DGSE Companies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are with FY 2017. This is an annual report, not a standalone fourth-quarter filing. The filing names the registrant as DGSE Companies, Inc.; it does not identify Envela Corp. as the registrant.
Business context
DGSE buys and sells jewelry, diamonds, watches, bullion, rare coins, scrap precious metals and collectibles through retail, e-commerce and wholesale channels. It operated five retail locations in Texas and South Carolina. Management emphasized developing larger, full-service stores and growing jewelry, diamond and watch sales; it did not expect to open additional retail locations in the next 12 months.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $54.06 million | $61.99 million |
| Gross profit / margin | $9.68 million / 17.9% | $11.29 million / 18.2% |
| Operating income | $651,432 | $1.95 million |
| Net income | $657,685 | $1.84 million |
| Basic and diluted EPS | $0.02 | $0.07 |
| Cash from operating activities | $375,217 | $248,275 |
- Revenue fell 12.8%. Jewelry sales declined 15%, bullion/rare coin sales about 11%, and scrap sales 18%. Management attributed the overall decline primarily to weaker gold prices and lower activity.
- Gross margin declined 0.3 percentage points. SG&A was $8.70 million, down 3.1%; lower advertising and payroll costs were partly offset by higher bad-debt expense.
- Cash and cash equivalents were $1.45 million; current assets were $11.39 million and current liabilities $4.60 million, implying working capital of about $6.79 million. Inventory increased to $9.77 million from $8.60 million.
- Operating cash flow was positive, while investing activities used $191,132 and financing activities used $2,352. Cash increased by $181,733 during the year.
- No long-term debt or capital-lease balance remained at year-end. Accounts payable to a related party were $3.09 million. Non-cancellable operating lease commitments totaled $1.87 million, including $548,425 due in 2019.
- Stockholders’ equity was $8.41 million, up from $7.76 million. The company reported no dividends and no material off-balance-sheet arrangements.
Material changes and unusual items
- Bad-debt expense rose to $1.24 million from $166,539. DGSE wrote off a $644,313 note receivable from Larson Group after its principal’s death and the company’s bankruptcy filing, and wrote off another $552,347 related to receivables and consignment balances associated with the vintage-watch business.
- The bad-debt charges were the principal reason net income fell by $1.18 million year over year, according to management.
- DGSE acquired a point-of-sale system intangible asset; year-end intangible assets were $234,350. Capital expenditures were $125,132, with an additional $66,000 spent on intangible assets.
- Advertising and marketing spending fell 52%, to approximately $416,306. Management cited lower precious-metal prices and reduced scrap purchases as challenges, while identifying jewelry, diamonds and fine watches as targeted growth areas.
Outlook, risks and contingencies
- Management expected operational cash flow to fund requirements over the next 12 months and estimated approximately $150,000 of capital expenditures. It said additional borrowing might be available if needed, but did not provide a formal earnings or revenue forecast.
- The filing’s gold-price discussion is inconsistent: one section reports a 5% decline from year-end 2017 to year-end 2018, while another says the decline was 1.5%. The MD&A gives a year-end 2018 price of $1,238 per ounce; the business discussion gives $1,283. The filing text does not provide a clear reconciled value.
- Key risks include precious-metal price and inventory volatility, discretionary consumer demand, intense competition, seasonality, inventory forecasting, and dependence on access to working capital. A related entity accounted for 11% of 2018 sales and 2% of purchases; related-party payables were material.
- Related entities collectively beneficially owned 71.4% of common stock, including Truscott at 47.7% and Eduro at 23.7%, creating significant ownership concentration. A prior $7.5 million related-party credit facility was terminated and had no outstanding balance at year-end.
- The company disclosed a prior SEC settlement concerning historical accounting irregularities and past internal-control deficiencies. For 2018, management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation. The financial-statement audit opinion was unqualified.
- Management stated that the company was in compliance with NYSE MKT continued-listing equity standards at year-end. No legal proceedings were reported. The filing lists lease commitments and describes resolved Texas sales-tax assessments.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for DGSE Companies, Inc., despite the request metadata naming Envela Corp.
- Reconcile the filing’s conflicting gold-price figures and the stated year-over-year percentage decline.
- Review the collectability and consequences of the Larson-related write-offs, including the company’s disclosure that substantially all remaining trade receivables were over 120 days past due, except specified items.
- Assess inventory levels and cash conversion, given the $1.17 million inventory increase and the business’s exposure to precious-metal prices.
- Examine related-party supplier, customer and payable arrangements, ownership concentration, and the availability of replacement financing after termination of the related-party credit facility.
- Review upcoming lease obligations, the planned $150,000 capital spending, and the financial impact of lease-accounting adoption.