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Legal Proceedings.

On April 16, 2012, the Company filed a Current Report on Form 8-K disclosing that our Board had determined the existence of the accounting irregularities beginning approximately during the second calendar quarter of 2007 and continuing in periods subsequent thereto (the "Accounting Irregularities"), which could affect financial information reported since that time. On April 16, 2012, the Company also announced that it had engaged forensic accountants to analyze the Accounting Irregularities, and that financial statements and information reported since the inception of the Accounting Irregularities, believed to begin in the second calendar quarter of 2007, should not be relied upon. The Company brought the Accounting Irregularities to the attention of the SEC in a letter dated April 16, 2012. On June 18, 2012, the Company received written notice that the SEC had initiated a private investigation into the Accounting Irregularities, to determine whether any persons or entities had engaged in any possible violations of the federal securities laws. The Company has cooperated fully, and continue to cooperate fully, with the SEC staff in the investigation. This investigation is still pending as of the date of the filing of this report, and there can be no certainty as to the outcome of this investigation, or to the findings of the SEC.

Also in connection with the Accounting Irregularities, and the subsequent halt in trading of our Common Stock on the NYSE MKT Exchange, the Company was served notice of two related lawsuits. The first, Civil Action No. 3:12-cv-3664 was filed in the United States District Court for the Northern District of Texas, on September 7, 2012, entitled Grant Barfuss, on behalf of himself and all others similarly situated vs. DGSE Companies, Inc.; L. S. Smith, John Benson and William Oyster. This was a complaint alleging violations of the securities laws and seeks unspecified damages. Plaintiffs alleged that certain public filings in 2010 and 2011 were false and misleading. The second suit, Case No. 3:12-cv-03850 in the United States District Court for the Northern District of Texas, was filed on September 21, 2012, by Jason Farmer, Derivatively on Behalf of Nominal Defendant DGSE Companies, Inc., Plaintiff, v. William H. Oyster, James D. Clem, William Cordeiro, Craig Alan-Lee, David Rector, L. S. Smith, and John Benson, Defendants, and DGSE Companies, Inc., Nominal Defendant. This suit was filed against DGSE, as a nominal defendant, and against certain and former officers and directors. The plaintiff asserted that certain reports were false and misleading, that the defendants breached fiduciary duties owed to DGSE, for abuse of control, and sought unspecified compensatory and exemplary damages, along with certain corporate governance changes, for the benefit of DGSE. On October 21, 2013 the United States District Court for the Northern District of Texas granted final approval of the previously proposed settlement of both the class action and derivative litigation. The defendants have agreed to pay $2 million to resolve all claims in both suits (including obligations to pay plaintiffs' attorneys' fees). It is expected that approximately 90% of the total settlement amount and related expenses will be paid from insurance proceeds. As of September 30, 2013, the Company had incurred approximately $150,000 in attorneys' fees and directly paid $150,000 as its portion of the settlement amount. The Company also expects to incur some additional fees and expenses associated with finalizing the settlement, but expects that any remaining costs associated with the settlement would not have a material effect on its financial position or results of operations.

The Company is currently discussing, both internally among the members of the Board and with its outside counsel, whether it is in the Company's best interest and in the best interest of its stockholders to pursue legal action against those officers and providers of professional services who were involved in the Accounting Irregularities. The Company has not made any determinations on this matter as of the date of this report.

The Texas Comptroller of Public Accounts (the "Comptroller") conducted a sales and use tax audit of DGSE with respect to the period March 1, 2006 through November 30, 2009 and subsequently sent a Notification of Audit Results, by letter dated December 17, 2010, asserting that the Company owed an amount of tax due, plus penalties and interest. We submitted a request for redetermination to the Comptroller by letter dated January 13, 2011. By letter dated August 25, 2011, the Comptroller stated that our request for a redetermination hearing had been granted. The hearing has not yet taken place, but the Company has been actively engaged in discussions with the Comptroller's office. The Company and the Comptroller have reached informal agreement on certain issues, while other issues remain under discussion. Although no final determination has been reached, based on the most recent communication from the Comptroller in October of 2013, the Company believes that it is likely to owe additional taxes and interest to the State of Texas, and has accordingly reserved an additional $650,000 in the current quarter towards the payment of these amounts. The total reserve is based on the Company's current best estimate, and may vary materially from any final assessment.