DGSE Companies' (DGSE) CEO Matthew Peakes on Q2 2016 Results - Earnings Call Transcript

| About: DGSE Companies, (DGSE)

DGSE Companies (NYSEMKT:DGSE)

Q2 2016 Earnings Conference Call

August 15, 2016 04:30 PM ET

Executives

Matthew Peakes - Chairman, President & Chief Executive Officer

Nabil Lopez - Chief Financial Officer

Analysts

Operator

Greetings, and welcome to the DGSE Companies' second quarter 2016 conference call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Matthew Peakes, Chairman, CEO and President. Thank you, sir. You may begin.

Matthew Peakes

Good afternoon, and thank you for joining us on our conference call to review the financial results of the second quarter and six months ended June 30, 2016. The call today will be hosted by myself and Mr. Nabil Lopez, the Company's Chief Financial Officer. Following our prepared remarks, there will be a formal question-and-answer session open to participants on the call.

Before we get started, I'm going to review the Safe Harbor statement. Some of the information discussed in this call, particularly our revenue, operational targets, and our forward-looking business plans, is based on information as of today, August 15, 2016, and contains forward-looking statements that involve risk and uncertainty.

Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as DGSE's SEC filings.

Regarding the agenda for today's call, first I'll give a brief summary of the second quarter. Second, Nabil Lopez, our CFO, will go over the financial results for the second quarter. I'll give a few closing remarks, and then Nabil and I will be glad to take your questions.

We announced second-quarter sales increased by 3.7% to $15.5 million compared to the same quarter of last year, largely driven by bullion sales. We constantly evaluate the profitability of each store; and in June we closed our Chicago store, six months prior to the end of the lease.

The gold market experienced a steady decline in the price per ounce in 2015 but has rebounded in the first half of this year. However, it has been a challenging environment for jewelry sales.

On June 20 of this year, we entered into a stock purchase agreement with Elemetal, LLC and NTR Metals, LLC which will cancel and forgive approximately $5.9 million of debt and bullion payable in exchange for both common stock and warrants to purchase common stock. The closing of the transaction is expected to take place following satisfaction of certain closing conditions, including obtaining the approval of the shareholders at the annual meeting to be held in the next few months. The preliminary proxy statement will be filed with the SEC within the next two weeks.

On July 27, we sold the property of our largest location for $2.25 million. We'll use the proceeds from the sale to fund the buildout of our new, much larger flagship location in North Dallas. We expect the new location to be open next month, allowing us to consolidate at least two existing stores.

With that, I will now turn the call over to Nabil for a more detailed look at the second-quarter 2016 financial results. Nabil?

Nabil Lopez

Thanks, Matthew, and welcome to everyone on the call today. For the quarter ended June 30, 2016, revenue from continuing operations were $15.5 million, a 3.7% increase compared to $14.9 million in the quarter ended June 30, 2015, as jewelry and scrap sales trended downward while DGSE's bullion sales saw an increase as compared to the prior year. The decrease in the scrap sale is consistent with industry-wide trends.

Gross profit from continuing operations for the quarter decreased $287,000 from $2.3 million to $2.6 million. Gross profit as a percentage of revenue decreased from 17.2% to 14.7%. The overall gross profit decrease was driven by lower sales in our jewelry and scrap categories. We are working to increase the jewelry margins by discounting to increase the jewelry margins by discounting less at the point of purchase.

Selling, general and administrative expenses for continuing operations increased $60,000 or 2% in the quarter ended June 30, 2016, to $2.6 million compared to $2.5 million in the prior year quarter. The increase is primarily due to costs associated with the proposed transaction with Elemetal, LLC and NTR Metals LLC, of approximately $85,000, and approximately $70,000 related to the acceleration of rent expense with the closing of the Chicago store. Depreciation and amortization increased 34% to $110,000 compared to $82,000 for the same period in the prior year. The increase was due to the write-off of assets formerly utilized in Chicago. The loss from continuing operations for the second quarter was $537,000 or $0.04 per share compared to a loss from continuing operations of $132,000 or $0.01 per share in the year ago quarter. The Company reported a net loss in the second quarter of approximately $537,000 or $0.04 per diluted share compared to a net loss of approximately $90,000 or $0.01 per share in the prior year quarter.

Turning to the year-to-date financials, in the six months ended June 30, 2016, revenues were $27.3 million, down $500,000 or 2% compared to $27.8 million in the same period last year. The decrease, again, is primarily due to the continued industry-wide weakness in the scrap metal transaction and jewelry sales. Bullion sales have increased approximately 19% as compared to the prior year period. Gross profit in the first six months of [2006] was $4.4 million or 16.2% of revenue which was down $471,000 from $4.9 million or 17.6% of revenue in the prior year period. The overall gross profit decrease was driven by lower sales in our jewelry and scrap categories. Bullion sales were up compared to the prior year.

Selling, general, and administrative expenses decreased $200,000 or 4% to $5.2 million compared to $5.4 million in the prior year period. The overall decrease was -- in SG&A was achieved primarily through the continued efforts to reduce expenses at all levels including store-level operating expenses, corporate overhead, and advertising expense despite recognizing approximately $175,000 of costs associated with the expenses related to the proposed transaction with Elemetal, LLC and NTR Metals, LLC and approximately $70,000 related to the acceleration of rent expense associated with the closing of Chicago. The loss from continuing operations for the six months ended June 30, 2016, was $1.2 million or $0.10 per share compared to a loss from continuing operations of $933,000 or $0.07 per share last year. The Company reported a net loss in the six months ended June 30, 2016, of $1.2 million or $0.10 per share compared to a net loss of $889,000 or $0.07 per share last year.

As of June 30, 2016, DGSE had cash and cash equivalents of approximately $1.1 million compared to $1.8 million at December 31, 2015. Stockholders' equity decreased 30.7% to $2.7 million at June 30, 2016, compared to $3.9 million at December 31, 2015.

At June 30, 2016, and December 31, 2015, the outstanding balance on the Company's credit facility with NTR Metals, LLC was $2.3 million.

And now I'll turn it back over to Matthew for some additional comments.

Matthew Peakes

Thanks, Nabil. While pleased with the increase in revenues during the second quarter, we are working on initiatives to increase both sales and margin while containing expenses in the very difficult environment for our industry.

Construction of the new store is moving right along, and we expect to have the store open next month, putting us in a prime retail location. The size and layout of the new location allows for operational improvements internally, which means an improved customer experience.

As you may have read in our last 8-K filing, this will be Nabil's last day with DGSE. As Controller, Nabil played a key role in leading the Company through the restatement and regulatory issues of years past. With that knowledge and history, I was appreciative of his willingness and desire to step into the role of CFO when the position was vacated last year.

I would like to take a moment to thank him for his years of service. And on behalf of the DGSE team, we wish him the best in his future endeavors.

In the interim, we've engaged Steve Patterson of Capital CFO Partners as acting Chief Financial Officer. Steve has a tremendous background both as a CPA and having served as a CFO for several public companies. We are glad to have him, and know he will be a great asset to DGSE. Welcome, Steve.

This concludes our prepared remarks, and we would now like to open the call to take your questions.

Question-and-Answer Session

Operator

Thank you, [Operator Instructions]. We do have a question coming from the line of [Moris Sorovsky] a Private Investor. Please proceed with your question.

Unidentified Analyst

I was just curious, on the store in Chicago, was there any mortgage on the store? What was the actual net proceeds?

Matthew Peakes

The store in Chicago was actually a leased location, so there were no proceeds from that sale. The sale was here in Dallas. It was our Reeder Road location. The proceeds, net of fees, was approximately $650,000.

Unidentified Analyst

Okay, and I was just curious: after the new store opens up in Dallas, how many other stores are left? I kind of lost track.

Matthew Peakes

We will have the store in Charleston. And then we will have four here in the Metroplex, depending on how quickly we are able to roll in a couple of other stores, which we plan to do.

Unidentified Analyst

Okay. And just lastly, the last few months, gold basically went up from around $1,050 to $1,300. I was just curious, how come you didn't see an increase in your scrap metal business?

Matthew Peakes

That's a great question. I can't really tell you why people aren't walking in the door. We see a pretty consistent flow of traffic. We see a pretty consistent flow of traffic, but the volatility seems to drive bullion purchases and sales more than scrap.

Operator

Thank you. [Operator Instructions] It appears we have no additional questions at this time, so I'd like to pass the floor back over to management for any additional concluding comments.

Matthew Peakes

Thank you for joining us today. We look forward to giving you an update during our next call, which will be in mid-November when we'll be discussing our third quarter results. This concludes our second quarter 2016 conference call.

Operator

Thank you. Ladies and gentlemen, once again, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.

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