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 September 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 November 11, 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
	Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	1
	Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2019 and 2018 (unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2018 and 2019 (unaudited)	3
	Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2018 and 2019 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
SIGNATURES		31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DGSE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,555,379		$	1,453,941
Trade receivables, net of allowances		2,040,890			94,345
Inventories		11,230,400			9,765,094
Prepaid expenses		382,325			81,094
Total current assets		16,208,994			11,394,474
Property and equipment, net		1,431,752			1,320,863
Goodwill		4,723,110			-
Intangible assets, net		235,100			234,350
Right-of -use assets from operating leases		3,779,707			-
Other assets		205,294			68,411
Total assets	$	26,583,957		$	13,018,098
LIABILITIES
Current Liabilities:
Accounts payable - trade	$	1,384,258		$	838,624
Accounts payable - trade, related party		-			3,088,973
Notes payable, related party		276,861			-
Line of credit		151,000			-
Current operating lease liabilities		1,158,210			-
Accrued expenses		865,137			579,203
Customer deposits and other liabilities		182,652			97,837
Total current liabilities		4,018,118			4,604,637
Notes payable, related party, less current portion		9,430,571			-
Long-term operating lease liabilities, less current portion		2,742,170			-
Total liabilities		16,190,859			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		(30,048,823	)		(32,028,460	)
Total stockholders’ equity		10,393,098			8,413,461
Total liabilities and stockholders’ equity	$	26,583,957		$	13,018,098

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

1

DGSE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenue
Sales	$	22,861,201		$	13,659,395		$	59,818,168		$	40,448,530
Cost of goods sold		17,674,747			11,182,226			49,047,917			33,278,876
Gross margin		5,186,454			2,477,169			10,770,251			7,169,654
Expenses:
Selling, general and administrative expenses		3,893,618			2,858,911			8,311,199			6,672,858
Depreciation and amortization		67,886			98,237			227,558			275,721
		3,961,504			2,957,148			8,538,757			6,948,579
Operating income (loss)		1,224,950			(479,979	)		2,231,494			221,075
Other (income) expense:
Other income, net		(955	)		(6,527	)		(54,285	)		(58,822	)
Interest expense		148,720			38,100			240,778			130,630
		147,765			31,573			186,493			71,808
Income (loss) before income taxes		1,077,185			(511,552	)		2,045,001			149,267
Income tax expense (benefit)		41,710			(16,646	)		65,364			23,787
Net income (loss)	$	1,035,475		$	(494,906	)	$	1,979,637		$	125,480
Basic net income (loss) per common share:	$	0.04		$	(0.02	)	$	0.08			0.00
Diluted net income (loss) per common share:	$	0.04		$	(0.02	)	$	0.08			0.00
Weighted-average number of common shares
Basic		26,924,381			26,924,381			26,924,381			26,924,381
Diluted		26,924,381			26,924,381			26,924,381			27,107,339

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

2

DGSE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended September 30, 2018 and 2019

(Unaudited)

					Additional					Total
	Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Balances at June 30, 2018		26,924,381	$	269,244	$	40,172,677	$	(32,065,759	)	$	8,376,162
Net Loss		-		-		-		(494,906	)		(494,906	)
Balances at September 30, 2018		26,924,381	$	269,244	$	40,172,677	$	(32,560,665	)	$	7,881,256

					Additional					Total
	Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Balances at June 30, 2019		26,924,381	$	269,244	$	40,172,677	$	(31,084,298	)	$	9,357,623
Net Income		-		-		-		1,035,475			1,035,475
Balances at September 30, 2019		26,924,381	$	269,244	$	40,172,677	$	(30,048,823	)	$	10,393,098

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

3

DGSE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months ended September 30, 2018 and 2019

(Unaudited)

					Additional					Total
	Common Stock				Paid-in		Accumulated			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		-		-		-		125,480			125,480
Balances at September 30, 2018		26,924,381	$	269,244	$	40,172,677	$	(32,560,665	)	$	7,881,256

					Additional					Total
	Common Stock				Paid-in		Accumulated			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		-		-		-		1,979,637			1,979,637
Balances at September 30, 2019		26,924,381	$	269,244	$	40,172,677	$	(30,048,823	)	$	10,393,098

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

4

DGSE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended
	September 30,
	2019			2018
Cash Flows From Operating Activities
Net income	$	1,979,637		$	125,480
Adjustments to reconcile income from operations to net cash used in operating activities:
Depreciation and amortization		227,558			275,721
Loss on sale of assets		-			40,045
True up accounts payable		-			(468,081	)
Bad debt expense		-			1,196,660
Changes in operating assets and liabilities:
Trade recivables, net		(920,929	)		146,811
Inventories		(256,103	)		(900,750	)
Note receivable		-			22,409
Prepaid expenses		(212,866	)		1,854
Operating leases		120,673			-
Other assets		(47,884	)		29,292
Accounts payable and accrued expenses		(627,911	)		(1,189,542	)
Accounts payable - trade, related party		(3,074,021	)		-
Customer deposits and other liabilities		79,358			105,250
Net cash used in operating activities		(2,732,488	)		(614,851	)
Cash Flows From Investing Activities:
Purchase of property and equipment		(102,989	)		(125,135	)
Intangile asssets		(45,000	)		(51,000	)
Acquisition of the Echo Entities, net of cash acquired		(5,876,517	)		-
Net cash used in investing activities		(6,024,506	)		(176,135	)
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			-
Line of credit		151,000			-
Payments on notes payable, related party		(292,568	)		-
Payments on capital lease obligations		-			(2,352	)
Net cash provided by (used in) financing activities		9,858,432			(2,352	)
Net change in cash and cash equivalents		1,101,438			(793,338	)
Cash and cash equivalents, beginning of period		1,453,941			1,272,208
Cash and cash equivalents, end of period	$	2,555,379		$	478,870
Supplemental Disclosures:
Cash paid during the period for:
Interest	$	240,778		$	130,594
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.

5

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.

6

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.

7

(4) Inventories

A summary of inventories is as follows:

	September 30, 2019		December 31, 2018
DGSE
Jewelry	$	7,780,945	$	7,001,477
Scrap gold/silver		545,299		1,205,111
Bullion		872,647		801,717
Rare coins and Other		802,632		756,789
Subtotal		10,001,523		9,765,094
Echo Entities
Electronic components - resale		289,922		-
Electronic components - recycle		938,955		-
Subtotal		1,228,877		-
	$	11,230,400	$	9,765,094

(5) Property and Equipment

Property and equipment consists of the following:

	September 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		(1,845,664	)		(1,701,498	)
Sub-Total		1,263,697			1,320,863
Echo Entities
Building and improvements		81,149			-
Machinery and equipment		27,497			-
Furniture and fixtures		93,827			-
		202,473			-
Less: accumulated depreciation		(34,418	)		-
Sub-Total		168,055			-
	$	1,431,752		$	1,320,863

8

(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:

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

9

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:

	Combined		Pro forma Combined
	For the Three Months Ended		For the Three Months Ended
	September 30, 2019		September 30, 2018
	(unaudited)		(unaudited)
Revenue	$	22,861,201	$	19,302,869
Income (loss) from continuing operations	$	1,035,475	$	(1,694,654	)
Net income (loss)	$	1,035,475	$	(1,694,654	)
Basic net income (loss) per common share	$	0.04	$	(0.06	)
Diluted net income (loss) per common share	$	0.04	$	(0.06	)

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:

	Pro forma Combined		Pro forma Combined
	For the Nine Months Ended		For the Nine Months Ended
	September 30, 2019		September 30, 2018
	(unaudited)		(unaudited)
Revenue	$	65,715,313	$	64,685,778
Income (loss) from continuing operations	$	1,130,482	$	1,633,124
Net income (loss)	$	1,130,482	$	1,633,124
Basic net income (loss) per common share	$	0.04	$	0.06
Diluted net income (loss) per common share	$	0.04	$	0.06

10

(7) Intangible Assets

Intangible assets consist of the following:

	Septemnber 30, 2019			December 31, 2018
DGSE
Domain names	$	41,352		$	41,352
Point of sale system		315,000			270,000
		356,352			311,352
Less: accumulated amortization		(121,252	)		(77,002	)
Subtotal		235,100			234,350
Echo Entities		-			-
	$	235,100		$	234,350

(8) Accrued Expenses

Accrued expenses consist of the following:

	September 30, 2019		December 31, 2018
DGSE
Professional fees	$	69,744	$	149,000
Advertising		-		52,590
Board member fees		-		7,500
Employee benefits		-		10,383
Insurance		56,669		-
Payroll		99,576		205,112
Property taxes		150,263		-
Sales tax		45,101		111,739
State income tax		59,538		42,879
Subtotal		480,891		579,203
Echo Entities
Payroll		162,235		-
Sales tax		7,095		-
Credit card		29,127		-
State income tax		16,963		-
Material & shipping costs (COGS)		168,826		-
Subtotal		384,246		-
	$	865,137	$	579,203

11

(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:

	For The Three Months Ended
	September 30, 2019
	DGSE			Echo Entities		Consolidated
Revenue:
Sales	$	16,652,927		$	6,208,274	$	22,861,201
Cost of goods sold		14,634,075			3,040,672		17,674,747
Gross profit		2,018,852			3,167,602		5,186,454
Expenses:
Selling, general and administrative expenses		1,868,144			2,025,474		3,893,618
Depreciation and amortization		44,368			23,518		67,886
		1,912,512			2,048,992		3,961,504
Operating income		106,340			1,118,610		1,224,950
Other (income) expense:
Other (income) expense, net		(955	)		-		(955	)
Interest expense		46,764			101,956		148,720
Income before income taxes		60,531			1,016,654		1,077,185
Income tax expense		30,383			11,327		41,710
Net income	$	30,148		$	1,005,327	$	1,035,475

12

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:

	For The Nine Months Ended
	September 30, 2019
	DGSE			Echo Entities		Consolidated
Revenue:
Sales	$	51,251,094		$	8,567,074	$	59,818,168
Cost of goods sold		44,743,932			4,303,985		49,047,917
Gross profit		6,507,162			4,263,089		10,770,251
Expenses:
Selling, general and administrative expenses		5,484,082			2,827,116		8,311,198
Depreciation and amortization		193,141			34,417		227,558
		5,677,223			2,861,533		8,538,756
Operating income		829,939			1,401,556		2,231,495
Other (income) expense:
Other (income) expense, net		(54,285	)		-		(54,285	)
Interest expense		106,970			133,808		240,778
Income before income taxes		777,254			1,267,748		2,045,002
Income tax expense		48,402			16,963		65,365
Net income	$	728,852		$	1,250,785	$	1,979,637

(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.

13

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

CONSOLIDATED	Three Months Ended September 30,
	2019							2018
	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
DGSE
Jewelry	$	4,036,825	$	1,149,134		28.5	%	$	3,694,204	$	1,223,144		33.1	%
Bullion/Rare Coin		9,621,146		442,573		4.6	%		8,120,071		727,555		9.0	%
Scrap		2,547,912		359,255		14.1	%		1,317,133		226,090		17.2	%
Other		447,044		67,890		15.2	%		527,987		300,380		56.9	%
Subtotal		16,652,927		2,018,852		12.1	%		13,659,395		2,477,169		18.1	%
Echo Entities
Recycle		5,133,181		2,408,416		46.9	%		-		-		-
Reuse		1,075,093		759,186		70.6	%		-		-		-
Subtotal		6,208,274		3,167,602		51.0	%		-		-		-
	$	22,861,201	$	5,186,454		22.7	%	$	13,659,395	$	2,477,169		18.1	%

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

TEXAS	Three Months Ended September 30,
	2019							2018
	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
DGSE
Jewelry	$	3,506,998	$	957,867		27.3	%	$	3,404,889	$	1,083,550		31.8	%
Bullion/Rare Coin		9,473,024		433,389		4.6	%		8,001,990		711,529		8.9	%
Scrap		2,547,912		359,255		14.1	%		1,317,133		226,090		17.2	%
Other		385,823		54,360		14.1	%		498,409		299,600		60.1	%
Subtotal		15,913,757		1,804,871		11.3	%		13,222,421		2,320,769		17.6	%
Echo Entities
Recycle		5,133,181		2,408,416		46.9	%		-		-		-
Reuse		1,075,094		759,186		70.6	%		-		-		-
Subtotal		6,208,275		3,167,602		51.0	%		-		-		-
	$	22,122,032	$	4,972,473		22.5	%	$	13,222,421	$	2,320,769		17.6	%

14

SOUTH CAROLINA	Three Months Ended June 30,
	2019							2018
	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
DGSE
Jewelry	$	529,825	$	191,267		36.1	%	$	289,315	$	139,594		48.2	%
Bullion/Rare Coin		148,122		9,184		6.2	%		118,081		16,026		13.6	%
Other		61,222		13,530		22.1	%		29,578		780		2.6	%
Subtotal		739,169		213,981		28.9	%		436,974		156,400		35.8	%
Echo Entities		-		-		-			-		-		-
Subtotal		-		-		-			-		-		-
	$	739,169	$	213,981		28.9	%	$	436,974	$	156,400		35.8	%

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

CONSOLIDATED	Nine Months Ended September 30,
	2019							2018
DGSE	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
Jewelry	$	12,432,060	$	3,715,091		29.9	%	$	13,519,276	$	3,840,235		28.4	%
Bullion/Rare Coin		30,543,290		1,468,358		4.8	%		21,828,412		2,128,921		9.8	%
Scrap		5,514,091		801,216		14.5	%		3,782,718		669,461		17.7	%
Other		2,761,652		522,497		18.9	%		1,318,124		531,037		40.3	%
Subtotal		51,251,093		6,507,162		12.7	%		40,448,530		7,169,654		17.7	%
Echo Entities
Recycle		6,721,265		3,156,235		47.0	%		-		-		-
Reuse		1,845,810		1,106,854		60.0	%
Subtotal		8,567,075		4,263,089		49.8	%		-		-		-
	$	59,818,168	$	10,770,251		18.0	%	$	40,448,530	$	7,169,654		17.7	%

15

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

TEXAS	Nine Months Ended September 30,
	2019							2018
DGSE	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
Jewelry	$	11,264,742	$	3,224,943		28.6	%	$	12,279,064	$	3,353,686		27.3	%
Bullion/Rare Coin		30,026,499		1,416,360		4.7	%		21,406,758		2,060,247		9.6	%
Scrap		5,514,091		801,216		14.5	%		3,782,718		669,461		17.7	%
Other		2,357,201		419,387		17.8	%		1,145,752		449,581		39.2	%
Subtotal		49,162,533		5,861,906		11.9	%		38,614,292		6,532,975		16.9	%
Echo Entities
Recycle		6,721,265		3,156,235		47.0	%		-		-		-
Reuse		1,845,810		1,106,854		60.0	%
Subtotal		8,567,075		4,263,089		49.8	%		-		-		-
	$	57,729,608	$	10,124,995		17.5	%	$	38,614,292	$	6,532,975		16.9	%

SOUTH CAROLINA	Nine Months Ended September 30,
	2019							2018
DGSE	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
Jewelry	$	1,167,318	$	490,148		42.0	%	$	1,240,212	$	486,549		39.2	%
Bullion/Rare Coin		516,791		51,998		10.1	%		421,654		68,674		16.3	%
Other		404,451		103,110		25.5	%		172,372		81,456		47.3	%
Subtotal		2,088,560		645,256		30.9	%		1,834,238		636,679		34.7	%
Echo Entities
Subtotal		-		-		-			-		-		-
	$	2,088,560	$	645,256		30.9	%	$	1,834,238	$	636,679		34.7	%

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.

16

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.

17

(11) 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.

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 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 seven operating leases, six in the Dallas/Fort Worth Metroplex and one in Charleston South Carolina. We have four 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 seven leases are triple net leases that we pay our proportionate amount of common area maintenance, property taxes and property insurance. Leasing costs for the three months ending September 30, 2019 and 2018 was $338,402 and $162,719, respectively. Leasing costs for the nine months ending September 30, 2019 and 2018 was $814,572 and $479,096, respectively. These lease costs consist of a combination of minimum lease payments and variable lease costs.

As of September 30, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 2.1 years and 5.5%, respectively. The Company’s future operating lease obligations that have not yet commenced are immaterial. For the three months ending September 30, 2019 and 2018, the Company’s cash paid for operating lease liabilities was $348,955 and $162,719, respectively. For the nine months ending September 30, 2019 and 2018, the Company’s cash paid for operating lease liabilities was $826,745 and $479,096, respectively.

18

Future annual minimum lease payments as of September 30, 2019:

	Operating Leases
DGSE
2019 (excluding the nine months ending September 30, 2019)	$	137,187
2020		550,623
2021		491,540
2022		247,040
2023		223,045
2024 and thereafter		289,327
Total minimum lease payments		1,938,762
Less imputed interest		(214,833	)
Subtotal		1,723,929
Echo Entities
2019 (excluding the nine months ending September 30, 2019)		198,869
2020		803,661
2021		785,240
2022		582,195
Total minimum lease payments		2,369,965
Less imputed interest		(193,514	)
Subtotal		2,176,451
	$	3,900,380

19

(12) Basic and Diluted Average Shares

A reconciliation of basic and diluted weighted average common shares for the three months and nine months ended September 30, 2019 and 2018 is as follows:

	For the Three Months Ended
	September 30,
	2019		2018
Basic weighted average shares		26,924,381		26,924,381
Effect of potential dilutive securities		-		-
Diluted weighted average shares		26,924,381		26,924,381

	For the Nine Months Ended
	September 30,
	2019		2018
Basic weighted average shares		26,924,381		26,924,381
Effect of potential dilutive securities		-		182,958
Diluted weighted average shares		26,924,381		27,107,339

For the three and nine months ended September 30, 2019, there were approximately 15,000 stock options excluded from the earnings per share calculation because their impact is antidilutive. For the three and nine months ended September 30, 2018 there were 1,015,000 of common share option, warrants and Restricted Stock Units (RSU’s) unexercised respectively.

(13) Long-Term Debt

	Outstanding Balance				Current
	September 30, 2019		December 31, 2018		Interest Rate			Maturity
DGSE
Note payable, related party	$	2,884,684	$	-		6.00	%		May 16, 2024
Echo Entities
Note payable, related party		6,545,887		-		6.00	%		May 16, 2024
Sub-Total		9,430,571		-
Current portion		276,861		-
	$	9,707,432	$	-

20

(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 nine months ended September 30, 2019 and 2018 was $0 and $0, respectively.

(15) 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. For the nine months ended September 30, 2019, 3% of sales and 1% of purchases were transactions with a certain Related Entity, and in the same period of 2018, these tranactions represented 10% of DGSE’s sales and 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 September 30, 2019, the Company was obligated to pay $0 to the certain Related Entity as a trade payable. As of September 30, 2018, the Company was obligated to pay $3,134,227 to the certain Related Entity as a trade payable. For the nine months ended September 30, 2019 and 2018, the Company paid the Related Entities $46,068 and $130,594 respectively, in interest on the Company’s outstanding payable.

On May 20, 2019, John Loftus, CEO and President of DGSE Companies, Inc., became the largest beneficial shareholder of our common stock, par value $0.01 per share. On the same day, Mr. Loftus loaned a wholly owned subsidiary, Corrent Resource Holdings, LLC $6,925,979 to complete the Echo 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 September 30, 2019 and 2018, the Company was obligated to pay Mr. Loftus, as note payable, related party $9,707,432 and $0 respectively. For the nine months ended September 30, 2019 and 2018, the Company paid Mr. Loftus $194,081 and $0 respectively, in interest on the Company’s note payable, related party.

(16) Subsequent Event

At the Company’s annual stockholder’s meeting, held October 11, 2019, a proposal to amend the articles of incorporation was passed, which included changing the corporate name to Envela Corporation and creating a class of preferred stock in the amount of 5,000,000 shares.

21

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 September 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

Our retail operation buys and sells 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 two quarters of Fiscal 2019 brought a dramatic increase in Gold prices ending at $1,409 an ounce on June 30, 2019, an increase of 10% since the beginning of 2019. Gold prices continued to rise in the third quarter ending at $1,485 an ounce on September 30, 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 and third quarters of 2019.

Following a leadership change in mid-December 2016, we eschewed the unsuccessful strategies of recent years, for our retail business, 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 our recyclable materials and we are also looking for new applications for our recycled electronic material.

22

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

CONSOLIDATED	Three Months Ended September 30,
	2019							2018
	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
DGSE
Jewelry	$	4,036,825	$	300,182		7.4	%	$	3,694,204	$	1,223,144		33.1	%
Bullion/Rare Coin		9,621,146		1,291,525		13.4	%		8,120,071		727,555		9.0	%
Scrap		2,547,912		384,461		15.1	%		1,317,133		226,090		17.2	%
Other		447,044		42,684		9.5	%		527,987		300,380		56.9	%
Subtotal		16,652,927		2,018,852		12.1	%		13,659,395		2,477,169		18.1	%
Echo Entities
Recycle		5,133,181		2,408,416		46.9	%		-		-		-
Reuse		1,075,093		759,186		70.6	%		-		-		-
Subtotal		6,208,274		3,167,602		51.0	%		-		-		-
	$	22,861,201	$	5,186,454		22.7	%	$	13,659,395	$	2,477,169		18.1	%

CONSOLIDATED	Nine Months Ended September 30,
	2019							2018
DGSE	Revenues		Gross Profit		Margin			Revenues		Gross Profit		Margin
Jewelry	$	12,432,060	$	2,866,139		23.1	%	$	13,519,276	$	3,840,235		28.4	%
Bullion/Rare Coin		30,543,290		2,317,310		7.6	%		21,828,412		2,128,921		9.8	%
Scrap		5,514,091		826,422		15.0	%		3,782,718		669,461		17.7	%
Other		2,761,652		497,291		18.0	%		1,318,124		531,037		40.3	%
Subtotal		51,251,093		6,507,162		12.7	%		40,448,530		7,169,654		17.7	%
Echo Entities
Recycle		6,721,265		3,156,235		47.0	%		-		-		-
Reuse		1,845,810		1,106,854		60.0	%		-		-		-
Subtotal		8,567,075		4,263,089		49.8	%		-		-		-
	$	59,818,168	$	10,770,251		18.0	%	$	40,448,530	$	7,169,654		17.7	%

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

Revenues. Revenues related to DGSE’s retail continuing operations increased by $2,993,532 or 22%, during the three months ended September 30, 2019, to $16,652,927, as compared to $13,659,395 during the same period in 2018. Jewelry, Bullion/rare coin and Scrap sales increased 9%, 18% and 93%, respectively, compared to the prior year quarter ending September 30, 2018. Other sales decreased 15% compared to the prior year quarter. Revenues increased for the quarter ending September 30, 2019, compared to the quarter ending September 30, 2018, primarily due to the increase in gold prices and our stategy to increase our sales velocity.

Revenues related to the Echo Entities from for the three months ending September 30, 2019 was $6,208,274. Recycled material sales accounted for 83% of the total sales at $5,133,181 and reused material sales accounted for 17% of the total sales at $1,075,093.

Gross Profit. Gross Profit related to DGSE’s operations for the three months ended September 30, 2019, decreased by $458,317 to $2,018,852 as compared to $2,477,169 during the same period in 2018. The decrease in total gross profit dollars was due primarily to the increase in sales velocity across the board, except for scrap. Even though there was additional revenues there was also lower gross margin percentages due to changing our strategy for a higher velocity of sales. Our strategy decreased the overall gross profit margin to 12.1% compared to 18.1% during the same period for the prior year.

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Gross Profit related to the Echo Entities support a larger profit margin compared to the retail segment. The Echo Entities profit margin of $3,167,602 on $6,208,274 sales, or an overall percentage of 51.0%.

Selling, General and Administrative Expenses. For the three months ended September 30, 2019, Selling, General and Administrative (“SG&A”) expenses for DGSE decreased by $990,766, or 35%, to $1,868,144, as compared to $2,858,911 during the same period in 2018. The decrease in SG&A was primarily due to a note receivable write off of $644,313 and additional bad debt write off of $552,347 during the three months ending September 30, 2018.

The SG&A expenses for the Echo Entities totaled $2,025,474 which primarily consists of payroll, payroll taxes and employee benefits of $1,364,161, rent and variable rent costs, net of sublet income, of $186,495, warehouse and office supplies of $89,987, insurance costs of $46,128, travel expenses of $50,339, professional fees of $44,263 and other administrative expenses totaling $244,101.

Depreciation and Amortization. For the three months ended September 30, 2019, depreciation and amortization expense for DGSE was $44,368 compared to $98,237 for the same period in 2018, a decrease of $53,869, or 55%. The decrease of $53,869 from the three months ending September 30, 2019 compared to the three months ending September 30, 2018 is primarily due to assets that are being fully depreciated but still in-service.

The Depreciation and Amortization expense for the Echo Entities consisted of depreciation of $23,518 and amortization of $0, for the three months ending September 30, 2019.

Interest Expense. For the three months ended September 30, 2019, interest expense, DGSE, was $46,764, an increase of $8,664, or 23%, compared to $38,100 during the same period in 2018. The increase is primarily due to the pay off of the accounts payable - trade, related party, now note payable, related party, outstanding balance of $2,970,566 as of September 30, 2019.

The interest expense for the Echo Entities was $101,956 for the three months ending September 30, 2019, which was related to the note payable, related party, with an outstanding balance of $6,736,867 as of September 30, 2019.

Income Tax Expense. For the three months ending September 30, 2019, our income tax expense was $41,710, compared to an income tax benefit of $16,646 for the three months ending September 30, 2018, an increase of $58,356. The effective income tax rate was 3.9% and 3.3% for the three months ending September 30, 2019 and 2018, respectively. Differences between our effective income tax rate and the U.S federal statutory rate are the impact of state taxes, non-deductable expenses, changes in reserves for uncertain tax positions and unutilized NOL carryforwards.

Earnings Per Share. For the three month ending September 30, 2019, our net income per basic and diluted shares attributable to common stockholders was $.04, compared to ($.02) per basic and diluted shares for the three months ending September 30, 2018, an increase of $.06 per share. The increase is primarily due to the addition of the Echo Entities net income for the three months ending September 30, 2019 and the write off of the note receivable of $644,313 and the accounts receivable write off of $552,347 for the three months ending September 30, 2018.

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

Revenues. Revenues related to DGSE increased by $10,802,563, or 27%, during the nine months ended September 30, 2019, to $51,251,093, as compared to $40,448,530 during the same period in 2018. Bullion/rare coin, scrap and other sales increased approximately 40%, 46% and 110%, respectively, compared to the nine months ended September 30, 2018. Jewelry sales decreased approximately 8%, compared to the prior year nine months. Revenues increased for the nine months ending September 30, 2019, compared to the nine months ending September 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 from for the nine months ending September 30, 2019 was $8,567,075. Recycled material sales accounted for 78% of the total sales at $6,721,265 and reused material sales accounted for 22% of the total sales at $1,845,810.

Gross Profit. Gross profit for the nine months ended September 30, 2019, related to DGSE decreased by $662,492, or 9%, to $6,507,162, as compared to $7,169,654 during the same period in 2018. The decrease in gross profit was due to a decrease in profit margin across the board except for jewelry which produced a slight increase. As a percentage of revenue, gross margin decreased to 12.7% compared to 17.7% in the same period compared to the prior year. Even though there was additional revenues there was also lower gross margin percentages due to changing our strategy for a higher velocity of sales.

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Gross Profit related to the Echo Entities support a larger profit margin compared to the retail segment. The Echo Entities profit margin for the nine months ending September 30, 2019 of $4,263,089 on $8,567,075 sales, or an overall percentage of 50.0%.

Selling, General and Administrative Expenses. For the nine months ended September 30, 2019, DGSE’s SG&A expenses decreased by $1,188,776, or 18%, to $5,484,082, as compared to $6,672,858 during the same period in 2018. The decrease in SG&A was primarily due to a note receivable write off of $644,313 and additional bad debt write off of $552,347 during the nine months ending September 30, 2018.

The SG&A expenses for the Echo Entities totaled $2,827,117 which primarily consists of payroll, payroll taxes and employee benefits of $1,920,722, rent and variable rent costs, net of sublet income, of $234,034, warehouse and office supplies of $149,787, insurance costs of $46,128, travel expenses of $50,339, professional fees of $44,263 and other administrative expenses totaling 381,844.

Depreciation and Amortization. For the nine months ended September 30, 2019, DGSE’s depreciation and amortization expense was $193,140 compared to $275,721 for the same period in 2018. The decrease is primarily due to assets that are being fully depreciated but still in service.

The Depreciation and Amortization expense for the Echo Entities consisted of depreciation of $34,418 and amortization of $0, for the nine months ending September 30, 2019.

Interest Expense. For the nine months ended September 30, 2019, the interest expense for DGSE was $106,970, a decrease of $23,660, or 18%, compared to $130,630 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 $2,970,566.

The interest expense for the Echo Entities was $133,808 for the nine months ending September 30, 2019, which was related to the note payable, related party, with an outstanding balance of $6,736,867 as of September 30, 2019.

Income Tax Expense. For the nine months ending September 30, 2019, our income tax expense was $65,364, compared to an income tax expense of $23,787 for the nine months ending September 30, 2018, an increase of $41,577. The effective income tax rate was 3.2% and 15.9% for the nine months ending September 30, 2019 and 2018, respectively. Differences between our effective income tax rate and the U.S federal statutory rate are the impact of state taxes, non-deductable expenses, changes in reserves for uncertain tax positions and unutilized NOL carryforwards.

Earnings Per Share. For the nine month ending September 30, 2019, our net income for basic and diluted shares attributable to common stockholders was $.08 per share, compared to $0.00 per share for basic and diluted shares for the nine months ending September 30, 2018, an increase of $.08 per share. The increase is primarily due to the addition of the Echo Entities net income for the nine months ending September 30, 2019 and the write off of the note receivable of $644,313 and the accounts receivable write off of $552,347 for the nine months ending September 30, 2018.

Liquidity and Capital Resources

During the nine months ended September 30, 2019 and 2018, cash flows used in operating activities totaled $2,732,488 and $614,851, respectively, an increase of $2,117,637. Cash used in operating activities for the nine months ended September 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 $627,911, the increase of inventories of $256,103, an increase in trade receivables, net of $920,929 and an increase in prepaid expenses of 212,865, offset by net income, without depreciation and amortization, of $2,207,195. Cash used in operating activities for the nine months ended September 30, 2018, was driven largely by the reduction of accounts payable and accrued expenses of $1,189,542, and the increase of inventories of $900,750, offset by the increase in customer deposits and other liabilities of $105,250, the decrease in trade receivables by $146,811, and net income, without non-cash items of depreciation, amortization, bad debt expense and accounts payable true-up of $1,129,780.

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During the nine months ended September 30, 2019 and 2018, cash flows used in investing activities totaled $6,024,506 and $176,135, respectively, an increase of $5,848,371. The use of cash in investing activities during the nine months ended September 30, 2019 was primarily the result of the Echo Tranaction. The use of cash in investing activities during the nine months ended September 30, 2018 was the result of the continuing buildout expenses related to the Midtown location at 13022 Preston Road, Dallas and the continual building of our POS system.

During the nine months ended September 30, 2019, cash flows provided in financing activities totaled $9,858,432 and during the nine months ended September 30, 2018, cash used in financing activities totaled $2,352, an increase of $9,856,080. The cash provided in financing activities during the nine months ended September 30, 2019 was primarily from the acquisition of the Echo Transaction for $6,925,979, financing the payoff of accounts payable – trade, related party of $3,074,021 and a line of credit for short-term financing of $151,000, offset by the use of funds to pay down the note payable, related party, of $292,568. The use of cash in financing activities during the nine months ended September 30, 2018 was the result of paying 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 recycling of electronic waste. The new point-of-sale system was designed and built specifically for DGSE and rolled out April 1, 2018. As of September 30, 2019, there were no commitments outstanding, except for the POS 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

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 September 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.

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

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Exhibit Number	Description	Filed Herein	Incorporated by Reference	Form	Date Filed with SEC	Exhibit Number
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
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

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Exhibit Number	Description	Filed Herein	Incorporated by Reference	Form	Date Filed with SEC	Exhibit Number
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
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

29

Exhibit Number	Description	Filed Herein	Incorporated by Reference	Form	Date Filed with SEC	Exhibit Number
10.20	Purchase Agreement dtd May 20, 2019, by and among Echo Environmental, LLC, ITAD USA, LLC and Corrent Resources, LLC		X	8-K	May 24, 2019	10.1
10.21	Promissory Note, dtd May 20, 2019, by and between Corrent Resources, LLC and John R. Loftus		X	8-K	May 24, 2019	10.2
10.22	Promissory Note, dtd May 20, 2019, by and between DGSE Companies, LLC and John R. Loftus		X	8-K	May 24, 2019	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: November 13, 2019	By:	/s/ JOHN R. LOFTUS
		John R. Loftus
		Chief Executive Officer (Principal Executive Officer)
Date: November 13, 2019		/s/ BRET A. PEDERSEN
		Bret A. Pedersen
		Chief Financial Officer (Principal Accounting Officer)

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