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Envela Corp - Quarter Report: 2019 March (Form 10-Q)

 

 

 

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, 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, 2019:

 

Class   Outstanding
Common stock, $0.01 par value per share   26,924,381

 

 

 

 
 

 

TABLE OF CONTENTS

 

Page No.
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 3
     
  Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (unaudited) 4
     
  Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2018 and 2019 (unaudited) 5
     
  Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited) 6
     
  Notes to Consolidated Financial Statements (unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
     
Item 4. Controls and Procedures 16
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 17
     
Item 1A. Risk Factors 17
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
     
Item 3. Defaults Upon Senior Securities 17
     
Item 4. Mine Safety Disclosures 17
     
Item 5. Other Information 17
     
Item 6. Exhibits 17
     
SIGNATURES 20

 

2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DGSE COMPANIES, INC. AND SUBSIDIARIES

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 

 

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

 

3
 

 

DGSE COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(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 

 

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

 

4
 

 

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.

 

5
 

 

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.

 

6
 

 

NOTES TO 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 buys and sells jewelry and bullion products to both retail and wholesale customers throughout the United States through its facilities in South Carolina and Texas, and through its various internet sites.

 

The interim 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) Critical Accounting Policies and Estimates

 

Financial Instruments

 

The carrying amounts reported in the 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.

 

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.

 

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 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 9 for additional information.

 

7
 

 

(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 

 

(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 

 

(6) Intangible Assets

 

Intangible assets consist of the following:

 

   March 31,   December 31, 
   2019   2018 
Domain names  $41,352   $41,352 
Point of sale system   285,000    270,000 
    326,352    311,352 
Less: accumulated amortization   (91,002)   (77,002)
           
Total intangibles  $235,350   $234,350 

 

8
 

 

(7) 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 

 

(8) 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 and jewelry and watch repair services through 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. 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 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%

 

9
 

 

The following disaggregation of revenue is listed by sales category 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%

 

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%

 

Revenues for monetary transactions (i.e., cash and receivables) with 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. We also recognize revenue upon the shipment of goods when retail and 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 related entity 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 offer 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 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 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.

 

10
 

 

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, 2019 and December 31, 2018, our allowance for returns remained the same at $28,402 and $28,402, respectively.

 

(9) 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.

 

The Company 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. 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.

 

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 five operating leases, four in the Dallas/Fort Worth Metroplex and one in Charleston South Carolina. We have two 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. All five leases are triple net leases that we pay our proportionate amount of common area maintenance, property taxes and property insurance. Our total leasing costs for the three months ending March 31, 2019 was $174,347, which consists of $134,595 of rental lease expense and $39,752 of variable lease costs.

 

As of March 31, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 3.1 years and 5.5%, respectively. The Company’s future operating lease obligations that have not yet commenced are immaterial. For the period ending March 31, 2019, the Company’s cash paid for operating lease liabilities was $136,260.

 

11
 

 

Future annual minimum lease payments as of March 31, 2019:

 

   Operating 
   Leases 
2019 (excluding the three months ending March 31, 2019)  $411,392 
2020   550,624 
2021   491,541 
2022   247,040 
2023   223,045 
2024 and thereafter   289,327 
      
Total minimum lease payments  $2,212,969 
Less imputed interest   (265,865)
      
Operating lease liability  $1,947,104 

 

(10) Basic and Diluted Average Shares

 

A reconciliation of basic and diluted weighted average common shares for the three months ended March 31, 2019 and 2018 is as follows:

 

   For the Three Months Ended 
   March 31, 
   2019   2018 
         
Basic weighted average shares   26,924,381    26,924,381 
Effect of potential dilutive securities   -    309,599 
Diluted weighted average shares   26,924,381    27,233,980 

 

For the three months ended March 31, 2019 and 2018 there were approximately 15,000 stock options excluded from the earnings per share calculation because their impact is antidilutive.

 

(11) 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 ended March 31, 2019 and 2018 was $0 and $0, respectively.

 

(12) 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. In the three months ended March 31, 2019, 10.4% of sales and 10.8% of purchases were transactions with a certain Related Entity, and in the same period of 2018, these transactions represented 10% of DGSE’s sales and 2% 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. As of March 31, 2019, the Company was obligated to pay $3,075,120 to the certain Related Entity as a trade payable. As of December 31, 2018, the Company was obligated to pay $3,088,973 to the certain Related Entity as a trade payable. For the three months ended March 31, 2019 and 2018, the Company paid the Related Entities $34,549 and $46,882, respectively, in interest on the Company’s outstanding payable.

 

(13) Sales and Use Tax

 

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.

 

12
 

 

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, 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 buy and sell 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.

 

Many aspects of our 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 prevalent during the quarter but the general overall trend was slightly upward.

 

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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.

 

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.

 

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 of revenue is listed by sales category 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%

 

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%

 

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Three Months Ended March 31, 2019 compared to Three Months Ended March 31, 2018

 

Revenues. Revenues related to continuing operations increased by $1,963,658 or 14%, during the three months ended March 31, 2019, to $16,019,530, as compared to $14,055,872 during the same period in 2018. Bullion/rare coin sales increased 41% offset by a 14% decrease in jewlelry sales and a slight decrease in scrap amd other sales compared with the prior year quarter. Bullion/rare coin sales increased $2,884,395 for the quarter ending March 31, 2019 as compared to the quarter ending March 31, 2018 due primarily to the addition of a new large customer. The decrease in jewelry, scrap and other sales is due primarily to the volatility of the price of gold in the market.

 

Gross Profit. For the three months ended March 31, 2019, gross profit decreased by $283,524, to $2,218,482 as compared to $2,502,006 during the same period in 2018. The decrease in total gross profit dollars was due primarily to the decrease in the jewelry and bullion/rare coin margins. Our new large customer, as first evidenced in the above Revenues paragraph, brings additional revenues but with a lower margin, therefore decreasing the overall gross profit margin to bullion/rare coin. As a percentage of revenue, total gross margin decreased to 13.8% compared to 17.8% during the same period for the prior year.

 

Selling, General and Administrative Expenses. For the three months ended March 31, 2019, Selling, General and Administrative (“SG&A”) expenses decreased by $267,327, or 13%, to $1,741,340, as compared to $2,008,667 during the same period in 2018. The decrease in SG&A was achieved primarily through the decrease in bonuses of $115,096 and the decrease in personal property taxes of $141,379. The reduction in bonuses was due to the elimination of the bonus program for store managers and key personnel. The decrease in personal property taxes of $141,379 was primarily due to unrecorded personal property tax liability at year end December 31, 2017. The tax jurisdiction changed and notification of the liability was received after the filing of the year ending December 31, 2017 10-K.

 

Depreciation and Amortization. For the three months ended March 31, 2019, depreciation and amortization expense was $74,324 compared to $89,752 to the same period in 2018, a decrease of $15,428, or 17%. 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 from the three months ending March 31, 2019 compared to the three months ending March 31, 2018 is primarily due to assets that are fully depreciated but still in-service.

 

Interest Expense. For the three months ended March 31, 2019, interest expense was $34,549, a decrease of $12,333, or 26%, compared to $46,882 during the same period in 2018. The decrease is primarily due to the continual pay down of the accounts payable - trade, related party outstanding balance of $3,075,120.

 

Liquidity and Capital Resources

 

During the three months ended March 31, 2019 and 2018, cash flows used in operating activities totaled $960,206 and $281,840, respectively, an increase of $678,366. Cash used in operating activities for the three months ended March 31, 2019, was driven largely by the reduction of accounts payable – trade and accrued expenses of $564,868, the increase of inventories of $550,567 and an increase in prepaid expenses of $185,536 offset by net income of $354,635. Cash used in operating activities for the three months ended March 31, 2018, was driven largely by the reduction of accounts payable - trade and accrued expenses of $308,133, the reduction of accounts payable - trade, related party of $212,616, the increase of prepaid expenses of $188,287, the increase in trade receivables of $209,217 and the increase in trade receivables, related party of $39,215, offset by the increase in customer deposits and other liabilities of $155,458 and net income of $346,208.

 

During the three months ended March 31, 2019 and 2018, cash flows used in investing activities totaled $14,175 and $86,074, respectively, a decrease of $71,899. The use of cash in investing activities during the three months ended March 31, 2019 was the result of buildout expenses associated with additional space leased for our Charleston, South Carolina location. The use of cash in investing activities during the three months ended March 31, 2018 was the result of the continuing buildout expenses to the Midtown location at 13022 Preston Road, Dallas, Texas.

 

During the three months ended March 31, 2019 and 2018, cash flows used in financing activities totaled $0 and $1,181 respectively, a reduction of $1,181. The use of cash in financing activities during the period ending March 31, 2018 was the result of payments toward capital lease obligations.

 

15
 

 

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 the continued buildout of the additional suite for our Charleston, South Carolina location. The new point-of-sale system was designed and built specifically for DGSE and rolled out April 1, 2018. As of March 31, 2019, there were no commitments outstanding, except for the POS system and the suite buildout, for capital expenditures.

 

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, 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.

 

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.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None

 

ITEM 1A. RISK FACTORS.

 

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.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

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
3.6   Certificate of Amendment to Articles of Incorporation, dated June 26, 1992       X   8-A12G   June 23, 1999   3.6
3.7   Certificate of Amendment to Articles of Incorporation, dated June 26, 2001       X   8-K   July 3, 2001   1.0
3.8   Certificate of Amendment to Articles of Incorporation, dated May 22, 2007       X   S-8   May 29, 2007   3.8
3.9   Certificate of Amendment to Articles of Incorporation, dated December 7, 2016       X   10-K   April 14, 2017   3.9
3.10   By-laws, dated March 2, 1992       X   8-A12G   June 23, 1999   3.7
3.11   Amendment to By-laws, dated September 4, 2015       X   8-K   September 11, 2015   3.1
3.12   Amendment to By-laws, dated October 9, 2015       X   8-K   October 9, 2015   3.9
4.1   Specimen Common Stock Certificate       X   S-4   February 26, 2007   4.1
4.2   Warrant to Purchase Shares of Common Stock of DGSE Companies, Inc. issued to Elemetal, LLC dated December 9, 2016       X   8-K   December 13, 2016   4.1

 

17
 

 

Exhibit
Number
  Description   Filed
Herein
  Incorporated
by Reference
  Form   Date Filed
with SEC
  Exhibit
Number
10.1   Lock-up Agreement, dated September 11, 2012, by and among DGSE Companies, Inc. and certain shareholders       X   8-K   September 16, 2011   10.2
10.2   Form of Option Grant Agreement       X   8-K   September 16, 2011   10.4
10.3   Registration Rights Agreement, dated September 12, 2011, by and between DGSE Companies, Inc. and certain shareholders       X   8-K   September 16, 2011   10.5
10.4   Registration Rights Agreement, dated September 12, 2011, by and between DGSE Companies, Inc. and NTR Metals, LLC       X   8-K   September 16, 2011   10.7
10.5   Option Grant Agreement, dated October 25, 2011, by and between DGSE Companies, Inc. and NTR Metals, LLC       X   8-K   October 28, 2011   10.2
10.6   Loan Agreement, dated July 19, 2012, by and between DGSE Companies, Inc. and NTR Metals, LLC       X   8-K   July 20, 2012   10.1
10.7   Guaranty and Security Agreement, dated July 19, 20123, among DGSE Companies, Inc., its subsidiaries, and NTR Metals, LLC       X   8-K   July 20, 2012   10.2
10.8   Revolving Credit Note granted in favor of NTR Metals, LLC       X   8-K   July 20, 2012   10.3
10.9   Amendment to Loan Agreement and Revolving Credit Note, dated February 25, 2014, by and between the Company and NTR       X   8-K   March 5, 2014   10.1
10.10   Office Space Lease, dated January 21, 2013, by and between 15850 Holdings LLC and the Company       X   10-K   March 27, 2014   10.21
10.11   Separation & Release of Claims Agreement dated April 17, 2014, by and between the Registrant and James Vierling       X   8-K   April 21, 2014   10.1
10.12   Payment Agreement, dated July 11, 2014       X   8-K   July 17, 2014   10.1
10.13   Second Amendment to Loan Agreement and Revolving Credit Note, dated January 26, 2015, by and between the Company and NTR       X   8-K   February 6, 2015   10.1
10.14   Offer Letter by and between DGSE and Matthew M. Peakes, dated September 4, 2015       X   8-K   September 11, 2015   10.1
10.15   Consulting, Separation and Release of Claims Agreement by and between DGSE and James D. Clem, dated September 4, 2015       X   8-K   September 11, 2015   10.2

 

18
 

 

Exhibit
Number
  Description   Filed
Herein
  Incorporated
by Reference
  Form   Date Filed
with SEC
  Exhibit
Number
10.16   Offer Letter by and between DGSE and Nabil J. Lopez, dated October 29, 2015       X   8-K   October 29, 2015   10.1
10.17   Form of Indemnification Agreement between DGSE Companies, Inc. and each executive officer and director of DGSE       X   8-K   February 12, 2016   10.1
10.18   Stock Purchase Agreement by and between DGSE Companies, Inc., Elemetal, LLC and NTR Metals, LLC dated June 20, 2016       X   8-K   June 22, 2016   10.1
10.19   Registration Rights Agreement by and among DGSE Companies, Inc., Elemetal, LLC, and NTR Metals, LLC dated as of December 9, 2016       X   8-K   June 22, 2016   10.3
14.1   Business Conduct & Ethics Policy       X   10-K/A   December 19, 2012   14.1
21.1   Subsidiaries of the Registrant       X   10-K   March 27, 2014   21.1
31.1   Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John R. Loftus   X                
31.2   Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen   X                
32.1   Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John R. Loftus   X                
32.2   Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen   X                
101.INS   XBRL Instance Document   X                
101.SCH   XBRL Taxonomy Extension Schema Document   X                
101.CAL   XBRL Taxonomy Calculation Linkbase Document   X                
101.DEF   XBRL Taxonomy Definition Linkbase Document   X                
101.LAB   XBRL Taxonomy Label Linkbase Document   X                
101.PRE   XBRL Taxonomy Presentation Linkbase Document   X                

 

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SIGNATURES

 

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: May 20, 2019 By: /s/ JOHN R. LOFTUS
    John R. Loftus
   

Chief Executive Officer

(Principal Executive Officer)

     
Date: May 20, 2019   /s/ BRET A. PEDERSEN
    Bret A. Pedersen
   

Chief Financial Officer

(Principal Accounting Officer)

 

20