Envela Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results. Envela operates two recommerce segments: DGSE, focused on luxury hard assets, and ECHG, focused on electronics, IT equipment, and recycling.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $38.81 million | $22.86 million | $85.19 million | $59.82 million |
| Gross profit | $7.16 million | $5.19 million | $16.94 million | $10.77 million |
| Gross margin | 18.5% | 22.7% | 19.9% | 18.0% |
| Operating income | $3.11 million | $1.22 million | $5.09 million | $2.23 million |
| Net income | $2.98 million | $1.04 million | $4.73 million | $1.98 million |
| Diluted EPS | $0.10 | $0.04 | $0.18 | $0.08 |
- Q3 revenue rose about 70% year over year and net income nearly tripled. Nine-month revenue increased about 42% and net income about 139%.
- For the nine months, DGSE revenue was $62.85 million and ECHG revenue was $22.34 million. Q3 revenue was $28.14 million for DGSE and $10.67 million for ECHG.
- Q3 consolidated gross margin declined from 22.7% to 18.5%, despite higher gross profit. ECHG’s Q3 gross margin fell to 34.9% from 51.0%; DGSE’s was broadly stable at 12.2% versus 12.1%.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $3.23 million, compared with cash used of $2.73 million in 2019. Investing activities used $3.38 million; financing provided $2.91 million. Cash increased $2.76 million to $7.27 million.
- At September 30, cash was $7.27 million, current assets $24.05 million, and current liabilities $6.73 million. Working capital was approximately $17.31 million.
- Total assets were $37.12 million and total liabilities $21.20 million. Stockholders’ equity was $15.92 million.
- Notes payable totaled $12.55 million, including $9.43 million owed to CEO John Loftus under related-party notes and a $1.67 million Paycheck Protection Program loan. Operating lease liabilities totaled about $5.07 million.
- The company reported an undrawn $3.5 million credit facility. Management said it believed resources, including the federal loan, were sufficient for working-capital needs, but warned additional liquidity might be needed depending on pandemic effects.
Material changes, outlook, and risks
- Management attributed the Q3 rebound to increased customer activity after COVID-related restrictions eased and higher gold prices. DGSE resale revenue rose sharply; DGSE recycled-material revenue declined as more purchased inventory was retained for retail resale.
- ECHG revenue and results are not fully comparable with 2019 because the Echo Entities and Teladvance were acquired during 2019. The filing also notes a new revenue disaggregation presentation in 2020.
- DGSE purchased retail buildings in Lewisville and Grapevine for a combined $1.815 million, largely financed with bank loans. Two new stores were expected to open before the 2020 holiday season. The Southlake store lease expired and the location was vacated.
- After quarter-end, Envela closed on a $3.521 million Irving office building purchase on November 4, 2020, partly financed by a $2.96 million loan. The building was approximately 70% leased; the company planned to sublet space to offset debt payments.
- The approximately $1.67 million PPP loan bears 1% interest and may be forgiven if criteria are met. Envela planned to apply for forgiveness in Q4 2020; forgiveness was not assured.
- Management cited uncertainty around COVID-19, possible renewed restrictions, changing demand, supply-chain disruption, and precious-metal price movements. It said the pandemic had reduced Q2 sales and could affect operations into 2021. Gold-price volatility and availability of secondary-market inventory are also risks.
- Management reported no material adverse effect expected from ordinary-course legal claims. Disclosure controls were deemed effective at a reasonable-assurance level, and no material change in internal control was reported.
Key facts for investors to verify
- Whether the PPP loan qualifies for forgiveness and the resulting effect on reported debt and cash flows.
- Whether the Q3 sales rebound and margins persist, particularly given lower consolidated and ECHG Q3 gross margins.
- Segment comparability and performance excluding the effects of acquisitions made during 2019.
- Debt service, related-party note terms, and the financing and occupancy economics of the retail and Irving property purchases.
- Potential working-capital or liquidity needs if COVID-19 disruptions, gold-price changes, or inventory constraints worsen.