Envela Corporation — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter report; the filing does not provide a clear standalone Q4 financial result.
Business context
Envela operates two segments: DGSE, which buys and sells jewelry, watches, coins, bullion and scrap precious metals; and the Echo Entities, which recycle electronics and provide IT asset disposition, reuse and related services. Envela acquired the Echo Entities on May 20, 2019, and changed its name from DGSE Companies to Envela Corporation in December 2019.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $82.0 million | $54.1 million |
| Gross profit | $16.3 million | $9.7 million |
| Gross margin | 19.8% | 17.9% |
| Operating income | $3.2 million | $0.7 million |
| Net income | $2.8 million | $0.7 million |
| Diluted EPS | $0.10 | $0.02 |
| Cash from (used in) operations | $(0.5) million | $0.4 million |
| Cash and cash equivalents at year-end | $4.5 million | $1.5 million |
Reported revenue rose approximately 52%, reflecting Echo’s inclusion from May 20, 2019 as well as growth at DGSE. Echo contributed $14.5 million of revenue and $1.8 million of net income during its included period. DGSE revenue rose 24.9%, but its gross profit fell to $8.9 million from $9.7 million and its gross margin contracted to 13.2% from 17.9%. Management attributed the margin decline primarily to a strategy favoring higher sales velocity. Consolidated margin benefited from Echo’s reported 50.6% gross margin; the periods are not directly comparable because Echo was not included in 2018.
DGSE bullion/rare-coin revenue increased 36.5% and scrap revenue increased 44.6%; jewelry revenue declined 4.3%. Management cited gold’s 19% price increase during 2019 and said DGSE scrap purchases increased 45% year over year.
Liquidity, debt and cash flow
Operating cash flow was negative despite higher net income, with the filing identifying increased trade receivables and repayment of related-party payables among the main uses. Investing cash use was $6.0 million, including $5.9 million, net of acquired cash, for the Echo acquisition. Financing provided $9.6 million, principally through two notes from CEO, President and Chairman John R. Loftus.
At year-end, Envela had $9.6 million of related-party notes payable to Mr. Loftus, bearing 6% interest and maturing May 16, 2024; $1.1 million was classified as current and $8.6 million as long-term. Current assets were $18.4 million and current liabilities were $4.8 million. A $1.0 million bank line of credit was undrawn at year-end; inventory secured the facility. Total liabilities were $15.8 million. The company also reported $3.6 million of lease liabilities. Management said it believed capital resources were sufficient for working-capital needs and expected approximately $150,000 of capital expenditures over the next 12 months.
Outlook, risks and unusual items
- No formal revenue or earnings guidance was provided. Management planned to focus DGSE on full-service stores and growth in jewelry, watches and scrap, and expected Echo trade shows to remain an important marketing channel.
- COVID-19 was identified as a developing risk after year-end, with uncertain potential effects on sales, store operations, supply chains, liquidity and Echo’s refining relationship with Hanwa, which generated about 90% of Echo refining revenue.
- Other material risks include precious-metal price volatility, discretionary consumer demand, inventory valuation and working-capital needs, competition, and concentration of voting power. N10TR held 47.7% and Eduro 23.7% of common shares as described in the filing.
- The Echo acquisition was a related-party transaction: the CEO had owned approximately one-third of the seller Elemetal before the transaction and financed the $6.9 million purchase-price note. A second $3.1 million CEO note refinanced a related-party payable. These notes bore 6% interest.
- Subsequent events included a February 2020 $1.5 million loan to CExchange, with warrant and call-option arrangements, and a proposed $1.4 million Lewisville retail-building purchase; the filing notes there was no assurance the building transaction would close.
- Management reported effective disclosure controls and internal control over financial reporting at December 31, 2019. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness. The filing also describes a prior SEC accounting-irregularities settlement and related governance reforms.
- Management considered ordinary-course claims and lawsuits not expected to have a material effect. The company paid no common-stock dividends and did not anticipate paying them in the foreseeable future.
Important facts for investors to verify
- How much of the reported growth and profitability is sustainable after separating Echo’s partial-year contribution from DGSE’s results.
- Whether DGSE can improve gross margins after the reported decline, particularly in bullion/rare coins and jewelry.
- Collection timing and credit quality for receivables, which increased materially during 2019, and the conversion of earnings into operating cash flow.
- Repayment capacity and terms of the $9.6 million in CEO-related notes, including the related-party approval process and ongoing interest expense.
- Echo’s dependence on Hanwa for refining revenue and the effect of pandemic-related disruptions on that relationship and operations.
- Completion, financing and expected returns of the proposed Lewisville property purchase, and whether the CExchange options or warrant are exercised.