DGSE Companies, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for DGSE Companies, Inc., not Envela Corp. It reports the quarter ended June 30, 2011, and six-month results through that date. Financial statements are unaudited.
Business context and reporting period
DGSE buys and sells jewelry, bullion and precious metals, and rare coins through retail locations, wholesale operations and online channels. It opened two DGSE Bullion Express locations in May 2011. Reportable segments include retail jewelry, wholesale jewelry, precious metals and rare coins.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Sales | $33.29 million, up 60.5% year over year | $58.04 million, up 52.4% |
| Operating income | $975,136 | $1.53 million |
| Net earnings | $568,099; diluted EPS $0.05 | $870,711; diluted EPS $0.08 |
| Operating cash flow | $(18,835) for the six months, versus $(298,447) in 2010 |
- Gross margin was approximately 12.1% for Q2 and 12.6% for the first half, compared with about 14.0% in 2010 before the prior-year inventory impairment charge.
- At June 30, cash was $388,623, inventories $18.66 million, and current assets $20.35 million against current liabilities of $7.75 million, yielding working capital of approximately $12.60 million.
- Total assets were $30.64 million and stockholders’ equity was $19.98 million. The balance sheet lists a $3.50 million line of credit, $2.84 million of long-term debt, $420,170 of current long-term debt maturities, $52,455 of notes payable and $73,323 of convertible debt.
- Cash declined by $482,845 in the first half to $388,623. Investing cash use was $135,501 and financing cash use was $328,509.
Material changes versus prior periods
- Sales growth was led by precious metals and jewelry. Management attributed higher precious-metals sales to strong demand and higher gold prices, and higher jewelry sales to more scrap-jewelry transactions.
- Cost of goods sold rose to 87.9% of sales in Q2 and 87.4% for the first half, from 86.0% in 2010, compressing gross margin.
- 2010 comparisons are affected by unusual items: a $3.77 million inventory impairment tied to accounting-system conversion and inventory-reconciliation errors, and a $9.20 million gain on debt settlement. The prior-year results also included a $385,000 legal-settlement loss. These items make reported net earnings comparisons less indicative of underlying operating performance.
- First-half inventory increased $1.61 million, principally as the company stocked more precious-metals products; accounts payable and accrued expenses also declined.
Outlook, risks and unusual items
- Management estimated approximately $100,000 of capital expenditures over the next 12 months, expected to be funded from working capital. It also estimated about $356,000 of interest payments over that period.
- Texas Capital Bank renewed the credit facility on July 14, 2011: a $3.5 million revolving note and a $1.0 million term loan. The facility is secured by substantially all assets and matures in June 2012. The filing reports compliance with stated June 30 covenants.
- Management said working-capital needs may rise if jewelry sales grow and that operations depend on renewing or refinancing debt and obtaining extended vendor terms. It noted that default could permit acceleration and foreclosure on assets.
- On June 16, DGSE announced a letter of intent to acquire Southern Bullion Trading (SBT) for up to 600,000 restricted shares. NTR Metals, a related-party major stockholder and refining partner, was to invest $2 million for 400,000 restricted shares. Closing remained subject to definitive agreements, due diligence and other conditions.
- NTR-related transactions were significant: in the first half DGSE sold about $21 million and purchased about $10.7 million of precious metals and bullion from NTR; $270,396 was payable to NTR at June 30. DGSE also issued 125,000 shares to NTR to settle approximately $511,000 of trade payables.
- Key risks identified include gold and precious-metals price fluctuations, inventory management, customer demand and economic conditions, interest rates, regulation, litigation, and internal-control effectiveness. DGSE does not use derivatives and said it had no material off-balance-sheet arrangements.
- Management concluded disclosure controls were ineffective, but the stated evaluation date is March 31, 2011, rather than June 30. The filing says no material changes in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Confirm the filing issuer and security: this document is DGSE Companies, Inc.’s 10-Q, despite the Envela Corp. request metadata.
- Review the renewed bank facility’s June 2012 maturity, borrowing terms, collateral and the company’s ability to refinance or meet obligations.
- Check subsequent filings for the outcome and final terms of the proposed SBT acquisition and NTR’s proposed $2 million investment.
- Assess the concentration and terms of related-party dealings with NTR, including the share settlements and the CEO-related option arrangement.
- Reconcile the disclosure-controls evaluation date and the credit-facility passage that refers to approximately $4.5 million outstanding “as of December 31, 2011,” a date/value statement that is unclear in this filing.