Unless the context indicates otherwise for one of our specific operating
segments, references to "we," "us," "our," the "Company" and "Envela" refer to
the consolidated business operations of
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended
Envela Overview
The Company operates through two recommerce business segments represented by customer designations. The consumer segment, formerly known as the DGSE segment, focuses on the recommercialization of luxury hard assets, and the commercial segment formerly known as the ECHG segment, focuses on the recommercialization of business IT equipment and electronic devices.
Through the consumer segment, the Company recommercializes luxury hard assets
and operates the Dallas Gold and Silver Exchange,
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Consumer Segment Business Overview
The consumer segment is headquartered in
For additional information regarding the consumer segment, see "Item 1. Business - Operating Segments - DGSE Segment." in the Company's 2022 Annual Report.
Consumer Segment Recommerce Activities
We operate a sustainable marketplace for preowned luxury goods. We buy and sell coins, diamonds, jewelry, and related accessories and other merchandise. Our ability to offer quality pre-owned goods at prices significantly lower than original retail prices attracts value-conscious customers. The consumer segment depends on purchasing products and materials from secondary markets. We are reliant on our ability to obtain an adequate supply of products and material at prices or other terms acceptable to us. The gross profit on sales of inventory depends primarily on our assessment of the purchase value at the time the property is purchased and our ability to sell that merchandise in a timely manner.
Consumer Segment Precious Metals Pricing and Business Impact
We are exposed to various market risks. Market risk is the potential loss arising from the adverse changes in market prices and rates. The nature of the consumer operations results in exposure to fluctuations in commodity prices, specifically diamonds, platinum, gold and silver. We do not currently use derivatives to hedge these risks.
As a significant portion of our inventory and sales involve gold and jewelry, our results can be influenced by the market price of gold and diamonds. Our retail sales and gross margin could be materially impacted if prices of diamonds, platinum, gold, or silver rise so significantly that our consumers' behavior changes or if price increases cannot be passed onto our customers.
Because the consumer segment buys and resells precious metals, it is impacted by fluctuations and changes in precious-metal pricing which rises and falls based upon global supply and demand dynamics, with the greatest impact on us relating to gold as it represents a significant portion of the precious-metal in which we trade. Such fluctuations, particularly with respect to gold, which accounts for a majority of our merchandise costs, can have a significant impact on its earnings and cash availability.
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We continue to monitor the economic impact on our operations from surging
inflation and the conflict in
Consumer Segment Growth and Expansion
Our continued strategy will be to expand the number of locations we operate
through opening new ("de novo") locations in both current markets within DFW and
Commercial Segment Business Overview
The commercial segment operates Echo,
Commercial Segment Recommerce Activities
A portion of the commercial business depends on obtaining products and material from secondary markets and is reliant on its ability to obtain an adequate supply of products and material at prices and other items acceptable to it. Although we believe that the long-term prospects for the industry remain bright, but because we do not have unlimited backlogs, our business can be promptly affected by short-term market fluctuations and supply limitations.
Commercial Segment Metals Pricing and Business Impact
The commercial recycling business is affected by precious and other non-ferrous metal prices, which fluctuate based upon global supply-and-demand dynamics, among other things, with the greatest impact relating to gold. As discussed below, we have seen a recent decrease of recycled items, which we believe is primarily due to the supply chain problems downstream with our customers.
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Commercial Segment Growth and Expansion
The commercial strategy is to expand both organically and through acquisitions. As an organization, we strive to deliver value through organic growth, high customer loyalty and retention as well as strategic acquisitions. We are committed to continuous innovation. Many of our clients have made commitments to going carbon neutral over the next few years and we see the potential to further expand key relationships as we partner with them in more ways to help them achieve their goal. With an emphasis on increasing recurring revenues and expanding our margins, commercially we believe our organic strategy will ultimately drive strong financial performance, including cash flow to support our acquisition strategy. Commercial's business strategy has always included pursuing synergistic acquisitions, and we plan to continue to expand the business by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance its growth.
For additional information regarding the commercial segment, see "Item 1. Business-Operating Segments-ECHG Segment." in the Company's 2022 Annual Report.
Economic Conditions
Surging inflation, supply chain disruptions and the war in
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with
While our significant accounting policies are more fully described in "Note 1 - Accounting Policies and Nature of Operations" in the Company's 2022 Annual Report, we believe that the accounting estimates discussed below relate to the more significant areas involving management's judgments and estimates.
Inventories
The consumer Segment inventory is valued at the lower of cost or net realizable value ("NRV"). We acquire a majority of our inventory from individual customers, including pre-owned jewelry, watches, bullion, rare coins and monetary collectibles. We acquire these items based on our own internal estimate of the fair value of the items at the time of purchase. We consider factors such as the current spot market price of precious metals and current market demand for the items being purchased. It supplements these purchases from individual customers with inventory purchased from wholesale vendors. These wholesale purchases can take the form of full asset purchases, or consigned inventory. Consigned inventory is accounted for on our balance sheet with a fully offsetting contra account so that consigned inventory has a net zero balance. The majority of our inventory has some component of its value that is based on the spot market price of precious metals. Because the overall market value for precious metals regularly fluctuates, these fluctuations could have either a positive or negative impact on the value of our inventory and could positively or negatively impact our profitability. We monitor these fluctuations to evaluate any necessary impairment to inventory.
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The Echo inventory principally includes processed and unprocessed electronic scrap materials. The value of the material is derived from recycling the precious and other scrap metals included in the scrap. The processed and unprocessed materials are carried at the lower of the average cost of the material during the month of purchase or NRV. The in-transit material is carried at lower of cost or NRV using the retail method. Under the retail method the valuation of the inventory at cost and the resulting gross margins are calculated by applying a cost to retail ratio to the retail value of the inventory.
For the three months ended
Recent Accounting Pronouncements
See Note 3- Accounting Policies and Estimates, to these interim condensed consolidated financial statements for recently adopted accounting pronouncements.
Use of Non-
In this management's discussion and analysis, we use supplemental measures of
our performance, which are derived from our interim consolidated financial
information, but which are not presented in our interim consolidated financial
statements prepared in accordance with
Non-
EBITDA is a key performance measure that our management uses to assess our
operating performance. Because EBITDA facilitates internal comparisons of our
historical operating performance on a more consistent basis, we use this measure
as an overall assessment of our performance, to evaluate the effectiveness of
our business strategies and for business planning purposes. EBITDA may not be
comparable to similarly titled metrics of other companies. EBITDA means earnings
before interest expense, other (income) expense, net, income tax expense, and
depreciation and amortization. EBITDA is a non-
The following table provides a reconciliation of net income to EBITDA:
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