DGSE DGSE Companies Inc

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 in South 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. We have engaged a third party to conduct an independent valuation of the Echo Transaction to be completed by the end of the year.

The Company now includes segment information, in the notes to the financial statements, due to the addition of the Echo Entities. The object of segment reporting is to provide a management approach that identifies different types of businesses within the Company and how we have organized the segments to make financial decisions. We consider the Company in the repurpose business and we have organized two different segments within our business and presented the performance of each seperately.

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) Accounting Policies and Estimates

Financial Instruments

The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, accounts payable, accrued expenses and notes payable-related party approximate fair value because of the immediate or short-term nature of these financial instruments. Notes payable, related party approximate fair value due to the market interest rate change.

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 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 11 for additional information.

(4) Inventories

A summary of inventories is as follows:

(5) Property and Equipment

Property and equipment consists of the following:

(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. We have engaged a third party to conduct an independent valuation of the Echo acquisition to be completed by the end of the year.

The preliminary purchase price is allocated as follows:

The following pro forma combines the results of the Echo Entities and the Company’s results of operations for the three months ended September 30, 2019 and 2018 as if they were combined the whole quarter:

The following pro forma combines the results of the Echo Entities and the Company’s results of operations for the nine months ended September 30, 2019 and 2018 as if they were combined the entire nine months:

(7) Intangible Assets

Intangible assets consist of the following:

(8) Accrued Expenses

Accrued expenses consist of the following:

(9) Segment Information

We determine our business segments based upon an internal reporting structure. We report our financial performance based on the following segments: DGSE and the Echo Entities.

Our DGSE segment includes Dallas Gold and Silver Exchange, which has four retail stores in the Dallas/Ft Worth Metroplex, and Charleston Gold and Diamond Exchange, which has one retail store in Charleston, South Carolina.

Our Echo Entities segment includes Echo Enrironmental Holdings and ITAD USA Holdings. These two companies were added May 20, 2019 and are involved in recycling and reusing electronic waste.

We allocate a portion of certain corporate costs and expenses, including information technology to our business segments that is included in Selling, general and administrative expenses. Our management team evaluates the operating performance of each segment and makes decisions about the allocation of resources according to each segment profit. The allocations are generally amounts agreed upon by management, which may differ from an arms-length amount.

The following segment seperates the results of Dallas Gold and Silver’s and the Echo Entity’s financial results of operations for the three months ending September 30, 2019:

The following segment seperates the results of Dallas Gold and Silver’s and the Echo Entity’s financial results of operations for the nine months ending September 30, 2019:

(10) Revenue Recognition

Revenue is recognized when we transfer promised goods, 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, recycled goods, recycled raw materials, scrap, jewelry and watch repair services through wholesale contracts, retail and 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 and segment:

The following disaggregation of revenue is listed by sales category, segment and state:

The following disaggregation of total revenue is listed by sales category and segment:

The following disaggregation of revenue is listed by sales category, segment and state:

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. We also recognize revenue upon the shipment of goods when retail or 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 party before the purchase of the Echo Entities on May 20, 2019. Since the refiner 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.

The 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 September 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.