DGSE Companies, Inc. (now identified in the request as Envela Corp.) — Q2 2017 Form 10-Q
Filing identity and period: The filing names DGSE Companies, Inc. as the registrant and covers the quarter and six months ended June 30, 2017. The interim financial statements are unaudited. DGSE buys and sells jewelry, bullion, coins, and other valuables through retail, wholesale, and online channels.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $16.75 million | $15.50 million | $31.87 million | $27.27 million |
| Gross profit / margin | $2.81 million / 16.8% | $2.28 million / 14.7% | $5.31 million / 16.7% | $4.43 million / 16.2% |
| Operating income (loss) | $284,345 | $(420,939) | $574,513 | $(996,016) |
| Net income (loss) | $265,150 | $(536,984) | $484,638 | $(1.23 million) |
| Basic and diluted EPS | $0.01 | $(0.04) | $0.02 | $(0.10) |
- Q2 sales grew 8% year over year; six-month sales grew 17%. Gross profit rose 23% in Q2 and 20% for the half.
- For the first six months, SG&A declined 13% to $4.56 million. Interest expense fell 49% to $99,205, reflecting the prior payoff of the Reeder Road mortgage and conversion of NTR debt into equity.
- Cash used in operating activities was $846,120 in the first half, compared with $514,425 used in the prior-year period. Capital spending was $94,521; financing cash use was $4,357. Cash declined from $1.41 million at year-end to $467,084.
- At June 30, total assets were $12.09 million, current assets $10.43 million, current liabilities $5.69 million, and stockholders’ equity $6.40 million. The approximate current ratio was 1.83. Reported debt was limited to a $9,309 capital-lease balance, all current; the NTR loan balance was zero.
- Accounts payable to related party Elemetal was $4.14 million, compared with $4.11 million at year-end. This is a material funding and counterparty concentration, distinct from the reported debt balance.
Material changes and management commentary
- Management attributed stronger results to a shift in sales mix, increased jewelry and scrap activity, and cost reductions. Q2 jewelry and scrap sales rose approximately 93% and 88%, respectively, while bullion/rare-coin sales fell approximately 24%. For the half, jewelry and scrap sales rose approximately 67% and 78%, while bullion/rare-coin sales fell approximately 6%.
- Q2 gross margin improved to 16.8%, helped by scrap growth. Six-month margin was 16.7%; increased bullion/rare-coin margin was partly offset by lower jewelry and scrap margins.
- After a December 2016 leadership change, management said it returned to its core approach of buying and selling jewelry and timepieces, emphasizing transparent transactions and value. It described the scrap-gold market as challenging in recent years and aimed to rebuild scrap purchasing and profitability.
- Elemetal-related transactions represented 26% of first-half sales and 22% of purchases, versus 32% and 24% in the prior-year period. Elemetal is DGSE’s largest shareholder and primary refiner and bullion trading partner. In December 2016, DGSE issued 5,948,560 shares to NTR, an Elemetal affiliate, in exchange for cancellation of $2.44 million of debt and accrued interest.
Outlook, risks, and unusual items
- Management expected approximately $180,000 of capital expenditures over the next 12 months, mainly for a new point-of-sale system and further buildout of its Dallas flagship location. The system was expected to be implemented in September 2017.
- Management stated it expected to renew, extend, or replace short-term funding as needed and believed additional borrowing could be available; inventory could also be adjusted to meet working-capital needs. These statements are not quantified financing commitments.
- A Texas sales-and-use-tax audit covering July 2013 through December 2016 was expected to continue through 2017. The company said exposure could not yet be determined and recorded no reserve. Separately, it paid $261,490 in March 2017 to settle an earlier audit assessment.
- DGSE disclosed continuing NYSE MKT listing-standard noncompliance related to equity and prior losses, with possible delisting if it failed to meet its compliance plan. It stated that equity exceeded the $6 million threshold for two consecutive quarters and expected to regain compliance with one standard; delisting could impair share liquidity and access to capital.
- Precious-metals prices and demand are business risks. Management noted gold was generally stable at about $1,242 per ounce during Q2 2017. Southern Bullion remains classified as discontinued operations; the company said it believed material closure costs had been recognized.
- The company said disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer identity: this supplied filing is for DGSE Companies, Inc., not an issuer named Envela Corp.
- Review the Texas audit outcome, any resulting liability, and whether a reserve is subsequently recorded.
- Check the NYSE MKT compliance determination and any impact on listing, liquidity, or financing access.
- Assess the sustainability of positive earnings given negative operating cash flow, reduced cash, and substantial payables to Elemetal.
- Monitor gross margins by product category, particularly jewelry and scrap, and the degree of reliance on related-party sales, purchases, and trade credit.
- Verify delivery and cost of the planned point-of-sale system and Dallas location buildout, and compare actual spending with the $180,000 estimate.