DGSE Reports Restated Financials for Fiscal 2010, Consolidated Financials for Fiscal 2011, and Finan

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DGSE Reports Restated Financials for Fiscal 2010, Consolidated Financials for Fiscal 2011, and Financial Results for First and Second Quarter 2012

DALLAS--(BUSINESS WIRE)-- DGSE Companies, Inc. (NYSE MKT: DGSE) today announced its completion and filing of its restated Consolidated Financial Statements for the fiscal year ended December 31, 2010, its Consolidated Financial Statements for the fiscal year ended December 31, 2011, and its Forms 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012. DGSE has now completed its Form 10-K and 10-Q filing requirements with the Securities and Exchange Commission ("SEC") and expects to regain compliance with the NYSE MKT listing requirements.


"I'm very pleased we have completed the restatement process and filed our appropriate financial statements, as it represents a fresh start after a long and arduous undertaking. Over the past ten months, our newly appointed executive team has worked diligently, with the assistance of outside accounting advisors, to evaluate and rebuild our financial statements," said James Vierling, Chairman, Chief Executive Officer and President. "We are now at a pivotal point to focus our collective efforts on improving our business. We believe we have assembled a strong management team that embodies the expertise and vision we need to greatly improve the Company's financial reporting and internal controls, to provide consistent and transparent shareholder communications and to execute on our growth strategies to provide enhanced shareholder value."

Financial Restatement

As previously disclosed, the Company discovered accounting irregularities pertaining to financial statements filed by prior DGSE management. Current management engaged forensic accountants to analyze approximately five years of financial data from the Company and subsequently engaged additional professional accounting support to assist in the recasting and restatement of DGSE's financials.

Current management has determined that the accounting irregularities were caused by three main factors:

(1) Inadequacies in DGSE's internal processes and controls, including decisions made by prior management which current management does not believe to be in accordance with Generally Accepted Accounting Principles (GAAP);

(2) Inappropriate set-up and implementation of DGSE's AccountMate Enterprise Resource Planning system; and

(3) Adjustments and other journal entries made to the general ledger by prior management which lacked adequate support.

DGSE has removed and replaced all individuals who served in executive positions prior to December 20, 2011, including the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Controller, and the Vice President of Finance.

In addition to management changes, DGSE has made a number of other changes to internal processes, procedures and controls to ensure that accounting irregularities do not occur in the future. These changes are detailed in the in the Company's Form 10-K filed today with the SEC.

All changes impacting periods prior to fiscal 2010 have been presented as adjustments to 2009 year-end retained earnings. The total of all adjustments related to 2009 and prior years, resulted in a $24.2 million reduction of retained earnings as of December 31, 2009. A thorough discussion of the adjustments and corrections behind this reduction in retained earnings is included in the Company's restated Form 10-K filed today with the SEC.

As more fully described in the Form 10-K filing, the restatement of fiscal 2010 resulted in an improvement of $5.9 million in earnings before income taxes for the year 2010, compared to previously reported results.

2011 Full Year Results

Operationally, the Company had a strong fiscal year ended December 31, 2011. Revenues increased by $67.1 million, or 81 percent, in fiscal 2011, to $150.0 million, compared to $82.5 million in 2010. This increase was primarily the result of the acquisition of Southern Bullion Trading, LLC ("SBT ") in September of 2011 and a $33.4 million, or 78 percent, increase in bullion sales.

Cost of goods sold as a percentage of sales increased slightly to 85.7 percent in fiscal 2011 from 85 percent in fiscal 2010. Accordingly, gross margins decreased slightly to 14.3 percent in 2011 from 15 percent in 2010. This slight decrease was due to an increase in bullion sales, which have a lower margin than jewelry and rare coin revenues.

Selling, general and administrative expenses increased $3.3 million, or 28 percent, in fiscal 2011 to $15.0 million, compared to $11.7 million in the prior year. This increase was primarily due to the addition of SBT in September of 2011 and to expenses related to opening new stores.

In fiscal 2011, the Company recorded a $4.4 million one-time non-cash loss on settlement of debt with a related party. This non-cash loss related to two separate transactions with NTR. In September of 2011, NTR forgave $2 million of payables owed by DGSE in exchange for 400,000 of our restricted shares of common stock. Based on the value of the shares at that time, the Company recorded a $1.7 million non-cash loss on settlement of this debt. In October of 2011, NTR forgave $2.5 million of additional payables in exchange for 5,000,000 options to purchase shares of our common stock at an exercise price of $15 per share. Based on the fair value of these options, estimated using the Black-Scholes model, the Company recognized an additional non-cash loss of $2.6 million. The Company had net income of $1.01 million, or $0.09 per diluted share, in fiscal 2011 compared to $10.7 million, or $0.96 per diluted share, as restated in fiscal year 2010.

First Quarter 2012 Results

In the quarter ended March 31, 2012, sales increased by $9.8 million, or 43%, to $32.8 million as compared to $23 million during the same period in 2011. This increase was primarily due to the addition of $7.8 million in sales from SBT, which was not a part of our operations until September 2011. Non-SBT sales increased by $2.1 million, or 9 percent, compared to the same period in 2011 due to an increase in jewelry, rare coins and scrap sales.

For the first quarter of 2012, cost of sales increased $5.7 million, or 28 percent, to $26.1 million compared to $20.4 million in the same period in 2011. Cost of goods as a percentage of sales decreased from 88.9 percent in 2011 to 79.5 percent in 2012, primarily due to higher margins in our newly acquired SBT business.

SG&A expenses increased by $3.5 million to $5.6 million, an increase of 175 percent, compared to $2 million during the same period in 2011, primarily due to $2 million related to the addition of the SBT stores. The opening of four new non-SBT stores added $645,000, due to increased advertising costs, salaries, payroll taxes, building rent and other costs. In addition, the Company incurred $365,000 in professional fees associated with the restatement of our financial statements, and the related SEC investigation.

In March 2012, current management decided to discontinue the operations of the Company's Superior Galleries subsidiary due to the lack of profitability and our belief that it was unlikely that profitability would be reached in the foreseeable future. The Company officially discontinued operations in June of 2012 but recognized losses in the first and second quarter of 2012 as discontinued operations. In the first quarter of 2012, the discontinued operations of Superior generated a net loss of $461,000.

Prior to the charge to discontinued operations, the Company had income from continuing operations of $959,000 for the first quarter of 2012. Net income after discontinued operations for the quarter was $497,000.

Second Quarter 2012 Results

For the three months ended June 30, 2012, sales decreased by $2.1 million, or 7 percent, to $28.6 million, as compared to $30.6 million during the same period in 2011. The decrease was primarily due to a decrease in sales of bullion, jewelry and rare coins. These decreases were partially offset by the acquisition of SBT in September 2011 which added revenues of $6.6 million for the quarter, and were not present in the same period in 2011. Revenue from discontinued operations for Superior was excluded in the amount of $1.1 million and $2.6 million for the periods ended June 30, 2012 and 2011, respectively.

For the second quarter, cost of sales decreased by $2.9 million, or 11 percent, to $24.6 million, as compared to $27.5 million during the same period in 2011, driven by lower sales. Cost of goods as a percentage of sales decreased from 89.8 percent in 2011 to 86.0 percent in 2012, primarily due to the higher margins on the newly acquired SBT business.

For the three months ended June 30, 2012, SG&A expenses increased by $3.4 million, or 133 percent, to $6 million, as compared to $2.6 million during the same period in 2011. $1.8 million of this increase is due to the addition of the SBT stores, and the opening of four new non-SBT stores added $692,000 in the current period, due to increased advertising costs, salaries, payroll taxes, building rent and other costs. In addition, the Company incurred $932,000 in professional fees associated with the restatement of our financial statements, and the related SEC investigation.

In the second quarter of 2012, the discontinued operations of Superior generated a net loss of $201,000. Prior to the charge to discontinued operations the Company incurred a loss from continuing operations of $2,207,000 for the second quarter of 2012. Net loss, after discontinued operations for the quarter was $2,408,000.

Outlook

"In summary, for the first half of 2012 sales were up $7.8 million over the first half of 2011, including the addition of SBT sales," stated Mr. Vierling . "The net loss for the period was $1.9 million but shareholders should note that this amount includes $2.0 million in discontinued operations, and one-time expenses associated with the restatement of our financial statements".

"During the year, we took decisive measures to not only rectify our financial reporting and controls, but to also gain market share through new store openings," stated Mr. Vierling.

"DGSE's retail footprint has grown significantly in the last 18 months through both acquisition and the opening of additional locations. In the coming year, DGSE will continue to evaluate opportunities to expand its number of retail stores. I expect that the bulk of our growth in 2013 will come from the addition of locations in metro areas in which we already have a strong retail presence," continued Mr. Vierling. "We are actively looking at expansion opportunities in Atlanta, Charleston, Chicago and Dallas that meet our qualifications as a premiere retail location".

"Additionally, we are pleased to announce that we are working directly with manufacturers and vendors to produce our own line of fine jewelry," continued Mr. Vierling. "We will be able to leverage our own inventory of pre-owned diamonds, and enhance our margin opportunity by as much as three times our typical jewelry margins. Several of our locations already have the initial deliveries of this new product line, and we will continue to add additional items to this line throughout the holiday season".

"We believe we have a fundamentally sound business model and balance sheet to drive profitability and enhance shareholder value. Having completed the restatement process, we can now fully focus on further development of our business," concluded Mr. Vierling.

Conference Call

The Company will host a teleconference tomorrow, Thursday, November 1, 2012, at 2:00 p.m. Central Time to discuss the Company's results. To participate in the teleconference, please call in a few minutes before the start time: +877-317-6789 for U.S. callers, +866-605-3852 for Canadian callers and +412-317-6789 for international callers and reference the DGSE conference call (confirmation code 10020541) when prompted. A replay will be available one hour after completion of the call through December 3, 2012 at 8:00 a.m. CT. To access the replay, please dial +877-344-7529 (U.S. callers) or +412-317-0088 (international callers) and reference passcode 10020541. The webcast and archived replay can also be accessed on the Company's website at www.dgse.com.

If you would like to schedule an individual meeting with DGSE management please call 972-481-3820 and speak with Stori Chapa or email investorrelations@dgse.com with your meeting request.

About DGSE Companies, Inc.

DGSE Companies, Inc. wholesales and retails jewelry, diamonds, fine watches, and precious metal bullion and rare coin products through its Bullion Express, Charleston Gold & Diamond Exchange, Dallas Gold & Silver Exchange and Southern Bullion Coin & Jewelry operations. DGSE also owns Fairchild International, Inc., one of the largest vintage watch wholesalers in the country. In addition to its retail facilities in Alabama, Florida, Georgia, Illinois, North Carolina, South Carolina, Tennessee and Texas, the Company operates internet websites which can be accessed at www.bullionexpress.com, www.dgse.com, www.cgdeinc.com and www.sbcoin.com. Real-time price quotations and real-time order execution in precious metals are provided on another DGSE website at www.usbullionExchange.com. Wholesale customers can access the full vintage watch inventory through the restricted site at www.fairchildwatches.com.

The Company is headquartered in Dallas, Texas, and its common stock trades on the NYSE MKT Exchange under the symbol "DGSE."

This press release includes statements which may constitute "forward-looking" statements, usually containing the words "believe," "estimate," "project," "expect" or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products and services in the marketplace, competitive factors, dependence upon third-party vendors and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this release.

DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
   
December 31,
 2011  2010 
As Restated
ASSETS
Current Assets:
Cash and cash equivalents$6,069,392$732,449
Trade receivables1,582,092715,382
Inventories11,635,2257,977,228
Prepaid expenses 98,455  28,473 
Total current assets19,385,1649,453,532
 
Marketable securities-available for sale-7,500
Property and equipment, net4,705,5514,342,556
Intangible assets, net3,397,36741,352
Other assets 160,491  21,492 
Total assets$27,648,573 $13,866,432 
 
LIABILITIES
Current Liabilities:
Line of credit$2,999,887$3,499,887
Current maturities of long-term debt451,674734,267
Current maturities of capital leases21,184-
Convertible debt, net of debt discount-147,999
Accounts payable-trade1,501,0571,477,980
Accrued expenses3,044,3931,076,266
Customer deposits and other liabilities 1,836,748  2,800,763 
Current liabilities related to continuing operations9,854,9439,737,162
 
 
Long-term debt, less current maturities2,471,2262,901,363
Capital leases, less current maturities30,914-
Accrued expenses, less current maturities -  1,829,663 
Total liabilities12,357,08314,468,188
 
Commitments and contingencies
 
STOCKHOLDERS' EQUITY
Common stock121,639104,117
Additional paid-in capital33,942,57919,080,390
Accumulated deficit (18,772,728) (19,786,263)
Total stockholders' equity (deficit)15,291,490(601,756)
  
Total liabilities and stockholders' equity$27,648,573 $13,866,432 

DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
    
For the Year Ended

December 31,

 2011 2010 
As Restated
Revenue:
Sales$149,627,353$82,567,921
 
Costs and expenses:
Cost of goods sold128,243,73570,162,747
Selling, general and administrative expenses14,977,35911,703,653
Depreciation and amortization 429,481 414,142 
143,650,57582,280,542
 
Operating income 5,976,778 287,379 
 
Other expense (income) :
Loss on settlement of debt with related party4,360,713-
Gain on settlement of debt and other liabilities-(10,845,049)
Other expense (income), net29,315(17,443)
Interest expense 573,215 383,994 
 4,963,243 (10,478,498)
 
Income before income taxes1,013,53510,765,877
 
Income tax expense-24,675
  
Net income$1,013,535$10,741,202 
 
Earnings per common share:
Basic$0.09$1.04 
Diluted$0.09$0.96 
 
Weighted-average number of common shares
Basic10,831,97110,335,794
Diluted10,201,19611,216,158

DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
   
March 31,December 31,
 2012  2011 
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents$3,354,378$5,976,928
Trade receivables576,2561,578,892
Inventories11,458,17410,717,291
Prepaid expenses 111,250  84,971 
Current assets related to continuing operations15,500,05818,358,082
 
Assets related to discontinued operations 1,030,368  1,311,929 
 
Total current assets 16,530,426  19,670,011 
 
Marketable securities-available for sale113,112-
Property and equipment, net4,611,9764,420,704
Intangible assets, net3,340,4853,397,367
Other assets 145,310  160,491 
Total assets$24,741,309 $27,648,573 
 
LIABILITIES
Current Liabilities:
Line of credit$2,999,887$2,999,887
Current maturities of long-term debt444,171451,674
Current maturities of capital leases25,34921,184
Accounts payable-trade996,3611,497,492
Accrued expenses833,2363,017,394
Customer deposits and other liabilities 1,001,879  1,836,748 
Current liabilities related to continuing operations6,300,8839,824,379
 
Liabilities related to discontinued operations 175,810  54,454 
 
Total current liabilities 6,476,693  9,878,833 
 
Long-term debt, less current maturities2,369,3952,447,336
Capital leases, less current maturities 21,174  30,914 
Total liabilities8,867,26212,357,083
 
Commitments and contingencies
 
STOCKHOLDERS' EQUITY
Common stock121,755121,639
Additional paid-in capital
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