UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form 10-Q





(Mark
One)





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


For
the quarterly period ended March 31, 2010


or




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


For
the transition period from ___ to ___





Commission
File Number 1-11048




DGSE
Companies, Inc.


(Exact name of registrant as
specified in its charter)





Nevada
                88-0097334(State
      or other jurisdiction of
                (I.R.S.
      Employerincorporation
      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)





NONE


(Former
name, former address and former


fiscal
year, if changed since last report)





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.


YESþ NOo





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




Large
      accelerated filer  ̈
                  Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                  Smaller
      reporting company þ


(Do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


YESo NOþ





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of May 12, 2010:





Class
              
              OutstandingCommon
      stock, $.01 par value per share
              
              9,833,635







TABLE OF
CONTENTS





Page No.PART
      I.
                                  FINANCIAL INFORMATIONItem 1.
                                  Consolidated
      Financial Statements.
                                  1Consolidated
      Balance Sheets as of March 31, 2010 and December 31, 2009
                                  1Consolidated
      Statements of Operations for the three months ended March 31, 2010 and
      2009
                                  2Consolidated
      Statements of Cash Flows for the three months ended March 31, 2010 and
      2009
                                  3Notes
      to Consolidated Financial Statements
                                  4Item 2.
                                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                  9Item 3.
                                  Quantitative
      and Qualitative Disclosures About Market Risk.
                                  16Item 4.
                                  Controls
      and Procedures.
                                  16PART
      II.
                                  OTHER INFORMATIONItem 3.
                                  Legal
      Proceedings.
                                  17Item 5.
                                  Other
      Information.
                                  17Item 6.
                                  Exhibits.
                                  17SIGNATURES
                                  
                                  21




i


DGSE
Companies, Inc. and Subsidiaries





PART
I.  FINANCIAL INFORMATION





Item
1. Consolidated Financial Statements.





CONSOLIDATED
BALANCE SHEETS





March 31,
                    2010
                  
                  
                  December 31,
                    2009UnauditedASSETSCurrent
      Assets:Cash
      and cash equivalents
                  
                  $
                  942,988
                  
                  
                  $
                  1,446,724Trade
      receivables
                  
                  
                  699,788
                  
                  
                  
                  649,310Inventories
                  
                  
                  16,627,447
                  
                  
                  
                  17,766,285Prepaid
      expenses
                  
                  
                  791,347
                  
                  
                  
                  807,298Prepaid
      federal income tax
                  
                  
                  660,433
                  
                  
                  
                  639,372Total
      current assets
                  
                  
                  19,722,003
                  
                  
                  
                  21,308,989Property
      and equipment, net
                  
                  
                  4,734,480
                  
                  
                  
                  4,713,142Deferred
      income taxes
                  
                  
                  1,731,175
                  
                  
                  
                  1,731,175Goodwill
                  
                  
                  837,117
                  
                  
                  
                  837,117Intangible
      assets
                  
                  
                  2,464,006
                  
                  
                  
                  2,464,006Other
      assets
                  
                  
                  261,905
                  
                  
                  
                  260,904Non-current
      assets of discontinued operations
                  
                  
                  295,617
                  
                  
                  
                  295,617$
                  30,046,303
                  
                  
                  $
                  31,655,950LIABILITIESCurrent
      Liabilities:Notes
      payable
                  
                  $
                  48,569
                  
                  
                  $
                  48,569Current
      maturities of long-term debt
                  
                  
                  310,438
                  
                  
                  
                  310,714Line
      of credit
                  
                  
                  3,195,000
                  
                  
                  
                  3,195,000Accounts
      payable – trade
                  
                  
                  650,129
                  
                  
                  
                  1,472,663Accrued
      expenses
                  
                  
                  334,473
                  
                  
                  
                  492,710Customer
      deposits
                  
                  
                  1,659,431
                  
                  
                  
                  2,092,593Total
      current liabilities
                  
                  
                  6,198,040
                  
                  
                  
                  7,612,249Long-term
      debt, less current maturities
                  
                  
                  11,539,856
                  
                  
                  
                  11,605,14317,737,896
                  
                  
                  
                  19,217,392STOCKHOLDERS’
      EQUITYCommon
      stock, $.01 par value; 30,000,000 shares authorized;
      9,833,635  shares issued and outstanding at the end of each
      period.
                  
                  
                  98,637
                  
                  
                  
                  98,637Additional
      paid-in capital
                  
                  
                  18,698,091
                  
                  
                  
                  18,698,091Retained
      deficit
                  
                  
                  (6,488,321
                  )
                  
                  
                  (6,358,170
                  )12,308,407
                  
                  
                  
                  12,438,558$
                  30,046,303
                  
                  
                  $
                  31,655,950





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


1


DGSE
Companies, Inc. and Subsidiaries





CONSOLIDATED
STATEMENTS OF OPERATIONS





Three months ended March 31,2010
                
                
                2009UnauditedRevenueSales
                
                $
                17,347,554
                
                
                $
                24,988,973Costs
      and expensesCost
      of goods sold
                
                
                14,918,715
                
                
                
                21,951,703Selling,
      general and administrative expenses
                
                
                2,466,647
                
                
                
                2,148,109Depreciation
      and amortization
                
                
                66,424
                
                
                
                50,45117,451,786
                
                
                
                24,150,263Operating
      income
                
                
                (104,232
                )
                
                
                838,710Other
      expense (income)Other
      income
                
                
                (17,440
                )
                
                
                —Interest
      expense
                
                
                110,406
                
                
                
                147,084Earnings (loss)
      before income taxes
                
                
                (197,198
                )
                
                
                691,626Income
      tax (benefit) expense
                
                
                (67,047
                )
                
                
                61,119Net
      earnings (loss) from continuing operations
                
                
                (130,151
                )
                
                
                630,507Discontinued
      operations:Loss
      from discontinued operations (less applicable income tax benefit of
      $39,271
                
                
                —
                
                
                
                400,991Net
      earnings (loss)
                
                $
                (130,151
                )
                
                $
                229,516Earnings
      per common shareBasicFrom
      continuing operations
                
                $
                (0.01
                )
                
                $
                0.06From
      discontinued operations
                
                $
                —
                
                
                $
                (0.04
                )Net
      earnings per common share
                
                $
                (0.01
                )
                
                $
                0.02DilutedFrom
      continuing operations
                
                $
                (0.01
                )
                
                $
                0.06From
      discontinued operations
                
                $
                —
                
                
                $
                (0.04
                )Net
      earnings per common share
                
                $
                (0.01
                )
                
                $
                0.02Weighted
      average number of common sharesBasic
                
                
                9,833,635
                
                
                
                9,833,635Diluted
                
                
                9,833,635
                
                
                
                9,833,635





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


2




DGSE
COMPANIES, Inc. and Subsidiaries





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Three months ended March 31,2010
                    
                    
                    2009UnauditedCash
      flows from operating activitiesNet
      earnings
                    
                    $
                    (130,151
                    )
                    
                    $
                    229,516Adjustments
      to reconcile net earnings to net cash provided by operating
      activitiesDepreciation
      and amortization
                    
                    
                    66,424
                    
                    
                    
                    59,351Deferred
      income taxes
                    
                    
                    -
                    
                    
                    
                    50,131(Increase)
      decrease in operating assets and liabilitiesTrade
      receivables
                    
                    
                    (50,478
                    )
                    
                    
                    924,861Inventories
                    
                    
                    1,138,838
                    
                    
                    
                    (644,229
                    )Prepaid
      expenses and other current assets
                    
                    
                    15,951
                    
                    
                    
                    2,837Accounts
      payable and accrued expenses
                    
                    
                    (934,785
                    )
                    
                    
                    (548,977
                    )Customer
      deposits
                    
                    
                    (433,162
                    )
                    
                    
                    786,647Federal
      income taxes payable
                    
                    
                    (67,047
                    )
                    
                    
                    —Other
      assets
                    
                    
                    43,999
                    
                    
                    
                    49,233Net
      cash provided (used) by operating activities
                    
                    
                    (350,411
                    )
                    
                    
                    909,370Cash
      flows from investing activitiesPawn
      loans made
                    
                    
                    —
                    
                    
                    
                    (348,699
                    )Pawn
      loans repaid
                    
                    
                    —
                    
                    
                    
                    189,649Recovery
      of pawn loan principal through sale of forfeited
collateral
                    
                    
                    —
                    
                    
                    
                    148,911Purchase
      of property and equipment
                    
                    
                    (87,762
                    )
                    
                    
                    (104,749
                    )Net
      cash used in investing activities
                    
                    
                    (87,762
                    )
                    
                    
                    (114,888
                    )Cash
      flows from financing activitiesRepayments
      of notes payable
                    
                    
                    (65,563
                    )
                    
                    
                    (119,598
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    (65,563
                    )
                    
                    
                    (119,598
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (503,736
                    )
                    
                    
                    674,884Cash
      and cash equivalents at beginning of period
                    
                    
                    1,446,724
                    
                    
                    
                    244,429Cash
      and cash equivalents at end of period
                    
                    $
                    942,988
                    
                    
                    $
                    919,313





Supplemental
disclosures:





Interest
paid for the three months ended March 31, 2010 and 2009 was $110,406 and
$147,084, respectively.


Income
taxes paid for the three months ended March 31, 2010 and 2009 was $0 and $0,
respectively.





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


3


DGSE
COMPANIES, Inc. and Subsidiaries





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





(1)
            Basis
      of Presentation.





The
accompanying unaudited condensed consolidated financial statements of DGSE
Companies, Inc. and Subsidiaries include the financial statements of DGSE
Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, Charleston
Gold and Diamond Exchange, Inc., Superior Galleries Inc., Superior Precious
Metals, Inc., American Gold and Diamond Exchange, Inc. In the opinion of
management, all adjustments consisting of normal recurring accruals considered
necessary for a fair presentation have been included.





The
interim financial statements of DGSE Companies, Inc. included herein have been
prepared by us pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the Commission's rules and regulations,
although we believe that the disclosures are adequate to make the information
presented not misleading. We suggest that these financial statements be read in
conjunction with the financial statements and notes included in our Annual
Report on Form 10-K for the year ended December 31, 2008. In our opinion, the
accompanying unaudited interim financial statements contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly its results of operations and cash flows for the periods presented. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full year. Certain reclassifications were
made to the prior year's consolidated financial statements to conform to the
current year presentation.





In
December  2008, we decided to discontinue the live auction segment of
our business activities. This decision was based on the substantial losses being
incurred by this operating segment during 2008. As a result, certain sections of
the Consolidated Financial Statements and related notes have been reclassified
to present the results of the auction segment activities as discontinued
operations.





In June
2009 the Company sold the assets of National Jewelry Exchange, Inc.(the
Company’s 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
National Jewelry Exchange have been reclassified to discontinued operations for
all periods presented.





In
November 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.





(2)
            Inventory.





A summary
of inventories is as follows:





March 31, 2010
                  
                  
                  December 31, 2009Jewelry
                  
                  $
                  12,166,438
                  
                  
                  $
                  12,880,768Rare
      coins
                  
                  
                  1,083,152
                  
                  
                  
                  1,021,172Bullion
                  
                  
                  2,945,247
                  
                  
                  
                  3,584,294Scrap
      gold
                  
                  
                  208,993
                  
                  
                  
                  280,051Other
                  
                  
                  223,617
                  
                  
                  
                  —Total
                  
                  $
                  16,627,447
                  
                  
                  $
                  17,766,285




4


DGSE
COMPANIES, Inc. and Subsidiaries





(3)
            Earnings
      per share.





A
reconciliation of the earnings and shares of the basic earnings per common share
and diluted earnings per common share for the periods ended March 31, 2010 and
2009 is as follows:





2010
                
                
                2009Three months ended March 31,
                
                
                Three months ended March 31,Net Earnings
                
                
                Shares
                
                
                Per share
                
                
                Net Earnings
                
                
                Shares
                
                
                Per shareBasic
      earnings per common share
                
                $
                (130,151
                )
                
                
                9,833,635
                
                
                $
                (0.01
                )
                
                $
                229,516
                
                
                
                9,,833,365
                
                
                $
                0.02Effect
      of dilutive stock options
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Diluted
      earnings per common share
                
                $
                (130,151
                
                
                
                9,833,635
                
                
                $
                (0.01
                )
                
                $
                229,516
                
                
                
                9,,833,365
                
                
                $
                0.02





For
the  three months ended March 31, 2010and 2009 1.4 million
shares  related to employee stock options were not added to the
denominator because inclusion of such shares would be antidilutive. For the
three months ended March31, 2009,438,672 related to
warrants  issued  in conjunction with an acquisition 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 March
31:


2010
                  
                  
                  2009Warrants
      issued in conjunction with acquisitions
                  
                  
                  —
                  
                  
                  
                  438,672Common
      stock options
                  
                  
                  1,423,134
                  
                  
                  
                  1,423,134
                  
                  
                  
                  -





The
warrants issued in conjunction with acquisitions were issued to expire on May
29, 2014 at an exercise price of $1.89.


5


DGSE
COMPANIES, Inc. and Subsidiaries





(4)
            Business
      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 and pawn operations. The
Company had no significant non cash items other than depreciation and
amortization. Our operations by segment for the three months ended March 31 were
as follows:





(In thousands)
                                              
                                              Retail
                                                Jewelry
                                              
                                              
                                              Wholesale
                                                Jewelry
                                              
                                              
                                              Precious
                                                Metals
                                              
                                              
                                              Rare
                                                Coins
                                              
                                              
                                              Discontinued
                                                Operations
                                              
                                              
                                              Corporate
                                                and Other
                                              
                                              
                                              ConsolidatedRevenues2010
                                              
                                              $
                                              5,588
                                              
                                              
                                              $
                                              676
                                              
                                              
                                              $
                                              8,461
                                              
                                              
                                              $
                                              2,622
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              17,3472009
                                              
                                              
                                              6,200
                                              
                                              
                                              
                                              952
                                              
                                              
                                              
                                              13,695
                                              
                                              
                                              
                                              4,142
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              24,989Net
      earnings (loss)2010
                                              
                                              
                                              (336
                                              )
                                              
                                              
                                              1
                                              
                                              
                                              
                                              152
                                              
                                              
                                              
                                              72
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (19
                                              )
                                              
                                              
                                              (130
                                              )2009
                                              
                                              
                                              195
                                              
                                              
                                              
                                              (51
                                              )
                                              
                                              
                                              340
                                              
                                              
                                              
                                              165
                                              
                                              
                                              
                                              (401
                                              )
                                              
                                              
                                              (18
                                              )
                                              
                                              
                                              230Identifiable
      assets2010
                                              
                                              
                                              23,243
                                              
                                              
                                              
                                              1,725
                                              
                                              
                                              
                                              2,962
                                              
                                              
                                              
                                              1,084
                                              
                                              
                                              
                                              295
                                              
                                              
                                              
                                              783
                                              
                                              
                                              
                                              30,0922009
                                              
                                              
                                              20,880
                                              
                                              
                                              
                                              1,719
                                              
                                              
                                              
                                              3,710
                                              
                                              
                                              
                                              2,278
                                              
                                              
                                              
                                              812
                                              
                                              
                                              
                                              2,264
                                              
                                              
                                              
                                              31,663Goodwill2010
                                              
                                              
                                              —
                                              
                                              
                                              
                                              837
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              8372009
                                              
                                              
                                              —
                                              
                                              
                                              
                                              837
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              837Capital
      Expenditures2010
                                              
                                              
                                              61
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              612009
                                              
                                              
                                              105
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              105Depreciation
      and amortization2010
                                              
                                              
                                              39
                                              
                                              
                                              
                                              1
                                              
                                              
                                              
                                              13
                                              
                                              
                                              
                                              13
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              662009
                                              
                                              
                                              50
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              50Interest expense2010
                                              
                                              
                                              107
                                              
                                              
                                              
                                              3
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1102009
                                              
                                              
                                              117
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              15
                                              
                                              
                                              
                                              15
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              147Income tax expense2010
                                              
                                              
                                              (173
                                              )
                                              
                                              
                                              1
                                              
                                              
                                              
                                              78
                                              
                                              
                                              
                                              37
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (10
                                              )
                                              
                                              
                                              (67
                                              )2009
                                              
                                              
                                              19
                                              
                                              
                                              
                                              (5
                                              )
                                              
                                              
                                              33
                                              
                                              
                                              
                                              16
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (2
                                              )
                                              
                                              
                                              61




6


DGSE
COMPANIES, Inc. and Subsidiaries





(5)
            Stock-based
      Compensation.





Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123(R) for all share based payment awards to employees and directors including
employee stock options granted under our employee stock option plan. In
addition, we have 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).





Stock-based
compensation expense under SFAS No. 123(R) for the months ended March 31, 2010
and 2009, respectively, was $0 and $0, relating to employee and director stock
options and our employee stock purchase plan.





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.





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). As of
March 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 March 31, 2010.





(6)
            Discontinued
      Operations.





In June
2009 the Company sold the assets of National Jewelry Exchange, Inc.(the
Company’s 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
National Jewelry Exchange have been reclassified to discontinued operations for
all periods presented.





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 2008 and 2007. During 2008 the auction segment incurred a pretax loss
of $2,379,151.





In
November 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.


7


DGSE
COMPANIES, Inc. and Subsidiaries




(9)
            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 Eventsissued 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.


8


DGSE
COMPANIES, Inc. and Subsidiaries





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





Forward-Looking
Statements





The
statements, other than statements of historical facts, included in this report
are forward-looking statements. 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 believe that the
expectations reflected in such forward-looking statements are accurate. However,
we cannot assure you that these expectations will occur. Our actual future
performance could differ materially from such statements. Factors that could
cause or contribute to these differences include, but are not limited
to:





·
            uncertainties
      regarding price fluctuations in the price of gold and other precious
      metals;





·
            our
      ability to manage inventory fluctuations and
  sales;





·
            changes
      in governmental rules and regulations applicable to the specialty
      financial services industry;





·
            the
      results of any unfavorable
litigation;





·
            interest
      rates;





·
            economic
      pressures affecting the disposable income available to our
      customers;





·
            our
      ability to maintain an effective system of internal
    controls;





·
            the
      other risks detailed from time to time in our SEC
  reports.





Additional
important factors that could cause our actual results to differ materially from
our expectations are discussed under “Risk Factors” in our Annual Report on Form
10-K for our fiscal year ended December 31, 2009. You should not unduly rely on
these forward-looking statements, which speak only as of the date of this
report. Except as required by law, we are not obligated to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
occurring after the date of this report or to reflect the occurrence of
unanticipated events.





Our
Business





We buy
and sell jewelry, bullion products and rare coins. Our customers include
individual consumer, dealers and institutions throughout the United States. .
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.




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 jewelry.
rare coins and bullion  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.





Americangoldandsilverexchange.com,
the over 900 proprietary Internet sites related to the home page of
Americangoldandsilverexchange.com along with our existing locations in Texas,
California and South Carolina, provide 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.


9


DGSE
COMPANIES, Inc. and Subsidiaries





Superior
Estate Buyers brings 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. During 2008 Superior
Estate Buyers held approximately 24 such buying events. It is our expectation
that, over time, this activity will be expanded significantly with the objective
of having teams conducting events on a continuous basis.




Superior
Precious Metals is the 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.




Critical Accounting Policies and
Estimates




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.




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”.


10


DGSE
COMPANIES, Inc. and Subsidiaries




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.




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.




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”.




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"). 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.




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.


11


DGSE
COMPANIES, Inc. and Subsidiaries




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. .




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 carry-back
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)
carry-forward 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.


12


DGSE
COMPANIES, Inc. and Subsidiaries





Results
of Operations





Three Months Ended March 31,
2010 compared to Three Months Ended March 31, 2009





Sales
decreased by $7,641,429or 30.6%, during the three months ended March 31, 2010 as
compared to 2009. This decrease was primarily the result of a $1,520,000, or
36.7%, decrease in rare coin sales, a $5,234,000, or 38.2%, decrease in the sale
of precious metal products, and $612,000, or 10.0%, decrease in our jewelry
sales during the first quarter of 2010 as compared to 2009. The decreases in
precious metals and rare coin were due to a less volatile market . The decrease
in jewelry sales was due to the sluggish retail environment. Cost of goods as a
percentage of sales decreased from 87.9% in 2009 to 86.0% in 2010. This decrease
was due to the decrease in rare coin and precious metals revenue as a percentage
of total sales.





Selling,
general and administrative expenses increased by $318,538, or 14.8%, during the
three months ended March 31, 2010 as compared to 2009. This increase was
primarily due to an increase in advertising expense ($77,000) and increased
payroll and related cost related. The decrease in interest expense was due to a
lower prime rate.





Income
tax expense is directly affected by the levels of pretax income and
non-deductible permanent differences





Income
taxes are provided at the rate of 34.00 % and 8.8% for 2010 and 2009,
respectively.





Historically,
changes in the market prices of precious metals have had a significant impact on
both revenues and cost of sales in the rare coin and precious metals segments in
which we operate. It is expected that due to the commodity nature of these
products, future price changes for precious metals will continue to be
indicative of our performance in these business segments. Changes in sales and
cost of sales in the retail and wholesale jewelry segments are primarily
influenced by the national economic environment. It is expected that this trend
will continue in the future due to the nature of these product.





Liquidity
and Capital Resources





During
the three months ended March 31, 2009 and 2010 cash flows from operating
activities totaled $909,370 and ($350,411), respectively. Cash flows from
operating activities during 2009 were primarily the result of a increase in
inventory ($644,229), a decrease in accounts payable and accrued expenses
($548,977), a increase in customer deposits $786,647 and a decrease in trade
receivables $924,861. The increase in inventory and customer deposits was due to
a late first quarter increase in demand for precious metal products. The
decrease in trade receivables was a result of a decrease in the sales of
wholesale jewelry products. During 2010 the negative cash flows from operating
activities were primarily due to a reduction trade payables and accrued
$(934,785) and a reduction in customer deposits ($433,162).





During
the three months ended March 31, 2009 and 2010 cash flows from investing
activities totaled ($114,888) and ($ 87,762),  respectively. During
2009 the primary use of cash from investing activities was the result of cash
used to purchase property and equipment ($104,749) and the increase in pawn
loans made net of pawn loans paid ($10,139). During 2010 the Company invested
$87,762 in property and equipment.





During
the three months ended March 31, 2009 and 2010 cash flows from financing
activities totaled ($119,598) and ($65,563), respectively. The use of cash
during both years was the result of repayment of loans to Texas Capital Bank and
the mortgage on our facility.




We expect
capital expenditures to total approximately $100,000 during the next twelve
months. It is anticipated that these expenditures will be funded from working
capital. As of March 31, 2010 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.


13


DGSE
COMPANIES, Inc. and Subsidiaries





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.




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.




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


14


DGSE
COMPANIES, Inc. and Subsidiaries




We have
been informed thaton
February 19, 2009, a US district court placed SIBLunder 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 toborrow 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.  Webelieve that certain terms
ofagreementsentered into by us,
Superior and/or SIBL and its affiliates in connection with our acquisition of
Superiorhave been
breached by SIBL or its affiliates, andwe 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 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





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 $4,300,000 and has a maturity date of June 22, 2010.  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 March 31, 2010, approximately $4,300,000 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.





The
covenants associated with our credit facility with Texas Capital Bank, N.A.
exclude Superior Galleries  are as follows:





As of March 31, 2010
                                  
                                  Requirement
                                  
                                  
                                  ActualcalculationMinimum tangible net worth
                                  
                                  10,500,000
                                  
                                  
                                  
                                  13,078,543Maximum
      total liabilities to tangible net worth
                                  
                                  Not
      to exceed 1.50
                                  
                                  
                                  
                                  .70Minimum
      debt service coverage
                                  
                                  Must
      be greater than 1.35
                                  
                                  
                                  
                                  1.56





Payments
      due by periodContractual
      Cash Obligations
                      
                      Total
                      
                      
                      2010
                      
                      
                      2011 - 2012
                      
                      
                      2013 – 2014
                      
                      
                      ThereafterNotes
      payable
                      
                      $
                      3,243,569
                      
                      
                      $
                      3,243,569
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Long-term
      debt and capital leases
                      
                      
                      12,315,301
                      
                      
                      
                      310,438
                      
                      
                      
                      9,639,112
                      
                      
                      
                      484,608
                      
                      
                      
                      1,881,143Operating
      Leases
                      
                      
                      2,072,320,
                      
                      
                      
                      498,736
                      
                      
                      
                      1,237,026
                      
                      
                      
                      302,486
                      
                      
                      
                      34,072Total
                      
                      $
                      17,631,190
                      
                      
                      $
                      4,052,743
                      
                      
                      $
                      10,876,138
                      
                      
                      $
                      787,094
                      
                      
                      $
                      1,915,215


15


DGSE
COMPANIES, Inc. and Subsidiaries





In
addition, we estimate that we will pay approximately $440,000 in interest during
the next twelve months.





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
3. Quantitative and Qualitative Disclosures About 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 gold values. We are also exposed to regulatory risk in
relation to its pawn loans. We do not use derivative financial
instruments.





Our
earnings and financial position may be affected by changes in gold 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 gold values cannot be
reasonably estimated.





Item
4. Controls and Procedures.





Evaluation of 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
quarterly 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.





Changes in internal controls.For the quarter ended March 31, 2010, 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.


16


DGSE
COMPANIES, Inc. and Subsidiaries





PART
II- OTHER INFORMATION





Item
3. Legal Proceedings





We may,
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.





Item
5. Other Information.





None.





Item
      6.
            Exhibits
      and Reports on  Form 8-K.





Exhibits:





Exhibit
                        
                        
                        
                        Filed
                        
                        Incorporated
                        
                        
                        
                        Date Filed
                        
                        ExhibitNo.
                        
                        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
                        
                        2.12.2
                        
                        Limited
      Joinder Agreement, dated as of January 6, 2007
                        
                        
                        
                        ×
                        
                        8-K
                        
                        January 9,
      2007
                        
                        2.93.1
                        
                        Articles
      of Incorporation dated September 17, 1965
                        
                        
                        
                        ×
                        
                        8-A12G
                        
                        June 23,
      1999
                        
                        3.13.2
                        
                        Certificate
      of Amendment to Articles of Incorporation, dated October 14,
      1981
                        
                        
                        
                        ×
                        
                        8-A12G
                        
                        June 23,
      1999
                        
                        3.23.3
                        
                        Certificate
      of Resolution, dated October 14, 1981
                        
                        
                        
                        ×
                        
                        8-A12G
                        
                        June 23,
      1999
                        
                        3.33.4
                        
                        Certificate
      of Amendment to Articles of Incorporation , dated July 15,
      1986
                        
                        
                        
                        ×
                        
                        8-A12G
                        
                        June 23,
      1999
                        
                        3.43.5
                        
                        Certificate
      of Amendment to Articles of Incorporation, dated August 23,
      1998
                        
                        
                        
                        ×
                        
                        8-A12G
                        
                        June 23,
      1999
                        
                        3.53.6
                        
                        Certificate
      of Amendment to Articles of Incorporation, dated June 26,
      1992
                        
                        
                        
                        ×
                        
                        8-A12G
                        
                        June 23,
      1999
                        
                        3.6


17


DGSE
COMPANIES, Inc. and Subsidiaries





3.7
              
              Certificate
      of Amendment to Articles of Incorporation, dated June 26,
      2001
              
              
              
              ×
              
              8-K
              
              July 3,
      2001
              
              1.03.8
              
              Certificate
      of Amendment to Articles of Incorporation, dated May 22,
    2007
              
              
              
              x
              
              8-K
              
              May
      31, 2007
              
              3.13.9
              
              By-laws,
      dated March 2, 1992
              
              
              
              ×
              
              8-A12G
              
              June 23,
      1999
              
              3.74.1
              
              Specimen
      Common Stock Certificate
              
              
              
              ×
              
              S-4
              
              January 6, 2007
              
              4.110.1
              
              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
              
              10.210.2
              
              Lease
      Agreement dated June 2, 2000 by and between SND Properties and
      Charleston Gold and Diamond Exchange, Inc.
              
              
              
              ×
              
              10-KSB
              
              March 29,
      2001
              
              10.110.3
              
              Lease
      agreement dated October 5, 2004 by and between Beltline Denton Road
      Associates and Dallas Gold & Silver Exchange
              
              
              
              ×
              
              10-K
              
              April 15,
      2005
              
              10.210.4
              
              Lease
      agreement dated December 1, 2004 by and between Stone Lewis Properties and
      Dallas Gold & Silver Exchange
              
              
              
              ×
              
              10-K
              
              April 15,
      2005
              
              10.310.5
              
              Lease
      agreement dated November 18, 2004 by and between Hinkle Income Properties
      LLC and American Pay Day Centers, Inc.
              
              
              
              ×
              
              10-K
              
              April 15,
      2005
              
              10.410.6
              
              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
              
              10.610.7
              
              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


18


DGSE
COMPANIES, Inc. and Subsidiaries





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
              
              10.210.9
              
              Loan
      Agreement, dated as of December 22, 2005, between DGSE Companies,
      Inc. and Texas Capital Bank, N.A.
              
              
              
              ×
              
              8-K/A
              
              August 17, 2006
              
              10.110.10
              
              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
              
              3.010.11
              
              Support
      Agreement, DGSE stockholders, dated as of January 6,
    2007
              
              
              
              ×
              
              8-K
              
              January 9,
      2007
              
              99.110.12
              
              Securities
      Exchange Agreement, dated as of January 6, 2007
              
              
              
              ×
              
              8-K
              
              January 9,
      2007
              
              99.210.13
              
              Warrant
      to DiGenova, issued January 6, 2007
              
              
              
              ×
              
              8-K
              
              January 9,
      2007
              
              99.310.14
              
              Support
      Agreement, Superior stockholders, dated as of January 6,
      2007
              
              
              
              ×
              
              8-K
              
              January 9,
      2007
              
              99.510.15
              
              Asset
      purchase agreement, dated May 9, 2007, by  and between DGSE
      Companies, Inc. and Euless Gold & Silver, Inc.
              
              
              
              ×
              
              8-K
              
              May
      9, 2007
              
              1.010.16
              
              Subordinated
      Promissory Note dated May 9, 2007
              
              
              
              ×
              
              8-K
              
              May
      9, 2007
              
              2.010.17
              
              Registration
      Rights Agreement with Stanford International Bank Ltd., dated as of May
      30, 2007
              
              
              
              ×
              
              8-K
              
              May
      31, 2007
              
              99.110.18
              
              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


19


DGSE
COMPANIES, Inc. and Subsidiaries





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
              
              99.310.20
              
              Form
      of Warrants
              
              
              
              ×
              
              8-K
              
              May
      31, 2007
              
              99.410.21
              
              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
              
              99.510.22
              
              Employment
      Agreement with L.S. Smith, dated as of May 30, 2007
              
              
              
              ×
              
              8-K
              
              May
      31, 2007
              
              99.610.23
              
              Employment
      Agreement with William H. Oyster, dated as of May 30, 2007
              
              
              
              ×
              
              8-K
              
              May
      31, 2007
              
              99.710.24
              
              Employment
      Agreement with John Benson, dated as of May 30, 2007
              
              
              
              ×
              
              8-K
              
              May
      31, 2007
              
              99.831.1
              
              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
              
              ×




Reports
on Form 8-K :




None.


20


SIGNATURES





In
accordance with Section 13 and 15(d) of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





DGSE
      Companies, Inc.By:
              /s/ L. S. Smith
              
              Dated:
      May 14, 2010L.
      S. SmithChairman
      of the Board,Chief
      Executive Officer andSecretary





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.





By:
              /s/ L. S. Smith
              
              Dated:
      May 14, 2010L.
      S. SmithChairman
      of the Board,Chief
      Executive Officer andSecretaryBy:
              /s/ W. H. Oyster
              
              Dated:
      May 14, 2010W.
      H. OysterDirector,
      President andChief
      Operating OfficerBy:
              /s/ John Benson
              
              Dated:
      May 14, 2010John
      BensonChief
      Financial Officer(Principal
      Accounting Officer)




21