DGSE Companies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The filing identifies the registrant as DGSE Companies, Inc. Its business buys and sells jewelry, watches, bullion, coins, scrap precious metals and other valuables through retail, wholesale and online channels.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $15.68 million | $10.57 million | $47.55 million | $37.84 million |
| Gross profit / margin | $2.90 million / 18.5% | $1.87 million / 17.7% | $8.20 million / 17.3% | $6.30 million / 16.6% |
| Operating income (loss) | $672,000 | $(1.42) million | $1.25 million | $(2.42) million |
| Net income (loss) | $604,000 | $(1.51) million | $1.09 million | $(2.74) million |
| Net income (loss) per diluted share | $0.02 | $(0.12) | $0.04 | $(0.22) |
- Cash flow: Operating activities used $647,000 in the first nine months of 2017, versus $250,000 used in 2016. Investing activities used $140,000, compared with $1.24 million provided in 2016; financing activities used $9,000, versus $1.60 million used.
- Liquidity: September 30 cash was $616,000, down from $1.41 million at December 31, 2016. Current assets were $10.30 million and current liabilities $5.58 million (working capital of approximately $4.73 million; current ratio approximately 1.85).
- Debt and obligations: The balance sheet reported $4,714 of capital lease obligations and no NTR loan balance. Trade payables to Elemetal, the largest shareholder and a key business partner, were $4.11 million and are presented separately from debt.
- Other balance-sheet items: Inventory was $8.58 million, down from $9.38 million. Total stockholders’ equity was $7.01 million, up from $5.91 million.
Changes versus prior comparable periods
- Q3 revenue rose 48%; nine-month revenue rose 26%. Management attributed growth principally to jewelry and scrap sales. Jewelry revenue increased about 107% in Q3 and 79% year to date; scrap revenue increased about 112% and 90%, respectively. Bullion/rare-coin sales rose about 16% in Q3 and were approximately flat year to date.
- Gross margin improved in both comparisons, which management linked to a greater contribution from higher-margin jewelry. Year-to-date SG&A declined 9% to $6.71 million; interest expense declined 48% to $150,000.
- 2016 results included a $1.03 million loss on asset sales, contributing to the prior-year operating and net losses. The 2017 periods were profitable.
- Cash decreased by $796,000 during the first nine months. Lower inventory partly offset cash uses from reduced payables and accrued expenses, higher receivables and prepaid expenses, and a $675,000 note receivable.
Outlook, commentary and risks
- Management expected approximately $50,000 of capital expenditures over the next 12 months, primarily for the Dallas flagship location, and said it expected funding needs to be met from operating cash flow. These are expectations, not a formal earnings forecast.
- The company said it continued evaluating a possible acquisition of certain assets of Elemetal Recycling but had not secured satisfactory financing; it did not expect the transaction to close in 2017 and gave no assurance it would occur. It stopped pursuing National Pawn after financing was unavailable.
- On September 22, 2017, DGSE divested its wholesale watch division to former division head David Larson and the Larson Group for a $675,000 note receivable. The note bears 4% annual interest, with monthly principal and interest payments and maturity on October 15, 2024. Management described the divestiture as part of streamlining operations and focusing fine watches on retail.
- Precious-metals prices and demand affect the business. Gold traded from $1,242 per ounce at the start of Q3 to $1,347 in September, then ended September at $1,271. Management also described the scrap-gold market as challenging, while seeking to rebuild scrap purchasing and sales.
- A Texas sales-and-use-tax audit covering July 2013 through December 2016 was in progress. The company said it could not determine potential exposure and recorded no reserve. Separately, a prior audit assessment was settled for $261,490 in March 2017.
- Elemetal accounted for 20% of nine-month sales and 13% of purchases; the company paid it $149,521 in interest during the period. This related-party dependence and the substantial payable are relevant to liquidity and business relationships.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether operating cash flow improves and cash remains adequate as the company funds operations and its Dallas location buildout.
- The collectability and payment performance of the $675,000 watch-sale note receivable.
- The terms, settlement progress and potential financial exposure from the Texas sales-tax audit for 2013–2016.
- The extent and terms of ongoing related-party dealings with Elemetal, including the $4.11 million payable and Elemetal’s share of sales and purchases.
- Whether revenue growth and margins are sustainable, particularly given precious-metals price volatility and lower scrap and bullion margins relative to jewelry.
- Any financing, definitive agreement or material change concerning the proposed Elemetal Recycling asset acquisition.