Business context and reporting period
DGSE Companies, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the three months ended March 31, 2018. The filing describes a business buying and selling jewelry, watches, diamonds, coins, bullion, scrap precious metals, and other valuables through retail, wholesale, and online channels. The supplied filing does not explain the relationship to Envela Corp, the company identified in the request metadata.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $14.06 million | $15.12 million; down 7% |
| Gross profit and margin | $2.50 million; 17.8% | $2.49 million; 16.5% |
| Operating income | $403,587 | $290,166 |
| Net income | $346,208; $0.01 per basic and diluted share | $219,536; $0.01 per share |
| Operating cash flow | $(281,840) | $(911,817) |
| Cash at quarter-end | $903,113 | $1,272,208 at December 31, 2017 |
| Total assets / liabilities | $13.29 million / $5.19 million | $13.31 million / $5.56 million at December 31, 2017 |
SG&A declined 5% to $2.01 million; depreciation and amortization was $89,752. Interest expense was $46,882, down from $49,840. Cash used in investing was $86,074, principally for the Dallas Midtown location buildout; financing cash use was $1,181. Working capital was approximately $5.77 million at March 31, 2018. Reported debt consisted of a $1,172 current capital-lease balance, with no long-term debt; separately, trade payables to a related entity were $3.69 million.
Material changes versus the prior comparable period
- Revenue fell $1.07 million, mainly reflecting a 20% decline in bullion/rare-coin sales; jewelry sales rose 16%, scrap sales were slightly higher, and other sales declined slightly.
- Gross profit increased $7,765 despite lower revenue, and gross margin expanded to 17.8% from 16.5%. Jewelry contributed to the gross-profit increase; bullion/rare-coin gross margin declined to 7.8% from 9.0%.
- Operating income rose to $403,587 from $290,166, supported by lower SG&A and improved gross margin. Net income increased to $346,208 from $219,536.
- Operating cash outflow narrowed by $629,977 year over year, but operations still used cash. Cash declined $369,095 from year-end 2017 to $903,113.
Outlook, commentary, risks, and unusual items
- Management expects approximately $25,000 of capital expenditures over the next 12 months, largely for additional components of its point-of-sale system, which it said was rolled out April 1, 2018. No specific revenue or earnings guidance is provided.
- Management said it expects to renew, extend, or replace short-term debt as it matures and believes additional working-capital loans could be obtained if needed; inventory could also be adjusted. These are management expectations, not assurances.
- Management identified precious-metals price movements—particularly gold—and weak conditions in the scrap-gold market as relevant business factors. It reported gold at $1,324 per ounce on March 31, 2018.
- A related entity was both a significant shareholder and a primary refiner/bullion trading partner. It accounted for 10% of sales and 2% of purchases in Q1 2018, versus 28% and 24%, respectively, in Q1 2017. The company owed this entity $3,689,677 at quarter-end and paid it $46,882 in interest during the quarter.
- A Texas sales-and-use-tax audit was finalized on April 2, 2018, after quarter-end, with $17,294 due including interest and penalties. The company reduced its previously established $70,000 reserve to that amount as of March 31.
- The company adopted ASC 606 using the full retrospective method and reported no effect on revenue recognition or its financial statements. Management said disclosure controls were effective at a reasonable assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Confirm the registrant’s identity and its relationship, if any, to Envela Corp; this filing identifies DGSE Companies, Inc.
- Assess the sustainability of earnings and margin improvement while revenue declined, especially the product-level performance of bullion/rare coins and jewelry.
- Monitor cash conversion, the decline in cash, and the company’s dependence on reducing payables or obtaining additional financing to meet working-capital needs.
- Review the terms, maturity, and ongoing exposure associated with the $3.69 million related-party payable and the related-party trading relationship.
- Confirm payment and final accounting for the $17,294 Texas tax assessment, and track planned POS-system spending and operating results after its rollout.