Unless the context indicates otherwise, references to "we," "us," "our," "the
Company" and "Envela" refer to the consolidated business operations of Envela
Corporation, and all of its direct and indirect subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2020
(this "Form 10-Q"), including but not limited to: (i) the section of this Form
10-Q entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations;" (ii) information concerning our business prospects or
future financial performance, anticipated revenues, expenses, profitability or
other financial items; and, (iii) our strategies, plans and objectives, together
with other statements that are not historical facts, includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Forward-looking statements generally
can be identified by the use of forward-looking terminology, such as "may,"
"will," "would," "expect," "intend," "could," "estimate," "should," "anticipate"
or "believe." We intend that all forward-looking statements be subject to the
safe harbors created by these laws. All statements other than statements of
historical information provided herein are forward-looking statements based on
current expectations regarding important risk factors. Many of these risks and
uncertainties are beyond our ability to control, and, in many cases, we cannot
predict all of the risks and uncertainties that could cause our actual results
to differ materially from those expressed in the forward-looking statements.
Actual results could differ materially from those expressed in the
forward-looking statements, and readers should not regard those statements as a
representation by us or any other person that the results expressed in the
statements will be achieved. Important risk factors that could cause results or
events to differ from current expectations are described under the section of
this Form 10-Q entitled "Risk Factors" and elsewhere in this Form 10-Q as well
as under the section entitled "Risk Factors" in our Fiscal 2019 10-K. These
factors are not intended to be an all-encompassing list of risks and
uncertainties that may affect the operations, performance, development and
results of our business. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to release publicly the results of any revisions to
these forward-looking statements, which may be made to reflect events or
circumstances after the date thereon, including without limitation, changes in
our business strategy or planned capital expenditures, or store growth plans, or
to reflect the occurrence of unanticipated events.
24
Results of Operations
General
The COVID-19 pandemic's effects, including limited Company operations due to a
portion of our retail stores being unable to sell certain products, mandated by
governing authorities, and dramatic changes in consumer behavior, led to a
decline in DGSE sales during the second quarter of fiscal year 2020. As the
activity has grown rapidly, from increased business, at both DSGE's retail
locations and ECHG's warehouses during the quarter ended September 30, 2020, we
continue to exercise the safety protocols established by the Company at the
start of the pandemic. The Company continues to operate at full strength and
will take measures to keep our employees safe where possible. The Company
established safety protocols by wearing masks and social distancing where
possible. The Company had no layoffs or terminations due to the pandemic,
although there had been reduced revenue from governmental shut-in orders for the
second quarter ended June 30, 2020. As the activity has grown rapidly, from
increased business, at both DGSE's retail locations and ECHG's warehouses during
the quarter ended September 30, 2020, we continue to exercise the safety
protocols established by the Company at the start of the pandemic. The Company
continues to operate at full strength and will take measures to keep our
employees safe where possible. Although retail investors' demand for
precious-metal coins appeared to have contributed to higher gold prices, jewelry
consumption and recycled-gold supply plunged during the second quarter as
consumers were confined to their homes for most of the quarter in an effort to
stem the spread of COVID-19, according to the World Gold Council (the "WGC").
Over the longer term, the WGC noted it believed that recycled-gold volumes could
likely rise once restrictions are lifted, with consumers looking for liquid
assets-such as gold-to help alleviate economic hardship caused by the lockdown.
Consumer demand for our products rose following the lifting of governmental
orders to refrain from selling non-essential items in our retail stores due to
the COVID-19 pandemic and a related spiking of gold prices.
The following disaggregation of total revenue is listed by sales category and
segment for the three months ended September 30, 2020 and September 30, 2019:
CONSOLIDATED Three Months Ended September 30,
2020 2019
Revenues Gross Profit Margin Revenues Gross Profit Margin
DGSE
Resale $27,101,477 $3,139,884 11.6% $14,105,015 $1,659,597 11.8%
Recycled 1,035,697 293,076 28.3% 2,547,912 359,255 14.1%
Subtotal 28,137,174 3,432,960 12.2% 16,652,927 2,018,852 12.1%
ECHG
Resale 7,812,553 2,376,406 30.4% 5,133,181 2,408,416 46.9%
Recycled 2,861,157 1,354,031 47.3% 1,075,093 759,186 70.6%
Subtotal 10,673,710 3,730,437 34.9% 6,208,274 3,167,602 51.0%
$38,810,884 $7,163,397 18.5% $22,861,201 $5,186,454 22.7%
25
The following disaggregation of total revenue is listed by sales category and
segment for the nine months ended September 30, 2020 and September 30, 2019:
CONSOLIDATED Nine Months Ended September 30,
2020 2019
Revenues Gross Profit Margin Revenues Gross Profit Margin
DGSE
Resale $59,065,343 $6,632,131 11.2% $45,737,002 $5,705,946 12.5%
Recycled 3,784,444 779,776 20.6% 5,514,091 801,216 14.5%
Subtotal 62,849,787 7,411,907 11.8% 51,251,093 6,507,162 12.7%
ECHG
Resale 15,595,813 5,818,672 37.3% 5,116,345 2,335,781 45.7%
Recycled 6,740,034 3,705,356 55.0% 3,450,730 1,927,308 55.9%
Subtotal 22,335,847 9,524,028 42.6% 8,567,075 4,263,089 49.8%
$85,185,634 $16,935,935 19.9% $59,818,168 $10,770,251 18.0%
Three Months Ended September 30, 2020 compared to Three Months Ended September
30, 2019
Revenue. Revenue related to DGSE's continuing operations increased by
$11,484,247, or 69%, during the three months ended September 30, 2020, to
$28,137,174, as compared to $16,652,927 during the same period in 2019. Resale
revenue, such as bullion, jewelry, watches and rare coins, increased by
$12,996,462, or 92%, during the three months ended September 30, 2020, to
$27,101,477 as compared to $14,105,015 during the same period in 2019.
Recycled-material sales decreased 59% to $1,035,697 for the three months ended
September 30, 2020, as compared to $2,547,912 for the three months ended
September 30, 2019. Revenue increased for resale items for the three months
ended September 30, 2020, compared to the three months ended September 30, 2019,
primarily due to the apparent increase in consumer demand following the lifting
of governmental orders to refrain from selling non-essential items in our retail
stores due to the COVID-19 pandemic and the related spiking of gold prices due
to the pandemic. The decrease in recycled-materials revenue is primarily due to
the spike in resale revenue stemming from the COVID-19 pandemic, as we purchased
inventory for the quarter ended September 30, 2020, more inventory was kept for
our retail stores as compared to the three months ended September 30, 2019, and
recycled less.
Revenue related to ECHG's continuing operations for the three months ended
September 30, 2020 increased by $4,465,436, or 72%, to $10,673,710, as compared
to $6,208,274 during the same period in 2019. Resale revenue increased by
$2,679,372, or 52%, to $7,182,553 as compared to $5,133,181 during the three
months ended September 30, 2019. Recycled sales increased by $1,786,064 or 166%,
to $2,861,157 as compared to $1,075,093 for the three months ended September 30,
2019. Teladvance was acquired on August 2, 2019; therefore, the revenue for the
three months ended September 30, 2019 may not be fully comparable to the three
months ended September 30, 2020.
The Company has no layoffs to-date or terminations due to the pandemic, although
revenue declined from governmental shut-in orders for the second quarter ended
June 30, 2020.
26
Gross Profit. Gross profit related to DGSE's operations for the three months
ended September 30, 2020, increased by $1,414,108, or 70%, to $3,432,960 as
compared to $2,018,852 during the same period in 2019. The increase in total
gross profit was due primarily to the increase in sales velocity of resale items
due to the apparent increase in consumer demand following lifting of the
governmental restrictions from the COVID-19 pandemic and the aforementioned
related spike in gold prices. Although there was increased revenue for the
resale items, there was also a slightly lower gross-margin percentages due to
DGSE's desire to increase the sales velocity after the lifting of governmental
orders due to the COVID-19 pandemic.
Gross profit related to ECHG for the three months ended September 30, 2020 was
$3,730,437 as compared to $3,167,602 during the same period in 2019. Gross
profit for resale revenue for the three months ended September 30, 2020 was
$2,376,406, or 64% of ECHG's gross profit, compared to recycled gross profit
during the same period of $1,354,031, or 36%. Teladvance was acquired on August
2, 2019; therefore, the gross profit for the three months ended September 30,
2019 may not be fully comparable to the three months ended September 30, 2020.
Selling, General and Administrative Expenses. For the three months ended
September 30, 2020, Selling, General and Administrative ("SG&A") expenses for
DGSE decreased by $164,750, or 9%, to $1,703,394, as compared to $1,868,144
during the same period in 2019. The decrease in SG&A was primarily due to
corporate overhead expenses being shared between both the DGSE and ECHG
segments.
The SG&A expenses for ECHG totaled $2,166,279 for the three months ended
September 30, 2020. Teladvance was acquired on August 2, 2019, therefore, the
SG&A expense for the three months ended September 30, 2019 may not be fully
comparable to the three months ended September 30, 2020.
Depreciation and Amortization. For the three months ended September 30, 2020,
depreciation and amortization expense for DGSE was $79,190, compared to $44,368
for the same period in 2019, an increase of $34,822, or 78%. The increase of
$34,822 from the three months ending September 30, 2020 compared to the three
months ending September 30, 2019 is primarily due to a vehicle purchase during
the first quarter of 2020 and amortization expenses from additional point of
sale "POS" costs during the year to be amortized.
The Depreciation and Amortization expense for ECHG consisted of depreciation of
$16,692 and amortization of $83,900 for the three months ending September 30,
2020. Amortization for the three months ended September 30, 2020, is from the
Echo Entities' Purchase Price Allocation of intangibles amortized over 10 years.
Teladvance was acquired on August 2, 2019; therefore, the depreciation and
amortization expense for the three months ended September 30, 2019 may not be
fully comparable to the three months ended September 30, 2020.
Interest Expense. For the three months ended September 30, 2020, interest
expense for DGSE was $53,931, an increase of $7,167 or 15%, compared to $46,764
during the same period in 2019. This increase was primarily the result of
additional loans to DGSE to finance recent real estate acquisitions for retail
operations, as discussed above.
The interest expense for ECHG was $101,868 for the three months ended September
30, 2020, as compared to $101,956 for the same period in 2019, a slight decrease
due to a paid down principal balance on the note payable, related party. The
interest paid and accrued interest for the three months ended September 30, 2020
is from the note payable, related party, the proceeds of which were used for the
purchase of the Echo Entities.
Income Tax Expense. For the three months ending September 30, 2020, income tax
expense was $273 a decrease of $41,437, compared to $41,710 for the three months
ending September 30, 2019. The effective income tax rate was 0% and 3.9% for the
three months ending September 30, 2020 and 2019, respectively. Differences
between our effective income tax rate and the U.S. federal statutory rate are
the result of state taxes, non-deductible expenses and changes in the valuation
allowance in relation to the deferred tax asset for NOL carryforwards.
Net Income. We recorded a net income of $2,984,824 for the three months ended
September 30, 2020, compared to a net income of $1,035,475 for the three months
ended September 30, 2019, an increase in net income of $1,949,349, which is due
primarily to an almost 70% increase in revenue between the periods.
27
Earnings Per Share. For the three months ending September 30, 2020, our net
income per basic and diluted shares attributable to common stockholders was
$0.11, compared to $0.04 per basic and diluted shares for the three months
ending September 30, 2019. This increase is again due primarily to an almost 70%
increase in revenue between the periods.
Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30,
2019
Revenues. Revenue related to DGSE's operations increased by $11,598,693, or 23%,
during the nine months ended September 30, 2020, to $62,849,787, as compared to
$51,251,094 during the same period in 2019. Resale revenue, such as bullion,
jewelry, watches and rare coins, increased $13,328,341, or 29%, compared to the
nine months ended September 30, 2019. Recycled revenue decreased by
approximately 31%, compared to the prior year nine months. Revenue increased for
the nine months ending September 30, 2020, compared to the nine months ending
September 30, 2019, primarily due an apparent increase in consumer demand
following the lifting of governmental orders to refrain from selling
non-essential items in our retail stores because of the COVID-19 pandemic and
the spiking of gold prices due to the pandemic.
Revenue related to ECHG for the nine months ended September 30, 2020 was
$22,335,847, consisting of $15,595,813 of resale revenue, or 70% of ECHG sales,
compared to $6,740,034 of recycled sales, or 30%. The Echo Entities were
acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019;
therefore, the revenue for the nine months ended September 30, 2019 is not
comparable to the nine months ended September 30, 2020.
Gross Profit. Gross profit for the nine months ended September 30, 2020, related
to DGSE, increased by $904,745, or 14%, to $7,411,907, as compared to $6,507,162
during the same period in 2019. The increase in gross profit was primarily due
to increased sales. As a percentage of revenue, gross margin decreased to 11.8%
for the nine months ended September 30, 2020, compared to 12.7% for the same
period in 2019.
Gross profit related to ECHG for the nine months ended September 30, 2020, was
$9,524,028, consisting of gross profit for resale revenue of $5,818,672, or 61%
of ECHG's gross profit, and recycled gross profit accounting for $3,705,356, or
39%. The Echo Entities were acquired on May 20, 2019, and Teladvance was
acquired on August 2, 2019; therefore, the gross profit for the nine months
ended September 30, 2019 is not comparable to the nine months ended September
30, 2020.
Selling, General and Administrative Expenses. For the nine months ended
September 30, 2020, DGSE's SG&A expenses decreased by $362,514, or 7%, to
$5,121,568, as compared to $5,484,082 during the same period in 2019. The
decrease in SG&A was primarily due to corporate overhead expenses being shared
between both the DGSE and ECHG segments.
The SG&A expenses for ECHG totaled $6,189,975 for the nine months ended
September 30, 2020. The Echo Entities were acquired on May 20, 2019, and
Teladvance was acquired on August 2, 2019; therefore, the SG&A expense for the
nine months ended September 30, 2019 is not comparable to the nine months ended
September 30, 2020.
Depreciation and Amortization. For the nine months ended September 30, 2020,
DGSE's depreciation and amortization expense was $235,471, compared to $193,141
for the same period in 2019. The increase is primarily due to additional POS
costs that are being amortized and a vehicle purchased during the first quarter
of 2020.
The Depreciation and Amortization expense for ECHG consisted of depreciation of
$52,046 and amortization of $251,700 for the nine months ended September 30,
2020. Amortization for the nine months ended September 30, 2020 is due to the
Echo Entities' Purchase Price Allocation of intangibles being amortized over 10
years. The Echo Entities were acquired on May 20, 2019, and Teladvance was
acquired on August 2, 2019; therefore, the depreciation and amortization expense
for the nine months ended September 30, 2019 is not comparable to the nine
months ended September 30, 2020.
Interest Expense. For the nine months ended September 30, 2020, the interest
expense for DGSE was $142,824, an increase of $35,854, or 34%, compared to
$106,970 during the same period in 2019. The increase is primarily due to an
increased interest rate on the note payable, related party, that paid off the
accounts payable, related party, outstanding balance on May 20, 2019.
28
The interest expense for ECHG was $302,587 for the nine months ended September
30, 2020, which is the interest paid and accrued for the nine months ended
September 30, 2020 for the note payable, related party, the proceeds of which
were used for the purchase of the Echo Entities. The Echo Entities were acquired
on May 20, 2019; therefore, the interest expense for the nine months ended
September 30, 2019 is not comparable to the nine months ended September 30,
2020.
Income Tax Expense. For the nine months ended September 30, 2020, income tax
expense was $35,127, a decrease of $30,238, or 46%, compared to $65,365 for the
nine months ended September 30, 2019. The effective income tax rate was 1.0% and
3.2% for the nine months ended September 30, 2020 and 2019, respectively.
Differences between our effective income tax rate and the U.S. federal statutory
rate are the result of state taxes, non-deductible expenses and changes in the
valuation allowance in relation to the deferred tax asset for NOL carryforwards.
Net Income. The Company recorded a net income of $4,725,147 for the nine months
ended September 30, 2020, compared to a net income of $1,979,637 for the nine
months ended September 30, 2019, an increase in net income of $2,745,510, which
is due primarily from the additional net income attributable to ECHG and
increased sales in both the DGSE and ECHG segments, for the nine months ended
September 2020, compared to the nine months ended September 30, 2019.
Earnings Per Share. For the nine months ended September 30, 2020, our net income
per basic and diluted shares attributable to common stockholders was $0.18,
compared to $0.08 per basic and diluted shares for the nine months ended
September 30, 2019.
Liquidity and Capital Resources
During the nine months ended September 30, 2020, cash flows provided by
operations totaled $3,234,699, and during the nine months ended September 30,
2019 cash flows used in operations totaled $2,732,488, an increase of
$5,967,187. Cash provided by operations for the nine months ended September 30,
2020 was driven largely by the increase of accounts payable and accrued expenses
of $1,006,345 and net income added to non-cash items of depreciation and
amortization of $5,264,364, offset by an increase in trade receivables of
$1,661,332 and an increase in inventories of $1,108,062. Cash used in operations
for the nine months ended September 30, 2019 was driven largely by the reduction
of accounts payable and accrued expenses of $1,006,345, the reduction of
accounts payable, related party of $3,074,021, the increase of trade receivables
of $920,929, the increase in inventories of $256,103 and the increase in prepaid
expenses of $212,866, offset by net income added non-cash items of depreciation,
amortization, bad debt expense of $2,207,195.
During the nine months ended September 30, 2020 and 2019, cash flows used in
investing activities totaled $3,382,591 and $6,024,506, respectively, a
period-over-period decrease of $2,641,915. The use of cash in investing
activities during the nine months ended September 30, 2020 was primarily due to
investing in a note receivable of $1,500,000 to CExchange and purchasing two new
retail locations for DGSE totaling $1,815,000, of which $363,000 was cash
payments applied against the purchases of the retail locations and the remainder
of the balance purchased was financed through notes payable. The use of cash in
investing activities during the nine months ended September 30, 2019 was
primarily due to purchasing the Echo Entities for $5,876,517, net of cash.
During the nine months ended September 30, 2020 and 2019, cash flows provided by
financing totaled $2,906,490 and $9,858,432, respectively, a period-over-period
decrease of $6,951,942. The cash provided by financing during the nine months
ended September 30, 2020 were payments made against the notes payable, related
party of $208,421, offset by the Federal Loan received of $1,668,200 and two
loans from Texas Bank and Trust for $496,000 and Truist Bank (f/k/a BB&T Bank)
for $956,000. The cash provided by financing during the nine months ended
September 30, 2019 represented payments made against the notes payable, related
party of $292,568, offset by financing to pay off the accounts payable, related
party of $3,074,021 and financing for the acquisition of the Echo Entities of
$6,925,979.
29
The COVID-19 pandemic has adversely affected global economic business
conditions. Future sales of products like ours have and may continue to decline
due to increased commodities prices, particularly gold. Although we are
continuing to monitor and assess the effects of the COVID-19 pandemic, the
ultimate impact, including the impact on our liquidity and capital resources, is
highly uncertain and subject to change. The duration of any such impact cannot
be predicted, and the Company believes additional liquidity may be necessary to
support ongoing operations during this period of uncertainty. The Company
entered into a Payment Protection Term Note effective April 20, 2020 with Truist
Bank (f/k/a BB&T Bank) as the lender in an aggregate principal amount of
approximately $1.67 million pursuant to the Paycheck Protection Program under
the Coronavirus Aid Relief, and Economic Security (CARES) Act, the Federal Loan.
On May 18, 2020, the Company renewed and increased its Texas Bank & Trust Co.
line of credit (the "Truist Credit Facility") from $1,000,000 to $3,500,000, and
from a one-year term to a two-year term, of which $0 is currently drawn. The
loan agreement for the Truist Credit Facility includes a 30-day clean-up
provision. From time to time we adjust our inventory levels to meet seasonal
demand or working-capital requirements. Management believes we have sufficient
capital resources (including the Federal Loan) to meet working-capital
requirements. If additional working capital is required, we will seek additional
loans from individuals or other commercial banks. The availability of such loans
on acceptable terms is uncertain.
We expect our capital expenditures to total approximately $150,000 during the
next twelve months. These expenditures will be driven by build-out expenses for
properties purchased by DGSE for retail locations, and the purchase of the
office building discussed below.
On September 14, 2020, the Company signed an initial agreement for the purchase
of an office building to relocate its corporate headquarters, in Irving, Texas,
for $3.521 million. The building has approximately 73,000 rentable square feet,
and is approximately 70% leased. We closed the purchase of the building on
November 4, 2020. The purchase was partly financed through a $2.96 million, 5
year loan, bearing an annual interest rate of 3.25%, amortized over 20 years,
payable to Texas Bank & Trust. The Company will continue to sublet the building
to offset the note payments.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to stockholders.
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