DGSE Companies, Inc. — Form 10-Q summary
Filing identity: The supplied filing names DGSE Companies, Inc. as the registrant; it does not identify Envela Corp. The information below summarizes the filing as provided. Reporting period: unaudited three months ended March 31, 2014, compared with the same 2013 period.
Business context and financial results
DGSE bought and sold jewelry and bullion to retail and wholesale customers through stores and online channels. Its results were exposed to precious-metal prices, which management said affect product costs, sales and scrap-gold buying activity.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales | $19.90 million | $29.25 million |
| Gross profit | $4.43 million | $5.30 million |
| Gross margin | 22.3% | 18.1% |
| Operating income (loss) | $(415,000) | $435,000 |
| Net income (loss) | $(523,000) | $300,000 |
| Net income (loss) per share, diluted | $(0.04) | $0.02 |
| Cash from continuing operations | $(179,000) | $(1.07 million) |
Sales fell 32%, principally from lower bullion and scrap sales; jewelry sales increased more than 15%. Gross profit declined 16%, but gross margin improved as jewelry represented more sales and margin percentages on bullion and scrap improved. Selling, general and administrative costs were nearly flat at $4.66 million. Interest expense rose 64% to $85,000, primarily due to interest accrued on a related-party trade payable.
Cash, liquidity and debt
- Cash was $2.78 million at March 31, down $430,000 from December 31, 2013. Cash used in investing was $100,000, mainly property and equipment; financing used $113,000, including an $80,000 repayment on the NTR line.
- Current assets were $15.57 million and current liabilities $9.70 million, leaving working capital of approximately $5.87 million. Inventory was $12.22 million.
- Debt and capital-lease balances totaled approximately $4.16 million: a $2.30 million NTR related-party credit line, a $1.81 million mortgage, and $46,000 of capital leases. The NTR facility bears 2% interest, is secured by subsidiary personal property, and was extended to August 1, 2015.
- Accounts payable to Elemetal, DGSE’s largest stockholder’s affiliate and primary refiner and bullion trading partner, were $3.73 million. Elemetal-related transactions represented 28% of sales and 30% of purchases in the quarter.
Material changes, outlook and risks
- DGSE discontinued six Southern Bullion locations in February 2014 due to ongoing unprofitability. In April, it decided to close the remaining 17 locations, with operations expected to be reported as discontinued beginning in Q2. The filing reported a $38,000 Q1 loss for the six locations closed in February; it does not include results for the 17 locations closed after quarter-end.
- Management expected approximately $3.7 million of 2014 non-recurring closure charges: $2.9 million in trade-name write-offs, $400,000 in fixed-asset write-downs, and $500,000 in lease, severance and related costs. Southern Bullion had generated an approximately $1.9 million net loss in 2013.
- Management expected 2014 capital expenditures of approximately $300,000, primarily for facility repairs and upgrades and a website relaunch. It also expected a cash settlement in 2014 for the Texas sales-tax audit, with the reserve then approximately $1.1 million; the final assessment could differ materially.
- Management said the average gold price during Q1 2014 was 11% below Q1 2013 and the March 31 closing price was 20% lower year over year. It attributed reduced scrap buying and Southern Bullion’s weak performance in part to lower gold prices. Management cautioned that commodity-price effects could not be reliably quantified.
- An SEC investigation into accounting irregularities dating back to approximately 2007 remained pending; historical financial information from the affected periods had been identified as unreliable. Two related lawsuits were settled in 2013. A separate suit was partly settled in Q1 2014, with discussions with other plaintiffs ongoing.
- The Texas sales-tax audit remained unresolved, although the company considered additional taxes, interest and penalties likely. Management said financing operations depended on extending or refinancing debt and negotiating extended vendor terms. Disclosure controls were deemed effective as of March 31, 2014, and no material internal-control changes were reported for the quarter.
Important facts for investors to verify
- Confirm the issuer and filing match the intended company: this filing identifies DGSE Companies, Inc., not Envela Corp.
- Track the Southern Bullion closures, actual closure costs, and the effect on continuing sales and profitability.
- Verify the final Texas tax assessment and cash payment, and monitor the pending SEC investigation and remaining litigation.
- Assess refinancing and repayment terms for the NTR facility, related-party trade payable concentration, and the company’s dependence on related-party commercial relationships.
- Review subsequent-period results to determine whether improved gross margin offset lower sales and operating losses.