Envela Corporation (NYSE American: ELA) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 2, 2022. Envela operates two recommerce segments: DGSE, focused on luxury hard assets, and ECHG, focused on electronics and IT asset resale, recycling, and related services.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $45.20 million | $37.68 million | $135.25 million | $96.90 million |
| Gross profit | $11.86 million | $8.11 million | $33.04 million | $21.54 million |
| Gross margin | 26.2% | 21.5% | 24.4% | 22.2% |
| Operating income | $3.57 million | $2.66 million | $10.54 million | $6.69 million |
| Net income | $3.32 million | $3.11 million | $9.81 million | $7.27 million |
| Diluted EPS | $0.12 | $0.12 | $0.36 | $0.27 |
- Q3 revenue increased 20.0% year over year; net income rose 6.8%. For the nine-month period, revenue grew 39.6% and net income 35.0%.
- Q3 SG&A rose to $7.75 million from $5.23 million, and depreciation and amortization increased to $535,000 from $216,000. Nine-month SG&A was $21.40 million versus $14.21 million.
- Cash from operations was $7.73 million for the first nine months, compared with $1.03 million in 2021. Investing used $444,000 and financing used $2.45 million; cash increased $4.83 million to $14.97 million.
- At September 30, cash was $14.97 million, current assets $44.25 million, and current liabilities $10.10 million. Notes payable totaled $16.29 million, including $1.25 million current; the $3.5 million revolving facility was undrawn. Operating lease liabilities totaled approximately $6.46 million.
- Inventory was $18.06 million, up from $14.05 million at year-end 2021. Stockholders’ equity was $37.44 million, versus $27.63 million at year-end.
Material changes and management commentary
- DGSE Q3 revenue rose 19.4%, with growth attributed to store-count expansion and comparable-store sales. Its gross margin was 12.3%, versus 12.0% a year earlier.
- ECHG Q3 revenue grew 21.1%; resale revenue increased, partly reflecting the Avail acquisition, while recycled revenue declined 16.8% amid a product-mix shift. ECHG gross margin increased to 54.9% from 41.4%, attributed to volume and improved product mix/pricing.
- For the first nine months, DGSE revenue rose 43.2% and ECHG revenue 31.3%. ECHG’s nine-month gross margin rose to 54.0% from 42.7%; DGSE’s eased to 12.6% from 13.3%.
- The final Avail purchase-price allocation recognized $2.736 million of previously unidentified intangible assets, reducing goodwill by the same amount. The company reported $250,800 of related catch-up amortization in Q3; total goodwill at September 30 was $3.62 million.
- Prior-year comparisons include $1.67 million of federal-loan forgiveness income and a $949,174 write-off of notes and accrued interest; neither item recurred in 2022. Avail was acquired in October 2021, affecting comparability.
- Management expects approximately $1.5 million of capital expenditures over the next 12 months, including equipment and potential DGSE property purchases. No formal revenue or earnings guidance was provided.
Risks, contingencies, and other disclosures
- Management cited inflation, supply-chain disruption, COVID-19, the Russia-Ukraine conflict, commodity-price volatility—particularly gold—and potential effects on sales, margins, and liquidity. The company does not hedge its commodity-price exposure with derivatives.
- DGSE depends on sourcing resale inventory from secondary markets; ECHG faces supply and downstream customer constraints. Management said the duration and financial impact of macroeconomic conditions remain uncertain and additional liquidity could be necessary.
- Management stated it believes current capital resources are sufficient for working-capital needs and the company does not currently anticipate drawing on its credit facility. It expects to renew, extend, or replace short-term debt as it matures.
- The company reported ordinary-course claims and lawsuits, which management did not expect to have a material adverse effect. No material risk-factor changes were reported. Disclosure controls were deemed effective; no material changes in internal control were reported.
Important facts for investors to verify
- Whether ECHG’s higher gross margins and improved product mix persist, and how much growth reflects Avail and other acquisitions versus organic performance.
- Whether DGSE can sustain sales growth while managing precious-metal price exposure, sourcing, and its comparatively low gross margin.
- Inventory growth, operating cash conversion, and the effects of working-capital needs on available liquidity.
- Debt maturities, required Avail installment payments, planned capital spending, and management’s assertion that liquidity is adequate.
- The ongoing amortization and carrying value of Avail’s newly identified intangible assets, and whether future impairment indicators emerge.