Business context and reporting period
This is DGSE Companies, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The filing describes a retailer and wholesaler of jewelry, bullion, scrap precious metals, and rare coins, operating stores and internet sites. The filing registrant is DGSE Companies, Inc.; the supplied company metadata says Envela Corp.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $23.75 million | $28.98 million | $83.82 million | $90.37 million |
| Gross margin | $4.53 million; 19.1% | $6.19 million; 21.4% | $14.28 million; 17.0% | $16.93 million; 18.7% |
| Operating loss | $1.15 million | $0.37 million | $1.93 million | $1.45 million |
| Net loss | $1.43 million | $0.54 million | $2.25 million | $2.45 million |
| Net loss per share | $0.12 | $0.04 | $0.19 | $0.20 |
| Cash used in continuing operating activities | Not separately reported | Not separately reported | $1.71 million | $2.73 million |
At September 30, 2013, cash was $2.44 million, inventory $13.53 million, total current assets $16.40 million, and current liabilities $12.20 million, for working capital of approximately $4.20 million. Total assets were $24.82 million, total liabilities $13.99 million, and stockholders’ equity $10.83 million. Cash declined $2.47 million from year-end 2012. Nine-month investing cash outflow was $0.62 million, primarily property and equipment; financing cash outflow was $0.14 million.
Material changes versus prior comparable periods
- Q3 sales fell 18%, mainly because scrap sales declined approximately 50%; nine-month sales fell 7%, with scrap sales down approximately 35%. The lower gold price reduced customer scrap selling and the company’s high-margin scrap buying activity.
- Gross margin dollars and rates declined in both comparisons. For the nine-month period, increased lower-margin bullion sales and reduced above-average-margin scrap sales weighed on the overall rate.
- SG&A declined 14% in Q3 and 13% year to date, reflecting cost reductions and lower restatement-related professional fees; costs from six recently opened stores and a $650,000 Texas tax reserve partly offset the reductions.
- Q3 operating and net losses worsened year over year. The nine-month net loss improved versus 2012, partly because 2012 included $706,641 of discontinued-operation losses; Superior Galleries had no activity in 2013.
- Inventory increased approximately $1.59 million from year-end 2012, while trade payables to NTR rose to $3.26 million from $1.28 million.
Outlook, risks, and unusual items
- Management expected approximately $750,000 of capital expenditures for 2013, principally for store openings and the corporate headquarters move, funded from working capital. No capital expenditure commitments were outstanding at quarter-end.
- The $3.58 million NTR related-party credit facility, bearing 2% interest and secured by subsidiary personal property, was reclassified as current because it matures August 1, 2014. Management said it was discussing an extension or refinancing with NTR and commercial lenders and expected to address the balance in the first half of 2014.
- NTR was the company’s largest stockholder, primary refiner, and bullion trading partner. For the first nine months, NTR accounted for 32% of sales and 39% of purchases. The filing identifies no market-rate fair value estimate for the related-party credit line.
- Following an ongoing Texas sales-and-use-tax audit, management considered additional taxes and interest likely and recorded a $650,000 reserve. The final assessment could vary materially.
- Two shareholder and derivative lawsuits related to accounting irregularities were settled for $2 million, with approximately 90% of the settlement and related expenses expected to be paid by insurance. DGSE reported $150,000 paid toward the settlement and approximately $150,000 in attorneys’ fees as of quarter-end.
- An SEC investigation into accounting irregularities dating back to approximately 2007 remained pending. The company said financial statements and information reported since the irregularities began should not be relied upon. Management had not decided whether to pursue claims against involved former officers or professional-service providers.
- Management stated disclosure controls were ineffective at September 30, 2013. A previously identified material weakness involved inadequate support and review for inventory, depository-account, and fixed-asset reconciliations; remediation efforts were underway.
- Management highlighted volatile precious-metal and diamond prices, particularly the year’s decline in gold, as a business risk. The filing reported no material changes to the risk factors in the 2012 Form 10-K.
Important facts for investors to verify
- Confirm the registrant’s identity and relationship, if any, to Envela Corp.; this filing is for DGSE Companies, Inc.
- Track refinancing or extension of the $3.58 million NTR facility before its August 2014 maturity, including terms and any continuing related-party dependence.
- Review the final Texas tax assessment against the $650,000 reserve and monitor related cash payments.
- Verify the final costs and insurance recovery for the $2 million litigation settlement, and the status and outcome of the SEC investigation.
- Assess whether control remediation resolves the disclosed material weakness and whether future financial reporting is reliable.
- Monitor gold prices, scrap purchasing volumes, inventory levels, and gross-margin mix, particularly the balance between scrap and lower-margin bullion.