Business context and reporting period
DGSE Companies, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2016. It buys and sells jewelry, watches, coins, bullion, scrap precious metals and other valuables through stores and online channels. Results below compare Q1 2016 with Q1 2015 unless otherwise noted.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable / December 31, 2015 |
|---|---|---|
| Sales | $11.775 million | $12.875 million |
| Gross profit and margin | $2.149 million; 18.3% | $2.333 million; 18.1% |
| Operating loss | $575,077 | $693,484 |
| Net loss | $690,331; $0.06 per share | $798,499; $0.07 per share |
| Operating cash flow | $(178,799) | $(960,480) |
| Cash and cash equivalents | $1.522 million | $1.753 million |
| Current assets / current liabilities | $12.086 million / $10.929 million | $11.655 million / $9.966 million |
| Total liabilities / stockholders’ equity | $13.243 million / $3.197 million | $12.283 million / $3.871 million |
Inventory was $10.250 million, up from $9.566 million at year-end. Debt and capital leases totaled approximately $3.882 million, including a $2.303 million related-party line of credit, a $1.555 million mortgage classified as current, and $22,763 of capital leases. The mortgage carries a balloon payment of approximately $1.5 million due August 1, 2016. No revenue or earnings guidance was provided.
Material changes versus the prior period
- Sales fell 9%, primarily as bullion and scrap sales declined approximately 15% and 37%, respectively; jewelry sales increased slightly.
- Gross profit dollars decreased 8%, while gross margin edged up to 18.3%. Lower jewelry margin was offset by improved bullion margin.
- SG&A decreased 9% to $2.624 million, partly reflecting ongoing cost reductions and the absence of approximately $145,000 of accelerated rent expense for stores closed in 2015. Depreciation and amortization fell 29%.
- Interest expense rose 14% to $95,207, mainly due to higher trade payables to Elemetal on which interest is paid.
- Cash used in operations improved by $782,000 year over year, but remained negative. The quarter included a $684,498 inventory increase and a $1.199 million increase in customer deposits and other liabilities.
Outlook, risks, contingencies and unusual items
- Management plans to emphasize jewelry, diamonds and watches, full-service retail locations and value-added services as the scrap-gold business contracts. It expected approximately $650,000 in capital expenditures over the next 12 months, chiefly for a new Euless store, facility work and a point-of-sale system.
- Management said it believed it could refinance, extend or replace the August 2016 mortgage before maturity. It also stated that operations and working-capital needs depend on extended vendor terms or refinancing debt; additional NTR credit-line draws require NTR approval.
- Elemetal, the largest shareholder and a primary refiner and bullion trading partner, represented 26% of sales and 27% of purchases in Q1 2016. DGSE owed Elemetal $4.978 million in trade payables at March 31, 2016. The related-party NTR line is secured by subsidiary personal property and matures August 1, 2017, subject to earlier termination provisions.
- After quarter-end, DGSE signed non-binding letters of intent to exchange $3.5 million of Elemetal trade payables and approximately $2.408 million of NTR debt for shares at $0.41 per share. The proposed transactions would issue approximately 8.537 million and 5.874 million shares, respectively; the Elemetal proposal also includes a one-year option for 1 million shares at $0.65. Both proposals require definitive agreements and shareholder approval, and completion is uncertain.
- DGSE received an April 12, 2016 NYSE MKT notice that it did not meet a continued-listing standard, citing $3.87 million of year-end 2015 equity and net losses in three of its four most recent fiscal years. It submitted a compliance plan on May 11; potential delisting could harm share liquidity, market price and access to capital.
- Southern Bullion remains classified as discontinued operations; Q1 2016 recorded a $97 tax expense. Management believed material closure expenses had been recognized. The filing reported no material change in previously disclosed legal proceedings and no material off-balance-sheet arrangements.
Most important facts to verify
- Whether the August 2016 mortgage was refinanced, extended or repaid, and whether the company maintained sufficient liquidity.
- Whether the Elemetal and NTR debt-for-equity proposals became binding and received shareholder approval; assess the resulting dilution against 12,328,956 shares outstanding at May 6, 2016.
- Progress and outcome of the NYSE MKT compliance plan and continued-listing status.
- Changes in sales and margins for scrap, bullion and jewelry, and the extent to which cost reductions and customer deposits support operating cash flow.
- Continuing exposure to Elemetal for trade financing, purchasing and sales, including the related-party payable and interest terms.