Envela Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with the same quarter of 2020. Envela operates DGSE, which buys and resells or recycles luxury goods and precious metals, and ECHG, which provides electronics recycling, IT asset disposition, and related services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $25.49 million | $25.83 million | Down 1.3% |
| Gross profit / margin | $6.30 million / 24.7% | $5.30 million / 20.5% | Gross profit up 18.9% |
| Operating income | $1.95 million | $1.30 million | Up 50.1% |
| Net income | $2.01 million | $1.17 million | Up 71.3% |
| Basic and diluted EPS | $0.07 | $0.04 | Up $0.03 |
| Cash from operations | $(0.38) million | $1.03 million | Declined $1.42 million |
Gross margin improved as DGSE raised margins on resale items and ECHG increased resale sales and margins. The overall net-income increase was primarily attributed to higher gross profit. SG&A rose to $4.15 million from $3.83 million; other income increased to $0.27 million from $0.04 million, partly from allocated headquarters rent and CExchange note interest.
Liquidity, debt, and balance sheet
- Cash was $8.40 million at March 31, 2021, down from $9.22 million at year-end. Current assets were $25.25 million and current liabilities $6.00 million.
- Operating cash use was driven chiefly by inventory growth of $1.62 million, higher prepaid expenses, and increased receivables. Inventory totaled $11.63 million, up from $10.01 million at December 31, 2020.
- Notes payable totaled $15.30 million, including $9.29 million of related-party notes payable to CEO John Loftus; the debt note reports $2.14 million as current. Operating lease liabilities totaled approximately $4.54 million, current and long-term combined.
- The company reported a $3.5 million Texas Bank & Trust line of credit, renewed through May 16, 2022, and said it did not currently anticipate needing it for operations.
- Total assets were $42.24 million; stockholders’ equity was $19.59 million. Cash used in investing and financing was $0.32 million and $0.11 million, respectively.
Material changes and management commentary
- DGSE revenue fell 7% to $18.91 million, while gross profit rose 19% to $2.81 million. Management attributed the revenue decline mainly to efforts to improve margins and cited lower or unstable gold prices.
- ECHG revenue increased 20% to $6.58 million and gross profit rose 19% to $3.50 million. Resale growth was partly offset by weaker recycled-material revenue and margin.
- Management said ECHG was seeing more recycled electronics being released as offices, schools, and government buildings resumed activity. DGSE reported fewer customers selling items than expected, which management said had been offset by other business areas.
- Management expects approximately $250,000 of capital expenditures over the next 12 months, principally for equipment and property build-outs; it reported no capital-expenditure commitments at quarter-end.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management said pandemic effects remain uncertain and additional liquidity may be needed if conditions warrant.
- Key exposures include precious-metal price fluctuations, availability and cost of secondary-market goods, changing customer supply and demand, and COVID-19-related economic disruption.
- The $1.67 million federally backed loan received in 2020 remained classified as debt while its forgiveness application awaited final SBA approval.
- ECHG had advanced $123,472 under a short-term facility to Committed Agency; the related service agreement was scheduled to end no later than July 30, 2021. The filing also describes a $2.1 million CExchange note receivable and associated warrant and call-option rights, with no assurance Envela would exercise them.
- Management reported routine legal claims that it did not expect to have a material adverse effect. It reported no material change to previously disclosed risk factors, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the SBA approves forgiveness of the $1.67 million loan and whether any balance remains payable.
- Whether operating cash flow recovers as inventory and other working-capital needs evolve.
- How gold-price movements and secondary-market product availability affect DGSE sales, margins, and cash needs.
- Whether ECHG’s resale growth and recycled-material margins can be sustained as activity normalizes.
- The status and collectability of notes receivable, including CExchange and Committed Agency, and any potential exercise of CExchange option rights.
- Related-party borrowing terms and repayment obligations, along with lease costs and upcoming store-lease decisions.