Envela Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. Envela operates DGSE, a luxury hard-assets recommerce business, and ECHG, which recycles and resells IT equipment and consumer electronics.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $37.68 million | $38.81 million | $96.90 million | $85.19 million |
| Gross profit / margin | $8.11 million / 21.5% | $7.16 million / 18.5% | $21.54 million / 22.2% | $16.94 million / 19.9% |
| Operating income | $2.66 million | $3.11 million | $6.69 million | $5.09 million |
| Net income | $3.11 million | $2.98 million | $7.27 million | $4.73 million |
| Diluted EPS | $0.12 | $0.11 | $0.27 | $0.18 |
| Cash from operations | — | $1.03 million | $3.23 million |
Q3 revenue declined about 3%, while nine-month revenue increased about 14%. Q3 operating income fell about 14%, despite higher gross profit, as operating expenses rose. Nine-month net income increased about 54%; results included a $1.67 million gain from forgiveness of the federal loan and a $949,174 write-off of CExchange notes and accrued interest. These unusual items materially affected reported earnings.
Segments and material changes
- DGSE: Q3 revenue fell 9% to $25.48 million, primarily from lower resale sales; recycled revenue increased. Nine-month revenue rose 7% to $67.41 million.
- ECHG: Q3 revenue increased 14% to $12.20 million, and gross profit rose 35% to $5.05 million. Nine-month revenue increased 32% to $29.49 million. Its nine-month recycled gross margin declined to 44.5% from 55.0% in 2020.
- Company-wide SG&A rose 35% in Q3 to $5.23 million and 26% for the nine-month period to $14.21 million. Management cited ECHG staffing and infrastructure costs and costs associated with newer DGSE locations.
- On June 9, ECHG acquired substantially all CExchange assets and certain liabilities in exchange for cancellation of $1.50 million of principal and accrued interest. The preliminary allocation recorded $1.89 million of goodwill. Envela subsequently wrote off the remaining $900,000 note and $49,174 accrued interest after concluding they might not be recoverable.
Cash, debt and liquidity
- At September 30, cash was $8.32 million, current assets $28.93 million and current liabilities $5.52 million; working capital was approximately $23.42 million.
- Cash from operations was $1.03 million, down from $3.23 million. Growth in receivables ($2.87 million) and inventory ($2.65 million), among other working-capital uses, weighed on cash generation.
- Investing activities used $3.35 million, including $3.06 million of property and equipment purchases. Financing provided $1.43 million, including $1.77 million of property-loan proceeds. Cash declined $895,000 from year-end.
- Notes payable totaled $15.18 million, including $9.14 million of related-party notes payable to CEO John R. Loftus; current principal was $550,256. Total liabilities were $24.38 million. Operating lease liabilities were $5.33 million, including current and long-term portions.
- A $1.67 million federal loan was forgiven effective April 1, 2021, with notification received in Q3. The company also had an undrawn $3.5 million Texas Bank and Trust facility, with a stated maturity of May 16, 2022.
Outlook, risks and notable items
- Management estimated approximately $1 million of capital expenditures over the next 12 months, including equipment and potential DGSE properties; no capital expenditure commitments existed at quarter-end. No specific earnings or revenue guidance was provided.
- Management said it believed capital resources were sufficient for working-capital requirements, while noting that growth could increase funding needs and that additional liquidity might be necessary if COVID-19 effects persist.
- Key exposures include gold and other commodity-price movements, sourcing adequate secondary-market inventory, uncertain COVID-19 effects, and customer and supplier activity. Management reported that 90% of Echo refining revenue came from one international refining partner.
- On November 1, 2021, ECHG acquired Avail Recovery Solutions for $4.5 million: $2.5 million paid at closing and $2.0 million payable in 12 monthly installments beginning after 90 days.
- Management reported effective disclosure controls as of September 30 and no material changes to internal control over financial reporting. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the federal-loan forgiveness and CExchange receivable write-off.
- Whether operating cash flow improves as receivables and inventory expand, and whether inventory levels and margins remain sustainable.
- The final CExchange purchase-price allocation, integration performance, and the financial and cash-flow effects of the Avail acquisition.
- Debt-service and liquidity capacity, including related-party obligations, the credit-facility maturity, lease commitments and the new Avail installments.
- Sensitivity of DGSE and ECHG results to precious-metal prices, sourcing conditions, and reliance on the principal refining partner.