Envela Corporation (NYSE American: ELA) — Q2 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2022. Envela operates two recommerce segments: DGSE, which buys and resells luxury hard assets and precious metals, and ECHG, which resells and recycles electronics and provides IT asset disposition services. Results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $42.64 million, up 26% from $33.72 million | $90.05 million, up 52% from $59.21 million |
| Gross profit / margin | $11.48 million / 26.9%, versus $7.13 million / 21.1% | $21.19 million / 23.5%, versus $13.43 million / 22.7% |
| Operating income | $4.11 million, versus $2.08 million | $6.97 million, versus $4.03 million |
| Net income / diluted EPS | $3.85 million / $0.14, versus $2.15 million / $0.08 | $6.50 million / $0.24, versus $4.16 million / $0.15 |
| Operating cash flow | Not separately presented for the quarter | $6.36 million, versus $0.26 million |
- Quarterly SG&A rose to $7.08 million from $4.83 million, reflecting, among other items, the new Frisco store and the addition of Avail and CExchange costs. Six-month SG&A was $13.64 million versus $8.98 million.
- ECHG contributed $12.30 million of Q2 revenue and $7.29 million of gross profit; its gross margin was 59.3%, compared with 37.6% a year earlier. DGSE generated $30.34 million of revenue and $4.19 million of gross profit; its gross margin was 13.8%, compared with 13.5%.
- Cash was $13.94 million at June 30, 2022, versus $10.14 million at December 31, 2021. Current assets were $40.76 million and current liabilities $10.12 million. Inventory increased to $17.80 million from $14.05 million and used $3.76 million of operating cash during the first half.
- Notes payable totaled $16.59 million, compared with $18.74 million at year-end; no balance was drawn on the $3.5 million line of credit at June 30. Operating lease liabilities totaled $6.85 million, including $1.63 million current.
- Six-month investing cash outflow was $0.42 million and financing cash outflow was $2.14 million, including $1.70 million to repay the line of credit.
Material changes and management commentary
Growth reflected increased sales in both segments. DGSE cited the January 2022 Frisco store and maturation of its Lewisville and Grapevine locations. ECHG attributed improvement partly to wholesale activity having been slowed by COVID-19 in the 2021 comparison period. Acquired businesses also affect comparability: Avail was acquired in October 2021, and CExchange in 2021. The filing’s Avail pro forma comparison gives prior-year Q2 revenue of $35.53 million and net income of $2.48 million, rather than the reported $33.72 million and $2.15 million.
Management expects approximately $1.0 million of capital expenditures over the next 12 months, principally for equipment and potential DGSE properties and store build-outs. It said it believes capital resources are sufficient for working capital, does not currently anticipate needing the undrawn credit facility for operations, and may seek additional bank loans if growth requires more working capital. The company provided no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Management identified uncertain effects from COVID-19, the Russia-Ukraine war, economic conditions, and fluctuating commodity prices—particularly gold—which can affect demand, margins, inventory values, and liquidity. Gold ended June 30, 2022 at $1,814 per ounce, after reaching $1,942 at the end of Q1, according to the filing.
- Both segments depend in part on obtaining suitable supply through secondary markets. ECHG also disclosed that one international refining partner generates 90% of its refining revenue.
- Envela stated that additional liquidity may be necessary to support operations amid ongoing uncertainty. Its capital-expenditure estimate and liquidity comments are forward-looking and subject to risks.
- An additional $216,988 payment for the Avail acquisition increased recorded goodwill; the purchase-price allocation remained preliminary. The company reported no goodwill impairment as of June 30, 2022.
- Management said ordinary-course legal claims were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable and how much reflects acquired operations or a COVID-affected comparison period.
- Whether ECHG’s elevated gross margin persists, and the extent of its reliance on its principal refining partner.
- Inventory growth, its conversion to cash, and the effect of gold and other commodity-price movements on DGSE’s margins and liquidity.
- Avail integration, the final purchase-price allocation and goodwill, and the returns from recent store expansion and acquisitions.
- Capital needs and debt-service capacity, including planned expenditures, lease commitments, and management’s statement that additional liquidity may be needed under adverse conditions.