Business context and reporting period
This is DGSE Companies, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The filing identifies the registrant as DGSE Companies, Inc. The business buys and sells jewelry, diamonds, watches, coins, bullion, scrap precious metals, and other valuables through stores and online channels.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $15.50 million | $14.94 million | $27.27 million | $27.82 million |
| Gross profit / margin | $2.28 million / 14.7% | $2.57 million / 17.2% | $4.43 million / 16.2% | $4.90 million / 17.6% |
| Operating loss | $(421,000) | $(46,000) | $(996,000) | $(739,000) |
| Net loss | $(537,000) | $(90,000) | $(1.23 million) | $(889,000) |
| Net loss per share | $(0.04) | $(0.01) | $(0.10) | $(0.07) |
- Cash from continuing operations was negative $514,000 in the first half, versus negative $595,000 a year earlier. Investing outflow was $99,000 and financing outflow $75,000; cash declined $688,000 to $1.06 million.
- At June 30, total assets were $15.36 million, total liabilities $12.68 million, and stockholders’ equity $2.68 million. Current assets were $11.06 million against current liabilities of $10.36 million.
- Debt included a $2.30 million related-party NTR credit line at 2%, a $1.52 million mortgage due August 1, 2016, and $20,000 of capital leases. Trade accounts payable were $6.70 million, including $5.85 million owed to Elemetal.
Changes versus prior period
- Second-quarter revenue rose 4%, driven by bullion sales up about 20%; jewelry sales fell about 27% and scrap sales about 7%. First-half revenue fell 2%; jewelry and scrap declined while bullion grew about 6%.
- Gross margin contracted as low-margin bullion represented a larger share of sales. First-half gross profit fell 10%.
- Second-quarter SG&A rose 2%, including $85,000 of proposed-transaction costs and about $70,000 of accelerated rent expense for a store closure. First-half SG&A declined 4% to $5.22 million despite transaction and closure costs.
- Interest expense increased 13% in both the quarter and first half, primarily because of interest-bearing Elemetal trade payables.
Outlook, transactions and risks
- Management is shifting toward larger, full-service stores and growing jewelry, diamond, and watch sales, while reducing reliance on scrap-gold buying. It cited ongoing weakness in the scrap-gold market and sensitivity to precious-metals prices.
- Expected capital expenditures over the next 12 months were approximately $650,000, mainly for a new DFW store buildout, facility work, and a point-of-sale system. No earnings or revenue guidance was provided.
- On July 27, 2016, after quarter-end, DGSE completed the $2.25 million sale of its largest Dallas retail property; proceeds were to pay off the mortgage, with remaining funds primarily for a replacement location. Management expected about $650,000 of sale loss and $250,000 of accelerated depreciation in Q3.
- A June 20 agreement, subject to shareholder approval and other closing conditions, proposed issuing NTR shares for cancellation of approximately $2.42 million of loan obligations and issuing Elemetal 8.54 million shares plus a warrant for 1 million shares in exchange for forgiveness of $3.5 million of trade payables. Failure to close could constrain bullion supply, prompt demands for payment, and materially harm liquidity.
- Elemetal and affiliates accounted for 32% of first-half sales and 24% of purchases. DGSE also warned that failure to regain NYSE MKT listing compliance by October 12, 2017 could result in delisting; its compliance plan had been accepted with an extension. Management reported disclosure controls effective and no material change in internal controls.
- The filing reports no material change in previously disclosed legal proceedings or risk factors. It also reports that the final payment on a Texas sales-tax audit agreement was made in January 2016.
Important facts for investors to verify
- Whether shareholders approved and all conditions were met for the Elemetal/NTR debt and payable-for-equity transaction, including the resulting dilution and any registration rights.
- Completion and use of proceeds from the property sale, the final mortgage payoff, and the actual Q3 sale loss and accelerated depreciation.
- Elemetal’s continued willingness to supply bullion and extend payment terms, given the $5.85 million payable and concentration of sales and purchases.
- Progress toward NYSE MKT listing compliance and the company’s ability to fund operations, inventory, and planned capital spending.
- The August 2016 CFO transition: the filing says an acting CFO was engaged at $9,000 per week effective upon the prior CFO’s resignation on August 15.