DGSE Companies, Inc. (now identified in the request as Envela Corp.) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing registrant is named DGSE Companies, Inc.; the supplied filing does not identify Envela Corp. as the registrant. DGSE buys and sells jewelry, watches, bullion, rare coins, scrap precious metals, and other valuables through retail, wholesale, and online channels.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $13.66 million | $15.68 million | $40.45 million | $47.55 million |
| Gross profit / margin | $2.48 million / 18.1% | $2.90 million / 18.5% | $7.17 million / 17.7% | $8.20 million / 17.3% |
| Operating income (loss) | $(0.48) million | $0.67 million | $0.22 million | $1.25 million |
| Net income (loss) | $(0.49) million | $0.60 million | $0.13 million | $1.09 million |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(0.61) million | $(0.65) million |
At September 30, cash was $478,870, current assets were $10.26 million, and current liabilities were $4.00 million. Inventory was $9.50 million. Total liabilities were $4.00 million; the capital lease was fully paid off, and no other balance-sheet debt is reported. However, $3.13 million of trade payables was owed to a related entity, which also received interest payments. Nine-month investing cash outflow was $176,135 and financing cash outflow was $2,352.
Changes and drivers
- Revenue declined 13% in Q3 and 15% for the first nine months, primarily because wholesale customers who stocked inventory in the prior year were buying as needed. Q3 jewelry and scrap sales fell about 35% and 24%; bullion/rare coin sales rose about 5%.
- Q3 gross margin slipped to 18.1% from 18.5%; nine-month margin improved to 17.7% from 17.3%, reflecting better margins in bullion/rare coins, jewelry, and other sales, partly offset by weaker scrap margins.
- Q3 SG&A increased 33% to $2.86 million. The company recorded $1.20 million in bad-debt expense, including a $644,313 Larson Group note write-off and $552,347 of receivables write-offs, primarily related to its previously sold vintage-watch business. Nine-month SG&A was slightly lower year over year.
- Management said gold prices fell to $1,187 per ounce at quarter-end, after $1,250 at June 30, 2018. It identified precious-metals price movements and weak scrap-gold market conditions as business factors.
Outlook, unusual items, and risks
- Management expected approximately $50,000 of capital expenditures over the next 12 months, mainly for equipment and continued work at its Midtown location. It said additional working capital might be sought from individuals or commercial banks, or supported by inventory adjustments; no financing commitment was specified.
- A point-of-sale system data-transfer problem caused an accounts-payable overstatement; a $468,081 adjustment reduced cost of goods sold in Q3. This materially affected reported gross profit and should be distinguished from recurring performance.
- The Larson Group note became unlikely to be collected after its principal’s death and the borrower’s Chapter 7 bankruptcy; management considered recovery of the balance or collateral remote. The Texas sales-and-use-tax audit concluded with $17,294 due, paid in April 2018.
- DGSE said disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter. It reported no legal proceedings or material off-balance-sheet arrangements.
- The company adopted ASC 606 using the full retrospective method and reported no effect on revenue or liquidity. It was evaluating the effects of the new lease standard.
Important facts for investors to verify
- Whether the $468,081 POS-related cost-of-goods-sold adjustment is fully supported and whether the system issues have been resolved.
- Recoverability, if any, of the Larson Group note and other written-off receivables, and the adequacy of remaining credit-loss reserves.
- Terms, related-party governance, and continued servicing of the $3.13 million payable to the related entity, including interest and any future trade dependence.
- Cash needs and funding availability given $478,870 of cash, recurring operating cash outflows, and inventory growth.
- Whether wholesale demand, precious-metals prices, and scrap margins stabilize; management provided no revenue or earnings forecast.