DGSE Companies, Inc. (identified in request metadata as Envela Corp.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing names the registrant as DGSE Companies, Inc. It buys and sells jewelry, watches, diamonds, coins, bullion, scrap precious metals, and other valuables through retail, wholesale, and online channels.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $12.73 million | $16.75 million | $26.79 million | $31.87 million |
| Gross profit / margin | $2.19 million / 17.2% | $2.81 million / 16.8% | $4.69 million / 17.5% | $5.31 million / 16.7% |
| Operating income | $328,834 | $284,345 | $701,054 | $574,513 |
| Net income | $274,179 | $265,150 | $620,386 | $484,638 |
- Q2 SG&A was $1.77 million, down 27%; six-month SG&A was $3.81 million, down 16%. Management attributed the reductions to lower store-level and corporate costs.
- Cash used in operations was $226,785 for the first half, compared with $846,120 used in the prior-year period. Investing activities used $145,825; financing activities used $2,352. Cash fell by $374,962 to $897,246.
- At June 30, current assets were $11.29 million and current liabilities were $5.22 million (an approximately 2.2 current ratio, calculated from reported amounts). Inventory was $9.42 million, up from $8.60 million at year-end.
- Total liabilities were $5.22 million, all current. The capital lease was paid off; the principal significant payable disclosed was $3.38 million owed to a related-party entity. The company paid that entity $92,530 in interest during the first half.
Material changes and management commentary
- Revenue declined 24% in Q2 and 16% for the first half. Management cited lower wholesale sales: wholesale customers had stocked inventory in the prior year but were purchasing as needed in 2018. Q2 jewelry, bullion/rare coin, and scrap sales fell approximately 30%, 21%, and 25%, respectively.
- Gross profit dollars fell with sales and mix, although consolidated gross margin improved. For the first half, higher jewelry and bullion/rare-coin margins were offset by lower scrap and other margins.
- Gold closed at $1,250 per ounce at June 30, 2018, down 4% for the first half, according to management. The filing says precious-metal price movements affect the business and describes the scrap-gold market as weak.
- Management’s strategy was to focus on competitively priced jewelry and watches and provide transparency and liquidity to customers. It said scrap-gold purchasing was a target for renewed growth.
Outlook, risks, and unusual items
- No revenue or earnings forecast was provided. Management expected approximately $50,000 of capital expenditures over the next 12 months, mainly for replacement equipment.
- Management said it historically renewed, extended, or replaced short-term debt as it matured and believed it could continue to do so near term. It also believed additional borrowing could be obtained if working capital were needed, with inventory adjustments as another option.
- Liquidity warrants attention: first-half operating cash use reflected inventory growth and reductions in trade and related-party payables, partly offset by higher customer deposits and lower receivables. Cash was below year-end despite positive net income.
- Related-party transactions are significant: the related entity represented 13% of first-half sales and 3% of purchases, versus 26% and 22% in the prior-year period. The related-party payable was $3.38 million at June 30.
- A Texas sales-and-use-tax audit concluded with a $17,294 liability, paid April 4, 2018; the filing reports no unpaid balance from this audit. Adoption of ASC 606 had no reported effect. The company was evaluating the impact of the forthcoming lease-accounting standard.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. Forward-looking statements are subject to the risks described in the filing and the 2017 Form 10-K.
Important facts for investors to verify
- Whether wholesale demand and revenue stabilize, and whether improved gross margins can persist as sales mix changes.
- Inventory levels, operating cash generation, and the company’s ability to fund operations while maintaining adequate cash.
- Terms, balance, and ongoing reliance on the related-party payable and the related entity’s role as refiner and bullion trading partner.
- Exposure to precious-metal prices and the performance of scrap-gold purchasing and sales.
- Any subsequent changes to liquidity plans, short-term financing availability, or the expected capital-spending program.