Envela Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Envela operates two recommerce segments: DGSE, focused on luxury hard assets, and ECHG, focused on electronics and IT equipment resale and recycling. ECHG was acquired in May 2019, so reported year-over-year comparisons include ECHG in Q1 2020 but not Q1 2019.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $25.83 million | $16.02 million |
| Gross profit | $5.30 million | $2.22 million |
| Gross margin | 20.5% | 13.8% |
| Operating income | $1.30 million | $0.40 million |
| Net income | $1.17 million | $0.35 million |
| Basic and diluted EPS | $0.04 | $0.01 |
| Cash from operating activities | $1.03 million | $(0.96) million |
- Revenue increased about 61% and net income about 231%; these consolidated comparisons are substantially affected by the addition of ECHG. Pro forma Q1 2019 results including ECHG showed revenue of $19.30 million and a net loss of $1.69 million.
- DGSE revenue was $20.36 million, up 27%; gross profit was $2.36 million. Its gross margin declined to 11.6% from 13.8%, despite higher sales. Management attributed revenue growth mainly to higher gold prices and gross profit growth to increased sales velocity.
- ECHG generated $5.47 million in revenue and $2.94 million in gross profit, a 53.7% gross margin; it reported $0.79 million net income. No Q1 2019 segment comparison is presented because ECHG was acquired during 2019.
- Cash and cash equivalents were $3.94 million at March 31, down from $4.51 million at year-end. The $1.03 million of operating cash flow was more than offset by $1.50 million invested in a CExchange note and $0.03 million of capital expenditures; financing used $0.07 million.
- Current assets were $17.31 million and current liabilities $3.24 million, implying a current ratio of approximately 5.3. Total liabilities were $14.62 million. Related-party notes payable totaled $9.57 million, bearing 6% interest and maturing May 2024; the lender is CEO, President and Chairman John R. Loftus. Operating lease liabilities totaled approximately $3.26 million.
- Interest expense was $145,315, compared with $34,549 in Q1 2019. The company reported income tax expense of $18,577 and an effective tax rate of 1.6%.
Material changes and notable items
- Envela revised its segment presentation in 2020 to report DGSE and ECHG results and further disaggregate revenue between resale and recycling.
- In February 2020, ECHG lent CExchange $1.50 million at 8.5%, with interest-only payments quarterly and maturity in February 2023. The agreement includes warrant and call-option rights to acquire CExchange; Envela stated there is no assurance it will exercise them.
- Management concluded there was no COVID-19-triggered goodwill impairment at March 31, 2020, but said it would continue evaluating ECHG goodwill.
- The company signed an initial agreement to buy a retail building in Lewisville, Texas, for $1.4 million and expected to close in Q2 2020, subject to due diligence. It anticipated financing 80% of the purchase with a roughly 3% ten-year mortgage; the purchase was not assured.
Outlook, risks and contingencies
- Management said COVID-19 restrictions and changing consumer behavior caused a marked sales decline in the second half of March and materially affected Q1 results. The ultimate effects on sales, operations and liquidity were uncertain; management said additional liquidity was necessary.
- Envela reported approval for an approximately $1.67 million federally backed loan at 1% interest, intended to cover eligible payroll, rent and utility costs during the pandemic. Forgiveness depends on meeting specified criteria.
- A $1.0 million revolving credit line was due to expire May 17, 2020. The bank had communicated approval of a two-year extension and increased limit, but definitive documents were still outstanding. Management believed resources, including the federal loan, were sufficient for working-capital needs; further financing, if needed, was not assured.
- Expected capital expenditures for the next 12 months were approximately $50,000. No specific full-year revenue or earnings guidance was provided.
- Key risks include COVID-related closures and demand disruption; volatility in precious-metal prices; availability and cost of goods sourced from secondary markets; and potential environmental compliance costs. Management said routine legal claims were not expected to have a material effect.
- Disclosure controls were deemed effective at a reasonable assurance level, with no material changes to internal control over financial reporting reported during the quarter.
Investor facts to verify
- Whether the $1.67 million federal loan was funded, and whether Envela met the conditions for forgiveness.
- Whether the revolving credit line extension and increased limit were finalized, and the facility’s current terms and availability.
- Subsequent COVID-19 effects on operating performance, liquidity, store operations and customer demand.
- Repayment terms and collectability of the CExchange note, and any decision regarding its warrant or call option.
- Whether the Lewisville property acquisition closed and how it was financed.
- The implications of substantial CEO-related debt and related-party governance, including the revised payment allocation on the notes.