DGSE Companies, Inc. (10-Q) — Quarter ended September 30, 2016
Entity note: The supplied filing is for DGSE Companies, Inc., not Envela Corp. Verify that this is the intended filing. DGSE buys and sells jewelry, bullion, coins, scrap precious metals, and related goods. The financial statements are unaudited and cover the three and nine months ended September 30, 2016.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $10.57 million | $16.52 million | $37.84 million | $44.34 million |
| Gross profit; margin | $1.87 million; 17.7% | $2.39 million; 14.4% | $6.30 million; 16.6% | $7.29 million; 16.4% |
| Operating loss | $1.42 million | $0.38 million | $2.42 million | $1.12 million |
| Net loss | $1.51 million | $0.47 million | $2.74 million | $1.36 million |
| Net loss per share | $0.12 | $0.04 | $0.22 | $0.11 |
- At September 30, cash was $1.14 million, current assets $10.61 million, and current liabilities $11.26 million; the current ratio was approximately 0.94. Total assets were $12.47 million, liabilities $11.27 million, and stockholders’ equity $1.20 million.
- Debt included a $2.30 million related-party NTR credit line, classified as current and bearing 2% interest, plus $16,728 in capital leases. The former Dallas property mortgage was paid off after its sale.
- For the first nine months, operating activities used $250,243, investing activities provided $1.24 million, and financing activities used $1.60 million. Cash declined $610,893 from year-end 2015 to $1.14 million.
- Accounts payable and accrued expenses totaled $7.09 million. The company owed Elemetal $6.02 million in trade payables; total trade payable exposure and related-party dependence are significant.
Changes versus the prior period
- Q3 revenue fell 36%; nine-month revenue fell 15%. Management cited lower bullion, jewelry, and scrap sales, store closures, and continued weakness in scrap-gold buying.
- Gross profit dollars declined in both comparisons, although gross margin improved in Q3 and edged up for the nine-month period, reflecting a greater mix of higher-margin categories relative to bullion.
- SG&A decreased 18.8% in Q3 and 9% year to date, reflecting cost reductions and lower advertising, partly offset by staff-reduction costs and expenses for the proposed related-party transaction.
- Net losses widened. The 2016 periods included a $1.03 million loss on the sale of the largest Dallas retail property; this included approximately $250,000 of accelerated depreciation and $136,000 of selling expense.
Outlook, risks, and unusual items
- Management planned approximately $350,000 of capital expenditures over the next 12 months, including about $150,000 to complete the Midtown Dallas flagship store in Q4 2016 and a point-of-sale system anticipated in mid-2017. Midtown is intended to support consolidation of at least three eastern Dallas-Fort Worth stores.
- No specific revenue or earnings guidance was provided. Management described a strategy focused on larger, full-service stores, diversified jewelry offerings, and value-added services, while noting that the scrap-gold market remains very weak.
- A June 2016 agreement with Elemetal and NTR proposes exchanging shares for forgiveness of NTR debt and accrued interest and $3.5 million of Elemetal trade payables. Closing requires, among other conditions, shareholder approval and an articles amendment; a vote was scheduled for December 7, 2016. The filing estimated that, excluding the warrant, closing would reduce liabilities and increase equity by $5.95 million. The substantial potential share issuance could materially dilute existing holders.
- If the transaction does not close, the company warned that access to bullion could be constrained, Elemetal could require repayment of payables, and NTR could decline to extend its loan, with adverse effects on sales and liquidity. The NTR facility was due August 1, 2017, subject to its terms.
- DGSE had received an NYSE MKT non-compliance notice related to stockholders’ equity below the required threshold and losses in three of four recent fiscal years. The exchange accepted a compliance plan and granted an extension through October 12, 2017; failure to regain compliance could result in delisting.
- A Texas sales-tax audit was finalized at $284,190, including penalties and interest; DGSE reduced its prior $360,000 accrual and said it considered the remaining exposure adequately accrued. The prior sales-tax payment agreement was fully paid in January 2016.
- Elemetal and affiliates accounted for 35% of nine-month sales and 20% of purchases. The filing also notes that the NTR line is related-party financing and secured by subsidiaries’ personal property.
Investor verification priorities
- Confirm the intended issuer: the submitted filing identifies DGSE Companies, Inc., rather than Envela Corp.
- Check whether the Elemetal/NTR recapitalization received all required approvals, closed, and on what final share, warrant, and debt-forgiveness terms.
- Review the company’s cash needs, vendor terms, and ability to fund operations given current liabilities exceeding current assets and its dependence on Elemetal.
- Track progress under the NYSE MKT compliance plan and any subsequent listing-status developments.
- Assess whether Midtown consolidation and cost reductions can offset continuing sales weakness, particularly in bullion and scrap.