Business context and reporting period
DGSE Companies, Inc. (the registrant named in the filing; the request metadata identifies Envela Corp.) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. DGSE buys and sells jewelry, bullion, precious metals, watches and related products through stores and online channels. Results below compare the three months ended March 31, 2015 with the same period in 2014 unless otherwise stated.
Financial performance and position
- Revenue: Continuing-operations sales were $12.88 million, down 29% from $18.06 million.
- Profitability: Gross profit was $2.33 million, down 27%; gross margin improved to 18.1% from 17.8%. Operating loss widened to $693,484 from $226,688. Continuing-operations net loss was $801,063 versus $284,585; net loss was $798,499 versus $522,978, including $2,564 income from discontinued operations compared with a $238,393 loss. Net loss per share was $0.07 versus $0.04.
- Expenses: SG&A fell 14% to $2.89 million. Depreciation and amortization rose 55% to $140,624. Interest expense was $83,768 versus $80,813.
- Cash flow: Cash used by continuing operations was $960,480, compared with $995,174. Investing used $8,804 and financing used $35,724. Cash fell by $1.01 million during the quarter to $1.18 million.
- Balance sheet and liquidity: At March 31, cash was $1.18 million, inventory $11.44 million, total assets $17.25 million, current liabilities $8.06 million and total liabilities $11.94 million. Total stockholders’ equity was $5.31 million. Current assets were $12.86 million. Trade receivables declined sharply to $14,668 from $904,076 at year-end.
- Debt and obligations: The related-party NTR revolving credit balance was $2.30 million at 2% interest and was extended to August 1, 2017. Mortgage payable was $1.69 million at 6.7%, maturing August 1, 2016; capital leases totaled $34,455. DGSE also reported $3.94 million payable to Elemetal, its largest shareholder’s affiliate, and approximately $423,000 remaining under its Texas tax payment agreement.
Material changes and management commentary
- Management attributed the sales decline to continued weakness in bullion and scrap, the first quarterly declines in jewelry, watch and diamond lines in several quarters, weather-related closures of DFW stores, and weakness in the energy sector affecting the company’s core market.
- Gold prices were generally stable during the quarter, with the London PM Fix at $1,187.56 on March 31, about 1% below year-end 2014. Management described the scrap-gold market as extremely negative and cited lower recycled-gold supply.
- DGSE closed two outlying DFW stores and signed a lease for a larger western-area location, pursuing larger full-service stores and a broader retail model. SG&A declined despite $143,000 of costs related to the closures; depreciation and amortization included a one-time write-off of assets at the closed stores, with the amount not specified.
- Southern Bullion’s remaining locations had been closed by April 2014. The current-quarter discontinued-operations income reflected minor wind-down accrual adjustments; management said it believed all material closure expenses had been recognized.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. DGSE expected approximately $750,000 of capital expenditures over the next 12 months for new DFW locations, facility upgrades and repairs, and a website relaunch; no capital-expenditure commitments were outstanding at quarter-end.
- Management said operations and working-capital financing depend on negotiating extended vendor terms or refinancing debt, and believed it could continue doing so in the near future. It also said inventory could be adjusted if additional working capital were needed.
- Risks include precious-metal price and scrap-market weakness, retail-market conditions, inventory and working-capital needs, and reliance on continued financing and vendor terms. Related-party concentration is material: Elemetal represented 14% of sales and 36% of purchases in the quarter, compared with 28% and 30%, respectively, in 2014; Elemetal is also DGSE’s primary refiner and bullion trading partner.
- The NTR facility is related-party financing secured by subsidiary personal property. The Texas Comptroller payment agreement requires monthly payments of $47,000 through the balance of 2015. The filing reported no material change in previously disclosed legal proceedings or risk factors. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the sharp sales decline and widening operating loss persist, and whether the improved gross-margin percentage can be maintained.
- Whether operating cash burn, the large inventory balance and low quarter-end cash leave adequate liquidity, particularly as trade payables and accrued liabilities are paid.
- Availability and terms of continued NTR financing and vendor credit, including the related-party nature and security of the NTR facility.
- Elemetal transaction exposure, including the $3.94 million payable and the concentration of purchases, sales and refining relationships.
- Execution and returns from the DFW store changes, planned capital expenditures and website relaunch, alongside the ongoing Texas tax-agreement payments.