supplemented by the market approach.  In estimating the fair value, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings and other factors.  The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are also consistent with the projections and assumptions that are used in current operating plans.  Such assumptions are subject to change as a result of changing economic and competitive conditions.  The rate used to discount estimated cash flows is a rate corresponding to the Company’s cost of capital, adjusted for risk where appropriate, and is dependent upon interest rates at a point in time.  There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.  It is possible that assumptions underlying the impairment analysis will change in such a manner to cause further impairment of goodwill, which could have a material impact on the Company’s results of operations.
 
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During the 4th quarter of 2008, given the sustained decline in the price of the Company’s Common Stock during 2008 when its share price approximated book value, continued operating losses within the auction segment, as well as further deterioration in credit markets and the macro-economic environment, the Company determined that the appropriate triggers had been reached to perform additional impairment testing on goodwill and its indefinite-lived intangible assets.
 
To derive the fair value of its reporting units, the Company performed extensive valuation analyses, utilizing both income and market approaches.  Under the income approach, the Company determined fair value based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.  Estimated future cash flows were based on the Company’s internal projection models, industry projections and other assumptions deemed reasonable by management.  For the impairment analysis, the Company used a weighted-average cost of capital of 20% and a terminal growth rate of 3%.  Under the market approach, the Company evaluated the fair value of its reporting units based on the overall actual market capitalization trend of the Company as compared to the net book value of the Company.  Changes in estimates or the application of alternative assumptions could produce significantly different results.
 
As a result of this analysis, $8,185,443 of goodwill was written off during the 4th quarter of fiscal 2008 relating to the goodwill resulting from the Superior Galleries acquisition.  The evaluation of other long-lived intangible assets relating to the Superior Galleries acquisition were not written off due to new business generated from the Superior Galleries, Inc. through the establishment of two new entities, Superior Estate Buyers and Superior Precious Metals, which attracted approximately $9.8 million and $1.8 million, respectively, in revenues in their first full year of operations in 2008.  These charges were driven by current projections and valuation assumptions that reflected the Company’s belief that the Superior Galleries, Inc. wholesale auction and coin segments would not sustain adequate growth and profitability to generate cash flow, especially in the current downtown in the economy.

The analysis of the wholesale watch sales division resulting from the acquisition of Fairchild with a carrying value of goodwill of $837,117 resulted in no impairment as its estimated future discounted cash flows significantly exceeded the net assets and related goodwill.
 
Income Taxes. The Company records deferred income tax assets and liabilities for differences between the book basis and tax basis of the related net assets. The Company records a valuation allowance, when appropriate, to adjust deferred tax asset balances to the amount management expects to realize. Management considers, as applicable, the amount of taxable income available in carryback years, future taxable income and potential tax planning strategies in assessing the need for a valuation allowance. The Company has recorded the net present value of the future expected benefits of the net operating loss (NOL) carryforward related to its subsidiary Superior Galleries, Inc. due to IRS loss limitation rules.  The Company will require future taxable income to fully realize the net deferred tax asset resulting from the NOL.

As of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). The adoption did not have a material impact on the Company’s consolidated financial statements or effective tax rate and did not result in any unrecognized tax benefits.

Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in the Company’s consolidated financial statements. For the years ended December 31, 2009 and 2008, the Company did not recognize any interest or penalty expense related to income taxes. It is determined not to be reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. The Company is currently subject to a three year statute of limitations by major tax jurisdictions. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction.

21

 
Results of Operations

Comparison of the Years ended December 31, 2009 and 2008

Revenues decreased by $15,854,000 or 15.6%, in 2009.  This decrease was primarily the result of a $2,652,000 or   5.8% decrease in the sale of precious metals products, a $11,958,000 or 32.6% decrease in retail jewelry sales and a $1,890,000, or 11.8% decrease in rare coin sales. The decreases in precious metals and rare coin sales were due to a reduced availability of precious metal products and the reduction of activity at Superior as a result of the discontinuance of the auction business segment. The decrease in jewelry sales was due to the sluggish retail environment. in addition, the discontinuance of the auction business segment and the sale of our pawn shops had an indirect effect on our retail sales.  Cost of goods sold as a percentage of sales decreased to 85.6% in 2009 from 87.2% in 2008 and gross margins increased to 14.4% in 2009 from 12.3% in 2008.  This increase was due to the decrease in precious metal sales which have a lower margin than jewelry and rare coins revenues.

Selling, general and administrative expenses increased $2,446,000 or 29.43% during the year. This increase was due to higher advertising and payroll related cost. Depreciation and amortization increased by $14,066 during 2009 due to new assets being placed into service. The decrease in interest expense was due to the reduction in debt outstanding and the non payment of the Superior related debt to Stanford International Bank resulting from the bank’s default under the loan agreement. Loss from discontinued operations was the result of the discontinuing the operations of our live

During 2008, the Company reflected $8,185,443 of goodwill relating to the acquisition of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, the Company is required to undertake an annual impairment test at its year end or when there is a triggering event. In addition to the annual impairment review, there were a number of triggering events in the fourth quarter due to the significant operating losses of Superior and the impact of the economic downturn on Superior’s operations and the decline in the Company’s share price resulting in a substantial discount of the market capitalization to tangible net asset value. An evaluation of the recorded goodwill was undertaken, which considered two methodologies to determine the fair-value of the entity:

 
·
A market capitalization approach, which measure market capitalization at the measurement date.
 
·
A discounted cash flow approach, which entails determining fair value using a discounted cash flow methodology.  This method requires significant judgment to estimate the future cash flow and to determine the appropriate discount rates, growth rates, and other assumptions.

Each of these the Company believes has merit, and resulted in the determination that goodwill was impaired. Accordingly, to reflect the impairment, the Company recorded a non-cash charge of $8,185,443, which eliminated the value of the goodwill related to Superior.

In November 2008 we decided to discontinue the live auction segment of the Company’s business activities. This decision was based on the substantial losses being incurred by this operating segment during 2008. As a result, the operating results of the auction segment have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2008 the auction segment incurred a pretax loss of $3,227,151which includes $848,000 related to the impairment of goodwill associated with the Superior acquisition in May 2007.  During 2009 the auction segment incurred a pretax loss of $710,056.

In June 2009 we sold the assets of National Jewelry Exchange, Inc. (our two pawn shops to an unrelated third party for cash in the amount of $ 1,324.450. The proceeds were used to retire $400,000 of our bank debt and the balance was used for working capital. As a result, the operations results of this segment have been classified as discontinued operations.
 
In December 2009, the Company decided to discontinued operations of Superior Estate Buyers. This decision was based on the substantial losses being incurred by this component during 2009. As a result, the operating results of this segment have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2009, Superior Estate Buyers incurred a pretax loss of $87,120.
 
As a result, operating results from these business segments have been reclassified to discontinued operations for all periods presented
 
Income tax expense is directly affected by the levels of pretax income and non-deductible permanent differences related to the goodwill impairment.  The Company’s effective tax rate was 31.5% and 23.1% for the year ended December 31, 2009 and 2008, respectively.  
 
22

 
Comparison of the Years ended December 31, 2008 and 2007

Revenues increased by $43,749,984 or 71.2%, in 2008.  This increase was primarily the result of a $24,296,000 or 114.9% increase in the sale of precious metals products, a $17,254,000, or 89.2% increase in retail jewelry sales and a $1,992,000, or 14.3% increase in rare coin sales. The increases in precious metals, rare coin and jewelry sales were due to a price increase in gold products ($13,435,000),  acquisition of Superior Galleries ($14,500,000) and Euless Gold and Silver ($8,600,000). Consumer loan service fees increased by $242,440 in 2008 due to increased loans outstanding during the year.  Cost of goods as a percentage of sales increased to 86.7% in 2008 from 84.1% in 2007 and gross margins decreased to 12.8% in 2008 from 15.9% in 2007.  This decrease was due to the significant increase in precious metal sales which have a much lower margin than jewelry and rare coins revenues.

Selling, general and administrative expenses increased $1,520,262 or 18.3% during the year. This increase was due to the start up of Superior Precious metals ($692,000), Superior Estate Buyers ($396,000), American Gold and Silver Exchange ($160,000) and the opening of our second pawn shop during 2007 ($440,000).  Depreciation and amortization increased by $236,975, or 95.6%, during 2008 due to additional assets being purchased through our recent acquisitions and depreciation on our new facility in Dallas, Texas. The increase in interest expense was due to the additional debt related to the Superior acquisition. The loss from discontinued operations was the result of the discontinuing the operations of our live auction segment and closing of our pay day loan stores.

At December 31, 2008, management believed the equity shares owned in three publicly traded stocks had declined on an other than temporary basis as these stocks are thinly traded and have market values of less than $ .01 per share. As a result, these investments were written-off in the amount of $115,992. this charge is included in other expense during 2008 net of interest earned during the year. Other income during 2007 was the result of the gain on the sale of the land and building at which our Dallas retail store and corporate headquarters were previously located.

During 2008, the Company reflected $8,185,443 of goodwill relating to the acquisition of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, the Company is required to undertake an annual impairment test at its year end or when there is a triggering event. In addition to the annual impairment review, there were a number of triggering events in the fourth quarter due to the significant operating losses of Superior and the impact of the economic downturn on Superior’s operations and the decline in the Company’s share price resulting in a substantial discount of the market capitalization to tangible net asset value. An evaluation of the recorded goodwill was undertaken, which considered two methodologies to determine the fair-value of the entity:

 
·
A market capitalization approach, which measure market capitalization at the measurement date.
 
·
A discounted cash flow approach, which entails determining fair value using a discounted cash flow methodology.  This method requires significant judgment to estimate the future cash flow and to determine the appropriate discount rates, growth rates, and other assumptions.

Each of these  the Company believes has merit, and resulted in the determination that goodwill was impaired. Accordingly, to reflect the impairment, the Company recorded a non-cash charge of $8,185,443, which eliminated the value of the goodwill related to Superior.

In November 2008 we decided to discontinue the live auction segment of the Company’s business activities. This decision was based on the substantial losses being incurred by this operating segment during 2008. As a result, the operating results of the auction segment have been reclassified to discontinued operations for both 2009,2008 and 2009. During 2008 the auction segment incurred a pretax loss of $3,227,151which includes $848,000 related to the impairment of goodwill associated with the Superior acquisition in May 2007.
 
23

 
In June 2009 we sold the assets of National Jewelry Exchange, Inc. (our two pawn shops to an unrelated third party for cash in the amount of $ 1,324.450. The proceeds were used to retire $400,000 of our bank debt and the balance was used for working capital.
 
As a result, operating results from this business segment has been reclassified to discontinued operations for all periods presented
 
Income tax expense is directly affected by the levels of pretax income and non-deductible permanent differences related to the goodwill impairment.  The Company’s effective tax rate was 11.4% and 23% for the year ended December 31, 2009 and 2008, respectively.  The provisions for deferred taxes increased due to the impairment of goodwill in 2008
 
Liquidity and Capital Resources

During the three years ended December 31, 2009 cash flows from operating activities totaled  $1,317,816, ($1,013,482), and (4,342,513), respectively. Cash provided in operating activities during 2009 was primarily the result of an decrease in trade receivables $2,173,749, a increase in accounts payable and accrued expenses $541,105, and a increase in customer deposits ($870,284). These uses of cash were partially offset by a increase in inventory ($2,362,528) and an increase in prepaid expenses.  The increase in deposits was primarily the result of price increase in gold products and a significant increase in the demand for precious metal products. Cash used in operating activities during 2008 was primarily the result of an increase in inventory ($3,077,051) offset by a decrease in trade receivable 1,473,136 and an increase in customer deposits 915,554. These increases were primarily the re the result of the acquisition of Superior Galleries, Inc. in May of 2007.

During the three years ended December 31, 2009 cash flows from investing activities totaled $851,204 ($1,222,178), and ($3,546,379). The cash provided in 2009 was the result of the proceeds from the sale discontinued operations (1,324,450) The uses of cash in 2008 and 2007 were primarily the result of building improvements ($1,130,602) during 2008, the purchase of a new facility ($3,780,554) during 2007 and cost related to the acquisition of Superior Galleries, Inc.($375,280)during 2007.During 2007 the Company sold it’s former corporate offices and store for cash in the amount of $1,299,898.

During the three years ended December 31, 2009 cash flows from financing activities totaled ($942,389), $1,919,205 and $7,215,158. These cash flows were the result of borrowings and repayments of loans.

We expect capital expenditures to total approximately $150,000 during the next twelve months.  It is anticipated that these expenditures will be funded from working capital. As of December 31, 2009 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. Management is 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.
 
24

 
In December 2005, we entered into a revolving credit facility with Texas Capital Bank, N.A., which currently permits borrowings up to a maximum principal amount of $3.3 million. Borrowings under the revolving credit facility are collateralized by a general security interest in substantially all of our assets (other than the assets of Superior). As of December 31, 2009, approximately $3.3 million was outstanding under the term loan and revolving credit facility. If we were to default under the terms and conditions of the revolving credit facility, Texas Capital Bank would have the right to accelerate any indebtedness outstanding and foreclose on our assets in order to satisfy our indebtedness. Such a foreclosure could have a material adverse effect on our business, liquidity, results of operations and financial position. This credit facility matures in June 2010.
 
Upon the consummation of our acquisition of Superior, and after the exchange by Stanford of $8.4 million of Superior debt for shares of Superior common stock, Superior amended and restated its credit facility with Stanford. The amended and restated commercial loan and security agreement, which we refer to as the loan agreement, decreased the available credit line from $19.89 million to $11.5 million, reflecting the $8.4 million debt exchange. Interest on the outstanding principal balance will continue to accrue at the prime rate, as reported in the Wall Street Journal or, during an event of default, at a rate 5% greater than the prime rate as so reported.
 
Loan proceeds can only be used for customer loans inventory purchases and receivables consistent with specified loan policies and procedures and for permitted inter-company transactions. Permitted inter-company transactions are loans or dividends paid to us or our other subsidiaries. We guaranteed the repayment of these permitted inter-company transactions pursuant to a secured subordinated guaranty in favor of Stanford.  In connection with the secured guarantee, Stanford and Texas Capital Bank, N.A., our primary lender, entered into an intercreditor agreement with us, and we entered into a subordination agreement with Superior, both of which subordinate Stanford's security interests and repayment rights to those of Texas Capital Bank.  As of December 31, 2009, approximately $9.2 million was outstanding under this credit facility and there were no intercompany transactions outstanding.

This credit facility matures on May 1, 2011, provided that in case any of several customary events of default occurs, Stanford may declare the entire principal amount of both loans due immediately and take possession and dispose of the collateral described below. An event of default includes, among others, the following events: failure to make a payment when due under the loan agreement; breach of a covenant in the loan agreement or any related agreement; a representation or warranty made in the loan agreement or related agreements is materially incorrect; a default in repayment of borrowed money to any person; a material breach or default under any material contract; certain bankruptcy or insolvency events; and a default under a third-party loan.  Superior is obligated to repay the first revolving loan from the proceeds of the inventory or other collateral purchased with the proceeds of the loan.

The loans are secured by a first priority security interest in substantially all of Superior’s assets, including inventory, accounts receivable, promissory notes, books and records and insurance policies, and the proceeds of the foregoing.  In addition, pursuant to the limited secured guaranty and intercreditor arrangements described above, Stanford would have a second-order security interest in all of our accounts and inventory to the extent of intercompany transactions.
 
The loan agreement includes a number of customary covenants applicable to Superior, including, among others: punctual payments of principal and interest under the credit facility; prompt payment of taxes, leases and other indebtedness; maintenance of corporate existence, qualifications, licenses, intellectual property rights, property and assets; maintenance of satisfactory insurance; preparation and delivery of financial statements for us and separately for Superior in accordance with generally accepted accounting principles, tax returns and other financial information; inspection of offices and collateral; notice of certain events and changes; use of proceeds; notice of governmental orders which may have a material adverse effect, SEC filings and stockholder communications; maintenance of property and collateral; and payment of Stanford expenses.
 
25

 
In addition, Superior has agreed to a number of negative covenants in the loan agreement, including, among others, covenants not to: create or suffer a lien or other encumbrance on any collateral, subject to customary exceptions; incur, guarantee or otherwise become liable for any indebtedness, subject to customary exceptions; acquire indebtedness of another person, subject to customary exceptions and permitted inter-company transactions; issue or acquire any shares of its capital stock; pay dividends other than permitted inter-company transactions or specified quarterly dividends, or directors’ fees; sell or abandon any collateral except in the ordinary course of business or consolidate or merge with another entity; enter into affiliate transactions other than in the ordinary course of business on fair terms or permitted inter-company transactions; create or participate in any partnership or joint venture; engage in a new line of business; pay principal or interest on subordinate debt except as authorized by the credit facility; or make capital expenditures in excess of $100,000 per fiscal year
 
We have been informed that on February 19, 2009, a US district court placed SIBL under the supervision of a receiver and that the court enjoined SIBL's creditors and other persons from taking certain actions related to SIBL or its assets.  In addition, on the same date, Antiguan Financial Services Regulatory Commission appointed a Receiver for Stanford International Bank Ltd. This action was subsequently ratified by the High Court of Justice in Antigua and Barbuda.  As a result of SIBL's current status, we do not believe that Superior will be able to borrow additional  funds under either revolving loan, including any amounts Superior is obligated to repay to SIBL pursuant to the repayment provisions applicable to the first revolving note.   We believe that certain terms of agreements entered into by us, Superior and/or SIBL and its affiliates in connection with our acquisition of Superior have been breached by SIBL or its affiliates, and we are evaluating available remedies, including but not limited to damages from responsible parties. While Superior does not currently require additional funds under the SIBL credit facility, should the need arise and Superior is unable to replace this credit facility the operations and performance of Superior could be materially adversely affected.
 
On January 27, 2010, DGSE Companies, Inc.(“DGSE”) and Stanford International Bank, LTD (‘SIBL”), which is the beneficial owner of a significant equity interest in DGSE, a primary lender to a wholly owned subsidiary of DGSE and subject to certain agreements with DGSE and its Chairman,  entered into definitive agreements whereby  SIBL will terminate all agreements, will convert all of its debt, interest and other expenses and  will sell all of its equity interests including common stock and warrants to DGSE or its assignees.

Stanford and its affiliates, including SIBL are under receivership, and, accordingly, the transaction is subject to the approval of the United States District Court for the Northern District of Texas which has jurisdiction for the assets of SIBL. The agreements also contain other closing conditions including, but not limited to the receipt of all United States governmental and regulatory approvals, if any, the receipt of third party approvals, consents and/or waivers as may be required in connection with the transaction and compliance with United States regulatory and governmental requirements, including proof acceptable to the Company, that upon transfer to the purchaser or its assignees that they will receive title to the Securities free and clear of all liens. It is anticipated that additional 8-K’s may be filed upon the occurrence of material events related to this matter.

As a result of the transaction, it is anticipated that the immediate shares outstanding of the Company will be reduced by all or part of approximately 3,400,000 held by SIB and over $10,000,000 in obligations owed by a subsidiary of DGSE to SIBL will be eliminated.

On October 17, 2007, we closed on the purchase of our new headquarters location.  As a result, we assumed a new loan with a remaining principal balance of $2,323,484 and an interest rate of 6.70%.  The loan has required monthly payments of $20,192 with the final payment due on August 1, 2016.

   
Payments due by period
 
Contractual Cash Obligations    Total     2010       2011 - 2012       2013 – 2014     Thereafter  
Notes payable                                          
  $ 3,243,569     $ 3,243,569     $ --     $ --     $ --  
Long-term debt and capital leases
    3,340,218       242,304       732,163       484,608       1,881,143  
Operating Leases
    2,108,774       523,769       1,248,447       302,486       34,072  
Total
  $ 8,692,561     $ 4,009,642     $ 1,980,610     $ 787,094     $ 1,915,215  

In addition, we estimate that we will pay approximately $385,000 in interest during the next twelve months.
 
26

 
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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

Market Risk

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and precious metal values.  We also are exposed to regulatory risk in relation to our pawn loans.  We do not use derivative financial instruments.

Our earnings and financial position may be affected by changes in precious metal values and the resulting impact on pawn lending and jewelry sales. The proceeds of scrap sales and our ability to liquidate excess jewelry inventory at an acceptable margin are dependent upon gold values.  The impact on our financial position and results of operations of a hypothetical change in precious metal values cannot be reasonably estimated.

ITEM 8. FINANCIAL STATEMENTS.

 
(a)
Financial Statements (see pages F-1 to F-25 of this report).
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 None.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure Controls and procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report.  Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.  Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective.

No changes in internal controls over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our control over financial reporting.
 
Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed 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.

27

 
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 using the criteria set forth by the Committee of Sponsoring Organizations of the Tread way Commission in Internal Control — Integrated Framework. Based on this assessment, management has concluded that, as of December 31, 2009, the Company’s internal control over financial reporting was effective 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 based on such criteria.
 
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting
 
For the quarter ended December 31, 2009, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.  OTHER INFORMATION.

None.
 
 
28

 
 
PART IV

ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
Exhibits

Exhibit
     
Filed
 
Incorporated
     
Date Filed
 
Exhibit
No.
 
Description
 
Herein
 
by Reference
 
Form
 
with SEC
 
No.
                             
2.1
 
Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of January 6, 2007
     
×
 
8-K
 
January 9, 2007
   
2.1
 
                             
2.2
 
Limited Joinder Agreement, dated as of January 6, 2007
     
×
 
8-K
 
January 9, 2007
   
2.9
 
                             
3.1
 
Articles of Incorporation dated September 17, 1965
     
×
 
8-A12G
 
June 23, 1999
   
3.1
 
                             
3.2
 
Certificate of Amendment to Articles of Incorporation, dated October 14, 1981
     
×
 
8-A12G
 
June 23, 1999
   
3.2
 
                             
3.3
 
Certificate of Resolution, dated October 14, 1981
     
×
 
8-A12G
 
June 23, 1999
   
3.3
 
                             
3.4
 
Certificate of Amendment to Articles of Incorporation , dated July 15, 1986
     
×
 
8-A12G
 
June 23, 1999
   
3.4
 
                             
3.5
 
Certificate of Amendment to Articles of Incorporation, dated August 23, 1998
     
×
 
8-A12G
 
June 23, 1999
   
3.5
 
                             
3.6
 
Certificate of Amendment to Articles of Incorporation, dated June 26, 1992
     
×
 
8-A12G
 
June 23, 1999
   
3.6
 
                             
3.7
 
Certificate of Amendment to Articles of Incorporation, dated June 26, 2001
     
×
 
8-K
 
July 3, 2001
   
1.0
 
                             
3.8
 
Certificate of Amendment to Articles of Incorporation, dated May 22, 2007
     
x
 
8-K
 
May 31, 2007
   
3.1
 
                             
3.9
 
By-laws, dated March 2, 1992
     
×
 
8-A12G
 
June 23, 1999
   
3.7
 
                             
4.1
 
Specimen Common Stock Certificate
     
×
 
S-4
 
January 6, 2007
   
4.1
 
 
29

 
10.1
 
Renewal, Extension And Modification Agreement dated January 28, 1994, by and among DGSE Corporation and Michael E. Hall And Marian E. Hall
     
×
 
10-KSB
 
March 1995
   
10.2
 
                             
10.2
 
Lease Agreement dated June 2, 2000 by and between SND Properties and Charleston Gold and Diamond Exchange, Inc.
     
×
 
10-KSB
 
March 29, 2001
   
10.1
 
                             
10.3
 
Lease agreement dated October 5, 2004 by and between Beltline Denton Road Associates and Dallas Gold & Silver Exchange
     
×
 
10-K
 
April 15, 2005
   
10.2
 
                             
10.4
 
Lease agreement dated December 1, 2004 by and between Stone Lewis Properties and Dallas Gold & Silver Exchange
     
×
 
10-K
 
April 15, 2005
   
10.3
 
                             
10.5
 
Lease agreement dated November 18, 2004 by and between Hinkle Income Properties LLC and American Pay Day Centers, Inc.
     
×
 
10-K
 
April 15, 2005
   
10.4
 
                             
10.6
 
Lease Agreement dated January 17, 2005 by and between Belle-Hall Development Phase III Limited Partnership and DGSE Companies, Inc.
     
×
 
S-4
 
January 6, 2007
   
10.6
 
                             
10.7
 
Sale agreement dated executed July 5, 2007 by and between DGSE Companies, Inc. and Texas Department of Transportation
     
×
 
8-K
 
July 11, 2007
   
10.1
 
                             
10.8
 
Purchase agreement dated July 5, 2007 by and between DGSE Companies, Inc. and 11311 Reeder Road Holdings, LP
     
×
 
8-K
 
July 11, 2007
   
10.2
 
                             
10.9
 
Loan Agreement, dated as of December 22, 2005, between DGSE Companies, Inc. and Texas Capital Bank, N.A.
     
×
 
8-K/A
 
August 17, 2006
   
10.1
 
 
30

 
10.10
 
Third Amendment to Loan Agreement, dated as of May 10, 2007, by and between DGSE Companies, Inc. and Texas Capital Bank, N.A.
     
×
 
8-K
 
May 9, 2007
   
3.0
 
                             
10.11
 
Support Agreement, DGSE stockholders, dated as of January 6, 2007
     
×
 
8-K
 
January 9, 2007
   
99.1
 
                             
10.12
 
Securities Exchange Agreement, dated as of January 6, 2007
     
×
 
8-K
 
January 9, 2007
   
99.2
 
                             
10.13
 
Warrant to DiGenova, issued January 6, 2007
     
×
 
8-K
 
January 9, 2007
   
99.3
 
                             
10.14
 
Support Agreement, Superior stockholders, dated as of January 6, 2007
     
×
 
8-K
 
January 9, 2007
   
99.5
 
                             
   10.15
 
Asset purchase agreement, dated May 9, 2007, by  and between DGSE Companies, Inc. and Euless Gold & Silver, Inc.
     
×
 
8-K
 
May 9, 2007
   
1.0
 
                             
   10.16
 
Subordinated Promissory Note dated May 9, 2007
     
×
 
8-K
 
May 9, 2007
   
2.0
 
                             
   10.17
 
Registration Rights Agreement with Stanford International Bank Ltd., dated as of May 30, 2007
     
×
 
8-K
 
May 31, 2007
 
   
99.1
 
                             
   10.18
 
Corporate Governance Agreement with Dr. L.S. Smith and Stanford International Bank Ltd., dated as of May 30, 2007
     
×
 
8-K
 
May 31, 2007
 
   
99.2
 
                             
   10.19
 
Escrow Agreement with American Stock Transfer & Trust Company and Stanford International Bank Ltd., as stockholder agent, dated as of May 30, 2007
     
×
 
8-K
 
May 31, 2007
 
   
99.3
 
                             
   10.20
 
Form of Warrants
     
×
 
8-K
 
May 31, 2007
   
99.4
 
                             
   10.21
 
Amended and Restated Commercial Loan and Security Agreement, by and between Superior Galleries Inc. and Stanford International Bank Ltd., dated as of May 30, 2007
     
×
 
8-K
 
May 31, 2007
 
   
99.5
 
 
31

 
   10.22
 
Employment Agreement with L.S. Smith, dated as of May 30, 2007
     
×
 
8-K
 
May 31, 2007
   
99.6
 
                             
   10.23
 
Employment Agreement with William H. Oyster, dated as of May 30, 2007
     
×
 
8-K
 
May 31, 2007
 
   
99.7
 
                             
   10.24
 
Employment Agreement with John Benson, dated as of May 30, 2007
     
×
 
8-K
 
May 31, 2007
 
   
99.8
 
   23.1
 
 Consent of Cornwell Jackson
 
                   
   31.1
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Dr. L.S. Smith
 
×
                   
                             
31.2
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John Benson
 
×
                   
                             
32.1
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Dr. L.S. Smith
 
×
                   
                             
32.2
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John Benson
 
×
                   

(b) Reports on Form 8-K :

None.
 
 
32

 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.

By:
/s/ L. S. Smith
 
Dated: March 30, 2010
 
L. S. Smith
   
 
Chairman of the Board,
   
 
Chief Executive Officer and
   
 
Secretary
   
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
By:
/s/ L. S. Smith
 
Dated: March 30, 2010
 
L.S Smith
   
 
Chairman of the Board,
   
 
Chief Executive Officer and
   
 
Secretary
   
       
By:
/s/ W. H. Oyster
 
 Dated: March 30, 2010
 
W. H. Oyster
   
 
Director, President and
   
 
Chief Operating Officer
   
       
By:
/s/ John Benson
 
 Dated: March 30, 2010
 
John Benson
   
 
Chief Financial Officer
   
 
(Principal Accounting Officer)
   

By:
/s/ William P. Cordeiro
 
Dated: March 30, 2010
 
Director
   
       
By:
/s/ Craig Allan-Lee
 
Dated: March 30, 2010
 
Director
   
       
By
     
       
By:
/s/David Rector
 
Dated: March 30, 2010
 
Director
   

33

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and
Shareholders of DGSE Companies, Inc.

We have audited the accompanying consolidated balance sheets of DSGE Companies, Inc. and its subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for the years ended December 31, 2009, 2008, and 2007.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We have not been engaged to perform an audit of the Company’s internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
  
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009 and 2008, and the consolidated results of operations and its cash flows for the years ended December 31, 2009, 2008, and 2007 in conformity with accounting principles generally accepted in the United States of America.
  
/s/ Cornwell Jackson Advisors
Plano, Texas
March 31, 2010
 
34


DGSE COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 
   
December 31,
 
   
2009
   
2008
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 1,446,724     $ 220,093  
Trade receivables
    649,310       1,928,867  
Inventories
    17,766,285       15,321,309  
Prepaid expenses
    807,298       522,494  
Prepaid federal income tax
    639,372       639,372  
Current assets of discontinued operations
          2,064,460  
Total current assets
    21,308,989       20,696,595  
                 
Marketable securities – available for sale
    45,000        
Property and equipment, net
    4,713,142       4,675,530  
Deferred income taxes
    1,731,175       1,908,032  
Goodwill
    837,117       837,117  
Intangible assets
    2,464,006       2,492,673  
Other assets
    260,904       209,008  
Non-current assets of discontinued operations
    295,617       524,960  
    $ 31,655,950     $ 31,343,915  
                 
LIABILITIES
               
Current Liabilities:
               
Notes payable
  $ 48,569     $ 191,078  
Current maturities of long-term debt
    310,714       599,972  
Line of credit
    3,195,000       3,595,000  
Accounts payable – trade
    1,472,663       734,906  
Accrued expenses
    492,710       644,318  
Customer deposits
    2,092,593       1,222,309  
Current liabilities of discontinued operations
          45,044  
Total current liabilities
    7,612,249       7,032,627  
                 
Long-term debt, less current maturities
    11,605,143       11,715,765  
      19,217,392       18,748,392  
                 
STOCKHOLDERS’ EQUITY
               
Common stock, $.01 par value; 30,000,000 shares authorized; 9,863,635 and 9,833,635 shares issued and outstanding at the end of each period in 2009 and 2008
      98,637         98,337  
Additional paid-in capital
    18,698,091       18,541,662  
Accumulated other comprehensive loss
           
Retained deficit
    (6,358,170 )     (6,044,476 )
      12,438,558       12,595,523  
                 
    $ 31,655,950     $ 31,343,915  

The accompanying notes are an integral part of these consolidated financial statements
 
F-1


DGSE COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Years ended December 31,
 
   
2009
   
2008
   
2007
 
Revenue
                 
Sales
  $ 85,369,679     $ 101,224,082     $ 59,856,414  
Consumer loan service charges
                86,019  
Management fees
                250,000  
      85,369,679       101,224,082       60,192,433  
Costs and expenses
                       
Cost of goods sold
    73,105,758       88,802,032       50,932,507  
Selling, general and administrative expenses
    10,753,717       8,307,924       7,637,399  
Depreciation and amortization
    410,838       396,772       226,406  
Impairment of goodwill
          7,337,443        
Gain of sale of property
                (579,447 )
      84,270,313       104,844,171       58,216,865  
                         
Operating income
    1,099,366       (3,620,089 )     1,975,568  
                         
Other (income) expense
                       
Other income
    (3,813 )     87,694       26,782  
Interest expense
    401,105       902,897       675,199  
                         
Earnings before income taxes
    702,074       (4,610,680 )     1,273,587  
                         
Income tax expense
    221,457       1,069,351       325,843  
                         
Net earnings (loss) from continuing operations
    480,617       (5,680,031 )     947,744  
                         
Discontinued operations:
                       
Loss (Gain) from discontinued operations (less applicable income tax benefit (expense) of $3,526, $1,118,485 and $57,231, respectively)
    803,848       2,171,176       111,095  
Loss (Gain) on disposal of  discontinued operations (less applicable income tax benefit (expense) of ($4,913), $0 and $26,208, respectively)
    (9,537 )           81,630  
                         
Net earnings (loss)
  $ (313,694 )   $ (7,851,207 )   $ 755,019  
                         
Earnings per common share
                       
Basic
                       
From continuing operations
  $ .05     $ (.59 )   $ .13  
From discontinued operations
    (.08 )     (.22 )     (.03 )
Net earnings per common share
  $ (.03 )   $ (.81 )   $ .10  
                         
Diluted
                       
From continuing operations
  $ .05     $ (.59 )   $ .11  
From discontinued operations
    (.08 )     (.22 )     (.02 )
Net earnings per common share
  $ (.03 )   $ (.81 )   $ .09  
                         
Weighted average number of common shares:
                       
Basic
    9,838,735       9,708,045       7,507,579  
Diluted
    9,838,735       9,708,045       8,281,887  
 
The accompanying notes are an integral part of these consolidated financial statements
 
F-2


DGSE COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31,

   
Common Stock
   
Additional Paid-in
   
Retained Earnings (Accumulated
   
Comprehensive
   
Accumulated Other Comprehensive
   
Total Stockholder’s
 
   
Shares
   
Amount
   
Income (Loss)
   
 Deficit)
   
Income (Loss)
   
Income (Loss)
   
Equity
 
Balance at January 1, 2007
    4,913,290     $ 49,133     $ 5,708,760     $ 1,051,712           $ (132,245 )   $ 6,677,360  
Net earnings
                            755,019     $ [(755,019 )]             755,019  
Other comprehensive income, net of tax:
                                                       
Unrealized gain on marketable securities
                                    34,957       34,957       34,957  
Comprehensive income
                                  $ [( 789,976 )]                
Acquisition of Superior
    3,669,067       36,691       12,593,172                               12,629,863  
Conversion of warrants
    908,000       9,080       142,485                               151,565  
Stock based compensation
                    28,817                               28,817  
                                                         
Balance at December 31, 2007
    9,490,357     $ 94,904     $ 18,473,234     $ 1,806,731             $ (97,288 )   $ 20,277,581  
Net loss
                            (7,851,207 )   $ [(7,851,207 )]           $ (7,851,207 )
Other comprehensive income, net of tax:
                                                       
Impairment of marketable securities
                                    97,288       97,288       97,288  
Comprehensive income
                                  $ [(7,753,919 )]                
Stock option expense
                    36,092                               36,092  
Stock issued in Heritage settlement
    8,372       83       49,916                               49,999  
Stock warrants exercised
    334,906       3,350       (17,580 )                             (14,230 )
                                                                       
Balance at December 31, 2008                                           .
    9,833,635     $ 98,337     $ 18,541,662     $ (6,044,476 )           $     $ 12,595,523  
Net loss
                            (313,694 )                     (313,694 )
Stock option expense
                    84,729                               84,729  
Stock issued in exchange for rent concession
    30,000       300       71,700                               72.000  
                                                                       
Balance at December 31, 2009
    9,863,635     $ 98,637     $ 18,698,091       (6,358,170 )           $     $ 12,438,558  
 
The accompanying notes are an integral part of these consolidated financial statements.

F-3


DGSE COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

   
2009
   
2008
   
2007
 
Cash flows from operating activities
                 
                   
Net earnings
  $ (313,694 )   $ (7,851,207 )   $ 755,019  
Adjustments to reconcile net earnings to net cash provided by operating activities
                       
Depreciation and amortization
    410,838       484,832       253,887  
Impairment of Goodwill
          8,185,443        
Deferred taxes
    176,857       (102,827 )     (31,692 )
(Gain)/Loss on sale of marketable securities
          115,991       (3,890 )
Stock options expense
    84,729       18,512       28,817  
Loss (gain) on discontinued operations
    (14,500 )           120,495  
Gain on sale of building
                (579,447 )
Settlement of Heritage litigation
          50,000        
(Increase) decrease in operating assets and liabilities
                       
Trade receivables
    2,173,749       1,473,136       (3,345,559 )
Inventories
    (2,362,528 )     (3,077,051 )     (928,838 )
Prepaid expenses and other current assets
    (223,275 )     (27,417 )     (70,810 )
Change in other assets
    (25,749 )     49,583       181,855  
Accounts payable and accrued expenses
    541,105       (668,000 )     (785,193 )
Change in customer deposits
    870,284       915,554       24,712  
Federal income taxes payable
          (580,031 )     38,131  
Net cash provided by (used in) operating activities
    1,317,816       (1,013,482 )     (4,342,513 )
Cash flows from investing activities
                       
Pawn loans made
    (635,020 )     (1,294,876 )     (714,209 )
Pawn loans repaid                                           
    328,074       649,122       380,060  
Recovery of pawn loan principal through sale of forfeited collateral
    298,483       624,557       204,121  
Pay day loans made
                (164,289 )
Pay day loans repaid
                125,982  
Purchase of property and equipment
    (419,783 )     (1,130,602 )     (3,780,554 )
Deal cost for Superior Galleries acquisition
          (70,379 )     (375,280 )
Investment in securities
    (45,000 )                
Acquisition of Euless Gold & Silver
                (600,000 )
Proceeds from sale of discontinued operations
    1,324,450             77,496  
Proceeds from sale of building
                1,299,898  
Proceeds from sale of marketable securities
                396  
Net cash provided by (used in) investing activities
    851,204       (1,222,178 )     (3,546,379 )
Cash flows from financing activities
                       
Proceeds from debt
          2,500,000       6,991,578  
Mortgage on new corporate office and store location
                2,441,992  
Issuance of common stock
                139,500  
Repayments of notes payable and line of credit
    (942,389 )     (580,795 )     (2,357,842 )
Net cash provided by financing activities
    (942,389 )     1,919,205       7,215,158  
                         
Net increase (decrease) in cash and cash  equivalents
    1,226,631       (316,455 )     (673,734 )
Cash and cash equivalents at beginning of period
    220,093       536,548       1,210,282  
Cash and cash equivalents at end of period
  $ 1,446,724     $ 220,093     $ 536,548  
Supplemental disclosures:
                       
Cash paid during the year for:
                       
Interest
  $ 381,919     $ 904,242     $ 572,592  
Income taxes
  $ 0     $ 600,000     $ 50,000  
Non cash Financing Activities:                         
Issuance of common stock in exchange for rent concession   $ 70,000                  

The accompanying notes are an integral part of these consolidated financial statements.

F-4

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

Note 1 – Summary of Accounting Policies and Nature of Operations

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:

Principles of Consolidation and Nature of Operations

DGSE Companies, Inc. and its subsidiaries (the “Company”), sell jewelry and bullion products to both retail and wholesale customers throughout the United States through its facilities in Dallas and Euless, Texas, Mt. Pleasant, South Carolina, Woodland Hills California and through its internet sites.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its subsidiaries.  All material intercompany transactions and balances have been eliminated.

On July 13, 2007, the Company sold the loan balances from our American Pay Day Center locations and discontinued operations in those locations.  During 2007, we recognized a pretax loss of $107,838 on the disposal of assets and a pretax loss of $51,937 from operations.

In November 2008, the Company decided to discontinue the live auction segment of its business activities. The decision was based on the substantial losses being incurred by this operating segment during 2008. As a result, the operating results of the auction segment have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2009 and 2008, the auction segment incurred pretax losses of $710,656 and $2,379,151.

On July 16, 2009, the Company sold the assets of our National Pawn locations and discontinued operations in those locations. As a result, the operating results of National Pawn have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2009, we recognized a pretax gain of $14,450 on the disposal of assets and incurred a pretax loss of $9,599 from operations.

In December 2009, the Company decided to discontinued operations of Superior Estate Buyers. This decision was based on the substantial losses being incurred by this component during 2009. As a result, the operating results of this segment have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2009, Superior Estate Buyers incurred a pretax loss of $87,120.

As a result of these dispositions, the Consolidated Financial Statements and related notes have been reclassed to present the results of the American Pay Day Center locations, auction segment, National Pawn locations and Superior Estate Buyer’s activities as discontinued operations.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Investments in Marketable Equity Securities

Marketable equity securities have been categorized as available-for-sale and carried at fair value.  Unrealized gains and losses for available-for-sale securities are included as a component of shareholders’ equity net of tax until realized.  Realized gains and losses on the sale of securities are based on the specific identification method.  The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary.  If the decline in the fair values is judged to be other than temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in the consolidated statements of operations.

Inventory

Jewelry and other inventory is valued at lower-of-cost-or-market (specific identification).  Bullion inventory is valued at lower-of-cost-or-market (average cost).

F-5

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization are being provided on the straight-line method over periods of three to thirty years.  Machinery and equipment under capital leases are amortized on the straight-line method over the life of the lease.  Expenditures for repairs and maintenance are charged to expense as incurred.

Goodwill

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets [ASC 350].  Under that pronouncement, goodwill is not being amortized but is subject to periodic tests to determine the amount of impairment, if any, to be reflected during the period.

Note 1 – Summary of Accounting Policies and Nature of Operations - continued

Impairment of Long-Lived Assets

The Company assesses the recoverability of its long-lived assets (including intangible assets) based on their current and anticipated future undiscounted cash flows.  An impairment occurs when the discounted cash flows (excluding interest) do not exceed the carrying amount of the asset.  The amount of the impairment loss is the difference between the carrying amount of the asset and its estimated fair value.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, marketable securities, short-term debt, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these consolidated financial instruments.  The carrying amount reported for long-term debt approximates fair value because substantially all of the underlying instruments have variable interest rates which reprice frequently or the interest rates approximate current market rates.

Advertising Costs

Advertising costs are expensed as incurred and amounted to $2,636,178, $2,028,275 and $1,262,804 for 2009, 2008 and 2007, respectively.

Accounts Receivable

The Company records trade receivables when revenue is recognized.  No product has been consigned to customers.  The Company’s allowance for doubtful accounts is primarily determined by review of specific trade receivables.  Those accounts that are doubtful of collection are included in the allowance.  These provisions are reviewed to determine the adequacy of the allowance for doubtful accounts.  Trade receivables are charged off when there is certainty as to their being uncollectible.  Trade receivables are considered delinquent when payment has not been made within contract terms.  As of December 31, 2009, the Company did not have an allowance recorded.

Pawn loans receivable in the amount of $0 and $306,620 as of December 31, 2009 and 2008, respectively, are included in the Consolidated Balance Sheets caption current assets of discontinued operations. The related pawn service charges receivable in the amount of $0 and $89,235 as of December 31 2009 and 2008, respectively, are also included in the Consolidated Balance Sheets caption current assets of discontinued operations.

Income Taxes

Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between the consolidated financial statements and tax basis of assets and liabilities.

In June 2006, the FASB released FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, FIN 48 interprets the guidance in FASB Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes [ASC 740-10-25 & ASC 740-10-50].  When FIN 48 is implemented, reporting entities utilize different recognition thresholds and measurement requirements when compared to prior technical literature.  The adoption of the provisions of FIN 48 did not have a material impact on the company’s financial position and results of operations. At December 31, 2009, the company had no liability for unrecognized tax benefits and no accrual for the payment of related interest.

F-6

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
Revenue Recognition

Revenue is generated from wholesale and retail sales of rare coins, precious metals, bullion and second-hand jewelry. The recognition of revenue varies for wholesale and retail transactions and is, in large part, dependent on the type of payment arrangements made between the parties. The Company recognizes sales on an F.O.B. shipping point basis.
 
The Company sells rare coins to other wholesalers/dealers within its industry on credit, generally for terms of 14 to 60 days, but in no event greater than one year.  The Company grants credit to new dealers based on extensive credit evaluations and for existing dealers based on established business relationships and payment histories. The Company generally does not obtain collateral with which to secure its accounts receivable when the sale is made to a dealer.  The Company maintains reserves for potential credit losses based on an evaluation of specific receivables and its historical experience related to credit losses.
 
Revenues for monetary transactions (i.e., cash and receivables) with dealers are recognized when the merchandise is shipped to the related dealer.

The Company also sells rare coins to retail customers on credit, generally for terms of 30 to 60 days, but in no event greater than one year.  The Company grants credit to new retail customers based on extensive credit evaluations and for existing retail customers based on established business relationships and payment histories. When a retail customer is granted credit, the Company generally collects a payment of 25% of the sales price, establishes a payment schedule for the remaining balance and holds the merchandise as collateral as security against the customer’s receivable until all amounts due under the credit arrangement are paid in full.  If the customer defaults in the payment of any amount when due, the Company may declare the customer’s obligation in default, liquidate the collateral in a commercially reasonable manner using such proceeds to extinguish the remaining balance and disburse any amount in excess of the remaining balance to the customer.

Under this retail arrangement, revenues are recognized when the customer agrees to the terms of the credit and makes the initial payment.  We have a limited-in-duration money back guaranty policy (as discussed below).

In limited circumstances, the Company exchanges merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which the Company recognizes revenue in accordance with SFAS 153, “Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29 [ASC 845].” When the Company exchanges merchandise for similar merchandise and there is no monetary component to the exchange, the Company does not recognize any revenue. Instead, the basis of the merchandise relinquished becomes the basis of the merchandise received, less any indicated impairment of value of the merchandise relinquished. When the Company exchanges merchandise for similar merchandise and there is a monetary component to the exchange, the Company recognizes revenue to the extent of monetary assets received and determine the cost of sale based on the ratio of monetary assets received to monetary and non-monetary assets received multiplied by the cost of the assets surrendered.

The Company has a return policy (money-back guarantee).  The policy covers retail transactions involving graded rare coins only. Customers may return graded rare coins purchased within 7 days of the receipt of the rare coins for a full refund as long as the rare coins are returned in exactly the same condition as they were delivered. In the case of rare coin sales on account, customers may cancel the sale within 7 days of making a commitment to purchase the rare coins. The receipt of a deposit and a signed purchase order evidences the commitment. Any customer may return a coin if they can demonstrate that the coin is not authentic, or there was an error in the description of a graded coin.

Revenues from the sale of consigned goods are recognized as commission income on such sale if the Company is acting as an agent for the consignor. If in the process of selling consigned goods, the Company makes an irrevocable payment to a consignor for the full amount due on the consignment and the corresponding receivable from the buyer(s) has not been collected by the Company at that payment date, the Company records that payment as a purchase and the sale of the consigned good(s) to the buyer as revenue as the Company has assumed all collection risk.

F-7

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
Pawn loans (“loans”) are made with the collateral of tangible personal property for one month with an automatic 60-day extension period.  Pawn service charges are recorded at the time of redemption at the greater of $15 or the actual interest accrued to date.  If the loan is not repaid, the principal amount loaned plus accrued interest (or the fair value of the collateral, if lower) becomes the carrying value of the forfeited collateral (“inventories”) which is recovered through sales to customers.

      Direct cost of Pawn Loan Service Charge Revenue

The direct cost of pawn loan service charge revenue is included in the Consolidated Statements of Operations caption “Selling, general and administrative.”

Note 1 – Summary of Accounting Policies and Nature of Operations - continued

Fair Value Measures
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No. 157”) [ASC 820]. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  Effective January 1, 2008, the Company has adopted the provisions of SFAS 157.
 
SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The adoption did not have any financial impact on the Company’s results of operations and financial position.

Shipping and Handling Costs

Shipping and handling costs are included in selling general and administrative expenses, and amounted to $357,492, $248,333 and $237,323 for 2009, 2008 and 2007, respectively.

Taxes Collected From Customers

In June of 2006, the FASB issued Emerging Issues Task Force 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-03”) [ASC 605-45]. The consensus reached in EITF 06-03 allows companies to adopt a policy of presenting taxes in the income statement on either a gross basis (included in revenues and costs) or net basis (excluded from revenues). Taxes within the scope of EITF 06-03 would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of excise taxes. The Company has consistently recorded all taxes within the scope of EITF 06-03 on a net basis.

F-8

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
Earnings (Loss) Per Share

Basic earnings per common share is based upon the weighted average number of shares of common stock outstanding.  Diluted earnings per share is based upon the weighted average number of common stock outstanding and, when dilutive, common shares issuable for stock options.

Comprehensive Income

The Company reports all changes in comprehensive income in the consolidated statements of changes in shareholders’ equity, in accordance with the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income [ASC 220].

Stock-based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share Based Payment, (SFAS No. 123(R)) [ASC 718] for all share-based payment award to employees and directors including stock options related to our employee stock purchase plan.  In addition, we applied the provisions of Staff Accounting Bulletin No. 107(SAB No. 107), issued by the  SEC, in our adoption of SFAS No. 123(R).

We adopted SFAS No. 123(R) using the modified-prospective-transition method.  Under this transition method, stock-based compensation expense recognized after the effective date includes: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the measurement date fair value estimate in accordance with the original provisions of SFAS No. 123, and (2) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the measurement date fair value estimate in accordance with the provisions of SFAS No. 123(R).

Stock-based compensation expense recognized each period is based on the greater of the value of the portion of share-based payment awards under the straight-line method or the value of the portion of share-based payment awards that is ultimately expected to vest during the period.  In accordance with SFAS No. 123(R), we estimate forfeitures at the time of grant and revise our estimate, if necessary, in subsequent period if actual forfeitures differ from those estimates.

Upon adoption of SFAS No. 123(R), we elected to use the Black-Scholes-Merton option-pricing formula to value share-based payments granted to employees subsequent to January 1, 2006 and elected to attribute the value of stock-based compensation to expense using the straight-line single option method.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,” which detailed an alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). This alternative transition method included simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation and to determine the subsequent impact on the APIC pool and Consolidated Statement of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R). The tax effect of employee stock-based compensation has no APIC pool.

SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. There has been no excess tax benefit as of December 31, 2009, 2008 and 2007.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, and expenses during the reporting period.  Actual results could differ from those estimates.

F-9

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
Reclassifications

Certain reclassifications were made to the prior years’ consolidated financial statements to conform to the current year presentation.

Subsequent Events

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (“SFAS 165”), [ASC 855-10-50].  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  The Company adopted the provisions of SFAS 165, effective May 2009.  Subsequent events have been evaluated through the date of the independent auditors report.

F-10

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
     New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168,  The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162  (The Codification). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic.  The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company’s references to U.S. GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations” (“SFAS No. 141(R)”) [ASC850], which establishes principles for how the acquirer recognizes and measures in the financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Effective January 1, 2009, we adopted SFAS No. 141(R) [ASC850].  No business combinations were completed in the first quarter of 2009. However, to the extent that future business combinations are material, our adoption of SFAS No. 141(R) [ASC850] will significantly impact our accounting and reporting for future acquisitions, principally as a result of (i) expanded requirements to value acquired assets, liabilities and contingencies at their fair values; and (ii) the requirement that acquisition-related transaction and restructuring costs be expensed as incurred rather than capitalized as a part of the cost of the acquisition.

SFAS No. 165, Subsequent Events issued by the FASB in May 2008 [ASC 855], establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. SFAS No. 165 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date should be disclosed if the financial statements would otherwise be misleading. Disclosures should include the nature of the event and either an estimate of its financial effect or a statement that an estimate cannot be made. SFAS No. 165 is effective for interim and annual financial periods ending after June 15, 2009, and should be applied prospectively. The requirements under this standard did not impact our financial condition or results of operations because they are consistent with our current practice.

F-11

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
Note 2 – Concentration of Credit Risk

The Company maintains cash balances in financial institutions in excess of federally insured limits.

Note 3 – Inventories

A summary of inventories at December 31 is as follows:

   
2009
   
2008
 
Jewelry                                             
  $ 12,880,768     $ 10,925,247  
Scrap gold                                             
    280,051       636,843  
Bullion                                             
    3,584,294       1,931,925  
Rare coins                                             
    1,021,172       1,827,294  
    Total                                             
  $ 17,766,285     $ 15,321,309  

Note 4 – Investments

As of December 31, 2009 and 2008, the Company’s investments were classified as follows:
 
2009
 
   
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Non-Current:
                       
Available-for-sale:
                       
Investments
  $ 45,000       -       -     $ 45,000  
   

2008
 
   
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Non-Current:
                       
Available-for-sale:
                       
Investments
    -       -       -       -  
 
Investment income (loss) for the years ended December 31, 2009, 2008 and 2007 consists of the following:
 
   
2009
   
2008
   
2007
 
Interest Income
    -       -       -  
Dividend Income
    -       -       -  
(Loss) on sale of marketable securities
    -       -       (3,890 )
Impairment of marketable securities
    -       (115,991 )     -  
Total
    -       (115,991 )     (3,890 )

The Company invests in various securities for business and strategic purposes. Investments are classified as “available for sale” and are carried at fair value based on quoted market prices. The Company reviews its investments on a regular basis to determine if any security has experienced an other-than-temporary decline in fair value. The Company considers various factors including the investee company’s cash position, earnings and revenue outlook, stock price performance, liquidity and management ownership, among other factors, in its review. If it is determined that an other-than-temporary decline exists in a security, the Company writes down the investment to its market value and records the related write-down as an investment loss in its Statement of Operations.

At December 31, 2008, the Company wrote-off the value its equity security investments. The write-off amounted to $115,992 and was due to a decline in the fair value of the equity security which, in the opinion of management, was considered to be other than temporary. The write-off is included in “Other income (expense)” in the accompanying Statement of Operations for 2008.

F-12

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
Note 5 – Property and Equipment

A summary of property and equipment at December 31, 2009 and 2008 is as follows:

   
2009
   
2008
 
Buildings and improvements    
  $ 3,275,395     $ 3,098,152  
Machinery and equipment     
    1,378,158       1,147,535  
Furniture and fixtures       
    802,060       789,456  
      5,455,613       5,035,143  
Less accumulated depreciation and amortization
    1,902,941       1,520,083  
      3,552,673       3,515,060  
Land                                                    
    1,160,470       1,160,470  
                 
Total Property and Equipment                                                    
  $ 4,713,142     $ 4,675,530  

During 2007, we sold the land and building at which our Dallas retail store and corporate headquarters were previously located for $1,299,898.  The net pretax gain from the sale was $579,447 and is included in “Income from continuing operations” in the 2007 Statement of Operations.  The net book value of the assets sold was $712,518, which is net of accumulated depreciation of $352,982.

Note 6 – Acquisitions

Superior Galleries, Inc.  On May 30, 2007, we completed our acquisition of Superior Galleries, Inc. for the total purchase price of approximately $13.6 million, which we refer to as Superior, pursuant to an amended and restated agreement and plan of merger and reorganization dated as of January 6, 2007, which we refer to as the merger agreement, with Superior and Stanford International Bank Ltd., then Superior’s largest stockholder and its principal lender, which we refer to as Stanford, as stockholder agent for the Superior stockholders, whereby Superior became a wholly owned subsidiary of DGSE Companies, Inc.  Superior’s principal line of business is the sale of rare coins on a retail, wholesale, and auction basis.  Superior now operates a store in Woodland Hills, CA.

In accordance with SFAS 142, the goodwill is not amortized but instead tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events.

During 2008, the Company reflected $8,185,443 of goodwill relating to the acquisition of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, the Company is required to undertake an annual impairment test at its year end or when there is a triggering event. In addition to the annual impairment review, there were a number of triggering events in the fourth quarter due to the significant operating losses of Superior and the impact of the economic downturn on Superior’s operations and the decline in the Company’s share price resulting in a substantial discount of the market capitalization to tangible net asset value. An evaluation of the recorded goodwill was undertaken and it was determined that it was impaired. Accordingly, to reflect the impairment, the Company recorded a non-cash charge of $8,185,443, which eliminated the value of the goodwill related to Superior.
 
The operating results of Superior have been included in the consolidated financial statements since the acquisition date of May 30, 2007. The following unaudited condensed consolidated financial information reflects the pro forma results of operations for the year ended December 31, 2007 as if the acquisition of Superior had occurred on January 1 of 2007 after giving effect to purchase accounting adjustments as compared to actual results of operations for the year ended December 31, 2008 and the effects of the discontinued operations related to the auction segment.

The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place at the beginning of the period, and may not be indicative of future operating results (in thousands, except per share data):  

   
Year Ended December 31,
 
(In thousands, except per share data)
 
2008
   
2007
 
   
(Unaudited)
 
         
Pro Forma
 
Total revenue
  $ 105,219     $ 73,565  
Net earnings (loss)
  $ (7,851 )   $ (2,922 )
Net earnings per share — basic
  $ (.80 )   $ (.33 )
Net earnings per share — diluted
  $ (.80 )   $ (.33 )
Weighted average shares — basic
    9,834       8,582  
Weighted average shares — diluted
    9,834       10,353  

F-13

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
In relation to the acquisition, as of June 29, 2007, Stanford and Dr. L.S. Smith, our chairman and chief executive officer, collectively had the power to vote approximately 63% of our voting securities, and beneficially owned approximately 56.4% of our voting securities on a fully-diluted basis (after giving effect to the exercise of all options and warrants held by them which are exercisable within sixty days of June 29, 2007 but not giving effect to the exercise of any other options or warrants). Consequently, these two stockholders may have sufficient voting power to control the outcome of virtually all corporate matters submitted to the vote of our common stockholders. Those matters could include the election of directors, changes in the size and composition of our board of directors, mergers and other business combinations involving us, or the liquidation of our company. In addition, Stanford and Dr. Smith have entered into a corporate governance agreement with us, which entitles Stanford and Dr. Smith to each nominate two “independent” directors to our board and entitles Dr. Smith, our chairman and chief executive officer, and William H. Oyster, our president and chief operating officer, to be nominated to our board for so long as each remains an executive officer.
 
Through this control of company nominations to our board of directors and through their voting power, Stanford and Dr. Smith are able to exercise substantial control over certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), a merger or consolidation with another company, and our acquisition or disposition of assets. Also, the concentration of voting power in the hands of Stanford and Dr. Smith could have the effect of delaying or preventing a change in control of our company, even if the change in control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Euless Gold & Silver, Inc.

On May 9, 2007 we purchased all of the tangible assets of Euless Gold and Silver, Inc., located in Euless, Texas.  The purchase price paid for these assets totaled $1,000,000 including $600,000 in cash and a two year note in the amount of $400,000.  We opened a new retail store in the former Euless Gold & Silver facility and operate under the name of Dallas Gold & Silver Exchange.  Of the assets received, $990,150 was inventory and the remainder was fixed assets.

We entered into these transactions seeing them as opportunistic acquisitions that would allow us to expand our operations and provide a platform for future growth.

F-14

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
Note 7 – Goodwill

The Company recognized an increase in goodwill as a result of the Superior Galleries, Inc. acquisition during 2007.  At December 31, goodwill was reflected for the following reporting units:
 
   
2009
   
2008
 
Superior Galleries, Inc
  $     $  
Wholesale Watch Sales
  $ 837,117     $ 837,117  
Total Goodwill
  $ 837,117     $ 837,117  

During 2008, the Company reflected $8,185,443 of goodwill, including $70,379 relating to Superior merger costs classified in other assets during 2008 relating to the acquisition of Superior Galleries, Inc. in May 2007, which were subsequently reclassified in 2008 to goodwill prior to recognition of impairment. Under SFAS No. 142, the Company is required to undertake an annual impairment test at its year end or when there is a triggering event. In addition to the annual impairment review, there were a number of triggering events in the fourth quarter due to the significant operating losses of Superior and the impact of the economic downturn on Superior’s operations and the decline in the Company’s share price resulting in a substantial discount of the market capitalization to tangible net asset value. An evaluation of the recorded goodwill was undertaken, which considered two methodologies to determine the fair-value of the entity:
 
·  
A market capitalization approach, which measure market capitalization at the measurement date.
   
·  
A discounted cash flow approach, which entails determining fair value using a discounted cash flow methodology.  This method requires significant judgment to estimate the future cash flow and to determine the appropriate discount rates, growth rates, and other assumptions.

Each of these methodologies the Company believes has merit, and resulted in the determination that goodwill was impaired. Accordingly, to reflect the impairment, the Company recorded a non-cash charge of $8,185,443, which eliminated the value of the goodwill related to Superior.

No impairment losses were recognized during 2009 or 2007.

Note 8 – Notes Payable

         At December 31, 2009, the Company was obligated to various individuals under unsecured, demand notes bearing annual interest rates of 8%totaling $48,569.

At December 31, 2008, the Company was obligated to various individuals under unsecured, demand notes bearing annual interest rates of 8% to 12% totaling $191,078.

At December 31, 2007, the Company was obligated to various individuals under unsecured, demand notes bearing annual interest rates of 8% to 12% totaling $187,468.

F-15

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

Note 9 – Long-Term Debt

   
2009
   
2008
 
A summary of long-term debt at December 31, follows:
           
Revolving promissory notes payable to bank, a note of $3,195,000 at December 31, 2009 and $3,595,000 at December 31, 2008 which bears interest at the greater of 6% or prime plus 1% (6.0% at December 31, 2009) and is due June 22, 2010 and a note of $1,000,000 which bears interest at the greater of 6% or prime plus 1% (6.0% at December 31, 2009) due in equal monthly installments of $16,667 through June 22, 2010. Balance of note was $216,639 and $399,976 as of December 31, 2009 and 2008, respectively. The defined borrowing base requirement is based on eligible trade receivables and inventory. As of December 31, 2009, available but unused borrowing capacity on the revolver was $0. These notes are secured by all accounts receivable, inventory, property and equipment and intangible assets. The notes contain certain covenants, restricting payment of dividends, and requiring the Company to maintain certain financial ratios. In addition to the above, the Company has an additional $11,500,000 line of credit with Stanford International Bank, LTD. Interest on this facility is at the prime rate, as reported in the Wall Street Journal and the facility will mature and become due in May 2011. Of this line, $9,200,000 has been drawn against, most of which related to the Superior Galleries acquisition.
  $ 12,611,915     $ 13,194,976  
                 
Our mortgage payable as of December 31, 2009 is due in monthly installments of $22,744, including interest of 6.70% with a balance due in August 2016.
    2,251,387       2,332,484  
                 
Note payable, due in quarterly payments of $57,691 including interest of 8.25%.  The final payment was made in May 2009
          110,791  
                 
Note payable, due January 2, 2013. Interest is payable monthly at a rate of 8%
    247,555       247,556  
                 
Capital lease obligations
          24,930  
      15,110,857       15,910,737  
Line of credit
    (3,195,000 )     (3,595,000 )
Less current maturities
    (310,714 )     (599,972 )
    $ 11,605,143     $ 11,715,765  
 
The following table summarizes the aggregate maturities of long-term debt and reflects the revised maturities from refinancing of certain long-term debt subsequent to year-end:

December 31,
 
Long-term debt
 
2010                                                
  $ 3,505,714  
2011                                                
    9,301,364  
2012                                                
    107,808  
2013                                                
    362,812  
2014                                                
    123,221  
Thereafter                                                
     1,709,938  
      15,110,857  
Less current portion
    (310,714 )
Less line of credit
     (3,195,000 )
    $ 11,605,143  

F-16

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

Note 10 – Earnings Per Common Share

A reconciliation of the income and shares of the basic earnings per common share and diluted earnings per common share for the years ended December 31, 2009, 2008 and 2007 is as follows:
 
 
Net Earnings
   
Shares
   
Per Share
 
   
(In thousands, except per share data)
 
Year ended December 31, 2009
                 
Basic earnings per common share
  $ (313,694 )     9,838,735     $ (0.03 )
Effect of dilutive stock options
                   
Diluted earnings per common share
  $ (313,694 )     9,838,735     $ (0.03 )
                         
Year ended December 31, 2008
                       
Basic earnings per common share
  $ (7,851,207 )     9,708,045     $ (0.81 )
Effect of dilutive stock options
                   
Diluted earnings per common share
  $ (7,851,207 )     9,708,045     $ (0.81 )
Year ended December 31, 2007
                       
Basic earnings per common share
  $ 755,019       7,507,579     $ 0.10  
Effect of dilutive stock options
          774,308          
Diluted earnings per common share
  $ 755,019       8,281,887     $ 0.09  

For the year ended December 31, 2009, 2008 and 2007, approximately 1.4 million shares, 1.4 million shares and 0 shares, respectively related to employee stock options were not added to the denominator because inclusion of such shares would be antidilutive.

For the year ended December 31, 2009, 2008 and 2007, approximately 400,000 shares, 400,000 shares and 370,000 shares, respectively related to warrants issued in conjunction with certain acquisitions were not added to the denominator because inclusion of such shares would be antidilutive.

The following table sets forth outstanding shares of common stock issued in the form of stock purchase warrants and employee stock options as of December 31:
 
   
2009
   
2008
   
2007
 
                   
Warrants issued in conjunction with financing
                3,982  
Warrants issued in conjunction with acquisitions
     422,814       422,814       370,928  
Common stock options
    1,443,134       1,443,134       399,398  
                         
 
The warrants issued in conjunction with financing were issued to expire on July 5, 2008 and were issued at an exercise price of $3.10.  The warrants issued in conjunction with acquisitions were issued to expire on May 29, 2014 at an exercise price of $1.89.  

Note 11 – Stock Options

In March 2004, our board of directors and the stockholders approved the 2004 Stock Option Plan that provided for incentive stock options and nonqualified stock options to be granted to key employee and certain directors.  Our Board of Directors or designated committee established the terms of each option granted under the 2004 Stock Option Plan.  The stock options granted under the plan generally vest over 1 to 5 years and have a maximum contractual life of 10 years. At December 31, 2009 we had 181,866 options available for grant and 1,518,134 options granted and outstanding under the 2004 Stock Option Plan.  

F-17

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
In May 2007, our board of directors and the stockholders approved the 2006 Equity Inventive Plan that provided for incentive stock options and nonqualified stock options to be granted to key employee and certain directors.  Our Board of Directors or designated committee established the terms of each option granted under the 2006 Equity Incentive Plan.  The stock options granted under the plan generally vest over 1 to 5 years and have a maximum contractual life of 10 years.  At December 31, 2009 we had 750,000 options available for grant and no options granted and outstanding under the 2006 Equity Incentive Plan.

Prior to January 1, 2006, the Company elected to follow Accounting Principles Board Opinion (APB) NO.25, Accounting for Stock Issued to Employees, and related interpretations to account for its employee and director stock options, as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.  Effective January 1, 2006, the Company adopted the fair value recognition provision of SFAS No. 123 (revised 2004), Share-Based Payments, (SFAS No. 123(R) for all share-based payment awards to employees and directors including employee stock options.  In addition, the Company has applied the provisions of Staff Accounting Bulletin No. 107 (SAB No. 107), issued by the Securities and Exchange Commission, in our adoption of SFAS No. 123(R).

The Company adopted SFAS No. 123(R) using the modified-prospective-transition method.  Under this transition method, stock-based compensation expense recognized after the effective date includes:  (1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimate in accordance with the original provisions of SFAS No. 123, and (2) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimate in accordance with the provision of SFAS No. 123.  Results from prior periods have not been restated and do not include the impact of SFAS No. 123(R).  Stock-based compensation expense under SFAS No. 123(R) for the year ended December 31, 2006 was $0, relating to employee and director stock options and our employee stock purchase plan.  Stock-based compensation expense under the provision of APB No. 25 for the year ended December 31, 2006 was insignificant.

Stock-based compensation expense recognized each period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.  SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  In our pro forma disclosures required under SFAS No. 123 for periods prior to 2006, the Company accounted for forfeitures as they occurred.

Upon adoption of SFAS No. 123(R), the Company elected to use the Black-Scholes-Merton option-pricing formula to value share-based payments granted to employees subsequent to January 1, 2006 and elected to attribute the value of stock-based compensation to expense using the straight-line single option method.  These methods were previously used for the Company’s pro forma information required under SFAS No. 123.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards”, which detailed an alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). This alternative transition method included simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation and to determine the subsequent impact on the APIC pool and Consolidated Statement of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R).  As of December 31, 2009, we have not recorded the tax effects of employee stock-based compensation and have made no adjustments to the APIC pool.

SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. As there have been no stock options exercised, we have not reported these excess tax benefits as of December 31, 2098. The following table summarizes the activity in common shares subject to options for the years ended December 31, 2009, 2008 and 2007:

   
At December 31,
 
   
2009
   
2008
   
2007
 
   
Shares
   
Weighted average exercise price
   
Shares
   
Weighted average exercise price
   
Shares
   
Weighted average exercise price
 
Outstanding at beginning of year
    1,458,155     $ 2.17       1,479,252     $ 2.13       1,403,134     $ 2.03  
Granted
    100,000       0.78       -       0.00       126,468       9.22  
Exercised
    -       0.00       -       0.00       -       0.00  
Forfeited
    (40,021 )     5.25       (21,097 )     5.72       (50,350 )     14.36  
                                                 
Outstanding at end of year
    1,518,134     $ 2.02       1,458,155     $ 2.17       1,479,252     $ 2.35  
                                                 
Options exercisable at end of year
    1,500,134     $ 1.98       1,418,155     $ 2.16       1,417,645     $ 2.13  

F-18

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
The weighted average estimated fair value of stock options granted during 2009 was $0.43 using the Black-Scholes-Morton option pricing formula utilizing a dividend yield of $0, volatility of 67%, risk-free rate of .10%, and expected life of 5 years.  Dividend yield was determined to be $0 as these have not been historically paid. Expected volatility is based on the historical volatility calculated from the historical values of the Company’s stock prices.  The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant.  The company estimates for forfeitures based on historical data.

The weighted average estimated fair value of stock options granted during 2007 was $4.62 using the Black-Scholes-Morton option pricing formula utilizing a dividend yield of $0, volatility of 55%, risk-free rate of 3.8%, and expected life of 5 years.  Dividend yield was determined to be $0 as these have not been historically paid.  Expected volatility is based on the historical volatility calculated from the historical values of the Company’s stock prices.  The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant.  The company estimates for forfeitures based on historical data.

Information about Plan stock options outstanding at December 31, 2009 is summarized as follows:
 
     
Options outstanding
 
Range of exercise prices
   
Number outstanding
 
Weighted average remaining contractual life
 
Weighted average exercise price
   
Aggregate intrinsic value
 
$0.78       100,000  
 years
  $ 0.78     $ 63,000  
$1.12       267,857  
 years
    1.12       77,679  
$1.13 to $2.25       1,072,777  
 years
    2.21       -  
$2.26 to $2.82       30,000  
 years
    2.56       -  
$2.83 to $4.19       17,500  
 years
    3.88       -  
$6.00       30,000  
 years
    6.00       -  
          1,518,134               $ 140,679  

     
Options exercisable
 
Range of exercise prices
   
Number outstanding
 
Weighted average remaining contractual life
 
Weighted average exercise price
   
Aggregate intrinsic value
 
$0.78       100,000  
years
  $ 0.78     $ 63,000  
$1.12       267,857  
years
    1.12       77,679  
$1.13 to $2.25       1,072,777  
years
    2.21       -  
$2.26 to $2.82       30,000  
years
    2.56       -  
$2.83 to $4.19       17,500  
years
    3.88       -  
$6.00       12,000  
years
    6.00       -  
          1,500,134               $ 140,679  
 
F-19

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
The aggregate intrinsic values in the above table were based on the closing price of our common stock of $1.41 as of December 31, 2009.  The aggregate fair value of stock options vesting during 2009 and 2008 was $71,000 and $63,000, respectively.

During 2009, 2008, and 2007, we recognized $84,729, $36,092 and $28,817, respectively, of stock-based compensation expense related to the plans, which was recorded in selling, general, and administrative expenses.  At December 31, 2009, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards was approximately$130,000.  The weighted average period over which the unearned stock-based compensation was expected to be recognized was approximately 3 years.

Note 12 – Comprehensive Income

Comprehensive income at December 31, 2009, 2008, and 2007 is as follows:

   
Before-Tax
         
Net-of-Tax
 
   
Amount
   
Tax Benefit
   
Amount
 
Accumulated comprehensive income (loss) at January  1, 2007
    (169,590 )     37,391       (132,245 )
Unrealized holding losses arising during 2007
    25,714       9,197       34,957  
Accumulated comprehensive income (loss) at December 31, 2007
    (143,876 )     46,588       (97,288 )
Unrealized holding gains arising during 2008
    (59,906 )     19,294       (40,508 )
Accumulated comprehensive income (loss) prior to being written off
    (203,782 )     65,882       (137,796 )
Write-off of securities
    203,782       (65,882 )     137,796  
Accumulated comprehensive income (loss) at December 31, 2008 and 2009
  $     $     $  

F-20

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

Note 13 – Intangible Assets

Intangible assets represent the customer base and trade name resulting from the Superior Acquisition as follows:
 
   
December 31, 2009
   
December 31, 2008
 
             
Customer base                                                          
  $ 372,666     $ 401,333  
Trade name                                                          
  $ 2,091,340     $ 2,091,340  
Intangible assets                                                          
  $ 2,464,006     $ 2,492,673  

Only the customer base intangible asset is subject to amortization.  The customer base is being amortized over a 15 year life.  Amortization expense related to the customer base was $28,667 and 28,667 for the years ended December 31, 2009 and 2008, respectively.  The accumulated amortization as of December 31, 2009 is $57,334.

Note 14 – Income Taxes

The income tax provision reconciled to the tax computed at the statutory Federal rate follows:

   
2009
   
2008
   
2007
 
                   
Tax expense at statutory rate                                                                    
  $ (57,785 )   $ (2,801,643 )   $ 272,658  
Goodwill impairment                                                                    
          2,783,051        
Valuation Allowance
    182,498                  
Other                                                                    
    98,131       (30,542 )     (30,254 )
    Tax expense                                                                    
    222,844       (49,134 )     242,404  
                         
Current                                                                    
    45,987       53,694       77,424  
Deferred                                                                    
    176,857       (102,828 )     164,980  
    Total                                                                    
  $ 222,844     $ (49,134 )   $ 242,404  
 
Deferred income taxes are comprised of the following at December 31, 2009 and 2008:

   
2009
   
2008
 
Deferred tax assets (liabilities):
           
     Inventory                                                                    
  $ 90,951     $ 123,655  
     Allowance for bad debt and other                                                                    
    34,122       33,293  
     Unrealized loss on available for sale securities
          (4,969 )
     Property and equipment                                                                    
    (175,046 )     (8,389 )
     Capital loss carryover                                                                    
    33,786       8,366  
     NOL carryforward                                                                    
    2,023,752       1,849,968  
     Goodwill                                                                    
    (93,892 )     (93,892 )
            Total deferred tax assets                                                                    
  $ 1,913,673     $ 1,908,032  
     Valuation Allowance
    (182,498 )      
    $ 1,731,175     $ 1,908,032  
 
The tax provision on pretax income from continuing operations includes the following:
 
     
2009
     
2008
     
2007
 
Federal—
                       
Current
  $     $ 1,118,458     $ 122,613  
Deferred
    157,784       (92,545 )     148,482  
                               
      157,784       1,025,940       271,095  
State and foreign—
                       
Current
    45,986       53,694       38,250  
Deferred
    17,686       (10,283 )     16,498  
                               
      63,672       43,411       54,748  
                               
    $ 221,456     $ 1,069,351     $ 325,843  
 
F-21

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 
A reconciliation of the effective tax rate to the amount computed by applying the federal income tax rate to pretax income
 
   
2009
   
2008
   
2007
 
                   
Tax expense at statutory rate
  $ 211,809     $ (1,704,412 )   $ 280,310  
Goodwill impairment
    -       2,783,051       -  
Other
    9,647       (9,288 )     (45,533 )
                               
      221,456       1,069,351       325,843  

The Company recorded a valuation allowance of $182,498 in 2009 related to the loss limitation for this time period. The Company has approximately $9.5 million of NOL’s, related to the Superior acquisition, that are limited under IRS rules. The Company believes it will produce income in the future to realize the remaining tax benefit attributes. The net operating loss carry-forward of approximately $880,000 related to the Company’s overall operations begins to expire in 2029.

Note 15 – Operating Leases

The Company leases certain of its facilities under operating leases.  The minimum rental commitments under noncancellable operating leases as of December 31, 2009 are as follows:
 
Year Ending December 31,
 
Lease
Obligations
 
       
2010
  $ 467,834  
2011
    477,816  
2012
    491,054  
2013
    193,470  
 2014 and thereafter
    127,925  
         
    $ 1,758,099  

Rent expense for the years ended December 31, 2009, 2008 and 2007 was approximately $412,377, $461,227 and $377,259, respectively.

Note 16 – Discontinued Operations

In November 2008 we decided to discontinue the live auction segment of the Company’s business activities. This decision was based on the substantial losses being incurred by this operating segment during 2008. As a result, the operating results of the auction segment have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2009 the auction segment incurred a pretax loss of $710,656. During 2008 the auction segment incurred a pretax loss of $2,379,151.

On July 16, 2009, the Company sold the assets of our National Pawn locations and discontinued operations in those locations. As a result, the operating results of National Pawn have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2009, we recognized a pretax gain of $14,450 on the disposal of assets and incurred a pretax loss of $9,599 from operations.

In December 2009, the Company decided to discontinued operations of Superior Estate Buyers. This decision was based on the substantial losses being incurred by this component during 2009. As a result, the operating results of this segment have been reclassified to discontinued operations for 2009, 2008 and 2007. During 2009, Superior Estate Buyers incurred a pretax loss of $87,120.

F-22

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007


The following summarizes the carrying amount of assets and liabilities of the above noted discontinued segment and/or components as of December 31:

Assets
 
2009
   
2008
 
   Cash
  $     $ 24,366  
   Accounts receivable
          1,297,776  
   Inventory
          731,524  
   Prepaid and other current asset
          10,824  
        Current assets
          2,064,460  
   Property and equipment, net
          192,776  
   Other long term assets
          26,909  
   Long-term receivable
  $ 295,617     $ 305,275  
        Total assets
    295,617     $ 2,589,420  
Liabilities
               
   Auctions payable
  $     $ 45,044  
 
On July 13, 2007, we sold the loan balances from our American Pay Day Center locations for $77,496 and discontinued operations in those locations.   The receivables sold, including interest due, had a balance of $120,573 at the time of the sale.  The sales price was determined based on the age of the outstanding receivables.  As a result of the sale and discontinued operations, we recognized a pretax loss of $107,838 on the disposal and a pretax loss on discontinued operations of $51,938 for the year ended December 31, 2007.

As a result, operating results from these business segments have been reclassified to discontinued operations for all periods presented.  As of December 31, 2009 there were no operating assets to be disposed of or liabilities to be paid in completing the disposition of these operations.

F-23

 
DGSE Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 17 – Segment Information

Management identifies reportable segments by product or service offered.  Each segment is managed separately. Corporate and other includes certain general and administrative expenses not allocated to segments, pay day lending and pawn operations. There were no significant non-cash items during the periods.  The Company’s operations by segment were as follows:

(In thousands)
 
Retail Jewelry
   
Wholesale
Jewelry
   
Bullion
   
Rare Coins
   
Discontinued Operations
   
Corporate and Other
   
Consolidated
 
Revenues
                                         
     2009
  $ 24,633     $ 3,917       42,797     $ 14,023     $           $ 85,407  
     2008
    34,737       5,125       45,449       15,913                   101,224  
     2007
    19,333       5,785       21,153       13,921                   60,192  
                                                         
Net income (loss)
                                                       
     2009
    379       (72 )     65       244       (795 )     (135 )     (314 )
     2008
    1,698       197       139       (7,446 )     (2,130 )     (183 )     (7,851 )
     2007
    319       270       235       8       42       (46 )     755  
                                                         
Identifiable assets
                                                       
     2009
    21,290       1,556       1,900       1,663       305       4,352       31,066  
     2008
    231396       1,710       1,955       1,827       1,206       1,250       31,344  
     2007
    16,135       2,167       536       11,651       2,987       3,389       36,859  
                                                         
Capital Expenditures
                                                       
     2009
    420                                     420  
     2008
    1,081             6                   10       1,097  
     2007
    3,126             23                   274       3,423  
                                                         
Depreciation and amortization
                                                       
     2009
    267       6       70       66             2       411  
     2008
    140             33       104       48       72       397  
     2007
    141                   32       32       21       226  
Goodwill
                                                       
     2009
          837                               837  
     2008
          837                               837  
     2007
            837             7,337       848             8,185  
                                                         
Interest expense
                                                       
     2009
    126       57       109       109                   401  
     2008
    545               179       179                   903  
     2007
    587             34       27             27       675  
                                                         
Income tax expense
                                                       
     2009
    174       (33 )     30       112             (62 )     221  
     2008
    967       55       27       68             (48 )     1,069  
     2007
    178       57       65       2             24       326  
 
Note 18 – Subsequent Events

On January 27, 2010, DGSE Companies, Inc.(“DGSE”) and Stanford International Bank, LTD (‘SIBL”), which is the beneficial owner of a significant equity interest in DGSE, a primary lender to a wholly owned subsidiary of DGSE and subject to certain agreements with DGSE and its Chairman,  entered into definitive agreements whereby  SIBL will terminate all agreements, will convert all of its debt, interest and other expenses and  will sell all of its equity interests including common stock and warrants to DGSE or its assignees.

Stanford and its affiliates, including SIBL are under receivership, and, accordingly, the transaction is subject to the approval of the United States District Court for the Northern District of Texas which has jurisdiction for the assets of SIBL. The agreements also contain other closing conditions including, but not limited to the receipt of all United States governmental and regulatory approvals, if any, the receipt of third party approvals, consents and/or waivers as may be required in connection with the transaction and compliance with United States regulatory and governmental requirements, including proof acceptable to the Company, that upon transfer to the purchaser or its assignees that they will receive title to the Securities free and clear of all liens. It is anticipated that additional 8-K’s may be filed upon the occurrence of material events related to this matter.

As a result of the transaction, it is anticipated that the immediate shares outstanding of the Company will be reduced by all or part of approximately 3,400,000 shares held by SIB and over $9,000,000 in obligations owed by a subsidiary of DGSE to SIBL will be eliminated.
 
On February 26, 2010, Superior Galleries, Inc. (‘Superior’) entered into a settlement agreement for a lawsuit filed by its previous landlord, DBKK, LLC for $385,000 to be paid over three years bearing interest at 8%.  The Company’s settlement with DBBK was a risk management decision based on an original claim in the amount of $806,000.  The lawsuit resulted from a lease transaction entered into by certain officers of Superior, Larry Abbott and Silvano Digenova, during a time when the Company had a management contract with Superior between these certain officers and Stanford International Bank, Ltd (‘SIBL’) that precluded them from entering into these transactions.  Although the claim has been settled, the Company believes it has a counter claim against Abbott, Digenova, and SIBL resulting from their false and misleading facts regarding the management of Superior and its financial condition, further business opportunities and available financing which induced the Company to acquire Superior.  The SIBL receiver (see discussion above regarding the SIBL matter) is well aware of these potential causes of actions and has considered these issues in the settlement agreement between the Company and SIBL.  After the closing with the SIBL receiver, the Company plans to seek damages against Abbott, Digenova and Certain former officers of SIBL.  Therefore, management has determined that the DBKK, LLC settlement transaction will be recorded as part of the overall settlement agreement with SIBL as discussed above.
 
On February 26, 2010, Superior Galleries, Inc. ('Superior') entered into a settlement agreement for a lawsuit filed by its previous landlord, DBKK, LLC for $385,000 to be paid over three years bearing interest at 8%. The Company's settlement with DBBK was a risk management decision based on an original claim in the amount of $806,000. The lawsuit resulted from a lease transaction entered into by certain officers of Superior, Larry Abbott and Silvano Digenova, during a time when the company had a management contract with Superior between these certain officers and Stanford International Bank, Ltd ('SIBL') that precluded them from entering into these transactions. Although the claim has been settled, the Company believes it has a counter claim against Abbott, Digenova, and SIBL resulting from their false and misleading facts regarding the management of Superior and its financial condition, further business opportunities and available financing which induced the Company to acquire Superior. The SIBL receiver (see discussion above regarding the SIBL matter) is well aware of these potential causes of actions and has considered these issues in the settlement agreement between the Company and SIBL. After the closing of SIBL receiver, the Company plans to seek damages against Abbott, Digenova and Certain former officers of SIBL. Therefore, management has determined that the DBKK, LLC settlement transaction will be recorded as part of the overall settlement agreement with SIBL as discussed above.
 
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Note 19 – Quarterly Results of Operations (Unaudited)

     
1st Quarter 
     
2nd Quarter 
     
3rd Quarter 
     
4th Quarter 
 
     
(In thousands, except per share data)
 
Year ended December 31, 2009                                
  Revenues                                                           
  $ 25,340     $ 21,634     $ 16,280     $ 22,116  
  Operating profit                                                           
    844       1,076       731       (1,552 )
  Net earnings                                                           
    229       689       270       (1,502 )
  Basic earnings per common share                                                           
  $ 0.02     $ 0.07     $ 0.03     $ (0.15 )
  Diluted earnings per common share
  $ 0.02     $ 0.07     $ 0.03     $ (0.15 )
Year ended December 31, 2008                                
  Revenues                                                           
  $ 32,175     $ 25,715     $ 23,994     $ 23,335  
  Operating profit                                                           
    1,051       557       1,085       962  
  Net earnings                                                           
    182       278       166       (8,477 )
  Basic earnings per common share                                                           
  $ 0.04     $ 0.05     $ 0.02     $ (0.86 )
  Diluted earnings per common share
  $ 0.04     $ 0.04     $ 0.02     $ (0.86 )
Year ended December 31, 2007                                
  Revenues                                                           
  $ 10,240     $ 12,220     $ 16,154     $ 22,993  
  Operating profit                                                           
    384       263       (5 )     534  
  Net earnings                                                           
    182       271       108       84  
  Basic earnings per common share                                                           
  $ 0.04     $ 0.05     $ 0.02     $ 0.02  
  Diluted earnings per common share
  $ 0.04     $ 0.05     $ 0.02     $ 0.02  
 
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