Business context and reporting period
DGSE Companies, Inc. (the registrant identified in this filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. It buys and sells jewelry, bullion and related products through stores and online channels. Southern Bullion operations are reported as discontinued operations.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Continuing-operations sales | $14.94 million | $17.52 million | $27.82 million | $35.58 million |
| Gross profit | $2.57 million | $3.01 million | $4.90 million | $6.22 million |
| Gross margin | 17.2% | 17.2% | 17.6% | 17.5% |
| Operating loss | $(45,671) | $(438,412) | $(739,154) | $(665,100) |
| Loss from continuing operations | $(131,973) | $(539,067) | $(933,035) | $(823,652) |
| Net loss | $(90,290) | $(4.45) million | $(888,788) | $(4.98) million |
Q2 net loss includes $41,683 of income from discontinued operations, versus a $3.91 million discontinued-operations loss in Q2 2014. The six-month comparison is similarly affected by Southern Bullion’s 2014 closure and write-offs; continuing-operations loss increased year over year.
- For the six months, SG&A fell 19% to $5.42 million; depreciation and amortization rose 22% to $222,332, including a one-time write-off of assets at closed stores.
- Cash and cash equivalents were $1.44 million at June 30, down from $2.18 million at December 31, 2014. Total assets were $16.44 million and stockholders’ equity was $5.23 million.
- Six-month cash used in continuing operating activities was $594,627; investing activities used $76,831 and financing activities used $71,074. Cash provided by discontinued operations was $2,897; net cash declined $739,635.
- Total liabilities were $11.20 million. Debt included a $2.30 million related-party revolving line at 2% (extended to August 1, 2017), a $1.66 million mortgage at 6.7% with a balloon payment of approximately $1.5 million due August 1, 2016, and $31,579 of capital leases.
- Current assets were $12.06 million versus current liabilities of $7.36 million. Inventory was $10.26 million.
Changes, outlook, and risks
- Continuing sales declined 15% in Q2 and 22% for the first half. Management attributed the decline mainly to weaker bullion and scrap sales; first-half jewelry, watch and diamond sales also declined slightly, with extreme weather affecting the core market.
- Management cited a weak recycled-gold market and renewed gold-price volatility; gold fell below $1,100 per ounce after quarter-end. The company closed several stores and is shifting toward larger, full-service locations. A Charleston-area store closed after quarter-end.
- Management estimated fiscal-year capital expenditures of approximately $500,000 for new-location buildouts, facility upgrades and repairs, and a website relaunch; there were no capital-expenditure commitments at June 30. No earnings or revenue guidance was provided.
- Management said operations and working-capital needs depend on continued extended vendor terms or refinancing debt, and expressed the belief that these options would remain available in the near term. The filing does not assure that financing will be obtained.
- Elemetal and affiliates were both a major trading partner and related-party lender. They represented 20% of first-half sales and 25% of purchases; DGSE owed Elemetal $3.76 million in trade payables at June 30 and had a $105,616 receivable. The NTR credit facility is secured by subsidiaries’ personal property.
- Approximately $300,000 remained payable to the Texas Comptroller under an agreed tax-payment plan, with monthly payments of $47,000 expected for the rest of 2015. The expense had been accrued in 2014.
- After quarter-end, two independent directors resigned and the CEO announced plans to resign effective mid-September. The company reported resulting NYSE MKT independent-director and audit-committee compliance concerns and possible delisting if compliance is not restored; it also cited potential governance-enforcement and litigation risk.
- Management reported disclosure controls were effective at June 30, 2015, with no material changes in internal control. It reported no material changes to previously disclosed legal proceedings.
Important facts for investors to verify
- Whether sales and margins stabilize amid continued weakness and volatility in precious metals and scrap-gold markets.
- Cash generation, working-capital needs, vendor payment terms, and access to refinancing or other financing.
- Repayment or extension terms for the related-party credit line and the August 2016 mortgage balloon payment.
- Progress in replacing directors and the CEO and restoring NYSE MKT and governance compliance.
- Execution and funding of planned capital spending, store changes, and the website relaunch, as well as completion of the Texas tax-payment plan.