Envela Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 23, 2021. This is an annual report, not a standalone fourth-quarter report. Envela operates two recommerce segments: DGSE, which buys, resells and recycles luxury hard assets, and ECHG, which handles electronics and IT equipment resale, disposition and recycling.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $113.9 million | $82.0 million |
| Gross profit and margin | $23.1 million; 20.2% | $16.3 million; 19.8% |
| Operating income | $6.8 million | $3.2 million |
| Net income | $6.4 million | $2.8 million |
| Diluted EPS | $0.24 | $0.10 |
| Operating cash flow | $6.9 million provided | $0.5 million used |
- DGSE revenue rose 27% to $85.7 million. Its resale revenue increased 33%, while recycled-material revenue declined 21%. DGSE gross margin fell to 12.1% from 13.2%, primarily as resale margin decreased from 12.9% to 11.5%.
- ECHG reported $28.3 million of revenue and $12.7 million of gross profit. Its 2019 results are not directly comparable because Echo and ITAD USA were acquired in May 2019 and Teladvance in August 2019. ECHG’s total gross margin was 44.9%, versus 50.6% in the partial-year 2019 comparison.
- Cash and cash equivalents were $9.2 million at year-end, versus $4.5 million. Current assets were $23.5 million and current liabilities $6.1 million, equivalent to working capital of approximately $17.5 million.
- Total notes payable were approximately $15.4 million, including $9.4 million owed to CEO John Loftus and $1.7 million in a federally backed COVID-19 loan. Operating lease liabilities totaled approximately $4.8 million. The company reported no balance drawn on its $3.5 million revolving credit line.
- Investing cash outflow was $8.0 million, including $2.1 million lent to CExchange and property purchases. Financing cash inflow was $5.8 million, including building loans and the COVID-19 loan.
Material changes and unusual items
- Total revenue increased 39% and net income more than doubled year over year. Growth includes a full year of ECHG operations in 2020 versus only partial-year contributions in 2019, so consolidated growth is not wholly comparable.
- Envela purchased two DGSE retail buildings and its Irving headquarters during 2020. Management said expected capital expenditures for the next 12 months were approximately $100,000, largely for equipment and headquarters build-out.
- DGSE reported a 21% decline in crafted-precious-metal purchases, which management attributed in part to COVID-related shutdowns and lower retail foot traffic, despite a 24% increase in gold prices during 2020.
- The company lent CExchange $2.1 million at 8.5% interest, with quarterly interest-only payments and a February 2023 maturity; related warrant and call-option rights are subject to conditions, and exercise is not assured.
- Envela applied for forgiveness of its approximately $1.67 million, 1% COVID-19 loan; the application was under SBA review at filing.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management described DGSE retail expansion and broadening its jewelry, diamond and fine-watch business as priorities, and expected digital and social marketing to remain important.
- Management said it believed available capital was sufficient for working-capital needs and that it did not anticipate drawing on the revolving credit line for operations. Future funding needs could increase with growth or adverse conditions.
- COVID-19 effects remained uncertain, including risks of business interruptions, store closures, weaker customer demand and supply-chain disruption. Precious-metal price volatility can affect inventory value, margins and buying activity.
- Refining relationships are concentrated: one Dallas refining partner is a major source of DGSE revenue and expenses, and one international refining partner generated 90% of ECHG refining revenue. Disruption to either relationship could materially affect results.
- Loftus, through N10TR and Eduro, beneficially controlled approximately 71.4% of outstanding shares, concentrating voting power. The company also has substantial related-party debt owed to him.
- Management reported disclosure controls and internal control over financial reporting effective at year-end. The auditor issued an unqualified opinion on the financial statements; it did not audit or opine on internal-control effectiveness. The filing describes prior accounting irregularities and an SEC settlement, and says required governance reforms were believed complete.
- Management considered ordinary-course claims and lawsuits not likely to have a material effect. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the COVID-19 loan was forgiven, and any resulting accounting or repayment obligation.
- Collectability and terms of the CExchange note, and the status and conditions of its warrant and call-option rights.
- Revenue and gross-margin trends on a comparable basis, particularly ECHG’s post-acquisition performance and DGSE resale margins.
- Exposure to the concentrated refining partners, and the related-party debt balance, repayment terms and governance safeguards.
- The extent to which COVID-19 conditions, gold-price movements and store expansion affect future cash flows and liquidity.