DGSE Companies, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The filing is by DGSE Companies, Inc. (the company now identified in the request as Envela Corp.). DGSE bought and sold jewelry and bullion through retail, wholesale, and online channels. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Sales | $30.54 million | $32.81 million; down 7% |
| Gross profit / margin | $5.61 million / 18.4% | $6.73 million / 20.5% |
| Operating income | $397,569 | $992,395 |
| Income from continuing operations | $300,412 | $897,419 |
| Net income / diluted EPS | $300,412 / $0.02 | $497,251 / $0.04, including a $400,168 discontinued-operations loss |
| Cash used in continuing operations | $1.11 million | $2.17 million |
| Cash and cash equivalents | $3.56 million | $4.91 million at Dec. 31, 2012 |
| Total assets / liabilities | $26.12 million / $12.74 million | $26.11 million / $13.03 million at Dec. 31, 2012 |
Q1 operating cash use chiefly reflected a $1.33 million inventory increase and a $228,000 decline in customer deposits and other liabilities, partly offset by continuing-operations income. Investing cash use was $177,000, primarily for property and equipment; financing cash use was $61,000, chiefly debt and lease payments.
At March 31, current assets were $17.89 million and current liabilities $7.34 million. Debt disclosures show a $3.58 million related-party revolving line, $1.93 million mortgage, and smaller obligations; the debt schedule reports $5.54 million of total debt and capital leases before current-maturity adjustments. The NTR line bears 2% interest, is secured by subsidiary personal property, and is due no later than August 1, 2014, subject to earlier termination or repayment provisions.
Material changes and management commentary
- Sales fell 7%; increases in bullion and wholesale watches were offset by declines in jewelry, scrap, and rare coins. Management attributed the gross-margin decline largely to a higher proportion of lower-margin bullion sales.
- SG&A declined 10% to $5.02 million, reflecting cost reductions, partly offset by $353,000 associated with four stores opened in 2012 and $101,694 in professional fees for the financial restatement and related matters.
- Interest expense declined 75% to $51,704, primarily because the NTR facility carried a lower rate than the former bank debt. Depreciation and amortization rose 27% to $192,884, mainly due to new assets and store openings.
- Superior Galleries was discontinued in 2012; there was no discontinued-operations activity in Q1 2013. Q1 2012 included its $400,168 loss, including a $201,091 asset write-off.
- Cash declined by $1.35 million during the quarter. Inventory increased to $13.27 million from $11.93 million at year-end.
Outlook, risks, and contingencies
- Management estimated capital expenditures of approximately $1 million over the next 12 months, mainly for store openings and the April 2013 headquarters move, expected to be funded from working capital. No capital-expenditure commitments were outstanding at March 31.
- The filing provides no earnings or revenue guidance. Management said working-capital needs could increase with jewelry growth and cited reliance on extended vendor terms, refinancing, or additional borrowing; inventory could be adjusted if needed.
- NTR, DGSE’s largest stockholder and primary refiner and bullion trading partner, accounted for 29% of sales and 36% of purchases in Q1 2013. Amounts payable to NTR were $2.45 million at quarter-end, versus $1.28 million at year-end. The $3.58 million NTR loan balance was unchanged.
- Management concluded disclosure controls were not effective as of March 31, 2013. A material weakness involved inadequate support and review for inventory, depository-account, and fixed-asset reconciliations. The company described remediation efforts, including improved reconciliations, journal-entry review, inventory-count procedures, and closing processes.
- The company had disclosed accounting irregularities believed to extend from 2007 onward and said previously reported financial information since then should not be relied upon. An SEC investigation remained pending. Two related securities/fiduciary-duty lawsuits sought unspecified damages; DGSE said it intended to defend itself. A Texas sales-and-use-tax audit dispute remained unresolved, with a hearing not yet held.
- Other income of $12,147 in Q1 2013 was attributed to an insurance settlement related to a store burglary. The filing reports commitments and contingencies but gives no clear quantified exposure for the lawsuits or tax audit.
Important facts for investors to verify
- How the accounting irregularities, SEC investigation, lawsuits, and remediation of the material weakness have progressed, and whether reported financial information remains subject to adjustment.
- Whether cash generation improves as inventory rises, and whether the company can fund planned spending and operating needs without additional borrowing or extended supplier terms.
- The terms, availability, and repayment risks of the related-party NTR facility, alongside the company’s substantial sales, purchases, and payables concentration with NTR.
- The outcome and potential financial exposure of the Texas sales-tax audit and related legal matters, which are not clearly quantified in this filing.