DGSE Companies, Inc. — Q2 2013 Form 10-Q
Period: Quarter and six months ended June 30, 2013. The filing is for DGSE Companies, Inc. (not Envela Corp.). DGSE buys and sells jewelry, bullion, scrap and rare coins through retail, wholesale and online channels.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $29.52 million | $28.58 million | $60.06 million | $61.40 million |
| Gross margin | $4.14 million; 14% | $4.01 million; 14% | $9.75 million; 16.2% | $10.74 million; 17.5% |
| Operating loss | $(1.17) million | $(2.07) million | $(0.77) million | $(1.08) million |
| Net loss | $(1.12) million | $(2.41) million | $(0.82) million | $(1.91) million |
| Basic and diluted loss per share | $(0.09) | $(0.20) | $(0.07) | $(0.16) |
For the six months, continuing operating activities used $1.72 million of cash, investing activities used $0.43 million, and financing activities used $0.10 million. Cash declined $2.25 million to $2.66 million from $4.91 million at December 31, 2012. Working-capital movements included a $1.62 million inventory increase and a $1.19 million decrease in customer deposits and other liabilities.
At June 30, current assets were $16.74 million and current liabilities were $7.54 million. Total liabilities were $12.91 million. Debt included $3.58 million drawn under the related-party NTR credit facility, plus $1.78 million of long-term debt excluding current maturities; current debt maturities were $122,421, with $68,515 of current capital-lease obligations. The NTR facility has a $7.5 million maximum, bears 2% interest, is secured by subsidiary personal property and is due August 1, 2014, subject to earlier demand or other termination provisions.
Changes versus prior period
- Q2 sales rose 3%, as higher bullion sales were partly offset by lower scrap and rare-coin sales. First-half sales declined 2%; bullion and wholesale watches increased, while jewelry, scrap and rare coins decreased.
- Q2 gross margin dollars increased 3%, with the percentage unchanged at 14%. First-half margin dollars fell 9% and the margin rate declined 1.3 percentage points, primarily because bullion, a lower-margin category, represented more sales.
- SG&A fell 13% in Q2 and 12% for the first half, reflecting cost reductions and lower restatement-related professional fees, partly offset by costs from five new stores. Depreciation and amortization increased with store and headquarters investments.
- Interest expense decreased 42% in Q2 and 43% in the first half, primarily due to the lower rate on the NTR facility. Prior-year results included losses from discontinued Superior Galleries operations; there was no discontinued-operations activity in 2013.
Outlook, risks and unusual items
- Management expected approximately $1.0 million of capital expenditures during 2013, largely for new stores and the April headquarters move, funded from working capital. No capital-expenditure commitments were outstanding at quarter-end. The filing provides no specific revenue or earnings guidance.
- Management said gold prices fell 25.3% in Q2 and 28.0% in the first half, and that lower prices reduced customer supply of unwanted gold, significantly affecting the higher-margin scrap-buying business. Commodity-price volatility is a key exposure.
- NTR, the majority shareholder and primary refiner/bullion trading partner, accounted for 25% of first-half sales and 39% of purchases. Amounts payable to NTR were $3.39 million at June 30. NTR also provides the credit facility, creating significant related-party and financing dependence.
- The company agreed in principle to a $2 million settlement of two shareholder lawsuits, including attorneys’ fees; approximately 90% of settlement and related expenses was expected to be covered by insurance. DGSE had accrued $150,000 for its portion and incurred $100,000 in legal fees. A Texas sales/use-tax audit dispute remained unresolved; the filing does not provide a clear claimed amount.
- An SEC investigation into accounting irregularities dating back to approximately 2007 remained pending. The company said historical financial information since the irregularities began should not be relied upon. Disclosure controls were ineffective as of June 30, 2013; management cited a material weakness in account reconciliations and described remediation efforts.
- Estate Gold and Silver, a related party, ceased operations after quarter-end. DGSE had provided it management services and conducted product transactions.
Important facts for investors to verify
- Progress and outcomes of the SEC investigation, accounting-control remediation and any implications for previously reported financial information.
- Final terms, insurance coverage and DGSE’s ultimate cash exposure for the $2 million lawsuit settlement, and the status of the Texas tax audit.
- Cash needs, inventory funding and the ability to renew, refinance or repay the NTR facility, including any demand or maturity provisions.
- Whether bullion mix and volatile precious-metal prices continue to pressure gross margins and scrap-buying activity.
- Actual capital spending and store performance, given first-half operating cash outflow and management’s planned 2013 expenditures.