Envela Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The filing was signed August 6, 2020. Envela operates two recommerce segments: DGSE, focused on luxury hard assets, and ECHG, focused on electronics and IT equipment resale and recycling.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $20.55 million | $20.94 million | $46.37 million | $36.96 million |
| Gross profit | $4.47 million | $3.37 million | $9.77 million | $5.58 million |
| Gross margin | 21.8% | 16.1% | 21.1% | 15.1% |
| Operating income | $0.67 million | $0.60 million | $1.97 million | $1.01 million |
| Net income | $0.57 million | $0.59 million | $1.74 million | $0.94 million |
| Basic and diluted EPS | $0.02 | $0.02 | $0.07 | $0.04 |
- Q2 revenue declined about 2%, while net income declined about 4%. DGSE revenue fell 23% to $14.35 million; ECHG revenue was $6.20 million. ECHG comparisons are not directly comparable because Echo was acquired in May 2019 and Teladvance in August 2019.
- For the first half, revenue increased about 25% and net income about 84%; the acquired ECHG businesses materially affect comparability. DGSE first-half revenue was nearly flat, but its gross profit fell 11% and gross margin declined to 11.5% from 13.0%.
- Q2 SG&A was $3.62 million, up from $2.68 million; depreciation and amortization was $0.18 million, and interest expense was $0.14 million. First-half interest expense was $0.29 million, versus $0.09 million.
- Six-month operating cash flow was positive $0.54 million, compared with negative $3.66 million in 2019. Investing used $1.53 million, primarily for a $1.50 million CExchange note; financing provided $1.53 million, including PPP proceeds.
Financial position and liquidity
- At June 30, cash was $5.05 million, current assets $19.88 million, and current liabilities $5.25 million. Working capital was approximately $14.63 million.
- Total notes payable were $11.17 million, including $9.50 million owed to CEO John R. Loftus and a $1.67 million PPP loan. Current notes payable were $1.97 million. Operating lease liabilities totaled approximately $2.99 million.
- Envela reported total assets of $29.18 million, total liabilities of $16.25 million, and stockholders’ equity of $12.93 million.
- The company renewed and increased its Texas Bank & Trust credit line from $1.0 million to $3.5 million, extending the term from one to two years. The filing does not state the amount drawn on the line.
Management commentary, outlook and risks
- Management attributed Q2 pressure on DGSE to COVID-19 restrictions that limited retail sales largely to bullion and reduced customer traffic. It reported no pandemic-related layoffs or terminations. Higher gold prices, weaker jewelry consumption, and reduced recycled-gold supply were noted as industry factors.
- Management said the pandemic’s duration and effects on sales, liquidity, and operations remained uncertain, and that additional liquidity was important. It believed available capital, including the PPP loan, was sufficient for working-capital needs, but said future borrowing availability on acceptable terms was uncertain.
- The approximately $1.67 million PPP loan bears 1% interest and may be forgiven if requirements are met. Envela expected to apply for forgiveness in Q3 2020; forgiveness was not assured.
- Management estimated approximately $75,000 of capital expenditures over the next 12 months, primarily for build-out of DGSE retail properties. It closed on a Lewisville, Texas retail building on July 9 for $1.195 million, financing 80% with a bank loan. A proposed Grapevine purchase for $620,000 was subject to due diligence and was not assured.
- Other key risks include precious-metal price volatility and the availability and cost of secondary-market inventory. Management reported no COVID-related goodwill impairment as of June 30, while noting it would continue evaluation. The company also disclosed ordinary-course claims and lawsuits that management did not expect to materially affect its financial condition, results, or cash flows.
- The company made a $1.50 million loan to CExchange at 8.5%, due February 2023, alongside warrant and call-option agreements to potentially acquire CExchange. Envela said exercise of those rights was not assured.
- No formal revenue or earnings guidance was provided. Management stated disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 conditions and restrictions continued to affect DGSE sales, margins, and liquidity after quarter-end.
- Whether the PPP loan qualified for forgiveness and the eventual amount forgiven or repayable.
- Credit-line utilization and compliance with its 30-day clean-up provision, as well as scheduled related-party debt service.
- Performance and collectability of the CExchange note, and whether Envela exercised its warrant or call option.
- Completion and financing of planned retail-property purchases and the expected related capital expenditures.
- Segment results on a comparable basis, particularly given the timing of the ECHG acquisitions.