Envela Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Envela operates consumer recommerce businesses in luxury hard assets and commercial businesses in electronics recycling, IT asset disposition and resale.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $36.27 million | $45.20 million | $134.96 million | $135.25 million |
| Gross profit / margin | $9.73 million / 26.8% | $11.86 million / 26.2% | $31.91 million / 23.6% | $33.04 million / 24.4% |
| Operating income | $1.95 million | $3.46 million | $7.16 million | $10.23 million |
| Net income | $1.71 million | $3.32 million | $5.84 million | $9.81 million |
| Diluted EPS | $0.06 | $0.12 | $0.22 | $0.36 |
| Operating cash flow | Not separately presented for Q3 | $3.47 million | $7.73 million |
Q3 revenue fell 19.8% year over year, while nine-month revenue was nearly flat, down 0.2%. Q3 net income declined 49%; nine-month net income declined 41%. Nine-month selling, general and administrative expense rose 9% to $23.71 million, while interest expense fell 4% to $0.35 million. EBITDA, a non-GAAP measure, was $2.29 million for Q3 and $8.19 million for the nine months, versus $3.99 million and $11.34 million, respectively, in 2022.
Liquidity, debt and capital
At September 30, 2023, cash was $17.31 million, current assets were $50.43 million and current liabilities were $9.43 million. Inventory was $23.05 million, up from $18.76 million at year-end 2022. Total notes payable were $15.25 million, including $1.33 million current; operating lease liabilities totaled $4.80 million. The $3.5 million revolving credit facility was undrawn. Cash increased only $0.14 million over the nine-month period.
Management expects approximately $4.0 million in capital expenditures over the next 12 months, including possible property purchases; $0.10 million remains committed to the Phoenix store build-out. Nine-month purchases of property and equipment were $1.56 million, and the company repurchased 224,631 shares for $1.32 million under its buyback authorization.
Material changes and management commentary
- Consumer revenue rose 5% for the first nine months, but consumer gross profit fell 4%; higher recycled revenue was offset by weaker resale gross profit. Commercial revenue declined 18%, principally reflecting post-pandemic normalization in cable-operator product and fewer reusable photovoltaic modules.
- Q3 commercial revenue declined 36%, while consumer revenue declined 12%. Consumer recycled revenue grew, which management attributed in part to individuals selling items to meet financial needs amid inflation.
- Lower commercial and consumer gross profit and higher taxes contributed to lower earnings. The effective tax rate increased to 20.8% for the nine months from 1.5% in 2022; management cited the end of the prior-year valuation allowance and current tax expense. The deferred tax asset fell to $0.10 million from $1.49 million.
- Operating cash flow decreased by $4.26 million year over year, with cash absorbed by inventory growth of $4.30 million and higher receivables of $1.39 million.
- On September 12, Envela acquired Steven Kretchmer, Inc. for $300,000, including a $200,000 installment note; preliminary goodwill of $300,000 was recorded. The Phoenix retail building, purchased for $1.23 million, was not yet in service at quarter-end.
- Other income increased, mainly from interest earned on savings balances and $94,115 of interest received on notes receivable previously written off.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings forecast. Management describes plans to expand consumer locations and pursue organic growth and acquisitions in the commercial segment. It says existing capital resources should meet working-capital needs and the credit line is available if needed.
Risks highlighted include precious-metal and other commodity-price volatility, inflation, supply-chain disruption, conflicts in Ukraine and the Middle East, changing consumer demand, and the commercial segment’s dependence on product supply and customer markets. Two precious-metal refining and bullion partners together represented 38.2% of Q3 revenue and 35.2% of nine-month revenue. Management reported ordinary-course legal claims but did not expect their resolution to materially affect financial condition, results or cash flow. No material changes to previously reported risk factors were disclosed. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial-segment demand and resale activity recover, particularly for cable-operator equipment and photovoltaic modules.
- Inventory growth, receivables collection and operating cash flow conversion in subsequent quarters.
- The extent to which higher taxes and lower margins continue to affect earnings.
- Revenue concentration with the two refining and bullion partners and the availability of alternative buyers.
- Actual timing and cost of the Phoenix store opening, planned capital expenditures, and the final purchase-price allocation for Kretchmer.
- Debt maturity and refinancing exposure, especially scheduled maturities in 2025 and 2026.