DGSE Companies, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for DGSE Companies, Inc. (now associated with Envela Corp.), for the quarter ended September 30, 2012. The interim financial statements are unaudited.
Business context and reporting period
DGSE operated precious-metals, jewelry, coin and collectibles businesses, including SBT, acquired in September 2011. The company discontinued Superior Galleries in June 2012 because management considered it unprofitable and unlikely to reach profitability. Prior-year figures are restated and recast to report Superior Galleries as discontinued operations.
Financial performance and liquidity
- Third quarter 2012: Sales were $29.0 million, down 34% from $44.0 million. Cost of goods sold was $22.8 million; gross profit was approximately $6.2 million, or 21.4% of sales, versus approximately 9.6% a year earlier. SG&A rose 107% to $6.4 million, including store-related costs and $1.44 million of professional fees. Operating loss was $397,000; net loss was $536,000, or $0.04 per share, compared with a net loss of $884,000, or $0.08 per share.
- First nine months 2012: Sales were $90.4 million, down 7.4%. Gross profit was approximately $16.9 million, or 18.7% of sales, versus approximately 10.1% in 2011. SG&A increased 134% to $18.0 million. Operating loss was $1.55 million; continuing-operations loss was $1.68 million and net loss was $2.45 million, or $0.20 per share.
- Cash flow: Continuing-operations operating cash outflow was $2.67 million for the nine months, compared with $6.72 million provided in 2011. Investing outflow was $823,000, including $883,000 of property and equipment purchases. Cash declined by $3.20 million to $2.78 million.
- Balance sheet at September 30: Total assets were $24.49 million and stockholders’ equity was $12.95 million. Current assets were $16.20 million and current liabilities $6.08 million. Inventory was $11.69 million, up from $10.72 million at year-end 2011.
- Debt: The company had $3.58 million outstanding on a related-party NTR revolving facility and $1.99 million on a mortgage, alongside smaller obligations. The NTR facility permits borrowings up to $7.5 million, carries 2% interest, is secured by subsidiary personal property, and has an August 2014 stated maturity subject to earlier repayment triggers.
Changes, outlook and significant matters
- Lower bullion sales and other category declines drove the quarterly revenue decrease. SBT contributed $7.82 million of third-quarter 2012 revenue and $22.25 million for the nine-month period. Management attributed improved gross margins mainly to SBT’s higher margins and a lower mix of low-margin bullion sales.
- Management expected approximately $1.0 million of capital expenditures over the next 12 months, primarily for new store openings, funded from working capital. It noted that growth could increase inventory and receivables funding needs and that operations depend in part on extending or refinancing debt. No detailed earnings or revenue guidance was provided.
- The filing reports accounting irregularities dating back to approximately the second quarter of 2007. The company said previously reported financial information since then should not be relied upon; it restated 2010 statements and adjusted 2011 figures. For the nine months ended September 2011, the restatement decreased net income by $1.46 million. Professional fees related to the restatement and SEC investigation were $2.74 million in the first nine months of 2012.
- Management concluded disclosure controls were ineffective. A material weakness involved inadequate support and review of reconciliations for inventory, depository accounts, payables, receivables, prepaid expenses and intercompany accounts.
- An SEC investigation into the accounting irregularities remained pending. The company also disclosed a securities class action and a derivative lawsuit, both seeking unspecified damages or other relief, and a Texas sales-and-use-tax audit assessment for which a redetermination hearing had been granted but not held. The company said it intended to defend the lawsuits; outcomes and financial effects were uncertain.
- NTR was both the majority stockholder, a significant precious-metals trading counterparty and the lender under the new facility. In the first nine months, DGSE sold approximately $38.5 million of precious metals and bullion to NTR, about 39% of that category’s sales, and owed NTR $966,121 in trade payables at quarter-end.
Important facts for investors to verify
- How the restatement and accounting review affect additional periods, and whether the SEC investigation or litigation results in penalties, damages or further corrections.
- Whether management remediates the material weakness and establishes effective financial-reporting controls.
- The company’s ability to sustain liquidity and fund inventory, store expansion and debt obligations, including the terms and availability of NTR-related financing.
- The outcome and potential liability from the Texas tax audit and pending lawsuits, and the continuing costs of discontinued Superior Galleries operations.
- The consistency of reported sales and margins, particularly given bullion volatility, SBT’s contribution and substantial related-party transactions.