Envela Corp quarterly report, Q1 FY2017

Business context and reporting period

The filing is DGSE Companies, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2017. DGSE buys and sells jewelry, watches, coins, bullion, scrap precious metals, and other valuables through retail, wholesale, and internet channels. The request identifies Envela Corp., but the filing itself names DGSE Companies, Inc.; confirm the issuer identity.

Management said that, following a leadership change in December 2016, the company returned to its focus on buying and selling jewelry and timepieces at competitive prices and providing customers transparency and value. Southern Bullion remains classified as discontinued operations.

Financial performance and liquidity

• Revenue rose 28%; jewelry sales increased 40%, bullion and rare-coin sales 21%, and scrap sales 67%. Gross profit dollars grew 16%, but gross margin declined, including a sharp reduction in scrap margin from 33.3% to 15.9%.
• SG&A fell 19% to $2.12 million, which management attributed to expense reductions. Interest expense fell 48% to $49,840, principally following debt reductions and the sale and payoff of the Reeder Road mortgage.
• Cash and equivalents were $462,228 at quarter-end, down from $1.41 million at December 31, 2016. Operating cash use reflected, among other items, a $1.01 million reduction in accounts payable and accrued expenses, higher prepaid expenses, and inventory investment. Investing and financing cash use was $33,750 and $4,287, respectively.
• At March 31, current assets were $10.52 million and current liabilities $6.08 million. Total liabilities were $6.08 million, including $9,427 of current capital-lease obligations; the NTR revolving credit facility had no balance outstanding. Stockholders’ equity was $6.13 million.

Material changes and notable items

• Compared with Q1 2016, the company moved from an operating and net loss to positive operating income and net income. Lower SG&A and interest costs contributed; gross margin nevertheless contracted.
• Elemetal, DGSE’s largest shareholder and primary refiner and bullion trading partner, accounted for 28% of Q1 2017 sales and 24% of purchases. At quarter-end DGSE owed Elemetal $3.95 million and had a $108,612 receivable from it.
• In December 2016, DGSE issued shares to Elemetal and NTR in exchange for cancellation of trade payables and indebtedness. This followed prior-period debt-to-equity transactions; no NTR facility borrowing was outstanding at quarter-end.
• The company paid $261,490 in March 2017 to settle a prior Texas sales-tax assessment. A separate Texas sales-and-use-tax audit covering July 2013 through December 2016 was announced; DGSE could not determine its exposure and recorded no reserve.

Outlook, risks, and contingencies

• No revenue or earnings guidance was provided. DGSE expected approximately $180,000 in capital expenditures over the next 12 months, largely for a custom point-of-sale system targeted for implementation by August 2017.
• Management said it believed additional loans could be obtained if working capital were needed and inventory could be adjusted. The NTR credit-line extension was scheduled to expire August 1, 2017; the filing reports no outstanding balance.
• Results are exposed to changing precious-metals prices and demand. Management noted gold rose about 10% during Q1 2017, while the scrap-gold market had been weak in recent years.
• NYSE MKT notified DGSE on April 20, 2017 that it remained out of compliance with stockholders’ equity listing standards. The filing said equity was above $6 million at March 31, but two consecutive quarters above the threshold were required; failure to regain compliance or make progress under its plan could lead to delisting, potentially harming share liquidity and access to capital.
• Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Confirm issuer identity: the supplied request says Envela Corp., whereas this filing is for DGSE Companies, Inc.
• Review the cash decline and operating cash outflow, and assess working-capital needs alongside the planned point-of-sale spending and NTR facility expiration.
• Track gross-margin performance by sales category, especially jewelry and scrap, as revenue growth did not translate into higher overall margin.
• Monitor NYSE MKT listing compliance and the outcome of the Texas audit; the company stated that potential exposure from the latter was undetermined and unreserved.
• Review related-party trading and balances with Elemetal, and reconcile the share-count presentation: the balance sheet lists 26,905,631 shares at both dates while its accompanying comparative share figure is 12,328,956.