UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,June 30, 2019
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. Employer | |
| incorporation or organization) | Identification No.) |
13022 Preston Road
Dallas, Texas 75240
(972) 587-4049
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
N/A
(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.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
| (Do not check if a smaller reporting company) | |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 20,August 21, 2019:
| Class | Outstanding | |
| Common stock, $0.01 par value per share | 26,924,381 |
TABLE OF CONTENTS
| 2 |
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 479,560 | $ | 1,453,941 | ||||
| Trade receivables, net of allowances | 169,951 | 94,345 | ||||||
| Inventories | 10,315,661 | 9,765,094 | ||||||
| Prepaid expenses | 266,630 | 81,094 | ||||||
| Total current assets | 11,231,802 | 11,394,474 | ||||||
| Property and equipment, net | 1,274,714 | 1,320,863 | ||||||
| Intangible assets, net | 235,350 | 234,350 | ||||||
| Right-of -use assets from operating leases | 1,887,256 | - | ||||||
| Other assets | 68,862 | 68,411 | ||||||
| Total assets | $ | 14,697,984 | $ | 13,018,098 | ||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable - trade | $ | 358,609 | $ | 838,624 | ||||
| Accounts payable - trade, related party | 3,075,120 | 3,088,973 | ||||||
| Current operating lease liabilities | 452,820 | - | ||||||
| Accrued expenses | 494,350 | 579,203 | ||||||
| Customer deposits and other liabilities | 54,705 | 97,837 | ||||||
| Total current liabilities | 4,435,604 | 4,604,637 | ||||||
| Long-term operating lease liabilities | 1,494,284 | - | ||||||
| Total liabilities | 5,929,888 | 4,604,637 | ||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.01 par value; 60,000,000 shares authorized; 26,924,381 shares issued and outstanding | 269,244 | 269,244 | ||||||
| Additional paid-in capital | 40,172,677 | 40,172,677 | ||||||
| Accumulated deficit | (31,673,825 | ) | (32,028,460 | ) | ||||
| Total stockholders’ equity | 8,768,096 | 8,413,461 | ||||||
| Total liabilities and stockholders’ equity | $ | 14,697,984 | $ | 13,018,098 | ||||
| June 30, 2019 | December 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,674,329 | $ | 1,453,941 | ||||
| Trade receivables, net of allowances | 1,451,039 | 94,345 | ||||||
| Inventories | 11,112,806 | 9,765,094 | ||||||
| Prepaid expenses | 388,925 | 81,094 | ||||||
| Total current assets | 14,627,099 | 11,394,474 | ||||||
| Property and equipment, net | 1,472,590 | 1,320,863 | ||||||
| Goodwill | 4,723,110 | - | ||||||
| Intangible assets, net | 235,600 | 234,350 | ||||||
| Right-of -use assets from operating leases | 4,016,743 | - | ||||||
| Other assets | 241,822 | 68,411 | ||||||
| Total assets | $ | 25,316,964 | $ | 13,018,098 | ||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable - trade | $ | 1,074,342 | $ | 838,624 | ||||
| Accounts payable - trade, related party | - | 3,088,973 | ||||||
| Notes payable, related party | 272,587 | - | ||||||
| Current operating lease liabilities | 1,140,852 | - | ||||||
| Accrued expenses | 959,173 | 579,203 | ||||||
| Customer deposits and other liabilities | 28,972 | 97,837 | ||||||
| Total current liabilities | 3,475,926 | 4,604,637 | ||||||
| Notes payable, related party, less current portion | 9,501,760 | - | ||||||
| Long-term operating lease liabilities, less current portion | 2,981,655 | - | ||||||
| Total liabilities | 15,959,341 | 4,604,637 | ||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.01 par value; 60,000,000 shares authorized; 26,924,381 shares issued and outstanding | 269,244 | 269,244 | ||||||
| Additional paid-in capital | 40,172,677 | 40,172,677 | ||||||
| Accumulated deficit | (31,084,298 | ) | (32,028,460 | ) | ||||
| Total stockholders’ equity | 9,357,623 | 8,413,461 | ||||||
| Total liabilities and stockholders’ equity | $ | 25,316,964 | $ | 13,018,098 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue | ||||||||||||||||
| Sales | $ | 20,937,437 | $ | 12,733,262 | $ | 36,956,967 | $ | 26,789,135 | ||||||||
| Cost of goods sold | 17,572,122 | 10,542,784 | 31,373,170 | 22,096,650 | ||||||||||||
| Gross margin | 3,365,315 | 2,190,478 | 5,583,797 | 4,692,485 | ||||||||||||
| Expenses: | ||||||||||||||||
| Selling, general and administrative expenses | 2,676,240 | 1,773,912 | 4,417,581 | 3,813,947 | ||||||||||||
| Depreciation and amortization | 85,348 | 87,732 | 159,672 | 177,484 | ||||||||||||
| 2,761,588 | 1,861,644 | 4,577,253 | 3,991,431 | |||||||||||||
| Operating income | 603,727 | 328,834 | 1,006,544 | 701,054 | ||||||||||||
| Other (income) expense: | ||||||||||||||||
| Other (income) expense, net | (56,728 | ) | 3,030 | (53,330 | ) | (52,295 | ) | |||||||||
| Interest expense | 57,509 | 45,648 | 92,058 | 92,530 | ||||||||||||
| 781 | 48,678 | 38,728 | 40,235 | |||||||||||||
| Income before income taxes | 602,946 | 280,156 | 967,816 | 660,819 | ||||||||||||
| Income tax expense | 13,419 | 5,977 | 23,654 | 40,433 | ||||||||||||
| Net income | $ | 589,527 | $ | 274,179 | $ | 944,162 | $ | 620,386 | ||||||||
| Basic net income per common share: | $ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.02 | ||||||||
| Diluted net income per common share: | $ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.02 | ||||||||
| Weighted-average number of common shares | ||||||||||||||||
| Basic | 26,924,381 | 26,924,381 | 26,924,381 | 26,924,381 | ||||||||||||
| Diluted | 26,924,381 | 27,091,298 | 26,924,381 | 27,167,620 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months ended June 30, 2018 and 2019
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balances at March 31, 2018 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,339,937 | ) | $ | 8,101,984 | ||||||||||
| Net Income | - | - | - | 274,179 | 274,179 | |||||||||||||||
| Balances at June 30, 2018 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,065,758 | ) | $ | 8,376,163 | ||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balances at March 31, 2019 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (31,673,825 | ) | $ | 8,768,096 | ||||||||||
| Net Income | - | - | - | 589,527 | 589,527 | |||||||||||||||
| Balances at June 30, 2019 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (31,084,298 | ) | $ | 9,357,623 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Six Months ended June 30, 2018 and 2019
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balances at December 31, 2017 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,686,145 | ) | $ | 7,755,776 | ||||||||||
| Net Income | - | - | - | 620,386 | 620,386 | |||||||||||||||
| Balances at June 30, 2018 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,065,759 | ) | $ | 8,376,162 | ||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balances at December 31, 2018 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,028,460 | ) | $ | 8,413,461 | ||||||||||
| Net Income | - | - | - | 944,162 | 944,162 | |||||||||||||||
| Balances at June 30, 2019 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (31,084,298 | ) | $ | 9,357,623 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCASH FLOWS
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue | ||||||||
| Sales | $ | 16,019,530 | $ | 14,055,872 | ||||
| Cost of goods sold | 13,801,048 | 11,553,866 | ||||||
| Gross margin | 2,218,482 | 2,502,006 | ||||||
| Expenses: | ||||||||
| Selling, general and administrative expenses | 1,741,340 | 2,008,667 | ||||||
| Depreciation and amortization | 74,324 | 89,752 | ||||||
| 1,815,664 | 2,098,419 | |||||||
| Operating income | 402,818 | 403,587 | ||||||
| Other (income) expense: | ||||||||
| Other (income) expense, net | 3,398 | (23,959 | ) | |||||
| Interest expense | 34,549 | 46,882 | ||||||
| 37,947 | 22,923 | |||||||
| Income before income taxes | 364,871 | 380,664 | ||||||
| Income tax expense | 10,236 | 34,456 | ||||||
| Net income | $ | 354,635 | $ | 346,208 | ||||
| Basic net income per common share: | $ | 0.01 | $ | 0.01 | ||||
| Diluted net income per share: | $ | 0.01 | $ | 0.01 | ||||
| Weighted-average number of common shares | ||||||||
| Basic | 26,924,381 | 26,924,381 | ||||||
| Diluted | 26,924,381 | 27,233,980 | ||||||
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income | $ | 944,162 | $ | 620,386 | ||||
| Adjustments to reconcile income from operations to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 159,672 | 177,484 | ||||||
| Loss on sale of equipment | - | 40,045 | ||||||
| Bad debt expense | 30,000 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables, net | (361,079 | ) | 70,837 | |||||
| Trade receivables, net of allowances, related party | - | 39,215 | ||||||
| Inventories | (138,509 | ) | (824,941 | ) | ||||
| Note receivable | - | 11,166 | ||||||
| Prepaid expenses | (248,178 | ) | (56,228 | ) | ||||
| Operating leases | 105,764 | - | ||||||
| Other assets | (55,700 | ) | 31,665 | |||||
| Accounts payable and accrued expenses | (949,957 | ) | (333,674 | ) | ||||
| Accounts payable - trade, related party | (3,074,021 | ) | (523,333 | ) | ||||
| Customer deposits and other liabilities | (74,322 | ) | 520,593 | |||||
| Net cash used in operating activities | (3,662,168 | ) | (226,785 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of property and equipment | (91,441 | ) | (118,825 | ) | ||||
| Intangile asssets | (30,000 | ) | (27,000 | ) | ||||
| Acquisition of the Echo Entities, net of cash acquired | (5,770,350 | ) | - | |||||
| Net cash used in investing activities | (5,891,791 | ) | (145,825 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Financing for the acquisition of the Echo Entities | 6,925,979 | - | ||||||
| Financing to pay off accounts payable, related party | 3,074,021 | - | ||||||
| Payments on notes payable, related party | (225,653 | ) | - | |||||
| Payments on capital lease obligations | - | (2,352 | ) | |||||
| Net cash provided by (used) in financing activities | 9,774,347 | (2,352 | ) | |||||
| Net change in cash and cash equivalents | 220,388 | (374,962 | ) | |||||
| Cash and cash equivalents, beginning of period | 1,453,941 | 1,272,208 | ||||||
| Cash and cash equivalents, end of period | $ | 1,674,329 | $ | 897,246 | ||||
| Supplemental Disclosures: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 92,058 | $ | 92,530 | ||||
| Income taxes | $ | 43,578 | $ | 20,025 | ||||
| Non cash activities: | ||||||||
| Transfer of fixed assets to intangible assets | $ | - | $ | 204,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months ended March 31, 2018 and 2019
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balances at December 31, 2017 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,686,145 | ) | $ | 7,755,776 | ||||||||||
| Net Income | - | - | - | 346,208 | 346,208 | |||||||||||||||
| Balances at March 31, 2018 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,339,937 | ) | $ | 8,101,984 | ||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balances at December 31, 2018 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (32,028,460 | ) | $ | 8,413,461 | ||||||||||
| Net Income | - | - | - | 354,635 | 354,635 | |||||||||||||||
| Balances at March 31, 2019 | 26,924,381 | $ | 269,244 | $ | 40,172,677 | $ | (31,673,825 | ) | $ | 8,768,096 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
DGSE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income | $ | 354,635 | $ | 346,208 | ||||
| Adjustments to reconcile net income from operations to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 74,324 | 89,752 | ||||||
| Loss on sale of equipment | - | 40,045 | ||||||
| Bad debt expense | 30,000 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade recivables, net | (105,606 | ) | (209,217 | ) | ||||
| Trade receivables, related party, net | - | (39,215 | ) | |||||
| Inventories | (550,567 | ) | (3,190 | ) | ||||
| Prepaid expenses | (185,536 | ) | (188,287 | ) | ||||
| Intangible assets | (15,000 | ) | - | |||||
| Note receivable | - | 8,317 | ||||||
| Other assets | (451 | ) | 39,038 | |||||
| Accounts payable - trade and accrued expenses | (564,868 | ) | (308,133 | ) | ||||
| Accounts payable - trade, related party | (13,853 | ) | (212,616 | ) | ||||
| Operating leases | 59,848 | - | ||||||
| Customer deposits and other liabilities | (43,132 | ) | 155,458 | |||||
| Net cash used in operating activities | (960,206 | ) | (281,840 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of property and equipment | (14,175 | ) | (86,074 | ) | ||||
| Net cash used in investing activities | (14,175 | ) | (86,074 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Payments on capital lease obligations | - | (1,181 | ) | |||||
| Net cash used in financing activities | - | (1,181 | ) | |||||
| Net change in cash and cash equivalents | (974,381 | ) | (369,095 | ) | ||||
| Cash and cash equivalents, beginning of period | 1,453,941 | 1,272,208 | ||||||
| Cash and cash equivalents, end of period | $ | 479,560 | $ | 903,113 | ||||
| Supplemental Disclosures: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 34,549 | $ | 46,882 | ||||
| Income taxes | $ | - | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| (1) | Basis of Presentation |
The consolidated interim financial statements of DGSE Companies, Inc., a Nevada corporation, and its subsidiaries (the “Company” or “DGSE”), included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the Commission’s rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company suggests that these financial statements be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (such fiscal year, “Fiscal 2018” and such Annual Report on Form 10-K, the “Fiscal 2018 10-K”). In the opinion of the management of the Company, 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.
| (2) | Principles of Consolidation and Nature of Operations |
DGSE, through it’s trade names Dallas Gold and Silver Exchange and Charleston Gold and Diamond Exchange (“DGSE”), buys and sells jewelry and bullion products to both retail and wholesale customers throughout the United States through its facilities inSouth Carolina and Texas, and through its various internet sites.
The Company also, through an asset purchase on May 20, 2019 (the “Echo Transaction”), as initially reported on Form 8-K filed May 24, 2019 and subsequent 8-K/A filed August 5, 2019, formed two new companies, Echo Environmental Holdings, LLC and ITAD USA, LLC (the “Echo Entities”), to process, recycle and resell electronic components.
Based on the terms of the purchase, the Company has concluded the Echo Transaction represents a business combination pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations, or ASC 805. The Company has determined that the assets purchased and the liabilities assumed, through the Echo Transaction, have an approximate fair value due to the their short-term nature.
The Company now includes revenue, gross profit and net income for two different segments because each product line has a different income profile. In order to understand the Company’s financial results, we will report each segment.
The interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated.
| (3) |
Financial Instruments
The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, accounts payable, accounts payable related party and accrued expenses approximate fair value because of the immediate or short-term nature of these financial instruments.
| 8 |
Earnings Per Share
Basic earnings per common share is computed by dividing net earnings available to holders of the Company’s common stock by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method.
Goodwill
Goodwill is not amortized but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to the Echo Entities only and not the whole Company. The Echo Entities’ have their own separate financial information to perform goodwill impairment testing going forward. The Company will evaluate goodwill based on cash flows for the Echo Entities’ segment. For tax purposes, goodwill is amortized and deductible over fifteen years.
Recent Accounting Pronouncement
On January 1, 2019 we adopted the new lease accounting standard in Accounting Standards Update No. 2016-02 (“ASU 2016-02”),Leases(Topic (Topic 842), using the modified retrospective method which allows for the application of the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these consolidated statements. Under the new guidance, lessees are required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term for all leases (with the exception of short-term leases) at the commencement date.
The Company elected certain of the available transition practical expedients, including those that permit it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. The most significant impact of the new guidance was the recognition of right-of-use (“ROU”) assets and liabilities for operating leases. See Note 911 for additional information.
| (4) | Inventories |
A summary of inventories is as follows:
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Jewelry | $ | 7,040,262 | $ | 7,001,477 | ||||
| Scrap gold/silver | 1,301,312 | 1,205,111 | ||||||
| Bullion | 1,255,631 | 801,717 | ||||||
| Rare coins and Other | 718,456 | 756,789 | ||||||
| $ | 10,315,661 | $ | 9,765,094 | |||||
June 30, 2019 | December 31, 2018 | |||||||
| DGSE | ||||||||
| Jewelry | $ | 7,718,365 | $ | 7,001,477 | ||||
| Scrap gold/silver | 1,010,669 | 1,205,111 | ||||||
| Bullion | 855,071 | 801,717 | ||||||
| Rare coins and Other | 420,155 | 756,789 | ||||||
| Subtotal | 10,004,260 | 9,765,094 | ||||||
| Echo Entities | ||||||||
| Electronic components - resale | 193,411 | - | ||||||
| Electronic components - recycle | 915,135 | - | ||||||
| Subtotal | 1,108,546 | - | ||||||
| $ | 11,112,806 | $ | 9,765,094 | |||||
| 9 |
| (5) | Property and Equipment |
Property and equipment consists of the following:
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Building and improvements | $ | 1,543,883 | $ | 1,529,649 | ||||
| Machinery and equipment | 1,039,013 | 1,039,013 | ||||||
| Furniture and fixtures | 453,699 | 453,699 | ||||||
| 3,036,595 | 3,022,361 | |||||||
| Less: accumulated depreciation | (1,761,881 | ) | (1,701,498 | ) | ||||
| Total property and equipment | $ | 1,274,714 | $ | 1,320,863 | ||||
June 30, 2019 | December 31, 2018 | |||||||
| DGSE | ||||||||
| Land | $ | 55,000 | $ | - | ||||
| Building and improvements | 1,561,649 | 1,529,649 | ||||||
| Machinery and equipment | 1,039,013 | 1,039,013 | ||||||
| Furniture and fixtures | 453,699 | 453,699 | ||||||
| 3,109,361 | 3,022,361 | |||||||
| Less: accumulated depreciation | (1,821,579 | ) | (1,701,498 | ) | ||||
| Sub-Total | 1,287,782 | $ | 1,320,863 | |||||
| Echo Entities | ||||||||
| Building and improvements | 81,149 | - | ||||||
| Machinery and equipment | 20,732 | - | ||||||
| Furniture and fixtures | 93,827 | - | ||||||
| 195,708 | - | |||||||
| Less: accumulated depreciation | (10,900 | ) | - | |||||
| Sub-Total | 184,808 | - | ||||||
| $ | 1,472,590 | $ | 1,320,863 | |||||
| (6) | Acquisition |
On May 20, 2019, Corrent Resources, LLC (“Corrent”), a wholly owned subsidiary of the Company, entered into an asset purchase agreement with each of Echo Environmental, LLC and its wholly owned subsidiary ITAD USA, LLC (collectively, the “Echo Entities”), pursuant to which the Echo Entities agreed to sell all of the assets, rights and interests of the Echo Entities (the “Acquired Assets”) for $6,925,979 (the “Echo Transaction”). The Echo Entities are wholly owned subsidiaries of Elemetal, LLC (“Elemetal”). John R. Loftus is the Company’s CEO, President and Chairman and owned approximately one-third of the equity interests of Elemetal prior to the Echo Transaction.
On the same day, Mr. Loftus became the largest beneficial owner of the Company’s stock by purchasing all of the Company’s stock beneficially owned by Elemetal. As part of the transaction of acquiring the stock from Elemetal, Mr. Loftus no longer owns an equity interest in Elemetal, LLC. As an interested party, Mr. Loftus was familiar with the operations of the Echo Entities.
In connection with the Echo Transaction, on May 20, 2019, Corrent executed and delivered to Mr. Loftus, a promissory note to which Corrent borrowed from Mr. Loftus $6,925,979, the proceds of which were used to purchase the Acquired Assets.
Goodwill is not amortized but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to the Echo Entities only and not the whole Company. The Echo Entities’ have their own separate financial information to perform goodwill impairment testing going forward. The Company will evaluate goodwill based on cash flows for the Echo Entities’ segment. For tax purposes, goodwill is amortized and deductible over fifteen years.
Due to time constraints and other variables, the purchase price allocation listed below is considered a preliminary allocation and is subject to change.
The preliminary purchase price is allocated as follows:
| Description | Amount | |||
| Assets | ||||
| Cash | $ | 1,049,462 | ||
| Account receivables | 1,025,615 | |||
| Inventories | 1,209,203 | |||
| Prepaids | 88,366 | |||
| Fixed assets | 191,208 | |||
| Right-of-use assets | 2,350,781 | |||
| Other assets | 88,998 | |||
| Liabilities | ||||
| Account payables | (723,043 | ) | ||
| Accrued liabilities | (721,483 | ) | ||
| Operating lease liabilities | (2,350,781 | ) | ||
| Other long-term liabilities | (5,457 | ) | ||
| Net assets | 2,202,869 | |||
| Goodwill | 4,723,110 | |||
| Purchase Price | $ | 6,925,979 | ||
| 10 |
The following proforma combines the results of the Echo Entities and the Company’s results of operations for the three months ended June 30, 2019 and 2018 as if they were combined the whole quarter:
| Proforma Combined | Proforma Combined | |||||||
For the Three Months Ended | For the Three Months Ended | |||||||
| June 30, 2019 | June 30, 2018 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenue | $ | 23,169,924 | $ | 24,325,768 | ||||
| Income from continuing operations | $ | 69,197 | $ | 1,593,361 | ||||
| Net income | $ | 69,197 | $ | 1,593,361 | ||||
| Basic net income per common share | $ | - | $ | 0.06 | ||||
| Diluted net income per common share | $ | - | $ | 0.06 | ||||
| (7) | Intangible Assets |
Intangible assets consist of the following:
| March 31, | December 31, | June 30, 2019 | December 31, 2018 | |||||||||||||
| 2019 | 2018 | |||||||||||||||
| DGSE | ||||||||||||||||
| Domain names | $ | 41,352 | $ | 41,352 | $ | 41,352 | $ | 41,352 | ||||||||
| Point of sale system | 285,000 | 270,000 | 300,000 | 270,000 | ||||||||||||
| 326,352 | 311,352 | 341,352 | 311,352 | |||||||||||||
| Less: accumulated amortization | (91,002 | ) | (77,002 | ) | (105,752 | ) | (77,002 | ) | ||||||||
| Total intangibles | $ | 235,350 | $ | 234,350 | ||||||||||||
| Subtotal | 235,600 | 234,350 | ||||||||||||||
| Echo Entities | - | - | ||||||||||||||
| $ | 235,600 | $ | 234,350 | |||||||||||||
| Accrued Expenses |
Accrued expenses consist of the following:
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Professional fees | $ | 84,088 | $ | 149,000 | ||||
| Advertising | - | 52,590 | ||||||
| Board member fees | - | 7,500 | ||||||
| Employee benefits | - | 10,383 | ||||||
| Insurance | 179,046 | - | ||||||
| Payroll | 67,278 | 205,112 | ||||||
| Property taxes | 57,000 | - | ||||||
| Sales tax | 53,823 | 111,739 | ||||||
| State income tax | 53,115 | 42,879 | ||||||
| Total accrued accounts payable | $ | 494,350 | $ | 579,203 | ||||
June 30, 2019 | December 31, 2018 | |||||||
| DGSE | ||||||||
| Professional fees | $ | 70,414 | $ | 149,000 | ||||
| Advertising | - | 52,590 | ||||||
| Board member fees | - | 7,500 | ||||||
| Employee benefits | - | 10,383 | ||||||
| Insurance | 136,667 | - | ||||||
| Payroll | 143,540 | 205,112 | ||||||
| Property taxes | 114,000 | - | ||||||
| Sales tax | 74,267 | 111,739 | ||||||
| State income tax | 33,191 | 42,879 | ||||||
| Subtotal | 572,079 | 579,203 | ||||||
| Echo Entities | ||||||||
| Payroll | 40,295 | - | ||||||
| Sales Tax | 4,829 | - | ||||||
| Credit Card | 48,712 | - | ||||||
| Professional Fees | 20,000 | |||||||
| State income tax | 11,000 | - | ||||||
| Material & shipping costs (COGS) | 262,258 | - | ||||||
| Subtotal | 387,094 | - | ||||||
| $ | 959,173 | $ | 579,203 | |||||
| 11 |
| (9) | Segments |
The purchase of the Echo Entities has given us two separate lines of businesses, although we feel they are interrelated as businesses that recycle either gold and silver and electronic components we have separated them in into segments as follows:
| For The Three Months Ended | ||||||||||||
| June 30, 2019 | ||||||||||||
| DGSE | Echo Entities | Consolidated | ||||||||||
| Revenue: | ||||||||||||
| Sales | $ | 18,578,637 | $ | 2,358,800 | $ | 20,937,437 | ||||||
| Cost of goods sold | 16,308,809 | 1,263,313 | 17,572,122 | |||||||||
| Gross profit | 2,269,828 | 1,095,487 | 3,365,315 | |||||||||
| Expenses: | ||||||||||||
| Selling, general and administrative expenses | 1,874,598 | 801,642 | 2,676,240 | |||||||||
| Depreciation and amortization | 74,449 | 10,899 | 85,348 | |||||||||
| 1,949,047 | 812,541 | 2,761,588 | ||||||||||
| Operating income | 320,781 | 282,946 | 603,727 | |||||||||
| Other (income) expense: | ||||||||||||
| Other (income) expense, net | (56,728 | ) | - | (56,728 | ) | |||||||
| Interest expense | 25,657 | 31,852 | 57,509 | |||||||||
| Income before income taxes | 351,852 | 251,094 | 602,946 | |||||||||
| Income tax expense | 7,783 | 5,636 | 13,419 | |||||||||
| Net income per segment | $ | 344,069 | $ | 245,458 | $ | 589,527 | ||||||
| Revenue Recognition |
Revenue is recognized when we transfer promised goods, or jewelry and watch repair services to customers in an amount that reflects the consideration to which the Company expects to be paid in exchange for those goods and services. The Company’s revenue is primarily generated from the sale of finished goods, andrecycled goods, recycled raw materials, scrap, jewelry and watch repair services through wholesale contracts, retail e-commerce or wholesale channels. We generate revenue through the sale of jewelry, rare coins, currency, collectibles, bullion, scrap and the repair of jewelry and watches.e-commerce. The Company’s performance obligations underlying such revenue, and the timing of revenue recognition, remains substantially unchanged following the adoption of ASC 606.
ASC 606 provides guidance to identify performance obligations for revenue-generating transactions. The initial guide is to identify the contract with a customer created with the sales invoice or a repair ticket. Secondly, to identify the performance obligations in the contract as we promise to deliver the purchased item, or promised repairs in return for payment or future payment as a receivable. The third guide is determining the transaction price of the contract obligation as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied.
The following disaggregation of total revenue is listed by sales category:category and segment:
| Three Months Ended March 31, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||||||||||||||||||||
| DGSE | ||||||||||||||||||||||||||||||||||||||||||||||||
| Jewelry | $ | 4,556,368 | $ | 1,325,658 | 29.1 | % | $ | 5,299,962 | $ | 1,596,620 | 30.1 | % | $ | 4,093,488 | $ | 1,240,299 | 30.3 | % | $ | 4,525,109 | $ | 1,020,470 | 22.6 | % | ||||||||||||||||||||||||
| Bullion/Rare Coin | 9,984,146 | 516,157 | 5.2 | % | 7,099,751 | 553,781 | 7.8 | % | 10,937,998 | 509,628 | 4.7 | % | 6,608,590 | 847,585 | 12.8 | % | ||||||||||||||||||||||||||||||||
| Scrap | 1,218,151 | 185,047 | 15.2 | % | 1,283,644 | 209,484 | 16.3 | % | 1,748,028 | 256,914 | 14.7 | % | 1,181,941 | 233,887 | 19.8 | % | ||||||||||||||||||||||||||||||||
| Other | 260,865 | 191,620 | 73.5 | % | 372,515 | 142,121 | 38.2 | % | 1,799,123 | 262,987 | 14.6 | % | 417,622 | 88,536 | 21.2 | % | ||||||||||||||||||||||||||||||||
| Subtotal | 18,578,637 | 2,269,828 | 12.2 | % | 12,733,262 | 2,190,478 | 17.2 | % | ||||||||||||||||||||||||||||||||||||||||
| $ | 16,019,530 | $ | 2,218,482 | 13.8 | % | $ | 14,055,872 | $ | 2,502,006 | 17.8 | % | |||||||||||||||||||||||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Recycle | 1,588,084 | 747,819 | 47.1 | % | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Reuse | 770,716 | 347,668 | 45.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | 2,358,800 | 1,095,487 | 46.4 | % | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| $ | 20,937,437 | $ | 3,365,315 | 16.1 | % | $ | 12,733,262 | $ | 2,190,478 | 17.2 | % | |||||||||||||||||||||||||||||||||||||
| 12 |
The following disaggregation of revenue is listed by sales category, segment and state:
| TEXAS | Three Months Ended June 30, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| DGSE | ||||||||||||||||||||||||
| Jewelry | $ | 3,863,109 | $ | 1,139,043 | 29.5 | % | $ | 4,169,364 | $ | 908,970 | 21.8 | % | ||||||||||||
| Bullion/Rare Coin | 10,773,197 | 481,379 | 4.5 | % | 6,514,586 | 830,976 | 12.8 | % | ||||||||||||||||
| Scrap | 1,748,028 | 256,914 | 14.7 | % | 1,181,941 | 233,887 | 19.8 | % | ||||||||||||||||
| Other | 1,459,655 | 175,553 | 12.0 | % | 331,507 | 32,381 | 9.8 | % | ||||||||||||||||
| Subtotal | 17,843,989 | 2,052,889 | 11.5 | % | 12,197,398 | 2,006,214 | 16.4 | % | ||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | |||||||||||||||||||||
| Recycle | 1,588,084 | 747,819 | 47.1 | % | - | - | - | |||||||||||||||||
| Reuse | 770,716 | 347,668 | 45.1 | % | ||||||||||||||||||||
| Subtotal | 2,358,800 | 1,095,487 | 46.4 | % | - | - | - | |||||||||||||||||
| $ | 20,202,789 | $ | 3,148,376 | 15.6 | % | $ | 12,197,398 | $ | 2,006,214 | 16.4 | % | |||||||||||||
| SOUTH CAROLINA | Three Months Ended June 30, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| DGSE | ||||||||||||||||||||||||
| Jewelry | $ | 230,379 | $ | 101,256 | 44.0 | % | $ | 355,745 | $ | 111,500 | 31.3 | % | ||||||||||||
| Bullion/Rare Coin | 164,801 | 28,249 | 17.1 | % | 94,004 | 16,882 | 18.0 | % | ||||||||||||||||
| Other | 339,468 | 87,434 | 25.8 | % | 86,115 | 56,155 | 65.2 | % | ||||||||||||||||
| Subtotal | 734,648 | 216,939 | 29.5 | % | 535,864 | 184,537 | 34.4 | % | ||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | - | - | - | ||||||||||||||||||
| Subtotal | - | - | - | - | - | - | ||||||||||||||||||
| $ | 734,648 | $ | 216,939 | 29.5 | % | $ | 535,864 | $ | 184,537 | 34.4 | % | |||||||||||||
| 13 |
The following disaggregation of revenue is listed by sales category and segment:
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| DGSE | ||||||||||||||||||||||||
| Jewelry | $ | 8,395,236 | $ | 2,565,957 | 30.6 | % | $ | 9,825,072 | $ | 2,617,091 | 26.6 | % | ||||||||||||
| Bullion/Rare Coin | 20,922,144 | 1,025,785 | 4.9 | % | 13,708,341 | 1,401,366 | 10.2 | % | ||||||||||||||||
| Scrap | 2,966,179 | 441,961 | 14.9 | % | 2,465,585 | 443,371 | 18.0 | % | ||||||||||||||||
| Other | 2,314,608 | 454,607 | 19.6 | % | 790,137 | 230,657 | 29.2 | % | ||||||||||||||||
| Subtotal | 34,598,167 | 4,488,310 | 13.0 | % | 26,789,135 | 4,692,485 | 17.5 | % | ||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | |||||||||||||||||||||
| Recycle | 1,588,084 | 747,819 | 47.1 | % | - | - | - | |||||||||||||||||
| Reuse | 770,716 | 347,668 | 45.1 | % | ||||||||||||||||||||
| Subtotal | 2,358,800 | 1,095,487 | 46.4 | % | - | - | - | |||||||||||||||||
| $ | 36,956,967 | $ | 5,583,797 | 15.1 | % | $ | 26,789,135 | $ | 4,692,485 | 17.5 | % | |||||||||||||
The following disaggregation of revenue is listed by sales category, segment and state:
| TEXAS | Three Months Ended March 31, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| Jewelry | $ | 4,149,254 | $ | 1,200,632 | 28.9 | % | $ | 4,618,131 | $ | 1,385,252 | 30.0 | % | ||||||||||||
| Bullion/Rare Coin | 9,780,278 | 501,592 | 5.1 | % | 6,890,182 | 538,025 | 7.8 | % | ||||||||||||||||
| Scrap | 1,218,151 | 185,047 | 15.2 | % | 1,283,644 | 209,484 | 16.3 | % | ||||||||||||||||
| Other | 257,104 | 189,474 | 73.7 | % | 372,515 | 142,121 | 38.2 | % | ||||||||||||||||
| $ | 15,404,787 | $ | 2,076,745 | 13.5 | % | $ | 13,164,472 | $ | 2,274,882 | 17.3 | % | |||||||||||||
| TEXAS | Six Months Ended June 30, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| Jewelry | $ | 7,757,744 | $ | 2,267,076 | 29.2 | % | $ | 8,874,175 | $ | 2,270,136 | 25.6 | % | ||||||||||||
| Bullion/Rare Coin | 20,553,475 | 982,971 | 4.8 | % | 13,404,768 | 1,348,718 | 10.1 | % | ||||||||||||||||
| Scrap | 2,966,179 | 441,961 | 14.9 | % | 2,465,585 | 443,371 | 18.0 | % | ||||||||||||||||
| Other | 1,971,378 | 365,027 | 18.5 | % | 647,343 | 149,981 | 23.2 | % | ||||||||||||||||
| Subtotal | 33,248,776 | 4,057,035 | 12.2 | % | 25,391,871 | 4,212,206 | 16.6 | % | ||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | |||||||||||||||||||||
| Recycle | 1,588,084 | 747,819 | 47.1 | % | - | - | - | |||||||||||||||||
| Reuse | 770,716 | 347,668 | 45.1 | % | ||||||||||||||||||||
| Subtotal | 2,358,800 | 1,095,487 | 46.4 | % | - | - | - | |||||||||||||||||
| $ | 35,607,576 | $ | 5,152,522 | 14.5 | % | $ | 25,391,871 | $ | 4,212,206 | 16.6 | % | |||||||||||||
| SOUTH CAROLINA | Three Months Ended March 31, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| Jewelry | $ | 407,114 | $ | 125,026 | 30.7 | % | $ | 681,831 | $ | 211,368 | 31.0 | % | ||||||||||||
| Bullion/Rare Coin | 203,868 | 14,565 | 7.1 | % | 209,569 | 15,756 | 7.5 | % | ||||||||||||||||
| Other | 3,761 | 2,146 | 57.1 | % | - | - | - | |||||||||||||||||
| $ | 614,743 | $ | 141,737 | 23.1 | % | $ | 891,400 | $ | 227,124 | 25.5 | % | |||||||||||||
| 14 |
| SOUTH CAROLINA | Six Months Ended June 30, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| Jewelry | $ | 637,493 | $ | 298,881 | 46.9 | % | $ | 950,897 | $ | 346,955 | 36.5 | % | ||||||||||||
| Bullion/Rare Coin | 368,669 | 42,814 | 11.6 | % | 303,573 | 52,648 | 17.3 | % | ||||||||||||||||
| Other | 343,229 | 89,580 | 26.1 | % | 142,794 | 80,676 | 56.5 | % | ||||||||||||||||
| Subtotal | 1,349,391 | 431,275 | 32.0 | % | 1,397,264 | 480,279 | 34.4 | % | ||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | - | - | - | ||||||||||||||||||
| Subtotal | - | - | - | - | - | - | ||||||||||||||||||
| $ | 1,349,391 | $ | 431,275 | 32.0 | % | $ | 1,397,264 | $ | 480,279 | 34.4 | % | |||||||||||||
Revenues for monetary transactions (i.e., cash and receivables) with commercial dealers and the retail public are recognized when the merchandise is delivered and payment has been made either by immediate payment or through a receivable obligation at one of our over the counter retail stores.obligation. We also recognize revenue upon the shipment of goods when retail andor wholesale customers have fulfilled their obligation to pay, or promise to pay, through e-commerce or phone sales. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. Our scrap is sold to a local refiner that was a related entityparty before the purchase of the Echo Entities on May 20, 2019. Since the refiner Elemetal. Since Elemetal is local we deliver the scrap to the refiner. The metal is assayed, price is determined from the assay and payment is made usually in one to two days. Revenue is recognized from the sale once payment is received.
We also offerThe retail portion of the Company offers a structured layaway plan. When a retail customer utilizes the layaway plan, we collect a minimum payment of 25% of the sales price, establish a payment schedule for the remaining balance and hold the merchandise as collateral as security against the customer’s deposit until all amounts due are paid in full. Revenue for layaway sales is recognized when the merchandise is paid in full and delivered to the retail customer. Layaway revenue is also recognized when a customer fails to pay in accordance with the sales contract and the sales item is returned to inventory with the forfeit of deposited funds, typically after 90 days.
In our retail operations, in limited circumstances, we exchange merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which we recognize revenue in accordance with Accounting Standards Codification (“ASC”) 845,Nonmonetary Transactions. When we exchange merchandise for similar merchandise and there is no monetary component to the exchange, we do 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 we exchange merchandise for similar merchandise and there is a monetary component to the exchange, we recognize revenue to the extent of the 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 offers our retail customers the option of third party financing for customers wishing to borrow money for the purchase. The customer applies on-line with the third party and upon going through the credit check will be approved or denied. If accepted, the customer is allowed to purchase according to the limits set by the financing company. We recognize the revenue of the sale upon the promise of the financing company to pay.
We have a return policy (money-back guarantee). The policy covers retail transactions involving jewelry, graded rare coins and currency only. Customers may return jewelry, graded rare coins and currency purchased within 30 days of the receipt of the items for a full refund as long as the items are returned in exactly the same condition as they were delivered. In the case of jewelry, graded rare coins and currency sales on account, customers may cancel the sale within 30 days of making a commitment to purchase the items. The receipt of a deposit and a signed purchase order evidences the commitment. Any customer may return a jewelry item or graded rare coins and currency if they can demonstrate that the item is not authentic, or there was an error in the description of a graded coin or currency piece. Returns are accounted for as a reversal of the original transaction, with the effect of reducing revenues, and cost of sales, and returning the merchandise to inventory. We have established an allowance for estimated returns related to Fiscal 2018 sales, which is based on our review of historical returns experience, and reduces our reported revenues and cost of sales accordingly. As of March 31,June 30, 2019 and December 31, 2018, our allowance for returns remained the same at $28,402 and $28,402, respectively.
The Echo Entities are large-scale processors of circuit boards and electronic waste. We are committed to fast and cost-efficient service to many different industries that need to recycle electronic components. There are three main revenue streams within our product mix. The first category is recycling fees, whereby we will receive electronic components and other material to process from a vendor. Upon the determination of the makeup of the materials we charge a processing fee to the vendor and also pay them for items we can sell. Revenue is recognized when service charges are determined after waste materials are sorted and processed. The second revenue stream is outright sales, which is the sale of processed material to a customer after we have sorted material, charged recycling fees and paid our vendors for that material. The sale is recognized when delivery has occurred and title and risk of loss has passed to the buyer upon the notice of bill of sale ending with a cash transaction or evidence of credit extended producing a trade accounts receivable. The third revenue stream is the settlement of precious metals processed from our recycling services. The precious metal we extract is sent to a refiner and is assayed. We recognize revenue when we receive the settlement from the refiner, except at quarter and year end when we accrue any outstanding settlements received after the end of a quarter or year.
| 15 |
| Leases |
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). We adopted ASC 842 on January 1, 2019, by applying its provisions prospectively. The financial results reported in periods prior to January 1, 2019 are unchanged. Upon adoption, we recognized all of our leases on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, the FASB retained a duel model, requiring leases to be classified as either operating of finance. Classification is based on certain criteria and we have determined that all of our retail building leases fall into the operating lease category. Our leases are included in our consolidated balance sheet as right-of-use assets along with the the current operating lease liabilities and long-term operating lease liabilities. We have also applied the ASC 842 provisions to the two leases purchased by the Company related to the Echo Transaction.
The
When the provision was first adopted by the Company on January 1, 2019, we recognized $1,994,840 of operating lease right-of-use assets, $446,462 in short-term operating lease liabilities and $1,609,891 in long-term operating lease liabilities on the consolidated sheet upon adoption of the new standard.balance sheet. The operating lease liabilities were determined based on the present value of the remaining minimum rental payments and the operating lease right-of-use asset was determined based on the value of the lease liabilities, adjusted for deferred rent balances of $61,500, which were previously included in other liabilities.
Due to the acquisition, referred in note (6), we recognized an additional $2,350,781 of operating lease right-of-use assets, $703,523 in short-term operating lease liabilities and $1,647,258 in long-term operating lease liabilities on the consolidated balance sheet. The operating lease liabilities were determined based on the present value of the remaining minimum rental payments and the operating lease right-of-use asset was determined based on the value of the lease liabilities.
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. If we cannot readily determine the discount rate implicit in the lease agreement, we utilize our incremental borrowing rate.
The Company has fiveseven operating leases, foursix in the Dallas/Fort Worth Metroplex and one in Charleston South Carolina. We have twofour leases expiring next year. Our Euless, Texas lease expires March 31, 2020, with an option for an additional five years which we are reasonably certain to exercise. Our Southlake, Texas location expires July 31, 2020, and with no current options. We will evaluate whether to continue to lease in the present location. Our lease on the main flagship store located at 13022 Preston Road, Dallas, Texas will be expiring October 31, 2021 with no current lease options. The Grand Prairie, Texas lease expires June 30, 2022, and has no current lease options. On April 19, 2018, we entered into an agreement with the landlord in Charleston, South Carolina, to increase the rental space by 2,104 square feet by taking over the vacant suite next door. The lease was amended to include the new space and extended to April 30, 2025. Our two new additional leases were the product of the Echo Tranaction. Both leases are located in Carrollton, Texas. The Belt Line Echo lease expires on December 31, 2020 with an initial option period of 24 months and a second option period of an additional 60 months. A portion of the building is sublet and the rent received is applied against the rental expense for the building. The McKenzie ITAD lease expires July 31, 2021 with no current lease options. All fiveseven leases are triple net leases that we pay our proportionate amount of common area maintenance, property taxes and property insurance. Our total leasingLeasing costs for the three months ending March 31,June 30, 2019 and 2018 was $174,347, which consists$319,975 and $157,969, respectively. These lease costs consist of $134,595a combination of rentalminimum lease expensepayments and $39,752 of variable lease costs.
As of March 31,June 30, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 3.12.4 years and 5.5%, respectively. The Company’s future operating lease obligations that have not yet commenced are immaterial. For the periodthree months ending March 31,June 30, 2019 and 2018, the Company’s cash paid for operating lease liabilities was $136,260.$331,923 and $124,221, respectively.
| 16 |
Future annual minimum lease payments as of March 31,June 30, 2019:
| Operating | Operating | |||||||
| Leases | Leases | |||||||
| 2019 (excluding the three months ending March 31, 2019) | $ | 411,392 | ||||||
| DGSE | ||||||||
| 2019 (excluding the six months ending June 30, 2019) | $ | 274,367 | ||||||
| 2020 | 550,624 | 550,623 | ||||||
| 2021 | 491,541 | 491,540 | ||||||
| 2022 | 247,040 | 247,040 | ||||||
| 2023 | 223,045 | 223,045 | ||||||
| 2024 and thereafter | 289,327 | 289,327 | ||||||
| Total minimum lease payments | $ | 2,212,969 | 2,075,942 | |||||
| Less imputed interest | (265,865 | ) | (239,599 | ) | ||||
| Subtotal | 1,836,343 | |||||||
| Operating lease liability | $ | 1,947,104 | ||||||
| Echo Entities | ||||
| 2019 (excluding the six months ending June 30, 2019) | 330,430 | |||
| 2020 | 803,661 | |||
| 2021 | 785,240 | |||
| 2022 | 582,195 | |||
| Total minimum lease payments | 2,501,526 | |||
| Less imputed interest | (215,362 | ) | ||
| Subtotal | 2,286,164 | |||
| $ | 4,122,507 |
| Basic and Diluted Average Shares |
A reconciliation of basic and diluted weighted average common shares for the three months and six months ended March 31,June 30, 2019 and 2018 is as follows:
| For the Three Months Ended | For the Three Months Ended | |||||||||||||||
| March 31, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Basic weighted average shares | 26,924,381 | 26,924,381 | 26,924,381 | 26,924,381 | ||||||||||||
| Effect of potential dilutive securities | - | 309,599 | - | 166,917 | ||||||||||||
| Diluted weighted average shares | 26,924,381 | 27,233,980 | 26,924,381 | 27,091,298 | ||||||||||||
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Basic weighted average shares | 26,924,381 | 26,924,381 | ||||||
| Effect of potential dilutive securities | - | 243,239 | ||||||
| Diluted weighted average shares | 26,924,381 | 27,167,620 | ||||||
| 17 |
For the three and six months ended March 31,June 30, 2019, and 2018 there were approximately 15,000 stock options excluded from the earnings per share calculation because their impact is antidilutive. For the three and six months ended June 30, 2018 there were 1,015,000 of common share option, warrants and Restricted Stock Units (RSU’s) unexercised respectively.
| Long-Term Debt |
| Outstanding Balance | Current | |||||||||||||||
| June 30, 2019 | December 31, 2018 | Interest Rate | Maturity | |||||||||||||
| DGSE | ||||||||||||||||
| Note payable, related party | $ | 2,907,719 | $ | - | 6.00 | % | May 16, 2024 | |||||||||
| Echo Entities | ||||||||||||||||
| Note payable, related party | 6,594,041 | - | 6.00 | % | May 16, 2024 | |||||||||||
| Sub-Total | 9,501,760 | - | ||||||||||||||
| Current portion | 272,587 | - | ||||||||||||||
| $ | 9,774,347 | $ | - | |||||||||||||
| (14) | Stock-Based Compensation |
The Company accounts for share-based compensation by measuring the cost of the employee services received in exchange for an award of equity instruments, including grants of stock options, based on the fair value of the award at the date of grant. In addition, to the extent that the Company receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in the consolidated statement of cash flows.
Stock-based compensation expense for the three months and six months ended March 31,June 30, 2019 and 2018 was $0 and $0, respectively.
| Related Party Transactions |
Through a series of transactions beginning in 2010, Elemetal, NTR and Truscott (“Related Entities”) became the largest shareholders of our common stock, par value $0.01 per share. A certain Related Entity has been DGSE’s primary refiner and bullion trading partner. InFor the threesix months ended March 31,June 30, 2019, 10.4%6% of sales and 10.8%2% of purchases were transactions with a certain Related Entity, and in the same period of 2018, these transactionstranactions represented 10%13% of DGSE’s sales and 2%3% of DGSE’s purchases. On December 9, 2016, DGSE and a certain Related Entity closed the transactions contemplated by the Debt Exchange Agreement whereby DGSE issued a certain Related Entity 8,536,585 shares of its common stock and a warrant to purchase an additional 1,000,000 shares to be exercised within two years after December 9, 2016, in exchange for the cancellation and forgiveness of $3,500,000 of trade payables owed to a certain Related Entity as a result of bullion-related transactions. The warrant for the additional 1,000,000 expired in December 2018. As of March 31,June 30, 2019, the Company was obligated to pay $3,075,120$0 to the certain Related Entity as a trade payable. As of December 31,June 30, 2018, the Company was obligated to pay $3,088,973$3,378,960 to the certain Related Entity as a trade payable. For the threesix months ended March 31,June 30, 2019 and 2018, the Company paid the Related Entities $34,549$46,068 and $46,882,$92,530 respectively, in interest on the Company’s outstanding payable.
The Texas Comptroller conducted a salesOn May 20, 2019, John Loftus, CEO and use tax auditPresident of DGSE Companies, Inc., became the largest beneficial shareholder of our Texas operations with respectcommon stock, par value $0.01 per share, as reported on Form 13 D/A filed on May 24, 2019. On the same day, Mr. Loftus loaned a wholly owned subsidiary, Corrent Resource Holdings, LLC $6,925,979 to complete the period July 1, 2013 through December 31, 2016. The auditEcho Transaction. Interest and principal payments totaling $49,620 are paid monthly and the loan matures May 16, 2024. Also on the same day, Mr. Loftus loaned the Company $3,074,021 to pay off the certain Related Entities outstanding payable, related party. Interest and principal payments totaling $22,023 are paid monthly and the loan matures May 16, 2024. As of June 30, 2019 and 2018, the Company was finalizedobligated to pay Mr. Loftus, as note payable, related party $9,774,347 and a determination was made$0 respectively. For the six months ended June 30, 2019 and 2018, the Company paid Mr. Loftus $45,990 and $0 respectively, in interest on April 2, 2018, that we owed a total of $17,294, which includes interest and penalties. An initial reserve of $70,000 was established at December 31, 2017 to cover any liability. That reserve was reduced to the amount owed of $17,294 for the accompanying consolidated balance sheet as of March 31, 2018.Company’s note payable, related party.
| 18 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Unless the context indicates otherwise, references to “we,” “us,” “our,” “the Company” and “DGSE” refer to the consolidated business operations of DGSE Companies, Inc., the parent, and all of its direct and indirect subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended March 31,June 30, 2019 (this “Form 10-Q”), including but not limited to: (i) the section of this Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” (ii) information concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items; and, (iii) our strategies, plans and objectives, together with other statements that are not historical facts, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate” or “believe.” We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements other than statements of historical information provided herein are forward-looking statements based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ from current expectations are described under the section of this Form 10-Q entitled “Risk Factors” and elsewhere in this Form 10-Q as well as under the section entitled “Risk Factors” in our Fiscal 2018 10-K. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to-release publicly the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital expenditures, store growth plans, or to reflect the occurrence of unanticipated events.
Results of Operations
General
We buyOur retail operation buys and sellsells jewelry, diamonds, fine watches, rare coins and currency, precious metal bullion products, scrap gold, silver, platinum and palladium as well as collectibles and other valuables. Our customers include individual consumers, dealers and institutions throughout the United States. Our new recycling and reusing operations, the Echo Entities, process circuit boards and electronic waste. Our customers are mostly industrial and resellers.
Many aspects of our retail business are impacted by changes in precious metals pricing which rise and fall based upon global supply and demand dynamics, with the greatest impact relating to gold. According to the London PM Fix,the price of gold started Fiscal year 2018 at $1,303 an ounce and climbed to $1,353 by April of 2018. Like the volatility in recent years, the price receded to $1,175 by August only to rebound to $1,283 an ounce by December 31, 2018. The first quarter of Fiscal 2019 brought some slight gains ending March 31, 2019 at $1,295 an ounce. The volatility was still prevalentGold dramatically increased during the the quarter butending June 30, 2019, ending at $1,409 an ounce. An increase of 10% since the general overall trend was slightly upward.beginning of 2019.
The market for buying and selling pre-owned or “scrap” gold has been negative during the past several years. Scrap gold purchases have historically been a critical profit engine for all of our locations, and our marketing strategy will continue to make this a significant impact on our revenue, profitability and long-term growth plans. The velocity of our sales have increased due to the rise in gold prices during the second quarter of 2019.
Following a leadership change in mid-December 2016, we eschewed the unsuccessful strategies of recent years and returned to our roots: buying and selling jewelry and timepieces at exceptional prices. Our strategy is to be an information resource for clients, bringing transparency to purchase and sale transactions, and offer value and liquidity to those seeking to buy, sell or trade jewelry, watches, diamonds or coins. For our recycling business, we are pushing for efficiency in processing and we are also looking for new applications for our recycled electronic material.
The following disaggregation of revenue is listed by sales category:
| Three Months Ended March 31, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| Jewelry | $ | 4,556,368 | $ | 1,325,658 | 29.1 | % | $ | 5,299,962 | $ | 1,596,620 | 30.1 | % | ||||||||||||
| Bullion/Rare Coin | 9,984,146 | 516,157 | 5.2 | % | 7,099,751 | 553,781 | 7.8 | % | ||||||||||||||||
| Scrap | 1,218,151 | 185,047 | 15.2 | % | 1,283,644 | 209,484 | 16.3 | % | ||||||||||||||||
| Other | 260,865 | 191,620 | 73.5 | % | 372,515 | 142,121 | 38.2 | % | ||||||||||||||||
| $ | 16,019,530 | $ | 2,218,482 | 13.8 | % | $ | 14,055,872 | $ | 2,502,006 | 17.8 | % | |||||||||||||
The following disaggregation oftotal revenue is listed by sales category and state:segment:
| TEXAS | Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||||||||||||||||||||||||||
| DGSE | ||||||||||||||||||||||||||||||||||||||||||||||||
| Jewelry | $ | 4,149,254 | $ | 1,200,632 | 28.9 | % | $ | 4,618,131 | $ | 1,385,252 | 30.0 | % | $ | 4,093,488 | $ | 1,240,299 | 30.3 | % | $ | 4,525,109 | $ | 1,020,470 | 22.6 | % | ||||||||||||||||||||||||
| Bullion/Rare Coin | 9,780,278 | 501,592 | 5.1 | % | 6,890,182 | 538,025 | 7.8 | % | 10,937,998 | 509,628 | 4.7 | % | 6,608,590 | 847,585 | 12.8 | % | ||||||||||||||||||||||||||||||||
| Scrap | 1,218,151 | 185,047 | 15.2 | % | 1,283,644 | 209,484 | 16.3 | % | 1,748,028 | 256,914 | 14.7 | % | 1,181,941 | 233,887 | 19.8 | % | ||||||||||||||||||||||||||||||||
| Other | 257,104 | 189,474 | 73.7 | % | 372,515 | 142,121 | 38.2 | % | 1,799,123 | 262,987 | 14.6 | % | 417,622 | 88,536 | 21.2 | % | ||||||||||||||||||||||||||||||||
| Subtotal | 18,578,637 | 2,269,828 | 12.2 | % | 12,733,262 | 2,190,478 | 17.2 | % | ||||||||||||||||||||||||||||||||||||||||
| $ | 15,404,787 | $ | 2,076,745 | 13.5 | % | $ | 13,164,472 | $ | 2,274,882 | 17.3 | % | |||||||||||||||||||||||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Recycle | 1,588,084 | 747,819 | 47.1 | % | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Reuse | 770,716 | 347,668 | 45.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | 2,358,800 | 1,095,487 | 46.4 | % | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| $ | 20,937,437 | $ | 3,365,315 | 16.1 | % | $ | 12,733,262 | $ | 2,190,478 | 17.2 | % | |||||||||||||||||||||||||||||||||||||
| SOUTH CAROLINA | Three Months Ended March 31, | |||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| Jewelry | $ | 407,114 | $ | 125,026 | 30.7 | % | $ | 681,831 | $ | 211,368 | 31.0 | % | ||||||||||||
| Bullion/Rare Coin | 203,868 | 14,565 | 7.1 | % | 209,569 | 15,756 | 7.5 | % | ||||||||||||||||
| Other | 3,761 | 2,146 | 57.1 | % | - | - | - | |||||||||||||||||
| $ | 614,743 | $ | 141,737 | 23.1 | % | $ | 891,400 | $ | 227,124 | 25.5 | % | |||||||||||||
| 19 |
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
| DGSE | ||||||||||||||||||||||||
| Jewelry | $ | 8,395,236 | $ | 2,565,957 | 30.6 | % | $ | 9,825,072 | $ | 2,617,091 | 26.6 | % | ||||||||||||
| Bullion/Rare Coin | 20,922,144 | 1,025,785 | 4.9 | % | 13,708,341 | 1,401,366 | 10.2 | % | ||||||||||||||||
| Scrap | 2,966,179 | 441,961 | 14.9 | % | 2,465,585 | 443,371 | 18.0 | % | ||||||||||||||||
| Other | 2,314,608 | 454,607 | 19.6 | % | 790,137 | 230,657 | 29.2 | % | ||||||||||||||||
| Subtotal | 34,598,167 | 4,488,310 | 13.0 | % | 26,789,135 | 4,692,485 | 17.5 | % | ||||||||||||||||
| Echo Entities | ||||||||||||||||||||||||
| 5/20/19 - 6/30/2019 | - | - | - | |||||||||||||||||||||
| Recycle | 1,588,084 | 747,819 | 47.1 | % | - | - | - | |||||||||||||||||
| Reuse | 770,716 | 347,668 | 45.1 | % | ||||||||||||||||||||
| Subtotal | 2,358,800 | 1,095,487 | 46.4 | % | - | - | - | |||||||||||||||||
| $ | 36,956,967 | $ | 5,583,797 | 15.1 | % | $ | 26,789,135 | $ | 4,692,485 | 17.5 | % | |||||||||||||
Three Months Ended March 31,June 30, 2019 compared to Three Months Ended March 31,June 30, 2018
Revenues.Revenues related to DGSE’s retail continuing operations increased by $1,963,658$5,845,375 or 14%46%, during the three months ended March 31,June 30, 2019, to $16,019,530,$18,578,637, as compared to $14,055,872$12,733,262 during the same period in 2018. Bullion/rare coin, Scrap and Other sales increased 41% offset by a 14% decrease in jewlelry66%, 48% and 331%, respectively, compared to the prior year quarter ending June 30, 2018. Jewelry sales and a slight decrease in scrap amd other salesdecreased 6% compared withto the prior year quarter. Bullion/rare coin salesRevenues increased $2,884,395 for the quarter ending March 31,June 30, 2019, as compared to the quarter ending March 31,June 30, 2018, primarily due primarily to the addition of a new large customer. The decreaseincrease in jewelry, scrapgold prices and otherour stategy to increase our sales is due primarilyvelocity.
Revenues related to the volatilityEcho Entities from May 20, 2019 to June 30, 2019 was $2,358,800. Recycled material sales accounted for 67% of the pricetotal sales at $1,588,084 and reused material sales accounted for 33% of gold in the market.total sales at $770,716.
Gross Profit.ForGross Profit related to DGSE’s retail operations for the three months ended March 31,June 30, 2019, gross profit decreasedincreased by $283,524,$79,350 to $2,218,482$2,269,828 as compared to $2,502,006$2,190,478 during the same period in 2018. The decreaseincrease in total gross profit dollars was due primarily to the decreaseincrease in total sales across the board and to the increase in the jewelry and bullion/rare coin margins. Our new large customer, as first evidenced in the above Revenues paragraph, bringsprice of gold. Even though there was additional revenues but withthere was also lower gross margin percentages due to changing our strategy for a lower margin, therefore decreasinghigher velocity of sales. Our strategy decreased the overall gross profit margin to bullion/rare coin. As a percentage of revenue, total gross margin decreased to 13.8%12.2% compared to 17.8%17.2% during the same period for the prior year.
Gross Profit related to the Echo Entities support a larger profit margin compared to the retail segment. The Echo Entities profit margin of $1,095,487 on $2,358,800 sales, or an overall percentage of 46.4%.
Selling, General and Administrative Expenses.For the three months ended March 31,June 30, 2019, Selling, General and Administrative (“SG&A”) expenses decreasedfor our retail segment increased by $267,327,$100,686, or 13%6%, to $1,741,340,$1,874,598, as compared to $2,008,667$1,773,912 during the same period in 2018. The decreaseincrease in SG&A was achieved primarily throughdue to the decreaseincrease in bonusesadvertising of $115,096 and the decrease$97,365. The increase in personal property taxes of $141,379. The reduction in bonusesadvertising was due to the eliminationchanged strategy of more velocity in our sales.
The SG&A expenses for the bonus program for store managersEcho Entities totaled $801,642 which primarily consists of payroll, payroll taxes and key personnel. The decrease in personal property taxesemployee benefits of $141,379 was primarily due to unrecorded personal property tax liability at year end December 31, 2017. The tax jurisdiction changed$556,561, rent and notificationvariable rent costs, net of the liability was received after the filingsublet income, of the year ending December 31, 2017 10-K.$47,539 and warehouse and office supplies of $59,800.
Depreciation and Amortization. For the three months ended March 31,June 30, 2019, depreciation and amortization expense for our retail segment was $74,324$74,449 compared to $89,752 to$87,732 for the same period in 2018, a decrease of $15,428,$13,283, or 17%15%. Amortization increased $14,000 for the three months ending March 31, 2019 compared to the same period in 2018. The increase is due to the amortization of the point-of-sale system we implemented starting April 1, 2018. The decrease in depreciation of $29,428$13,283 from the three months ending March 31,June 30, 2019 compared to the three months ending March 31,June 30, 2018 is primarily due to assets that are being fully depreciated but still in-service.
| 20 |
The Depreciation and Amortization expense for the Echo Entities consisted of depreciation of $10,899 and amortization of $0, for the three months ending June 30, 2019.
Interest Expense. For the three months ended March 31,June 30, 2019, interest expense, for the retail segment, was $34,549,$25,657, a decrease of $12,333,$19,991, or 26%44%, compared to $46,882$45,648 during the same period in 2018. The decrease is primarily due to the continual pay down of the accounts payable - trade, related party, now note payable, related party, outstanding balance of $3,075,120.$2,991,135 as of June 30, 2019.
The interest expense for the Echo Entities was $31,852 for the three months ending June 30, 2019, which was related to the note payable, related party, with an outstanding balance of $6,783,212 as of June 30, 2019.
Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018
Revenues.Revenues related to the Company’s retail operations increased by $7,809,031, or 29%, during the six months ended June 30, 2019, to $34,598,166, as compared to $26,789,135 during the same period in 2018. Bullion/rare coin, scrap and other sales increased approximately 53%, 20% and 193%, respectively, compared to the six months ended June 30, 2018. Jewelry sales decreased approximately 15%, compared to the prior year six months. Revenues increased for the six months ending June 30, 2018, compared to the six months ending June 30, 2018, primarily due to the increase in gold prices and our strategy to increase our velocity of sales.
Revenues related to the Echo Entities for the six months ending June 30, 2019 are the same as the three months ending June 30, 2019, due to the purchase of the Echo assets was completed during the three months ended June 30, 2019.
Gross Profit.Gross profit for the six months ended June 30, 2018, related to our retail operations decreased by $204,175, or 4%, to $4,488,310, as compared to $4,692,485 during the same period in 2018. The decrease in gross profit was due to a decrease in profit margin across the board except jewelry. As a percentage of revenue, gross margin decreased to 13.0% compared to 17.5% in the same period compared to the prior year. An increase in the margin for jewelry was offset by a decrease in the margin for for all other categories for the six months ended June 30, 2019.
Gross profit related to the Echo Entities for the six months ended June 30, 2019 is the same as the three months ended June 30, 2019, due to the purchase of the Echo assets was completed during the three months ended June 30, 2019.
Selling, General and Administrative Expenses.For the six months ended June 30, 2019, the retail SG&A expenses decreased by $198,008, or 1%, to $3,615,939, as compared to $3,813,947 during the same period in 2018. The decrease in SG&A was achieved through continued efforts to reduce expenses at all levels, including store-level operating and corporate overhead expenses.
SG&A expenses related to the Echo Entities for the six months ended June 30, 2019 are the same as the three months ended June 30, 2019, due to the purchase of the Echo assets was completed during the three months ended June 30, 2019.
Depreciation and Amortization. For the six months ended June 30, 2019, the retail depreciation and amortization expense was $148,773 compared to $177,484 for the same period in 2018. The decrease is primarily due to assets that are being fully depreciated but still in service.
Depreciation and amortization expense related to the Echo Entities for the six months ended June 30, 2019 are the same as the three months ended June 30, 2019, due to the purchase of the Echo assets was completed during the three months ended June 30, 2019.
Interest Expense. For the six months ended June 30, 2019, the interest expense for the retail segment was $60,206, a decrease of $32,324, or 52%, compared to $92,530 during the same period in 2018. The decrease is due to the continual pay down of the accounts payable, related party, now note payable, related party, outstanding balance of $2,991,135.
Interest expense related to the Echo Entities for the six months ended June 30, 2019 are the same as the three months ended June 30, 2019, due to the purchase of the Echo assets was completed during the three months ended June 30, 2019.
| 21 |
Liquidity and Capital Resources
During the threesix months ended March 31,June 30, 2019 and 2018, cash flows used in operating activities totaled $960,206$3,662,168 and $281,840,$226,785, respectively, an increasea decrease of $678,366.$3,435,383. Cash used in operating activities for the threesix months ended March 31,June 30, 2019, was driven largely by the reduction of accounts payable – trade, related party of $3,074,021, accounts payable – trade and accrued expenses of $564,868,$949,957, the increase of inventories of $550,567$138,509 and an increase in prepaid expensestrade receivables, net of $185,536$361,079 offset by net income, without depreciation and amortization and bad debt expense, of $354,635.$,1,133,834. Cash used in operating activities for the threesix months ended March 31,June 30, 2018, was driven largely by the reduction of accounts payable -– trade, related party of $523,333, a reduction of accounts payable and accrued expenses of $308,133, the reduction of accounts payable - trade, related party of $212,616,$333,674, and the increase of prepaid expensesinventories of $188,287, the increase in trade receivables of $209,217 and the increase in trade receivables, related party of $39,215,$824,941, offset by the increase in customer deposits and other liabilities of $155,458$520,593, the decrease in trade receivables by $110,052, and the net income, without depreciation and amortization, of $346,208.$797,870.
During the threesix months ended March 31,June 30, 2019 and 2018, cash flows used in investing activities totaled $14,175$5,891,791 and $86,074,$145,825, respectively, a decreasean increase of $71,899.$5,745,966. The use of cash in investing activities during the threesix months ended March 31,June 30, 2019 was primarily the result of buildout expenses associated with additional space leased for our Charleston, South Carolina location.the Echo Tranaction. The use of cash in investing activities during the threesix months ended March 31,June 30, 2018 was the result of the continuing buildout expenses related to the Midtown location at 13022 Preston Road, Dallas, Texas.
During the threesix months ended March 31,June 30, 2019, cash flows provided in financing activities totaled $9,774,347 and the during the six months ended June 30, 2018, cash flows used in financing activities totaled $0$2,352, an increase of $9,776,699. The provision of cash in financing activities during the six months ended June 30, 2019 was financing the acquisition of the Echo Transaction for $6,925,979 and $1,181 respectively, a reductionthe financing of $1,181.the payoff of the accounts payable – trade, related party of $3,074,021, offset by the use of funds to pay down the note payable, related party, of $225,653. The use of cash in financing activities during the period ending March 31,six months ended June 30, 2018 was the result of payments towardpaying off the capital lease obligations.
We expect our capital expenditures to total approximately $85,000 during the next twelve months. These expenditures will be largely driven by the purchase of additional components of our new point-of-sale system and miscellaneous equipment needed in the continued buildoutrecycling of the additional suite for our Charleston, South Carolina location.electronic waste. The new point-of-sale system was designed and built specifically for DGSE and rolled out April 1, 2018. As of March 31,June 30, 2019, there were no commitments outstanding, except for the POS system and the suite buildout, for capital expenditures.system.
From time to time, we have adjusted our inventory levels to meet seasonal demand or in order to meet working capital requirements. Management believes that if additional working capital is required, additional loans can be obtained from individuals or from commercial banks. If necessary, inventory levels may be adjusted in order to meet unforeseen working capital requirements
The Texas Comptroller conducted a sales and use tax audit of our Texas operations with respect to the period July 1, 2013 through December 31, 2016. The audit was finalized and a determination was made on April 2, 2018, that we owed a total of $17,294, which includes interest and penalties. An initial reserve of $70,000 was established at December 31, 2017 to cover any liability. That reserve was reduced to the amount owed of $17,294 for the accompanying consolidated balance sheet as of March 31, 2018. The balance due of $17,294 was paid in full on April 4, 2018.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Because we are a “smaller reporting company,” we are not required to disclose the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and our principal financial officer, conducted an evaluation, as of the end of the period covered by the Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management has concluded that as of March 31,June 30, 2019, the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in that the reports that we file or submit under the Exchange Act and are effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
| 22 |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
None
Because we are a “smaller reporting company”, we are not required to disclose the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
None.
| Exhibit Number | Description | Filed Herein | Incorporated by Reference | Form | Date Filed with SEC | Exhibit Number | ||||||
| 3.1 | Articles of Incorporation dated September 17, 1965 | X | 8-A12G | June 23, 1999 | 3.1 | |||||||
| 3.2 | Certificate of Amendment to Articles of Incorporation, dated October 14, 1981 | X | 8-A12G | June 23, 1999 | 3.2 | |||||||
| 3.3 | Certificate of Resolution, dated October 14, 1981 | X | 8-A12G | June 23, 1999 | 3.3 | |||||||
| 3.4 | Certificate of Amendment to Articles of Incorporation , dated July 15, 1986 | X | 8-A12G | June 23, 1999 | 3.4 | |||||||
| 3.5 | Certificate of Amendment to Articles of Incorporation, dated August 23, 1998 | X | 8-A12G | June 23, 1999 | 3.5 |
| 23 |
| 24 |
| 25 |
| 26 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DGSE COMPANIES, INC. (Registrant) | |||
| Date: | By: | /s/ JOHN R. LOFTUS | |
| John R. Loftus | |||
Chief Executive Officer (Principal Executive Officer) | |||
| Date: | /s/ BRET A. PEDERSEN | ||
| Bret A. Pedersen | |||
Chief Financial Officer (Principal Accounting Officer) | |||
| 27 |