Envela Corp quarterly report, Q2 FY2021

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Envela Corporation (NYSE American: ELA) — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021; unaudited. Envela operates DGSE, which recommercializes luxury hard assets, and ECHG, which recommercializes business IT equipment and consumer electronics.

Financial performance

  • Q2 revenue: $33.72 million, up 64% year over year. Gross profit was $7.13 million; gross margin was 21.1%, compared with 21.8%.
  • Q2 operating income and net income: $2.08 million and $2.15 million, respectively, versus $0.67 million and $0.57 million. Diluted EPS was $0.08 versus $0.02.
  • First-half revenue: $59.21 million, up 27.7%. Gross profit was $13.43 million and gross margin was 22.7%, compared with $9.77 million and 21.1%.
  • First-half operating income and net income: $4.03 million and $4.16 million, respectively, versus $1.97 million and $1.74 million. Diluted EPS was $0.15 versus $0.06.
  • Segment results, Q2: DGSE revenue was $23.01 million and ECHG revenue was $10.71 million. Both segments reported operating income: $1.11 million for DGSE and $0.97 million for ECHG.
  • Cash flow: First-half operating cash flow was $0.26 million, down from $0.54 million. Investing used $1.13 million and financing used $0.22 million. Cash declined $1.09 million to $8.13 million.
  • Liquidity and debt at June 30: Current assets were $29.63 million and current liabilities $8.29 million (approximately 3.6x current ratio). Notes payable totaled $15.19 million, including $9.22 million payable to the CEO; this excludes operating lease liabilities. The $3.5 million Texas Bank & Trust facility was undrawn.
  • Balance sheet: Total assets were $46.34 million, total liabilities $24.60 million and stockholders’ equity $21.74 million. Inventory was $12.59 million.

Changes and notable items

  • Growth reflected higher sales in both segments, DGSE’s two new Texas retail locations, and less pandemic-related disruption than in 2020. The prior-year Q2 comparison also included temporary retail closures.
  • ECHG acquired substantially all CExchange assets and certain liabilities on June 9, 2021, forgiving $1.5 million of loan principal plus $55,892 accrued interest. The preliminary allocation recorded $1.89 million of goodwill. A further $900,000 principal balance plus interest remained receivable and was expected to be collected in Q3 2021.
  • Gross margin trends differed by segment: Q2 ECHG margin declined to 37.6% from 46.1%, while DGSE margin improved to 13.5% from 11.3%. For the first half, ECHG margin fell to 43.5% from 49.7%, including a lower recycled-sales margin; DGSE margin rose to 14.1% from 11.5%.
  • Operating cash flow was modest relative to net income, principally as receivables increased $3.37 million and inventory increased $2.58 million. These working-capital uses were partly offset by higher payables and accrued expenses.

Outlook, risks and contingencies

  • Management expected approximately $1.0 million of capital expenditures over the next 12 months, including equipment and retail-property costs. On July 30, 2021, DGSE completed a $2.22 million Frisco, Texas building purchase, partly financed by a $1.772 million, five-year loan at 3.75%.
  • Management stated it believed capital resources were sufficient for working-capital needs, but cautioned that additional liquidity might be needed depending on the pandemic’s duration and effects. No revenue or earnings guidance was provided.
  • Risks include COVID-19 uncertainty, changes in gold and other commodity prices, availability and pricing of secondary-market inventory, and working-capital demands from growth. Envela said approximately 90% of Echo refining revenue came from one refining partner.
  • The $1.668 million federal Paycheck Protection Program loan remained outstanding; the application for forgiveness was pending SBA approval.
  • After quarter-end, the Committed Agency facility matured July 30. Following repayments, $120,708 of principal plus accrued interest remained outstanding. Routine legal claims were not expected by management to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
  • Management concluded disclosure controls were effective as of June 30, 2021; no material change in internal control over financial reporting was reported.

Investor verification priorities

  1. Track conversion of earnings into operating cash flow, especially receivables, inventory and supplier-payment trends.
  2. Verify collection of the CExchange-related $900,000 loan balance and the remaining Committed Agency balance, and assess collectability and timing.
  3. Review ECHG margins, particularly recycled-sales profitability, and the exposure to its major refining partner.
  4. Confirm the status and accounting treatment of PPP loan forgiveness, and assess total debt service, including related-party debt and the Frisco loan.
  5. Compare actual capital spending and liquidity needs with management’s outlook, while monitoring gold prices, pandemic effects and inventory sourcing.