ENVELA CORP
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended
December 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Transition Period
From
to
Commission File Number
001-11048
ENVELA
CORPORATION
(EXACT NAME OF
REGISTRANT AS SPECIFIED IN ITS CHARTER)
|
NEVADA
|
|
88-0097334
|
|
(STATE OF
INCORPORATION)
|
|
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
|
1901 GATEWAY DRIVE, STE 100.
IRVING, TX 75038
(ADDRESS OF
PRINCIPAL EXECUTIVE OFFICES)
(972)
587-4049
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING
AREA CODE)
www.envela.com
|
|
|
|
|
|
|
Securities
registered pursuant to Section 12(b) of the
Act:
|
|
|
|
|
|
|
|
|
|
|
|
Title of each
class
|
|
Trading
Symbol
|
|
Name of exchange
on which registered
|
|
|
|
|
|
|
|
COMMON STOCK, par value $0.01
per share
|
|
ELA
|
|
NYSE
American
|
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
|
|
|
|
|
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes ☐ No ☒
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90
days. Yes ☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such
files). Yes ☒ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Exchange Act.
|
Large accelerated
filer ☐
|
|
Accelerated filer ☐
|
|
Non-accelerated filer ☒
|
|
Smaller reporting company ☒
|
|
|
|
Emerging growth
company ☐
|
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check
mark whether the registrant has filed a report on and attestation
to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of
the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
☒
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes
☐
No
☒
As of June 30,
2020, the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant was $45.132 million
based on the closing sale price as reported on the NYSE American.
As of March 22, 2021, there were 26,924,631 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Part III
incorporates certain information by reference from the
registrant’s definitive proxy statement for the 2021 Annual
Meeting of Stockholders, which definitive proxy statement will be
filed by the registrant with the Securities and Exchange Commission
within 120 days after the end of the registrant’s fiscal year
ended December 31, 2020.
ENVELA
CORPORATION
FORM 10-K
For the Fiscal Year Ended
December 31, 2020
INDEX
|
|
|
|
|
|
Page
|
|
|
|
|
|||
|
|
|
|
|||
|
|
|
|
5
|
||
|
|
|
|
|||
|
|
|
|
12
|
||
|
|
|
|
|||
|
|
|
|
18
|
||
|
|
|
|
|||
|
|
|
|
18
|
||
|
|
|
|
|||
|
|
|
|
19
|
||
|
|
|
|
|||
|
|
|
|
19
|
||
|
|
|
|
|||
|
|
|
|
|||
|
|
|
|
|||
|
|
|
|
20
|
||
|
|
|
|
|||
|
|
|
|
21
|
||
|
|
|
|
|||
|
|
|
|
21
|
||
|
|
|
|
|||
|
|
|
|
28
|
||
|
|
|
|
|||
|
|
|
|
29
|
||
|
|
|
|
|||
|
|
|
|
55
|
||
|
|
|
|
|||
|
|
|
|
55
|
||
|
|
|
|
|||
|
|
|
|
|
55
|
|
|
|
|
|
|||
|
|
|
|
56
|
||
|
|
|
|
|||
|
|
|
|
|
56
|
|
|
|
|
|
|||
|
|
|
|
|||
|
|
|
|
|||
|
|
|
58
|
|||
|
|
|
|
|||
|
|
|
58
|
|||
|
|
|
|
|||
|
|
|
58
|
|||
|
|
|
|
|||
|
|
|
58
|
|||
|
|
|
|
|||
|
|
|
58
|
|||
|
|
|
|
|||
|
|
|
|
|||
|
|
|
|
|||
|
|
|
59
|
|||
|
|
|
|
|||
|
|
|
62
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
Unless the context
indicates otherwise for one of our specific operating segments,
references to “we,” “us,”
“our,” the “Company”, “Envela”
refer to the consolidated business operations of Envela
Corporation, the parent, and all of its direct and indirect
subsidiaries.
Note About Forward-Looking
Statements
This annual report
on Form 10-K for the fiscal year ended December 31, 2020 (this
“Form 10-K”), including but not limited to “Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations” below, information concerning our
business prospects or future financial performance, anticipated
revenues, expenses, profitability or other financial items, and 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,”
“typical,” “projection,”
“plan,” “target,” “mission,”
“intend,” “believe” or similar words. 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 and
may contain information about financial results, economic
conditions, trends, and known uncertainties. All forward-looking
statements are 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 “Item
1A. Risk Factors” below and elsewhere in this Form 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 hereon, including without
limitation, changes in our business strategy or planned capital
expenditures, store growth plans, or to reflect the occurrence of
unanticipated events.
PART
I
Item
1
P
ART
I
I
TEM 1. BUSINESS
OUR MISSION
Envela’s
mission is to empower recommerce buyers and sellers to extend the
useful life of goods by reselling previously owned or used goods,
or recycling goods’ materials, elements or components for
sale and reuse.
OVERVIEW
Envela
is a holding company owning subsidiaries engaged in the
recommercialization of goods. Envela’s recommerce operations
in each subsidy reconditions previously owned or used goods for
resale, or recycles products’ value by extracting materials,
elements or components that can be sold. Envela’s recommerce
businesses is conducted on both a retail basis and a wholesale
basis through distributors, resellers, dedicated stores and online.
Envela’s subsidiaries also operate a number of other related
businesses and brands engaged in a variety of activities, as
identified herein. Envela is domiciled in the state of Nevada, and
its corporate headquarters are located in Irving,
Texas.
OPERATING SEGMENTS
Envela
operates through two recommerce business segments represented by
its two direct subsidiaries. DGSE, LLC (“DGSE”) focuses
on the recommercialization of luxury hard assets, and ECHG, LLC
(“ECHG”) focuses on the recommercialization of business
IT equipment and consumer electronic devices.
DGSE
operates the Dallas Gold & Silver Exchange, Charleston Gold
& Diamond Exchange and Bullion Express brands and primarily
buys and resells or recycles luxury hard assets like jewelry,
diamonds, gemstones, fine watches, rare coins and related
collectibles, precious-metal bullion products, gold, silver and
other precious-metals. Buying and selling items for their
precious-metals content is a major method by which DGSE markets
itself. DGSE also offers jewelry repair services, custom-made
jewelry and consignment items, and maintains relationships with
refiners for precious-metal items that are not appropriate for
resale.
ECHG
owns and operates Echo Environmental Holdings, LLC
(“Echo”), ITAD USA Holdings, LLC (“ITAD
USA”) and Teladvance, LLC (“Teladvance”), through
which it primarily buys and resells or recycles consumer electronic
components and IT equipment. Echo focuses on end-of-life
electronics recycling and sustainability, ITAD USA provides IT
equipment disposition, including compliance and data sanitization
services, and Teladvance operates as a value-added reseller by
providing offerings and services to companies looking either to
upgrade capabilities or dispose of equipment. Like DGSE, ECHG also
maintains relationships with refiners or recyclers to which it
sells valuable materials it extracts from electronics and IT
equipment that are not appropriate for resale or
reuse.
During the first quarter of fiscal year 2020, Envela revised the
way it reviews its financial information to align more closely with
its strategy to engage in diverse recommerce activities through the
two principal business segments mentioned above—DGSE and
ECHG. Although our Company’s overall strategy is recommerce,
we feel there are distinct segments within recommerce. DGSE buys
luxury hard assets, and ECHG buys consumer electronics and IT
equipment, for either resale or recycling
.
Envela will continue to report its revenue and
operating expenses based on its DGSE and ECHG operating
segments
, and beginning in fiscal year 2020, Envela
disaggregated its revenue, within the operating segments, based on
its resale and recycle presentation basis. The Company’s
historical disaggregation of revenue has been recast to conform to
our current presentation.
The
Company includes segment information in the notes to the financial
statements. The objective of segment reporting is to provide a
management approach that identifies different types of businesses
within the Company and how we have organized the segments to make
financial decisions.
DGSE SEGMENT
DGSE
buys to resell or recycle luxury hard assets, including jewelry,
diamonds, fine watches, rare coins and currency, precious-metal
bullion as well as items for their precious-metals content, and
other valuables. DGSE reconditions items for resale as a whole good
or component parts, or recycles them by selling recovered precious
metals to refiners. These metals include gold, silver, platinum and
palladium, with gold constituting the majority of our purchases and
resales. DGSE resells through its retail locations or wholesale
contacts.
Where resale or
wholesale is not appropriate, such as for crafted-precious-metal
items at the end of their useful lives, the items are sent to a
third-party refiner and analyzed for metal content, after which
they can be recycled and either sold or recrafted into new jewelry
or bullion products.
In addition to purchase and resale,
DGSE offers on-site jewelry and watch repair and restoration
services at its Dallas flagship location, located at 13022 Preston
Road, Dallas, Texas 75240, and also partners with a number of
consignment vendors which expands offerings at DGSE’s retail
locations. DGSE also designs and offers custom bridal and fashion
jewelry. As referenced above, DGSE also purchases items for their
precious-metal content. Buying and selling precious metal is a
major method by which DGSE markets itself.
5
PART I
Item
1
For
over 40 years, DGSE has been a destination location for those
seeking value and liquidity in reselling or trading jewelry, and in
recycling the precious metals of items it determines are not
appropriate to sell as a whole good or as component parts.
DGSE’s in-house staff of experts, including horologists,
gemologists and authenticators, inspect items for authenticity and
value, and share their market knowledge with its
customers.
DGSE
operates six retail locations: five Dallas Gold & Silver
Exchange stores throughout the Dallas/Fort Worth Metroplex and the
Charleston Gold & Diamond Exchange in Mt Pleasant, South
Carolina. In the fourth quarter of 2020, DGSE moved its Southlake,
Texas location to Grapevine, Texas, and opened a new location in
Lewisville, Texas—both suburbs of Dallas. DGSE purchased its
Grapevine and Lewisville buildings; it leases its stores in
Charleston, South Carolina and the three other locations in the
Dallas/Fort Worth Metroplex. DGSE’s Dallas flagship location
offers on-site jewelry-repair and watch-restoration
services.
We
believe that the most successful DGSE locations will be those that
can sustain our full retail “exchange” model: engaging
in both buying and selling luxury hard assets and maintaining a
robust and diverse inventory across all jewelry categories, fine
watches and monetary collectibles. Also, to help extend the life of
luxury goods, our stores offer repair and restoration services for
jewelry and watches. Examples of luxury hard assets that we buy and
sell are estate and designer jewelry, fine timepieces, rare and
numismatic coins, diamonds, gold, silver and other precious metals.
See “Item 7. Management’s Discussion and
Analysis
—
DGSE
Precious Metals Pricing and Business Impact” for more
information.
In
recent years, DGSE has maintained several
brick-and-mortar stores
throughout
Dallas/Fort Worth
Metroplex,
making our experts
accessible to provide our customers guidance and insight.
We
are now focusing on bringing the DGSE experience to a wider
customer base through an expanded footprint.
Brick-and-mortar expansion remains a top priority
and strong growth opportunity for DGSE. Purchasing the Lewisville
and Grapevine stores were part of that focus.
We want to
continue adding new merchandise daily to an already inviting
product selection and providing omnichannel and immersive consumer
experiences to customers in existing and new
locations.
We will
continue to focus on evolving our business across the Dallas/Fort
Worth Metroplex and in Charleston, South Carolina in an effort to
drive efficiency across our geographical footprint and maximize
profitability.
DGSE
views e-commerce as a supplement, but not a replacement, to its
retail locations and other operations. For more information, see
“—Sales and Marketing” below.
ECHG SEGMENT
ECHG
owns and operates Echo, ITAD USA and Teladvance, through which it
buys to resell or recycle consumer electronics and IT equipment
from businesses and other organizations, such as school districts.
Items designated for resale as a whole or as component parts get
extended operational life by first having any existing data erased
and then being refurbished before resale. ECHG recycles goods by
removing usable components for resale as components, or by
extracting the valuable metals (or other materials) for sale to
downstream recycling and refining companies that further process
the metal or other materials for subsequent resale. Our customers
include companies and organizations that are based domestically and
internationally. A significant amount of ECHG’s refining
revenue comes through Echo from a refining partner with an
international refining facility.
ECHG’s
goal is to extend the useful life of electronics through recommerce
whenever possible. Resale and reuse conserves energy and raw
materials required to make new products and turns obsolete IT
assets into revenue.
Echo
and ITAD USA (the “Echo Entities”) were formed in
connection with the purchases on May 20, 2019 of the assets of Echo
Environmental, LLC and ITAD USA, LLC (the “Echo Legacy
Entities”). Teladvance was subsequently acquired on August
2
,
2019.
Echo
and ITAD USA each operate in separate leased warehouses in
Carrollton, Texas. These leases were originally assigned in
connection with the asset acquisition from the Echo Legacy
Entities. Teladvance also primarily operates out of the same
Carrollton location as Echo.
Through
ECHG and its subsidiaries, Envela plays a larger role in
environmental sustainability. It is our mission to solve problems
for our clients and leave the planet a better place than we found
it. The world is quickly shifting its priorities to better manage
our global resources, and it is our drive to work with our
customers to design a flexible, convenient, hassle-free recycling
solution that accommodates their specific needs.
For
more information about ECHG’s business drivers, see
“Item 7. Management’s Discussion and
Analysis
—
DGSE
Business Drivers and Impacts.”
6
PART I
Item
1
CUSTOMER
TYPES
DGSE Retail Business
DGSE’s
products and services are marketed through six retail locations in
Texas and South Carolina. As noted above, the brick-and-mortar
retail locations operate under the Dallas Gold & Silver
Exchange and Charleston Gold & Diamond Exchange brands. DGSE
markets bullion products online under the Bullion Express
brand.
DGSE Wholesale Business
DGSE
transacts a significant amount of business with wholesalers in its
industry. These wholesale transactions occur at industry-specific
trade shows held periodically throughout the year, during in-person
and telephonic sales calls, and through industry-trade
websites.
ECHG Business
ECHG
provides custom electronics recycling solutions to meet the needs
of diverse clients, including Fortune 500 companies,
municipalities, school districts, individual consumers and other
organizations. ECHG helps consumers realize maximum value for their
used electronics and in the process helps protect the environment
through responsible recycling.
PRODUCTS AND SERVICES
DGSE Buy Sell Trade
DGSE
provides a marketplace that delivers what we believe to be
unparalleled value and liquidity for those seeking to buy, sell or
trade luxury hard assets like jewelry, watches and diamonds, as
well as most numismatic items, discussed below. DGSE buys and sells
merchandise in every major jewelry category, including bridal
jewelry, fashion jewelry, custom-made jewelry, diamonds and other
gemstones, findings (jewelry components) and fine
watches.
Much of
our jewelry and fine-watch inventory is purchased directly from
individual and wholesale customers at our retail locations. We
process these purchased items at a central location where expert
jewelers, gemologists, precious metal dealers and watchmakers sort
them into three main resale categories: retail appropriate,
wholesale appropriate and refiner appropriate. Following a
determination of retail appropriateness, jewelry and fine watches
are cleaned, serviced and repaired by our experienced jewelers and
watchmakers so they’re in like-new condition and suitable for
resale. Most of these items are then individually tagged and sent
to one of our retail locations for sale. Items determined to be not
appropriate for our retail locations but suitable for wholesale are
grouped into wholesale lots and liquidated through either wholesale
contacts or via
in-person dealer-to-dealer sales.
Items that are not appropriate for retail or wholesale are sold to
a third-party refiner.
The
higher-quality diamonds and gemstones that we purchase are
typically submitted for independent assessment and certification by
the Gemological Institute of America (“GIA”) and other
third-party certifying authorities. This process helps us resell
the diamonds and gemstones individually or as components of our
custom bridal and fashion jewelry. Mid-quality diamonds and
gemstones are often also utilized in our custom fashion jewelry or
packaged with lower-quality stones and sold to wholesalers across
the country. DGSE utilizes jewelry makers to design and create
custom fashion jewelry for sale at its locations, including to
customer specifications.
7
PART I
Item
1
In
addition to our own inventory of reconditioned luxury hard assets
that we offer for sale, we maintain relationships with numerous
commercial consignment vendors across the country who supply us
with new and pre-owned jewelry on consignment. This supplements our
over-the-counter jewelry purchases and enhances our overall jewelry
offering. Sales of this consignment jewelry are settled with our
consignment vendors on a weekly or monthly basis.
DGSE
also buys and sells most numismatic items, including rare coins,
currency, medals, tokens and other monetary collectibles. Most of
our rare coins, currency and monetary collectibles are purchased
directly from individual customers. We then resell them through our
retail activities or wholesale contacts.
DGSE Bullion
Our
bullion-trading operation buys and sells all forms of gold, silver,
platinum and palladium products, including United States and other
government-issue coins, private-mint medallions, art bars and trade
unit bars. All of our store locations conduct retail bullion
transactions. Wholesale bullion transactions are conducted through
our main bullion-trading operation in Dallas, Texas, through which
DGSE maintains numerous vendor relationships with major industry
wholesalers, mints and institutions.
We
purchase bullion products from a variety of vendors and sell them
based on current precious-metal market pricing. Bullion inventory
is subject to market-value changes created by underlying commodity
markets. While we believe that we effectively manage commodity risk
associated with our bullion business, including by periodically
entering into futures contracts to hedge our exposure against
market-price changes, there are national and international factors
beyond our control that may affect margins, customer demand and
transactional volume. These factors include, but are not limited
to, U.S. Federal Reserve policies, inflation rates, global economic
uncertainty, and government and private-mint supply.
DGSE Other Products & Services
We
maintain a jewelry-repair center at our Dallas flagship location.
We accept repair, polishing and service orders through all of our
retail locations which are routed to our Dallas flagship location
for service.
ECHG Electronic Recycling
ECHG,
through its wholly owned subsidiary Echo, offers comprehensive
end-of-life electronics recycling. ECHG works with customers to
design a flexible, convenient, hassle-free program that
accommodates specific customer needs. It offers comprehensive
turnkey solutions that include transportation and product
tracking.
ECHG IT Asset Disposition
ECHG,
through its wholly owned subsidiary ITAD USA, offers wide-ranging
IT equipment disposition services for diverse clients that want to
replace and remarket their IT equipment. ITAD USA helps companies
carefully navigate the maze of local compliance and regulations
associated with technology disposition. From secure logistics and
transportation to comprehensive reporting tools and data
sanitization services, ITAD USA’s solutions cover all
enterprise technology types. Depending on an IT asset’s
condition, it can be refurbished and redeployed within the
customer’s business, remarketed and sold, or donated to
charity. When assets are being sold, ITAD USA’s in-house,
global-commodity experts help determine market value, and its
remarketing network helps ensure clients get maximum
value.
ECHG Hardware & Cloud Solutions
ECHG,
through its wholly owned subsidiary Teladvance, operates as a
value-added reseller, providing IT equipment offerings and services
to companies looking to upgrade their software, hardware or
networking capabilities, or dispose of IT equipment during the
process of moving to cloud services. ECHG delivers a diverse
portfolio of latest-technology products and services for
clients’ specific business and technology needs.
Moreover,
helping new cloud customers recover value from their existing
datacenter components, ECHG offers true cradle-to-grave technology
solutions.
8
PART I
Item
1
CORPORATE
INFORMATION
We
incorporated in the State of Nevada on September 16, 1965, as
Canyon State Mining Corporation of
Nevada
. During the ensuing 56 years, the Company transformed
its business to meet its customers’ needs and changed its
name to reflect those transformation, including to the following:
Canyon State Corporation
(October 13, 1981),
The American
Pacific Mint, Inc.
(July 15, 1986),
Dallas Gold & Silver Exchange, Inc
.
(June 22, 1992), and
DGSE
Companies Inc.
(June 26, 2001). By pursuing diversified
business opportunities in the recommerce sector that have potential
long-term rewards, we continued to evolve, and on December 12,
2019, we changed our name to
Envela Corporation
to better reflect
our current business operations and diversified recommerce
portfolio. These diversified business opportunities include
authenticated recommerce retail of luxury hard assets; end-of-life
IT asset recycling; data destruction and IT-asset disposition; and
provision of products, services and solutions to industrial and
commercial companies.
Information contained
on, or accessible through, our website is not incorporated by
reference into and does not constitute a part of this annual report
or any other report or documents we file with or furnish to the
Securities and Exchange Commission (the
“SEC”).
Our
principal executive offices’ address and telephone number are
shown on the cover of this document. Our website address,
envela.com
,
reflects corporate information and is intended primarily for
investors. Many of our subsidiaries and brands maintain their own
websites for commercial purposes, including primarily the
following:
DGSE.com
,
CGDEinc.com
,
echoenvironmental.com
,
ITADUSA.com
and
teladvance.com
.
Envela
and its subsidiaries hold well-established trademarks and trade
names, including the following:
DGSE;
Dallas Gold & Silver Exchange; Charleston Gold & Diamond
Exchange; Bullion Express;ECHG; ITAD USA; Echo Environmental;and
Teladvance.
Envela
and other trade names, trademarks and service marks of the Company
are the property of Envela. Solely for convenience, the trademarks,
service marks, logos and trade names referred to in this document
are without the “®” and “™”
symbols, but such references are not intended to indicate that we
waive or will not assert our rights in them.
9
PART I
Item
1
SALES AND
MARKETING
In fiscal year
2020, DGSE’s advertising activities continued to rely heavily
on digital media, radio and print. Marketing activities centered on
each of the major business categories, emphasizing our broad array
of products, expertise, and price advantages compared to our local
and regional competition. In fiscal year 2020, we spent
approximately $253,000 on advertising and marketing in our
operations, a 36% year-over-year decrease. Our advertising and
marketing spending represent costs for traditional and digital
media, in-store displays, brochures and informational pamphlets,
production fees, and other related items.
In fiscal year
2021, we anticipate our radio, digital and social media presence to
remain an integral part of DGSE’s marketing strategy. The
website for the Dallas Gold & Silver Exchange has been
redesigned to be viewed on a variety of platforms across a
multitude of digital devices. We believe our enhanced web platform
also facilitates a personalized shopping experience, including
recommending inventory, and delivers a seamless digital experience
for product research and social sharing. Additionally, we
anticipate that social media will continue to play an increasingly
larger role in our overall advertising mix. The digital advertising
will allow us to target specific customer groups on a wider
scale.
ECHG’s
advertising activities focus primarily on regional and national
trade shows. In fiscal year 2020, we spent approximately $27,000 on
advertising and marketing, a significant portion of which was spent
at regional and national trade shows. In 2021, ECHG expects trade
shows will continue to be the largest portion of their advertising
budget since downstream recyclers frequent such trade shows to
evaluate who can meet their needs or service their projects. Also,
at trade shows, representatives of ITAD USA make many contacts with
decision makers seeking either to purchase refurbished electronics
for their employees or to sell their older electronic devices for
recycling and reuse.
SEASONALITY
DGSE’s
retail and wholesale jewelry business is generally seasonal. The
time periods around Christmas, Valentine’s Day and
Mother’s Day are typically the main seasons for jewelry
sales.
Our businesses of
buying and selling bullion, precious metal and rare-coins are less
seasonal, though we believe they are directly impacted by several
factors outside of our control, including U.S. Federal Reserve
policies, inflation rates, global economic uncertainty,
governmental and private-mint supply.
These factors may
affect margins, customer demand and transactional
volume.
Seasonal swings
are rarely sustained or noticed in ECHG’s business of
recycling end-of-life assets and refurbishing value-sustaining
electronic components.
EMPLOYEES
As of December 31,
2020, we employed 152 people, all full-time employees. None of our
employees are represented by a labor union. We believe that our
current employee relations are in good condition. Our management
policy is to keep employees informed of material decisions that
affect them, encourage employee suggestions, and implement them
whenever practicable.
GOVERNMENT REGULATIONS,
ENVIRONMENTAL MATTERS AND IMPACT OF CLIMATE
CHANGE
Envela buys and
resells precious metals, which are generally subject to regulation
including conflict mineral tracing. However, in conjunction with
legal counsel, we have determined that we do not have sufficient
control over manufacturing of any of our products to be included in
the group of companies required to provide conflict-minerals
disclosure and reporting. If our sourcing processes should change,
or if there is a determination that our current practices should be
covered by the conflict-minerals reporting and disclosure
guidelines, we would need to implement significant additional
measures to comply with these rules. See “Item 1A. Risk
Factors—The conflict-mineral diligence process, the results
from that process and the related reporting obligations could
increase costs, adversely affect our reputation and adversely
affect our ability to obtain merchandise” for additional
information. In addition, Envela partners with refiners for certain
of its sales. These refiners are subject to increasingly stringent
governmental regulation in their refining operations, and a change
or increase in such regulations in the United States or abroad may
have an adverse impact on our business.
10
PART I
Item
1
Envela recognizes
that climate change is a major risk to society and therefore
continues to take steps to reduce its climatic impact.
Nevertheless, management believes that climate change has only a
limited influence on Envela’s performance and is of limited
significance directly to the business. However, as a significant
portion of Envela’s business relies on the availability of
disposable income for its customers, a change in fuel prices could
have a material impact on Envela’s business. See “Item
1A. Risk Factors—Adverse economic conditions in the U.S. or
in other key markets, and the resulting declines in consumer
confidence and spending, could have a material adverse effect on
our operating results” for more
information.
Envela applied for
and received, on April 20, 2020, an approximately $1.67 million
federally backed loan with 1% interest, the proceeds of which were
intended to pay employees and cover certain rent and
utility-related costs during the COVID-19 pandemic (the
“Federal Loan”). The Federal Loan is forgivable to the
extent that certain criteria are met. We applied for the
forgiveness of the Federal Loan during the fourth quarter ending
December 31, 2020 and are pending the results of such
application.
AVAILABLE
INFORMATION
Envela files
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements and other information
with the US Securities and Exchange Commission (“SEC”).
Such information, and amendments to reports previously filed or
furnished, is available free of charge from our corporate website,
envela.com
, as soon as
reasonably practicable after such materials are filed with or
furnished to the SEC. The SEC also maintains an internet site at
sec.gov
that contains the
Company’s filings.
Additionally,
there are complete copies of our policies (Business Code of Conduct
& Ethics; Related Party Transaction Policy; and Whistleblower,
committee charters (Audit; Compliance, Governance and Nominating;
and Compensation), and information about how to communicate with
our Board.
11
PART
I
Item
1A
I
TEM 1A. RISK FACTORS
Our operations and
financial results are subject to various risks and uncertainties,
including those described below, that could adversely affect our
business, financial condition, results of operations, cash flows,
and the trading price of shares of our common stock, par value
$0.01 per share (our “Common
Stock”).
You should carefully review
and consider the risks described below and the forward-looking
statements contained in this Form 10-K before evaluating our
business or making an investment decision. Our business, financial
condition or results of operations could be materially adversely
affected by these risks. The trading price of our Common Stock
could decline due to any of these risks, and you may lose all or
part of your investment. You should also refer to the other
information included or incorporated by reference in this report,
including our consolidated financial statements and the related
notes thereto. These risks and uncertainties could cause actual
results and events to differ materially from those anticipated.
Additional risks which we do not presently consider material, or of
which we are not currently aware, may also have an adverse impact
on our business. Please also see the section of this Form 10-K
entitled “Note About Forward-Looking Statements” on
page 2.
The
voting power in our company is substantially controlled by a small
number of stockholders, which may, among other things, delay or
frustrate the removal of incumbent directors or a takeover attempt,
even if such events may be beneficial to our
stockholders.
N10TR, LLC
(“N10TR”) is our largest shareholder, owning 12,814,727
shares of our Common Stock, representing 47.7% of our total
outstanding shares of Common Stock. Eduro Holdings, LLC
(“Eduro”) owns 6,365,460 shares of our Common Stock,
representing 23.7% of our total outstanding shares of Common Stock.
Both N10TR and Eduro are under the common control of John R.
Loftus, our CEO, President the Chairman of the Board. Consequently,
Mr. Loftus, N10TR and Eduro are in a position to significantly
influence any matters that are brought to a vote of the
shareholders, including, but not limited to, the election of
members of our Board and any action requiring the approval of
shareholders, including any amendments to our governing documents,
mergers or sales of all or substantially all of our assets. This
concentration of ownership also may delay, defer or even prevent a
change in control of our company and make some transactions more
difficult or impossible without the support of Mr. Loftus, N10TR
and Eduro. These transactions might include proxy contests, tender
offers, mergers or other purchases of Common Stock that could give
stockholders the opportunity to realize a premium over the
then-prevailing market price for shares of our Common
Stock.
In fiscal
year 2014, we came to an agreed settlement with the SEC, stemming
from an investigation of accounting irregularities. As part of this
settlement we agreed to a series of corporate governance reforms,
which were independently verified in fiscal year 2015. If we do not
comply with the corporate governance reforms, we could face
additional enforcement actions by the SEC or other governmental or
regulatory bodies, as well as additional shareholder lawsuits, all
of which could have significant negative financial or operational
implications.
On April 16, 2012,
we filed a Current Report on Form 8-K disclosing that our Board had
determined the existence of certain accounting irregularities
beginning approximately during the second calendar quarter of 2007
and continuing in periods subsequent thereto (the “Accounting
Irregularities”). We brought the Accounting Irregularities to
the attention of the SEC in a letter dated April 16, 2012. On June
18, 2012, we received written notice that the SEC had initiated a
private investigation into the Accounting Irregularities, to
determine whether any persons or entities had engaged in any
possible violations of the federal securities laws. On June 2,
2014, we received notice of the entry of an agreed final judgment
by the Honorable Judge Jane Boyle (the “Agreed Final
Judgment”) in Civil Action No. 3:14-cv-01909-B, entitled
Securities and Exchange Commission v. DGSE Companies Inc., et. al.,
filed on May 27, 2014 in Federal District Court for the Northern
District of Texas (the “Civil Action”). We consented to
the Agreed Final Judgment prior to the filing of the Civil Action
by the SEC. The Agreed Final Judgment was entered in connection
with the conclusion of the investigation against DGSE by the SEC
regarding the Accounting Irregularities.
12
PART I
Item
1A
In connection with
the Agreed Final Judgment and as remedial measures in connection
with the Accounting Irregularities, we agreed to undertake certain
corporate governance reforms, all of which we believe to be
complete at this time (the “Corporate Governance
Reforms”). The Corporate Governance Reforms include the
appointment of two new independent directors to the Board,
establishing the position of a Lead Independent Director on the
Board and establishing reasonable term limits for members of the
Board, among other reforms. We engaged a consultant satisfactory to
the SEC to confirm implementation of the Corporate Governance
Reforms. Due to Board member resignations in the latter half of
fiscal year 2015, we were unable to complete our confirmation with
the consultant by the initial deadline; however, with the addition
of new independent directors, we regained compliance with the
Corporate Governance Reforms. If we fall out of compliance with the
Corporate Governance Reforms, we may be the subject of additional
enforcement actions and further lawsuits, which could be
debilitating. The costs of such investigations and of defending
lawsuits could be significant and could exceed the amount of any
available insurance coverage we have, and we may not have
sufficient resources in the future to satisfy such costs. These
matters may continue for some time, and we have no way of
anticipating when or how they may be resolved. As a result of the
investigation and settlement, as well as any future investigations
or lawsuits, we could face loss of reputation, decline in
confidence from investors, fall in the market price for our shares,
inability to acquire capital and failure to continue as a going
concern.
In the
past, our internal controls over financial reporting and procedures
related thereto have been deficient. Although we have taken
significant remedial measures, our previous deficiencies could have
a material adverse effect on our business and on our
investors’ confidence in our reported financial information,
and there is no guarantee that our internal controls over financial
reporting and procedures will not fail in the
future.
Effective internal
controls over financial reporting and disclosure controls and
procedures are necessary for us to provide reliable financial
reports and to detect and prevent fraud. In the past, our internal
controls and procedures have failed. The remedial measures taken by
us may not be sufficient to regain the confidence of investors or
any loss of reputation, which could in turn affect our finances and
operations. Our disclosure controls and internal controls over
financial reporting may not prevent all errors or all instances of
fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. Further, the design
of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within our business have been detected. These inherent limitations
include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or
mistake. Controls can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the
likelihood of future events, and any design may not succeed in
achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with
policies or procedures. Because of the inherent limitation of a
cost-effective control system, misstatements due to error or fraud
may occur and not be detected. If there is a failure in any of our
internal controls and procedures, we could face investigation or
enforcement actions by the SEC and other governmental and
regulatory bodies, litigation, loss of reputation and investor
confidence, inability to acquire capital and other material adverse
effects on our finances and business
operations.
The
market for precious metals is inherently
unpredictable.
Bullion, crafted
precious metal, and other precious metal products are purchased and
sold based on current market pricing for precious metals. Bullion
and precious metal inventories are subject to market-value changes
created by their underlying commodity markets. We periodically
enter into futures contracts to hedge our exposure against
market-price changes. There are several national and international
factors which are beyond our control, but which may affect margins,
customer demand and transactional volume in our bullion business.
These factors include, but are not limited to, the policies of the
U.S. Federal Reserve, inflation rates, global economic uncertainty,
and governmental and private mint supply. If we misjudge the
commodity markets underlying the bullion inventory, our bullion
business could suffer adverse consequences. Substantially lower
precious-metal prices could negatively affect our ability to
continue purchasing significant volumes of bullion, crafted
precious metal, and other precious-metal products, which could
negatively affect our profitability.
Adverse
economic conditions in the U.S. or in other key markets, and the
resulting declines in consumer confidence and spending, could have
a material adverse effect on our operating
results.
Our results are
dependent on a number of factors impacting consumer confidence and
spending, including, but not limited to, the following: general
economic and business conditions; wages and employment levels;
volatility in the stock market; home values; inflation;
consumer-debt levels; availability and cost of consumer credit;
economic uncertainty; solvency concerns of major financial
institutions; fluctuations in foreign-currency exchange rates; fuel
and energy costs and/or shortages; tax issues; and general
political conditions, both domestic and abroad.
Adverse economic
conditions, including declines in employment levels, disposable
income, consumer confidence and economic growth, could result in
decreased consumer spending that would adversely affect sales of
consumer goods, particularly those viewed as discretionary items
like many of our products. Adverse economic conditions may arise
from general economic factors as well as events such as war,
terrorism, natural disasters or outbreaks of disease, as in the
case of the coronavirus pandemic which has already adversely
affected global economic business conditions. In addition, if any
of these events should occur, future sales on products like ours
could decline due to increased commodities prices, particularly
gold.
13
PART I
Item
1A
The
coronavirus pandemic continues to be serious threat to health and
economic wellbeing affecting our business, customers and supply
chain.
On March 11, 2020,
the World Health Organization announced that infections of the
coronavirus COVID-19 had become pandemic, and on March 13, the U.S.
President announced a National Emergency relating to the disease.
There has been widespread infection in the United States and
abroad. National, state and local authorities have implemented
social distancing and imposed quarantine and isolation measures on
large portions of the population, including temporary mandatory
business closures. These measures, while intended to protect human
life, are having a serious adverse impact on domestic and foreign
economies with unknown duration. The effectiveness of economic
stabilization efforts, including government payments to affected
citizens and industries, and vaccine distribution and development
efforts are uncertain.
The sweeping
nature of the coronavirus pandemic makes it extremely difficult to
predict how our business and operations will be affected in the
long term, though the likely overall economic impact of the
pandemic is viewed as highly negative to the general economy. The
pandemic continues to be a threat, and any potential variant strain
that may mutate can cause continued interruptions in travel and
business disruptions with respect to us, our customers or our
supply chain. This could adversely affect our sales, costs and
liquidity position, possibly to a significant degree. We may again
become subject to store closures. We are continuing to monitor and
assess the progress of vaccines concerning our employees and the
public. The effects of the coronavirus pandemic on our business,
the ultimate impact remains uncertain and subject to change. The
duration of any such impact cannot be
predicted.
We continue to
monitor the impact of the COVID-19 pandemic on all aspects of our
business. One impact has been, despite the usual correlation of
increasing gold prices with precious-metal-recycling revenues for
our DGSE business, our revenues in that area are down year over
year. See “Item 7. Management’s Discussion and
Analysis—DGSE Precious Metals Pricing and Business
Impact” for more information.
We face
intense competition across all markets for our products and
services, which may lead to lower revenue or operating
margins.
The industries in
which we operate are highly competitive, and we compete with
numerous other companies, a number of which are larger and have
significantly greater financial, distribution, advertising and
marketing resources. Our products compete on a number of bases,
including attractiveness of brand and category assortments as well
as pricing competitiveness. Significant increases in these
competitive influences could adversely affect our operations
through a decrease in the number and dollar volume of
sales.
For all of our
products and services, we compete with a number of comparably sized
and smaller firms, as well as a number of larger firms throughout
the United States. Many of our competitors attract customers with
their reputation and through their industry connections.
Additionally, other reputable companies may decide to enter our
markets to compete with us. These companies may have greater name
recognition and have greater financial and marketing resources than
we do. If these companies are successful in entering the markets in
which we participate, or if customers choose to go to our
competition, we may attract fewer buyers and our revenue could
decrease.
Jewelry and watch
retailing is highly fragmented and competitive. We compete for
jewelry sales primarily against specialty jewelers such as Zales,
Jared, and Kay’s, as well as other retailers that sell
jewelry and watches including department stores, discount stores,
apparel outlets, and internet retailers. Participants in the
jewelry and watch category compete for a share of our
customers’ disposable income with other consumer sectors such
as electronics, clothing, furniture, travel and restaurants. This
competition for consumers’ discretionary spending is
particularly relevant to gift giving, and somewhat to bridal
jewelry (e.g. engagement, wedding, and
anniversary).
Consumers are
increasingly shopping for jewelry or starting their jewelry-buying
experience online, which makes it easier for them to compare prices
with other jewelry retailers. If DGSE’s brands do not offer
the same or similar items at the lowest prices, consumers may
purchase their jewelry from competitors, which would adversely
impact the Company’s sales and results of
operations.
Our DGSE
wholesale and jewelry business is seasonal, with sales
traditionally greater during certain holiday seasons, so events and
circumstances that adversely affect holiday consumer spending will
have a disproportionately adverse effect on our operational
results.
Our DGSE wholesale
and jewelry sales are seasonal by nature. The time periods around
Christmas, Valentine’s Day and Mother’s Day are
typically the main seasons for jewelry sales. Our sales are
traditionally greater during significant holidays that occur in
late fall, winter or early spring. The amount of net sales and
operating income generated during these seasons depends upon the
general level of retail sales at such times, as well as economic
conditions and other factors beyond our control. Given the timing
of our annual seasonality, inclement weather can at times pose a
substantial barrier to consumer retail activity and have a material
negative impact on our store traffic. If events or circumstances
were to occur that negatively impact consumer spending during such
holiday seasons, it could have a material adverse effect on our
sales, profitability and operating results.
14
PART I
Item
1A
If we
misjudge the demand for our products, high inventory levels could
adversely affect future operating results and
profitability.
Consumer demand
for our products can affect inventory levels. If consumer demand is
lower than expected, inventory levels can rise, causing a strain on
operating cash flow. If the inventory cannot be sold through our
retail outlets or wholesale contacts, additional write-downs or
write-offs to future earnings could be necessary. Conversely, if
consumer demand is higher than expected, insufficient inventory
levels could result in unfulfilled customer orders, loss of revenue
and an unfavorable impact on customer relationships. In particular,
volatility and uncertainty related to macro-economic factors make
it more difficult for us to forecast customer demand in our various
markets. Failure to properly judge consumer demand and properly
manage inventory could have a material adverse effect on
profitability and liquidity.
Changes
in our liquidity and capital requirements and our ability to secure
financing and credit could materially adversely affect our
financial condition and results of operations.
We require
continued access to capital, and a significant reduction in cash
flows from operations or the availability of credit could
materially and adversely affect our ability to achieve our planned
growth and operating results. Similarly, if actual costs to build
or acquire new stores significantly exceed planned costs, our
ability to build or acquire new stores or to operate the same
profitably could be materially restricted. Credit and equity
markets remain sensitive to world events and macro-economic
developments. Therefore, our cost of borrowing may increase, and it
may be more difficult to obtain financing for our operations or to
refinance long-term obligations as they become payable.
Additionally, our borrowing costs can be affected by independent
rating agencies’ short- and long-term debt ratings which are
based largely on our performance as measured by credit metrics
including interest coverage and leverage ratios. A decrease in
these ratings would likely increase our borrowing cost and make it
more difficult for us to obtain financing. A significant increase
in our costs to finance operations may have a material adverse
impact on our business results and financial
condition.
Interest-rate
fluctuations could increase our interest
expense.
Interest rates
could rise, which would increase our borrowing cost, or could make
it difficult or impossible to secure financing.
A failure
in our information systems could prevent us from effectively
managing and controlling our business or serving our
customers.
We rely on our
information systems to manage and operate our stores and business.
These include our telephone phone system, website, point-of-sale
application, accounting package and other systems. Each store is
part of an information network that permits us to maintain adequate
cash inventory, daily reconcile cash balances, and timely report
revenues and expenses. Any disruption in the availability of our
information systems could adversely affect our operation, the
ability to serve our customers and our results of
operations.
Our
success depends on our ability to attract, retain and motivate
qualified directors, management and other skilled
employees.
Our future success
and growth depend on the continued services of our directors, key
management and employees. Losing services of any of these
individuals or any other key employee or contractor could
materially affect our business. Our future success also depends on
our ability to identify, attract and retain additional qualified
personnel. Competition for employees in our industries is intense,
and we may not be successful in attracting or retaining them. There
are a limited number of people with knowledge of, and experience
in, our industries. We do not have employment agreements with many
of our key employees. We do not maintain life insurance policies on
any of our employees. The loss of key personnel, especially without
advance notice, or the inability to hire or retain qualified
personnel, could have a material adverse effect on sales and
operations. We cannot guarantee that we will continue to retain our
key management and skilled personnel, or that we will be able to
attract, assimilate and retain other highly qualified personnel in
the future.
15
PART I
Item
1A
We have
not paid dividends on our Common Stock in the past and do not
anticipate paying dividends on our Common Stock in the foreseeable
future.
We have not paid
Common Stock dividends since our inception and do not anticipate
paying dividends in the foreseeable future. Our current business
plan provides for reinvesting earnings in an effort to complete
development of our technologies, inventories and expansion, with
the goal of increasing sales and long-term profitability and
value.
We are
subject to new and existing corporate-governance and
internal-control reporting requirements, and our costs related to
compliance with, or our failure to comply with, existing and future
requirements could adversely affect our
business.
In addition to the
Corporate Governance Reforms, we face corporate-governance
requirements under the Sarbanes-Oxley Act of 2002, and the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(the ”Dodd-Frank Act”), as well as new rules and
regulations subsequently adopted by the SEC, the Public Company
Accounting Oversight Board and the NYSE American (the
“Exchange”). These laws, rules and regulations continue
to evolve and may become increasingly stringent in the future. We
cannot ensure that we will be able to comply fully with these laws,
rules and regulations that address corporate governance, internal
control reporting and similar matters. Failure to comply with these
laws, rules and regulations could subject us to investigation and
enforcement actions, and could materially adversely affect our
reputation, financial condition and the value and liquidity of our
securities.
Our
websites may be vulnerable to security breaches and similar
threats, which could result in our liability for damages and harm
to our reputation.
Despite the
implementation of network security measures, our websites are
vulnerable to computer viruses, break-ins and similar disruptive
problems caused by internet users. These occurrences could result
in our liability for damages, and our reputation could suffer.
Circumvention of our security measures may result in the
misappropriation of customer or other confidential information. Any
such security breach could lead to interruptions, delays and
cessation of service to our customers and could result in a decline
in revenue and income.
Fluctuations
in the availability and pricing of commodities, particularly gold,
which accounts for the majority of our merchandise costs, could
adversely impact our earnings and cash
availability.
While jewelry
manufacturing is a major driver of demand for gold, management
believes that the cost of gold is predominantly driven by
investment transactions which have resulted in significant changes
in that cost over the past decade. Our cost of merchandise and
potentially our earnings may be adversely impacted by
investment-market considerations that cause the price of gold to
significantly increase or decrease.
An inability to
increase retail prices to reflect higher commodity costs would
result in lower profitability. Historically, jewelry retailers have
been able, over time, to increase prices to reflect changes in
commodity costs. However, in general, particularly sharp increases
in commodity costs may result in a time lag before increased
commodity costs are fully reflected in retail prices. There is no
certainty that such price increases will be sustainable, so
downward pressure on gross margins and earnings may occur.
Moreover, any sustained increases in the cost of commodities could
result in the need to fund a higher level of inventory or to make
changes in the merchandise available to
customers.
A significant
portion of our profit is generated from buying and selling
pre-owned jewelry or other precious-metal-based products.
Significant price fluctuations in precious metals, especially
downward, can have a severe impact on this part of our business, as
people are less likely to sell these products to us if they believe
their merchandise is being undervalued, or if they believe the
value is uncertain.
The
conflict-mineral diligence process, the results from that process
and the related reporting obligations could increase costs,
adversely affect our reputation and adversely affect our ability to
obtain merchandise.
In August 2012,
the SEC, pursuant to the Dodd-Frank Act, issued final rules which
require annual disclosure and reporting on the source and use of
certain minerals, including gold, from the Democratic Republic of
Congo and adjoining countries. The gold supply chain is complex,
and while our management believes that the rules only cover less
than 1% of annual worldwide gold production based upon current
estimates
,
the final rules
require certain jewelry retailers and manufacturers that file with
the SEC to exercise reasonable due diligence in determining the
country of origin of the statutorily designated minerals that are
used in kinds of products we sell. Jewelry retailers or
manufacturers who meet certain criteria were required to file
certain reports with the SEC beginning in May 2014, disclosing
their due-diligence measures related to country of origin, the
results of those activities, and related determinations. In
conjunction with legal counsel, we have determined that we do not
have sufficient control over manufacturing of any of our products
to be included in the group of companies required to provide
conflict-minerals disclosure and reporting.
16
PART I
Item
1A
If our sourcing
processes should change, or if there is a determination that our
current practices should be covered by the conflict-minerals
reporting and disclosure guidelines, we would need to implement
significant additional measures to comply with these rules. We
cannot be certain of the costs that might be associated with such
regulatory compliance. The final rules also cover tungsten, which
is contained in a small portion of items that we sell. Other
minerals, such as diamonds, could be added to those currently
covered by these rules. We may incur reputational risks with
customers and other stakeholders if, due to the complexity of the
global supply chain, we are unable to sufficiently verify the
origin of the relevant metals. Also, if the responses of parts of
our supply chain to verification requests were adverse, it could
harm our ability to obtain merchandise and add to compliance
costs
Our
customer and vendor concentration in one significant entity could
have an adverse impact on our business.
A significant
amount of DGSE’s revenue and expenses stems from sales to and
purchases from one Dallas refining partner, which relationship
constitutes Envela’s single largest source of revenues and
expenses
.
In addition, a
significant amount of ECHG’s refining revenue comes through
Echo from one refining partner with an international refining
facility. Any adverse break in either relationship could reduce the
flow of refining materials to them and revenue to us. While it
remains a developing situation, the coronavirus pandemic and any
continuing quarantines, interruptions in travel and business
disruptions with respect to us or either refining partner could
cause such an adverse break in the relationship and reduce refining
revenue to us, possibly to a significant degree. Although we are
continuing to monitor and assess the effects of the coronavirus
pandemic, including the development and distribution of vaccine,
the ultimate impact of COVID-19 and such efforts is highly
uncertain and subject to change. The duration of any such impact
cannot be predicted.
17
PART
I
Item 1B,
2
I
TEM 1B. UNRESOLVED STAFF
COMMENTS
None.
I
TEM 2. PROPERTIES
We lease and own
various properties across the two markets in which DGSE and ECHG
currently operate.
Eight
leased and owned properties are in the Dallas/Fort Worth Metroplex
and one in Charleston,
South Carolina. The leases have a
wide variety of terms, rents and expiration dates. See Note 16 to
our consolidated financial statements for more information
regarding our leases. DGSE purchased two stand-alone retail
buildings in Lewisville, Texas and Grapevine, Texas, both suburbs
of Dallas, during fiscal year 2020, and closed the Southlake, Texas
retail location due to an expiring lease. Envela also purchased an
office building for the Company headquarters in Irving, Texas
during fiscal year 2020. We lease unused space of our Company
headquarters to other tenants. The Lewisville, Grapevine and Irving
locations were purchased with financing from long term debt. For
more information on this financing, see Note 10 to our consolidated
financial statements. We are constantly evaluating each of our
locations in terms of profitability, effectiveness and fit with
long-term strategy.
Our principal
corporate offices have moved from the Dallas location, with an
address of 13022 Preston Road, Dallas, Texas 75240, to our newly
purchased office building at 1901 Gateway Drive, Ste 100, Irving,
Texas, 75038. The Dallas location remains open as DGSE’s
flagship retail store.
We consider
whether to renew or renegotiate our leases based on a variety of
factors, including whether current lease options are available. On
September 9, 2020, we entered into a new lease for Echo’s
Carrollton warehouse location, the initial term for which began
January 1, 2021 and will expire on January 31, 2026. The new lease
omits provisions in the previous lease requiring a sublet of a
portion of the warehouse to a third party and provides us an
optional extension of an additional 60 months. The leases for our
Dallas flagship location and ITAD’s Carrollton location will
expire, with no current lease options, on October 31, 2021 and July
31, 2021, respectively. We continue to evaluate options with
respect to renegotiating leases or moving operations conducted at
or centrally routed to these locations.
The following
table provides a summary of all materially significant locations
out of which we and our subsidiaries operate as of December 31,
2020:
|
Location
|
State
|
Use
|
Rent/Own
|
Square
Footage
|
Comments
|
|
|
|
|
|
|
|
|
Irving
|
TX
|
Envela
Corporation
|
Own
|
72,552
|
Purchased November 4,
2020.
|
|
|
|
|
|||
|
Lewisville
|
TX
|
Dallas Gold &
Silver
|
Own
|
3,000
|
Purchased July 9,
2020.
|
|
|
|
|
|||
|
Grapevine
|
TX
|
Dallas Gold &
Silver
|
Own
|
3,412
|
Purchased September 14,
2020.
|
|
|
|
|
|||
|
Grand
Prairie
|
TX
|
Dallas Gold &
Silver
|
Rent
|
2,000
|
|
|
|
|
|
|||
|
Euless
|
TX
|
Dallas Gold &
Silver
|
Rent
|
4,400
|
|
|
|
|
|
|||
|
Dallas
|
TX
|
Dallas Gold &
Silver
|
Rent
|
15,120
|
|
|
|
|
|
|||
|
Mount
Pleasant
|
SC
|
Charleston Gold &
Diamond
|
Rent
|
4,782
|
|
|
|
|
|
|||
|
Carrollton
|
TX
|
Echo Environmental
Holdings, LLC
|
Rent
|
166,000
|
|
|
|
|
|
|||
|
Carrollton
|
TX
|
ITAD USA Holdings,
LLC
|
Rent
|
38,338
|
|
In our opinion,
these properties have been well maintained, are in good operating
condition and contain all necessary equipment and facilities for
their intended purposes.
18
PART I
Item 3,
4
I
TEM 3. LEGAL PROCEEDINGS
There are various
claims, lawsuits and pending actions against the Company arising in
the normal course of the Company's business. It is the opinion of
management that the ultimate resolution of these matters will not
have a material effect on the Company's financial condition,
results of operations or cash flows.
I
TEM 4. MINE SAFETY
DISCLOSURES
Not applicable.
19
PART II
Item
5
P
ART
II
I
TEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
MARKET AND STOCKHOLDERS
Our Common Stock
is traded on the Exchange, under the symbol “ELA.” As
of March 17, 2021, we had 326 record holders of our Common
Stock.
SHARE REPURCHASES AND DIVIDENDS
We have not
declared any dividends with respect to our Common Stock. We intend
to retain all earnings to finance future growth; accordingly, it is
not anticipated that cash or other dividends will be paid to
holders of Common Stock in the foreseeable
future.
Securities authorized for
issuance under equity compensation plans.
On December 7,
2016, our shareholders approved the adoption of the 2016 Equity
Incentive Plan (the “2016 Plan”), which reserved
1,100,000 shares of our Common Stock for issuance pursuant to
awards issued thereunder. As of December 31, 2020, no awards had
been made under the 2016 Plan. The Company’s prior 2006
Equity Incentive Plan (the “2006 Plan”) expired
according to its terms on December 31, 2019, and as a result no
further shares may be issued under the 2006 Plan. No securities
issued pursuant to the 2006 Plan remain issuable upon the exercise
of any option, warrants or rights. However, 15,000 options issued
pursuant to the Company’s 2004 Employee Stock Option Plan
(the “2004 Employee Stock Option Plan”) remain
unexercised and have no expiration date. For more information, see
Note 14 to our consolidated financial
statements.
The
following table summarizes our equity compensation plan information
as of December 31, 2020:
|
Plan
Category
|
Column (a):
Number of securities to be issued upon
exercise of outstanding options, warrants and
rights
|
Column (b):
Weighted-average exercise price of outstanding
options, warrants and rights
|
Column (c):
Number of securities remaining available for
future issuance under equity compensation plans (excluding
securities reflected in column (a))
|
|
Equity compensation plans approved by security
holders
|
15,000
(1)
|
2.17
|
1,100,000
(2)
|
|
Equity compensation plans not approved by
security holders
|
N/A
|
N/A
|
N/A
|
|
Total
|
15,000
|
2.17
|
1,100,000
|
(1) Represents
15,000 options issued under the 2004 Employee Stock Option Plan,
which remain unexercised and have no expiration
date.
(2) The total
number of securities remaining available for future issuance is
solely comprised of shares of Common Stock reserved under the 2016
Plan.
Purchases of equity
securities by the issuer and affiliates
purchases.
There have been no purchase
made by or on behalf of the issuer or any “affiliated
purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange
Act of any of our equity securities in the three month’s
ended December 31, 2020.
20
PART II
Item 6,
7
I
TEM 6. SELECTED FINANCIAL
DATA
FINANCIAL
HIGHLIGHTS
Not required because we are a “Smaller
Reporting Company” as that term is defined in Rule 12b-2
promulgated under the Exchange
Act.
I
TEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
Please see the
section of this Form 10-K entitled “Note About
Forward-Looking Statements” on page 2.
The coronavirus
disease 2019 (COVID-19) pandemic has adversely affected global
economic business conditions. Future sales on products like ours
could decline, and the ultimate impact is uncertain and subject to
change. We took steps during Fiscal 2020 to have as many employees
work from home as possible. We also followed governmental
directives to wear masks and adopt the social distance guidelines
where possible. The duration of this pandemic and the impact,
either direct or indirect cannot be predicted. The Company believed
additional liquidity was necessary to support ongoing operations
during this period of uncertainty. We applied for and received
approximately $1.67 million, 1% interest, federally backed loan to
pay employees and cover certain rent and utility-related costs
during the COVID-19 pandemic (the “Federal Loan”). The
loan is forgivable to the extent that certain criteria are met. We
have applied for forgiveness and that forgiveness application is
currently under review by the SBA.
Changes in Financial
Presentation During Fiscal Year 2020
During the first quarter of fiscal year 2020, we
revised the way we review and report our financial information to
align more closely with the Company’s strategy to engage in
diverse recommerce activities through two principle business
segments—DGSE and ECHG. Envela continues to report its
revenue and operating expenses based on its DGSE and ECHG operating
segments
, and beginning in fiscal year 2020, disaggregated
its revenue, within the operating segments, based on its resale and
recycle presentation basis. The Company’s historical
disaggregation of revenue has been recast to conform to our current
presentation. For more information, see “Item 1.
Business—Operating Segments” above.
DGSE Precious Metals Pricing
and Business Impact
Because DGSE buys
and resells precious metals, it is impacted by changes in precious
metals 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 metals in which
we trade. Gold prices stabilized during fiscal year 2019 starting
at $1,238 an ounce, as determined by the London AM Fix
on January 1, 2019, climbing to
$1,523 an ounce, as determined by the London PM Fix on December 31,
2019, representing an increase of 19% during fiscal year 2019. Gold
prices surged during the beginnings of the COVID-19 pandemic,
starting at $1,523 an ounce, as determined by the London AM Fix on
January 1, 2020, and rose strongly during the first half of 2020
peaking at $2,060 an ounce during August. However, gold prices
dipped from the peak to close at $1,891 an ounce, as determined by
the London PM Fix on December 31, 2020, registering a 24% increase
during fiscal year 2020.
The
World Gold Council (“WGC”), noted that gold demand
improved greatly during 2019 due to uncertainty in the global
financial markets and rising geopolitical unrest. As noted, gold
prices observably surged during the beginnings of the COVID-19
pandemic and price tempered toward the end of the year. According
to Stuart Burns of the Industry News, physical demand could pick up
during 2021 due to China’s forecasted double-digit growth and
world recovery from the pandemic. The WGC has projected the price
of gold to remain over $1,800 an ounce this year
.
The
pandemic, economic downturn, and civil unrest, seem to have been
affecting the recommerce business in unpredictable ways - there are
fewer customers raising money by selling items. This is the
opposite of what one might expect when a record number of people
are unemployed. Government stimulus checks, eviction moratoriums
and forbearances on mortgages and student loans may be contributing
to this effect. To date, this drop has been offset by other areas
of our business. This diversity, combined with DGSE’s
continued focus on disciplined operations, makes us optimistic for
DGSE’s continued future success.
21
PART II
Item
7
When
prices rise for gold or other precious metals, DGSE has observed
that individual sellers tend to be more likely to sell their
unwanted crafted-precious-metal items and at the same time retail
customers tend to buy bullion and other gold products so as not to
miss out on potential market gains. Tracking the rise in gold
prices, DGSE’s crafted-precious-metal purchases increased 45%
in fiscal year 2019. In fiscal year 2020, however, DGSE experienced
a dip in crafted-precious-metal purchases by 21%. The Company
attributes this dip to the impact of the COVID-19 and various
shutdown orders, which impacted foot traffic and its retail
locations. While the precious metals industry has improved, our
focus will be to continue to grow our jewelry, diamond and fine
watch business, as well as maintain our business of purchasing
crafted-precious-metal items, a diversified strategy which we
believe will continue to grow and be a profit engine in the
future.
For additional
information regarding DGSE, see “Item 1.
Business—Operating Segments—DGSE
Segment.”
ECHG Business Drivers and
Impacts
ECHG owns and
operates Echo, ITAD USA and Teladvance, through which it primarily
buys and resells or recycles consumer electronic components and IT
equipment. Echo focuses on end-of-life electronics recycling and
also offers disposal transportation and product tracking, ITAD USA
provides IT equipment disposition including compliance and data
sanitization services, and Teladvance operates as a value-added
reseller by providing offerings and services to companies looking
to either upgrade capabilities or dispose of equipment. Like DGSE,
ECHG also maintains relationships with refiners or recyclers to
which it sells extracted valuable materials from electronics and IT
equipment that are not appropriate for resale or
reuse.
For additional
information regarding DGSE, see “Item 1.
Business—Operating Segments—ECHG
Segment.”
Critical Accounting Policies
and Estimates
Our significant
accounting policies are disclosed in Note 1 of our consolidated
financial statements. The following discussion addresses our most
critical accounting policies, which are those that are both
important to the portrayal of our financial condition and results
of operations and that require significant judgment or use of
complex estimates. References to fiscal years below are denoted
with the word “Fiscal” and the associated
year.
Inventories
: DGSE 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 market 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. We supplement 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.
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 market 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.
Impairment of Long-Lived and Amortized
Intangible Assets
: We perform impairment evaluations of our
long-lived assets, including property, plant and equipment and
intangible assets with finite lives whenever business conditions or
events indicate that those assets may be impaired. When the
estimated future undiscounted cash flows to be generated by the
assets are less than the carrying value of the long-lived assets,
the assets are written down to fair market value and a charge is
recorded to current operations. Based on our evaluations, no
impairment was required as of December 31, 2020 or
2019.
22
PART II
Item
7
Revenue Recognition
: In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards update (ASU) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), which superseded revenue recognition requirements in
Topic 605, Revenue Recognition. The ASU is based on the principle
that revenue is recognized to depict the transfer of goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The ASU also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and
cash flows arising from customer contracts, including significant
judgements and changes in judgements and assets recognized from
cost incurred to obtain or fulfill a contract.
ASC 606 provides
guidance to identify performance obligations for revenue-generating
transactions. The initial step is to identify the contract with a
customer created with the sales invoice or repair ticket. Secondly,
to identify the performance obligations in the contract as we
promise to deliver the purchased item or promised repairs in return
for payment or future payment as a receivable. The third step is
determining the transaction price of the contract obligation as in
the full ticket price, negotiated price or a repair price. The next
step is to allocate the transaction price to the performance
obligations as we designate a separate price for each item. The
final step in the guidance of ASC 606 is to recognize revenue as
each performance obligation is satisfied.
Our
over-the-counter sales with the retail public and wholesale dealers
are recognized when merchandise is delivered, and payment has been
made either by immediate payment or through a receivable obligation
at one of our retail locations. We also recognize revenue upon the
shipment of goods when retail and wholesale customers have
fulfilled their obligation to pay, or promise to pay, through
e-commerce or phone sales. We have elected to account for shipping
and handling costs as fulfillment costs after the customer obtains
control of the goods.
Crafted-precious-metal items at the
end of their useful lives are sold to a refiner. Since the local
refiner is located in the Dallas/Fort Worth area we deliver the
metal to the refiner. The metal is melted and assayed, price is
determined from the assay and payment is made usually in a day or
two. Revenue is recognized from the sale once payment is
received.
DGSE also offers a
structured layaway plan. When a retail customer utilizes the
layaway plan, we collect a minimum payment of 25% of the sales
price, establish a payment schedule for the remaining balance and
hold the merchandise as collateral as security against the
customer’s deposit until all amounts due are paid in full.
Revenue for layaway sales is recognized when the merchandise is
paid in full and delivered to the retail customer. Layaway revenue
is also recognized when a customer fails to pay in accordance with
the sales contract and the sales item is returned to inventory with
the forfeit of deposited funds, typically after 90
days.
In limited
circumstances, we exchange merchandise for similar merchandise
and/or monetary consideration with both dealers and retail
customers, for which we recognize revenue in accordance with
Accounting Standards Codification (“ASC”) 845,
Nonmonetary Transactions. When we exchange merchandise for similar
merchandise and there is no monetary component to the exchange, we
do not recognize any revenue. Instead, the basis of the merchandise
relinquished becomes the basis of the merchandise received, less
any indicated impairment of value of the merchandise relinquished.
When we exchange merchandise for similar merchandise and there is a
monetary component to the exchange, we recognize revenue to the
extent of the monetary assets received and determines the cost of
sale based on the ratio of monetary assets received to monetary and
non-monetary assets received multiplied by the cost of the assets
surrendered.
The Company offers
the option of third-party financing to customers wishing to borrow
money for the purchase. The customer applies on-line with the
financing company and upon going through the credit check will be
approved or denied. If accepted, the customer is allowed to
purchase according to the limits set by the financing company. Once
the customer does purchase merchandise, based on their financing
agreement, we record and recognize the sale at that point, based on
the promise to pay by the finance company up to the
customer’s approved limit.
We have a return
policy (money-back guarantee). The policy covers retail
transactions involving jewelry, graded rare coins and currency
only. Customers may return jewelry, graded rare coins and currency
purchased within 30 days of the receipt of the items for a full
refund as long as the items are returned in exactly the same
condition as they were delivered. In the case of jewelry, graded
rare coins and currency sales on account, customers may cancel the
sale within 30 days of making a commitment to purchase the items.
The receipt of a deposit and a signed purchase order evidences the
commitment. Any customer may return a jewelry item or graded rare
coins and currency if they can demonstrate that the item is not
authentic, or there was an error in the description of a graded
coin or currency piece. Returns are accounted for as a reversal of
the original transaction, with the effect of reducing revenues, and
cost of sales, and returning the merchandise to inventory. We have
established an allowance for estimated returns related to year
ended December 31, 2020 (“Fiscal 2020”) and year ended
December 31, 2019 (“Fiscal 2019”) sales, which is based
on our review of historical returns experience and reduces our
reported revenues and cost of sales accordingly. As of December 31,
2020 and 2019, our allowance for returns remained the same at
approximately $28,000 for both years.
23
PART II
Item
7
The Echo Entities
have several revenue streams and recognize revenue according to ASC
606 at an amount that reflects the consideration to which the
entities expect to be entitled in exchange for transferring goods
or services to the customer. The revenue streams are as
follows.
●
Outright sales are
recorded when product is shipped. Once the price is established and
the terms are agreed to and the product is shipped, the revenue is
recognized. The Echo Entities have fulfilled their performance
obligation with an agreed upon transaction price, payment terms and
shipping the product.
●
Echo recognizes
refining revenue when our inventory arrives at the destination port
and the performance obligation is satisfied by transferring the
control of the promised goods that are identified in the customer
contract. Ninety percent (90%) of our refining revenue is generated
from one refining partner that has an international refining
facility. This refining partner pays us sixty percent (60%) of
an Invoice within five working days upon the receipt of the Ocean
Bill of Lading issued by the Ocean Carrier. Our initial
Invoice is recognized in full when our performance obligation is
satisfied, as stated in the first sentence. Under the guidance of
ASC 606, an estimate of the variable consideration that we expect
to be entitled is included in the transaction price stated at the
current precious metal spot price and weight of the precious metal.
An adjustment to revenue is made in the period once the underlying
weight and any precious metal spot price movement is resolved,
which is usually around six (6) weeks. Any adjustment from the
resolution of the underlying uncertainty is netted with the
remaining forty percent (40%) due from the original
contract.
●
Hard drive sales
by the Echo Entities are limited to customers who are required to
prepay shipments. Once the commodity price is established and
agreed upon by both parties, customers send payment in advance. The
Company releases the shipment on the same day when payment receipt
is confirmed, and revenue is recognized on day of shipment. If
payment is received on the last day of the month and shipment goes
out the following day the payment received is deferred revenue and
recognized the following month when the shipment is
made.
●
The Echo Entities
also provide recycling services according to a Scope of Work and
services are recognized when promised services are rendered. We
have recycling services conducted at the Echo facility and another
type of service is conducted at the client’s facility. The
Scope of Work will determine the charges and whether it is
completed on campus or off campus. Payment terms are also dictated
in the Scope of Work.
Accounts Receivable
: We record trade
receivables when revenue is recognized. When appropriate, we will
record an allowance for doubtful accounts, which is primarily
determined by an analysis of our trade receivables aging. The
allowance is determined based on historical experience of
collecting past due amounts, based on the degree of their aging. In
addition, specific accounts that are doubtful of collection are
included in the allowance. These provisions are reviewed to
determine the adequacy of the allowance for doubtful accounts.
Trade receivables are charged off when there is certainty as to
their being uncollectible. Trade receivables are considered
delinquent when payment has not been made within contract terms.
DGSE had no allowance for doubtful accounts balance for the years
ending December 31, 2020 and 2019. The Echo Entities also had no
allowance for doubtful accounts balance for the years ending
December 31, 2020 and 2019.
Note Receivable:
We record ECHG’s
note receivable as a non-current asset due to the note being
quarterly interest only payments, with a maturity date of February
20, 2023. Interest is accrued quarterly and payments are applied
against the accruals. From time to time, the balance is increased
through amendments to the note. We perform impairment evaluations
on the note on December 31
of each year, or
whenever business conditions or events indicate that the note
receivable may be impaired. The note receivable, in addition, has a
warrant and call option agreements to the lender which represents
the right of the lender to purchase an equity interest for a
certain amount within a certain time. There is no guarantee that
the warrant will be exercised. As of December 31, 2020, based on
our evaluation, no impairment was required.
24
PART II
Item
7
Income Taxes
: Income taxes are accounted
for under the asset and liability method prescribed by ASC 740,
Income Taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation
allowance is recorded to reduce the carrying amounts of deferred
tax assets unless it is more likely than not such assets will be
realized.
We account for our
position in tax uncertainties in accordance with ASC 740, Income
Taxes. The guidance establishes standards for accounting for
uncertainty in income taxes. The guidance provides several
clarifications related to uncertain tax positions. Most notably, a
“more likely-than-not” standard for initial recognition
of tax positions, a presumption of audit detection and a
measurement of recognized tax benefits based on the largest amount
that has a greater than 50 percent likelihood of realization. The
guidance applies a two-step process to determine the amount of tax
benefit to be recognized in the financial statements. First, we
must determine whether any amount of the tax benefit may be
recognized. Second, we determine how much of the tax benefit should
be recognized (this would only apply to tax positions that qualify
for recognition.) No additional liabilities have been recognized as
a result of the implementation. We have not taken a tax position
that, if challenged, would have a material effect on the financial
statements or the effective tax rate during Fiscal 2020 and Fiscal
2019, respectively.
Results of
Operations
Year Ended December 31, 2020
Compared to Year Ended December 31, 2019
Revenue.
Revenue related to DGSE’s
continuing operations increased by $18,141,237, or 27%, during
fiscal 2020, to $85,661,391, as compared to $67,520,154 during
Fiscal 2019. Resale revenue, such as bullion, jewelry, watches and
rare coins, increased by $19,702,014 in Fiscal 2020, or 33%, to
$79,790,419 as compared to $60,088,405 during Fiscal 2019.
Recycled-material sales decreased 21% to $5,870,972 for Fiscal
2020, as compared to $7,431,749 for Fiscal 2019. Revenue increased
for resale items for Fiscal 2020, compared to Fiscal 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 Fiscal 2020, more inventory
was kept for our retail stores as compared to Fiscal 2019, and
recycled less.
Revenue related to
ECHG for Fiscal 2020 was $28,260,624. Resale revenue of $19,395,834
accounted for 69% of the total. Recycled revenue of $8,864,790
accounted for 31% of the total. The assets of the Echo Legacy
Entities were acquired on May 20, 2019 and the Echo Entities were
formed in connection therewith, and Teladvance was acquired on
August 2, 2019; therefore, Fiscal 2019 is not comparable to Fiscal
2020.
Gross
Margin: Gross margin related to
DGSE, increased in Fiscal 2020 by $1,452,046 to $10,369,870, as
compared to $8,917,824 during Fiscal 2019. The increase in gross
profit was primarily related to a 33% increase in resale revenue
although the resale margin decreased from 12.9% in Fiscal 2019 to
11.5% in Fiscal 2020. The gross profit for recycled material sales
for Fiscal 2020 compared to Fiscal 2019 stayed relatively the same
although sales decreased by 21%. The sales declined but the profit
margin increased from 15.6% in Fiscal 2019 to 19.7% in Fiscal
2020.
The ECHG profit
margin for Fiscal 2020 was $12,699,093. Resale profit margin was
49% or $9,504,607, an overall percentage of 75% of ECHG’s
total profit margin. Recycling’s gross margin of 36.0%
accounted for $3,194,486, or 25% of the total. The assets of the
Echo Legacy Entities were acquired on May 20, 2019 and the Echo
Entities were formed in connection therewith, and Teladvance was
acquired on August 2, 2019; therefore, Fiscal 2019 is not
comparable to Fiscal 2020.
The
following table represents our historical operating revenue and
gross profit results by category:
|
|
For the Years
Ended
|
|||||
|
|
December 31,
2020
|
December 31,
2019
|
||||
|
|
Revenues
|
Gross
Profit
|
Margin
|
Revenues
|
Gross Profit
|
Margin
|
|
DGSE
|
|
|
|
|
|
|
|
Resale
|
$
79,790,419
|
9,215,494
|
11.5
%
|
$
60,088,405
|
$
7,760,365
|
12.9
%
|
|
Recycled
|
5,870,972
|
1,154,376
|
19.7
%
|
7,431,749
|
1,157,459
|
15.6
%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
85,661,391
|
10,369,870
|
12.1
%
|
67,520,154
|
8,917,824
|
13.2
%
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
|
|
Resale
|
19,395,834
|
9,504,607
|
49.0
%
|
8,722,281
|
4,692,114
|
53.8
%
|
|
Recycled
|
8,864,790
|
3,194,486
|
36.0
%
|
5,782,062
|
2,645,904
|
45.8
%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
28,260,624
|
12,699,093
|
44.9
%
|
14,504,343
|
7,338,018
|
50.6
%
|
|
|
|
|
|
|
|
|
|
|
$
113,922,015
|
$
23,068,963
|
20.2
%
|
$
82,024,497
|
$
16,255,842
|
19.8
%
|
25
PART II
Item
7
Selling, General and Administrative
:
Selling, general and administrative expenses for DGSE decreased
$551,975 or 7% in Fiscal 2020, to $6,933,259 compared to $7,485,234
in the prior year. The overall decrease in SG&A was primarily
through the ability to apply corporate overhead expenses to two
reporting segments.
Selling, general
and administrative expenses for ECHG totaled $8,620,015 for Fiscal
2020. The expenses consist primarily of payroll, payroll taxes and
employee benefits of $5,192,492, rent and variable rent costs, net
of sublet income, of $813,220, warehouse and office supplies of
$202,728, insurance costs of $97,490, travel expenses of $29,623,
professional fees of $91,327, Utilities of $228,620 and overhead
administrative expenses of $979,767. The assets of the Echo Legacy
Entities were acquired on May 20, 2019 and the Echo Entities were
formed in connection therewith, and Teladvance was acquired on
August 2, 2019; therefore, Fiscal 2019 is not comparable to Fiscal
2020.
Depreciation and Amortization:
Depreciation and amortization for DGSE increased by $53,160 or 20%
in Fiscal 2020 to $321,833 as compared to $268,673 in Fiscal 2019.
The increase is primarily due to the added depreciation from two
buildings purchased, and associated build-out costs, that were put
into service during the fourth quarter of Fiscal
2020.
The Depreciation
and Amortization expense for ECHG totaled $406,793 for Fiscal 2020.
The balance is made up of the amortization of intangibles acquired
from the Echo Transaction on May 20, 2019 of $335,600 and
depreciation expense of $71,193. The assets of the Echo Legacy
Entities were acquired on May 20, 2019 and the Echo Entities were
formed in connection therewith, and Teladvance was acquired on
August 2, 2019; therefore, Fiscal 2019 is not comparable to Fiscal
2020.
Other Income:
Other income for DGSE
increased by $58,590 in Fiscal 2020, to $113,974 compared to
$55,384 in Fiscal 2019. Fiscal 2020, other income of $113,974, was
primarily the combination of writing off old vendor checks of
approximately $45,000 and half of the rent income allocated from
tenants at the new Company headquarters’ of $67,632. Fiscal
2019, other income of $55,384 was primarily the write up of a small
plot of land owned by the Company for many
years.
Other income for
ECHG totaled $193,023 in Fiscal 2020. The other income amount of
$193,024 is primarily a combination of interest income from note
receivable of $114,297 and half of the rent income allocated from
tenants at the new Company headquarters’ of $67,632. The
assets of the Echo Legacy Entities were acquired on May 20, 2019
and the Echo Entities were formed in connection therewith, and
Teladvance was acquired on August 2, 2019; therefore, Fiscal 2019
is not comparable to Fiscal 2020.
Interest Expense
: Interest expense for
DGSE increased by $47,054 or 29% in Fiscal 2020, to $209,295
compared to $162,241 in Fiscal 2019. The increase is due from the
promissory note issued by John R. Loftus to pay off an accounts
payable – related party balance on May 20, 2019, that has a
slightly higher interest rate than the accounts payable –
related party had as an imputed rate and the two notes payable
associated with the new stand-alone buildings purchased during the
second half of 2020.
The interest
expense for ECHG was $411,204 in Fiscal 2020. The interest is
primarily related to the note payable, related party, with an
outstanding balance of $6,496,128 as of December 31, 2020. The
assets of the Echo Legacy Entities were acquired on May 20, 2019
and the Echo Entities were formed in connection therewith, and
Teladvance was acquired on August 2, 2019; therefore, Fiscal 2019
is not comparable to Fiscal 2020.
Income Tax Expense
: Income tax expense
for DGSE decreased $5,498 or 6% in Fiscal 2020, to $89,618 compared
to $95,116 in Fiscal 2019. See Note 15 for Federal Income
Taxes.
Net Income
:
We recorded a
net income of $6,383,943 in Fiscal 2020, compared to a net income
of $2,780,713 in Fiscal 2019, an increase in net income of
$3,603,230 is due primarily to an increase of revenue of
approximately $32.0 million and the purchase of the assets of the
Echo Legacy Entities on May 20, 2019.
26
PART II
Item
7
Earnings Per Share
: Our net income per basic and diluted shares
attributable to holders of our Common Stock was $0.24, for Fiscal
2020, compared to $0.10 per basic and diluted shares for Fiscal
2019, an increase of $0.14 per share. The increase is due primarily
from the revenue increase of approximately $32.0 million from
Fiscal 2019 to Fiscal 2020 and the purchase of the assets of the
Echo Legacy Entities on May 20, 2019.
Liquidity and Capital Resources:
During
Fiscal 2020, cash flows provided by operating activities totaled
$6,897,091 compared to cash flows used in operating activities
totaling $542,828 in Fiscal 2019, an increased cash flows provided
by operating activities of $7,439,919. Cash provided by operating
activities for the year ended December 31, 2020, was primarily
driven by the increase in trade accounts receivable of $151,124, an
increase in customer deposits and other liabilities of $263,572 and
net income, with depreciation, amortization and stock based
compensation to employees of $7,112,894. Offset by the increase of
inventories of $497,444, the increase of prepaid expenses of
$108,884 and the reduction of accounts payable and accrued accounts
payable of $29,332. Cash used in operating activities for the year
ended December 31, 2019, was primarily driven by the increase in
trade accounts receivable of $1,877,783, the reduction of accounts
payable and accrued accounts payable of $492,952, the reduction of
the accounts payable – related party of $3,074,021. Offset by
the reduction of inventories of $1,464,843, the increase in
operating leases of 124,713 and net income, with depreciation and
amortization of $3,301,011.
During Fiscal 2020
and Fiscal 2019, cash used in investing activities totaled
$7,964,588 and $6,039,505, respectively, an increase of $1,925,083.
The cash used in investing for 2020, was a combination of investing
in a note receivable of $2,100,000 to CExchange, LLC
(“CExchange”), purchasing two new retail locations for
DGSE totaling $1,815,000 and associated build out costs, of which
$363,000 was cash payments applied against the purchases of the
retail locations and the remainder of the balance from the
purchases was financed through notes payable, and the purchase of
our corporate headquarters totaling $3,521,021, of which $561,021
was cash payments applied against the office building and the
remainder of the balance from the purchase was financed through
notes payable. The cash used in investing for 2019, was the
combination of property and equipment purchases of $102,989, the
continual upgrading our point-of-sale system in the amount of
$60,000 and acquisition of the assets of the Echo Legacy Entities,
net of cash acquired, in the amount of
$5,876,516.
During Fiscal
2020, cash provided by financing activities totaled $5,774,873, and
Fiscal 2019, cash provided by financing activities totaled
$9,639,052, a decrease in cash provided by financing activities of
$3,864,179. The cash provided by financing activities during Fiscal
2020 is funds provided by loans made by Texas Bank & Trust for
the corporate office building in Irving, Texas and the retail
building in Grapevine, Texas, both totaling $3,456,000, a loan made
by Truist Bank (f/k/a BB&T Bank) for the retail building
located in Lewisville, Texas for $956,000 and the proceeds from the
Federal Loan of $1,668,200. Offset by principal payments made
against the two promissory notes from Mr. Loftus in the amount of
$279,210 and principal payments made against the notes payable
loans issued for the buildings purchased mentioned in this
paragraph of approximately $26,000. The cash provided by financing
activities during Fiscal 2019 is funds provided to purchase the
assets of the Echo Legacy Entities through a promissory note from
John R. Loftus dated May 20, 2019 for $6,925,979. Additionally,
funds provided to pay off an accounts payable – related party
balance of $3,074,021, evidenced by a promissory note dated May 20,
2019 by John R. Loftus and the drawing on a short-term line of
credit from Texas Bank and Trust of $150,000. Offset by principal
payments made against the two promissory notes From Mr. Loftus in
the amount of $360,948 and the pay down of the short-term line of
credit from Texas Bank and Trust for $150,000.
On May 17, 2019,
the Company secured a twelve month Line of Credit from Texas Bank
and Trust for $1,000,000. The Line of Credit was renewed for an
additional 24 months and increased to $3,500,000 on May 17, 2020.
The Line of Credit is to fund any cash shortfalls that we may have
from time-to-time during the next 24 months. We don’t
anticipate the need of those funds for operations. Also, from
time-to-time, we have adjusted our inventory levels to meet
seasonal demand or in order to meet working capital requirements.
Management believes we have enough capital resources to meet
working capital requirements. If additional working capital is
required, additional loans can be obtained from individuals or from
other commercial banks. If necessary, inventory levels may be
adjusted in order to meet unforeseen working-capital
requirements.
We expect our
capital expenditures to total approximately $100,000 during the
next twelve months. These expenditures will be largely driven by
the purchase of equipment and the build-out of corporate space in
our office building for tenants, As of December 31, 2020, there
were no commitments outstanding for capital
expenditures.
In the event of
significant growth in retail and wholesale jewelry sales and
recycling demand, whether purchases or services, our demand for
additional working capital will increase due to a related need to
stock additional jewelry inventory, increases in wholesale accounts
receivable and the purchasing of recycled material. Historically we
have funded these activities through
operations.
We have
historically renewed, extended or replaced short-term debt as it
matures, and management believes that we will be able to continue
to do so in the near future.
27
PART II
Item 7,
7A
On May 20, 2019,
we entered into two (2) loan agreements with John R. Loftus, the
Company’s CEO, President and Chairman of the Board. The first
note of $6,925,979, pursuant to the Echo Legacy Entities asset
purchase agreement, is a 5-year promissory note amortized over 20
years at 6% annual interest rate. The second note of $3,074,021
paid off the accounts payable – related party balance to a
former Related Party on May 20, 2019. The promissory note is a
5-year note amortized over 20 years at 6% annual interest rate.
Both notes are being serviced by operational cash
flow.
The coronavirus
disease 2019 (COVID-19) pandemic has adversely affected global
economic business conditions. Future sales on products like ours
could decline, and the ultimate impact is uncertain and subject to
change. The duration of this pandemic and the impact, either direct
or indirect cannot be predicted. The Company believed additional
liquidity was necessary to support ongoing operations during this
period of uncertainty. We applied for and received approximately
$1.67 million, 1% interest, Federal Loan to pay employees and cover
certain rent and utility-related costs during the COVID-19
pandemic. The loan is forgivable to the extent that certain
criteria are met. We have applied for forgiveness and that
forgiveness application is currently under review by the
SBA.
The Company leases
certain of its facilities under operating leases. The minimum
rental commitments under non-cancellable operating leases as of
December 31, 2020 are as follows:
|
Operating
Leases
|
Total
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
|
|
|
|
|
|
|
|
|
DGSE
|
$
1,205,662
|
$
479,161
|
$
235,674
|
$
212,855
|
$
213,885
|
$
64,087
|
|
|
|
|
|
|
|
|
|
Echo
Entities
|
4,217,873
|
869,209
|
786,396
|
808,022
|
830,244
|
924,002
|
|
|
|
|
|
|
|
|
|
Total
|
$
5,423,535
|
$
1,348,370
|
$
1,022,070
|
$
1,020,877
|
$
1,044,129
|
$
988,089
|
Off-Balance Sheet
Arrangements.
We do not have any
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 our stockholders.
STATEMENT OF
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL
STATEMENTS
Management is
responsible for the preparation of the consolidated financial
statements and related information that are presented in this
report. The consolidated financial statements, which include
amounts based on management’s estimates and judgments, have
been prepared in conformity with accounting principles generally
accepted in the United States of America.
The Company
designs and maintains accounting and internal control systems to
provide reasonable assurance at reasonable cost that assets are
safeguarded against loss from unauthorized use or disposition, and
that the financial records are reliable for preparing consolidated
financial statements and maintaining accountability for assets.
These systems are augmented by written policies, an organizational
structure providing division of responsibilities and careful
selection and training of qualified personnel.
The Company
engaged Whitley Penn LLP, an independent registered public
accounting firm, to audit and render an opinion on the consolidated
financial statements in accordance with the standards of the Public
Accounting Oversight Board (United States). Management’s
report was not subject to attestation by our independent registered
public accounting firm pursuant to rules of the SEC that permit the
company to provide only management’s report in this annual
report.
The Board, through
its Audit Committee, consisting solely of independent directors of
the Company, meets periodically with management and our independent
registered public accounting firm to ensure that the Company is
meeting its responsibilities and to discuss matters concerning
internal controls and financial reporting. Whitley Penn LLP and our
management team each have full and free access to the Audit
Committee.
I
TEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not required
because we are a “Smaller Reporting Company” as that
term is defined in Rule 12b-2 promulgated under the Exchange
Act.
28
PART II
Item
8
I
TEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
ENVELA CORPORATION AND
SUBSIDIARIES
C
ONSOLIDATED INCOME STATEMENTS
|
Year Ended December 31,
|
2020
|
2019
|
|
Revenue:
|
|
|
|
Sales
|
$
113,922,015
|
$
82,024,497
|
|
Cost
of goods sold
|
90,853,052
|
65,768,655
|
|
Gross
margin
|
23,068,963
|
16,255,842
|
|
Expenses:
|
|
|
|
Selling,
General & Administrative Expenses
|
15,553,274
|
12,494,510
|
|
Depreciation
and Amortization
|
728,626
|
520,298
|
|
Total
cost of revenue
|
16,281,900
|
13,014,808
|
|
|
|
|
|
Operating
income
|
6,787,063
|
3,241,034
|
|
Other
income, net
|
306,997
|
49,756
|
|
Interest
expense
|
(620,499
)
|
(414,961
)
|
|
Income
before income taxes
|
6,473,561
|
2,875,829
|
|
Income
tax expense
|
89,618
|
95,116
|
|
|
|
|
|
Net
income
|
$
6,383,943
|
$
2,780,713
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
Basic
|
$
0.24
|
$
0.10
|
|
Diluted
|
$
0.24
|
$
0.10
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
Basic
|
26,924,631
|
26,924,381
|
|
Diluted
|
26,939,631
|
26,939,631
|
The
accompanying notes are an integral part of these consolidated
financial statements.
29
PART II
Item
8
ENVELA CORPORATION AND
SUBSIDIARIES
C
ONSOLIDATED BALANCE SHEETS
|
December
31,
|
2020
|
2019
|
|
|
|
|
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash and
cash equivalents
|
$
9,218,036
|
$
4,510,660
|
|
Trade
receivables, net of allowances
|
2,846,619
|
2,997,743
|
|
Inventories
|
10,006,897
|
9,509,454
|
|
Current
right-of-use assets from operating leases
|
1,157,077
|
1,160,658
|
|
Prepaid
expenses
|
281,719
|
172,834
|
|
Total current
assets
|
23,510,348
|
18,351,349
|
|
Note
receivable
|
2,100,000
|
-
|
|
Property and equipment,
net
|
6,888,601
|
1,351,039
|
|
Goodwill
|
1,367,109
|
1,367,109
|
|
Intangible assets,
net
|
2,992,473
|
3,394,073
|
|
Long-term operating lease
right-of-use assets, less current portion
|
3,522,923
|
2,335,040
|
|
Other long-term
assets
|
197,638
|
204,784
|
|
Total
assets
|
$
40,579,092
|
$
27,003,394
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable-trade
|
$
1,510,697
|
$
1,467,845
|
|
Notes
payable, related party
|
307,032
|
1,084,072
|
|
Notes
payable
|
1,813,425
|
-
|
|
Current
operating lease liabilities
|
1,148,309
|
1,175,109
|
|
Accrued
expenses
|
844,324
|
916,509
|
|
Customer
deposits and other liabilities
|
428,976
|
165,404
|
|
Total current
liabilities
|
6,052,763
|
4,808,939
|
|
Notes payable, related
party, less current portion
|
9,052,810
|
8,554,980
|
|
Notes payable, less current
portion
|
4,240,658
|
-
|
|
Long-term operating lease
liabilities, less current portion
|
3,654,419
|
2,445,301
|
|
Total
liabilities
|
23,000,650
|
15,809,220
|
|
Commitments and
contingencies
|
|
|
|
Stockholders’
equity:
|
|
|
|
Common
stock, $0.01 par value; 60,000,000 shares
authorized;
|
|
|
|
26,924,631
shares and 26,924,381 shares issued and
outstanding
|
|
|
|
as
of December 31, 2019 and 2020 respectively; Preferred stock,
$0.01
|
|
|
|
par
value; 5,000,000 shares authorized; 0 shares issued and
outstanding
|
269,246
|
269,244
|
|
Additional
paid-in capital
|
40,173,000
|
40,172,677
|
|
Accumulated
deficit
|
(22,863,804
)
|
(29,247,747
)
|
|
Total stockholders’
equity
|
17,578,442
|
11,194,174
|
|
Total liabilities and
stockholders’ equity
|
$
40,579,092
|
$
27,003,394
|
The accompanying notes are
an integral part of these consolidated financial
statements.
30
PART II
Item
8
ENVELA CORPORATION AND
SUBSIDIARIES
C
ONSOLIDATED CASH FLOW STATEMENTS
|
Year
Ended December 31,
|
2020
|
2019
|
|
|
|
|
|
Operations
|
|
|
|
Net
income
|
$
6,383,943
|
$
2,780,713
|
|
Adjustments to reconcile
net income to net cash from (used in)
operations:
|
|
|
|
Depreciation,
amortization, and other
|
728,626
|
520,298
|
|
Stock
based compensation to employees, officers and
directors
|
325
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Trade
receivables
|
151,124
|
(1,877,783
)
|
|
Inventories
|
(497,444
)
|
1,464,843
|
|
Prepaid
expenses
|
(108,884
)
|
(3,375
)
|
|
Other
assets
|
7,145
|
(47,374
)
|
|
Accounts
payable and accrued expenses
|
(29,332
)
|
(492,952
)
|
|
Accounts
payable, related party
|
-
|
(3,074,021
)
|
|
Operating
leases
|
(1,984
)
|
124,713
|
|
Customer
deposits and other liabilities
|
263,572
|
62,110
|
|
|
|
|
|
Net
cash provided by (used in) operations
|
$
6,897,091
|
$
(542,828
)
|
|
|
|
|
|
Investing
|
|
|
|
Investment in note
receivable
|
(2,100,000
)
|
-
|
|
Purchase of property and
equipment
|
(5,864,588
)
|
(102,989
)
|
|
Purchase of intangible
assets
|
-
|
(60,000
)
|
|
Acquisition of Echo
Entities, net of cash acquired
|
-
|
(5,876,516
)
|
|
|
|
|
|
Net
cash used in investing
|
(7,964,588
)
|
(6,039,505
)
|
|
|
|
|
|
Financing
|
|
|
|
Short-term financing, line
of credit
|
-
|
150,000
|
|
Financing for the
acquisition of the Echo Entities
|
-
|
6,925,979
|
|
Financing to pay off
accounts payable, related party
|
-
|
3,074,021
|
|
Payments on short-term
financing, line of credit
|
-
|
(150,000
)
|
|
Payments on notes payable,
related party
|
(279,210
)
|
(360,948
)
|
|
Payments on notes
payable
|
(26,117
)
|
-
|
|
Proceeds from PPP
loan
|
1,668,200
|
-
|
|
Proceeds from notes payable
for retail and office buildings
|
4,412,000
|
-
|
|
|
|
|
|
Net
cash provided by financing
|
5,774,873
|
9,639,052
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
4,707,376
|
3,056,719
|
|
Cash and cash equivalents,
beginning of period
|
4,510,660
|
1,453,941
|
|
|
|
|
|
Cash and cash equivalents,
end of period
|
$
9,218,036
|
$
4,510,660
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
Cash paid
during the period for:
|
|
|
|
Interest
|
$
620,499
|
$
390,864
|
|
Income
taxes
|
$
59,025
|
$
43,578
|
The accompanying notes are
an integral part of these consolidated financial
statements.
31
PART II
Item
8
ENVELA CORPORATION AND
SBDISIARIES
C
ONSOLIDATED STOCKHOLDERS’ EQUITY
STATEMENTS
|
|
Common Stock
|
|
|
|
|
|
|
Shares
|
Amount
|
Additional Paid-in Capital
|
Accumulated Deficit
|
Total Stockholders' Equity
|
|
Balance at December 31,
2018
|
26,924,381
|
$
269,244
|
$
40,172,677
|
$
(32,028,460
)
|
$
8,413,461
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
2,780,713
|
2,780,713
|
|
|
|
|
|
|
|
|
Balance at December 31,
2019
|
26,924,381
|
$
269,244
|
$
40,172,677
|
$
(29,247,747
)
|
$
11,194,174
|
|
|
|
|
|
|
|
|
Stock issued to employees,
officers and directors
|
250
|
2
|
323
|
-
|
325
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
6,383,943
|
6,383,943
|
|
|
|
|
|
|
|
|
Balance at December 31,
2020
|
26,924,631
|
$
269,246
|
$
40,173,000
|
$
(22,863,804
)
|
$
17,578,442
|
32
PART II
Item
8
N
OTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 —
ACCOUNTING POLICIES AND NATURE OF OPERATIONS
A summary of the
significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows. References
to fiscal years below are denoted with the word
“Fiscal” and the associated year.
Principles of Consolidation
and Nature of Operations
Envela and its
subsidiaries engage in diverse business activities within the
recommerce sector. These activities include being one of the
nation's premier authenticated recommerce retailers of luxury hard
assets; providing end-of-life asset recycling; offering data
destruction and IT asset management; and providing products,
services and solutions to industrial and commercial companies.
Envela operates primarily via two business segments. Through DGSE,
we operate Dallas Gold & Silver Exchange, Charleston Gold &
Diamond Exchange, and Bullion Express brands. Through ECHG we
operate Echo Environmental, ITAD USA and Teladvance. Envela is a
Nevada corporation, headquartered in Irving,
Texas.
DGSE
primarily buys and resells or recycles luxury hard assets like
jewelry, diamonds, gemstones, fine watches, rare coins and related
collectibles, precious-metal bullion products, gold, silver and
other precious-metals. DGSE operates six jewelry stores at both the
retail and wholesale levels, throughout the United States via its
facilities in Texas and South Carolina. The Company also maintains
a presence in the retail market through our web
-
sites, www.dgse.com and
www.cgdeinc.com.
ECHG buys
electronic components from businesses and other organizations, such
as school districts, for end-of-life recycling or to add life to
electronic devices by data destruction and refurbishment for reuse.
For end-of–life recycling, we sell to downstream recycling
companies who further process our material for end users. The
electronic devices saved for reuse are cleaned of prior data,
refurbished and sold to businesses or organizations wanting to
extend the remaining life and value of recycled electronics. Our
customers are companies and organizations that are based
domestically and internationally.
For additional
business operations for both DGSE and ECHG, see “Item 1.
Business—Operating Segments” in this annual report on
Form 10-K.
The consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and include the accounts of the
Company and its subsidiaries. All material intercompany
transactions and balances have been eliminated.
The Company
operates the business as two operating and reportable segments
under a variety of banners. DGSE includes Charleston Gold &
Diamond Exchange and Dallas Gold & Silver Exchange. ECHG
includes Echo, ITAD USA and Teladvance.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on
previously reported results of operations.
Cash and Cash
Equivalents
The Company
considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents. The carrying
amounts reported in the consolidated balance sheets approximate
fair value.
Inventories
DGSE’s
inventory is valued at the lower of cost or NRV. The Company
acquires a majority of its inventory from individual customers,
including pre-owned jewelry, watches, bullion, rare coins and
collectibles. The Company acquires these items based on its own
internal estimate of the fair market value of the items at the time
of purchase. The Company considers factors such as the current spot
market price of precious metals and current market demand for the
items being purchased. The Company supplements these purchases from
individual customers with inventory purchased from wholesale
vendors. These wholesale purchases of new merchandise can take the
form of full asset purchases, or consigned inventory. Consigned
inventory is accounted for on the Company’s consolidated
balance sheet with a fully offsetting contra account so that
consigned inventory has a net zero balance. The majority of the
Company’s 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 the Company’s inventory and could positively
or negatively impact the profitability of the Company. The Company
regularly monitors these fluctuations to evaluate any necessary
impairment to its inventory.
33
PART II
Item
8
ECHG’s
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 market 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.
The inventory
listed in Note 3, and for the time period until May 17, 2022, is
pledged as collateral against our $3,500,000 short-term line of
credit with Texas Bank and Trust.
Property and
Equipment
Property and
equipment are stated at cost. Depreciation on property and
equipment is provided for using the straight-line method over the
anticipated economic useful lives of the related property.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If
circumstances require a long-lived
asset or asset group be tested for possible impairment, we first
compare undiscounted cash flows expected to be generated by the
asset or asset group to its carrying value. If the carrying value
of the long-lived asset or asset group is not recoverable on an
undiscounted cash flow basis, an impairment is recognized to the
extent the carrying value exceeds its fair value. Fair value is
determined through various valuation techniques including
discounted cash flow models, quoted market values, and third-party
independent appraisals, as considered necessary. There
were no impairments recorded during Fiscal 2020 and
Fiscal 2019.
Expenditures for
maintenance and repairs are charged against income as incurred;
betterments that increase the value or materially extend the life
of the related assets are capitalized. When assets are sold or
retired, the cost and accumulated depreciation are removed from the
accounts and any gain or loss is recorded to current operating
income.
Impairment of Long-Lived
Assets, Amortized Intangible Assets and
Goodwill
The Company
performs impairment evaluations of its long-lived assets, including
property, equipment, and intangible assets with finite lives
whenever business conditions or events indicate that those assets
may be impaired. When the estimated future undiscounted cash flows
to be generated by the assets are less than the carrying value of
the long-lived assets, the assets are written down to fair market
value and a charge is recorded to current operations. Based on the
Company’s evaluations no impairment was required as of
December 31, 2020 or 2019.
We evaluate goodwill for
impairment annually in the fourth quarter, or when there is reason
to believe that the value has been diminished or impaired.
Evaluations for possible impairment are based upon a comparison of
the estimated fair value of the reporting segment to which the
goodwill has been assigned, versus the sum of the carrying value of
the assets and liabilities of that segment including the assigned
goodwill value. Goodwill is tested at the segment level and is the
only intangible asset with an indefinite life on the balance
sheet.
Financial
Instruments
The carrying
amounts reported in the consolidated balance sheets for cash
equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying
amounts reported for the note receivable and notes payable
approximate fair value because the underlying instruments have an
interest rate that reflects current market rates. None of these
instruments are held for trading purposes.
34
PART II
Item
8
Advertising
Costs
DGSE’s
advertising costs are expensed as incurred and amounted to $240,770
and $392,588 for Fiscal 2020 and Fiscal 2019,
respectively.
ECHG’s
advertising costs are expensed as incurred and amounted to $16,311
and $4,809 For Fiscal 2020 and for the period beginning May 20,
2019 through December 31, 2019, respectively.
Accounts
Receivable
Given the
generally low level of accounts receivable for DGSE, the Company
uses a simplified approach to calculate a general bad debt reserve.
An allowance is calculated for each aging “bucket,”
based on the risk profile of that bucket. For example, based on our
historical experience, we have chosen to not place any reserve on
amounts that are less than 60 days past due. From there the reserve
amount escalates: 10% reserve on amounts over 60 but less than 90
days past due, 25% on amounts over 90 but less than 120 past due,
and 75% on amounts over 120 days past due. The account receivables
past 120 days past due are reviewed quarterly and if they are
deemed uncollectable will be written off against the
reserve.
For Fiscal 2020
and 2019, besides the normal timing to clear credit cards and
financing collections, DGSE’s accounts receivable balance
consisted of wholesale dealers that are current, therefore no
reserve was established at December 31, 2020 and 2019. Once a
reserve is established, and an amount is considered to be
uncollectable it is to be written off against the reserve. We will
revisit the reserve periodically, but no less than annually, with
the same analytical approach in order to determine if the reserve
needs to be increased or decreased, based on the risk profile of
open accounts receivable at that point.
ECHG has a more
sizable accounts receivable balance of $2,528,215 at December 31,
2020 and $2,383,061 as of December 31, 2019. We use a different
approach for allowance for doubtful accounts because customers are
generally larger and payable terms are farther out. Once we
determine that a balance is uncollectable we reserve that balance
but still pursue payment. On the rare occasion we determine a
balance is uncollectable we will write off the balance against the
reserve. As of December 31, 2020 and 2019, we consider the full
accounts receivable balance to be fully collectable and feel that a
reserve of $0 to be appropriate.
As of December 31,
2020 and 2019, there was no allowance for doubtful
accounts.
A summary of the
Allowance for Doubtful Accounts is presented
below:
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Beginning
Balance
|
$
-
|
$
-
|
|
Bad debt expense
(+)
|
37,798
|
-
|
|
Receivables written off
(-)
|
(37,798
)
|
-
|
|
Ending
Balance
|
$
-
|
$
-
|
35
PART II
Item
8
Note
Receivable
ECHG, LLC, entered
into an agreement with CExchange, LLC on February 15, 2020, to lend
$1,500,000 bearing interest at eight and one-half percent (8.5%)
with interest only payments due quarterly. The loan matures on
February 20, 2023. The parties also agreed to warrant and
call-option agreements to acquire all of CExchange’s equity
interests. On November 7, 2020, the Company entered into an
agreement, whereby, increasing the loan from $1,500,000 to
$2,100,000. CExchange is the leader in retail trade-in services,
providing in-store and online solutions for most of the major
consumer electronics retailers in the United States. CExchange
helps retailers provide in-store trade-in programs designed to
allow customers to exchange their old technology for cash in
minutes. This fits well with ECHG’s core business of
refurbishing and reusing cell telephones. There is no assurance
that the Company will exercise its warrant or call
option.
Short-Term
Financing
Envela established
a short-term line of credit with Texas Bank and Trust to cover
emergency cash needs for $1,000,000 on May 17, 2019. The line of
credit was renewed for an additional two years and increased to
$3,500,000 on May 17 2020 and expires May 16, 2022. It has a
varying interest rate, per annum, based on the Prime Rate. On
December 31, 2020, the interest rate was 5% and the balance due on
this short-term line of credit was $0.
Income
Taxes
Income taxes are
accounted for under the asset and liability method prescribed by
Financial Accounting Standards Board (the “FASB”)
Accounting Standards Codification (“ASC”) 740, Income
Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation
allowance is recorded to reduce the carrying amounts of deferred
tax assets unless it is more likely than not such assets will be
realized.
The Company
accounts for its position in tax uncertainties in accordance with
ASC 740. The guidance establishes standards for accounting for
uncertainty in income taxes. The guidance provides several
clarifications related to uncertain tax positions. Most notably, a
“more likely-than-not” standard for initial recognition
of tax positions, a presumption of audit detection and a
measurement of recognized tax benefits based on the largest amount
that has a greater than 50 percent likelihood of realization. ASC
740 applies a two-step process to determine the amount of tax
benefit to be recognized in the financial statements. First, the
Company must determine whether any amount of the tax benefit may be
recognized. Second, the Company determines how much of the tax
benefit should be recognized (this would only apply to tax
positions that qualify for recognition). The Company has not taken
a tax position that, if challenged, would have a material effect on
the financial statements or the effective tax rate during the years
ended December 31, 2020 and 2019.
The Company
currently believes that its significant filing positions are highly
certain and that all of its other significant income tax filing
positions and deductions would be sustained upon audit or the final
resolution would not have a material effect on the consolidated
financial statements. Therefore, the Company has not established
any significant reserves for uncertain tax positions. The Company
recognizes accrued interest and penalties resulting from audits by
tax authorities in the provision for income taxes in the
consolidated statements of operations. During Fiscal 2020 and
Fiscal 2019, the Company did not incur any federal income tax
interest or penalties.
Revenue
Recognition
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), which superseded revenue recognition requirements in
Topic 605, Revenue Recognition. The ASU is based on the principle
that revenue is recognized to depict the transfer of goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The ASU also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and
cash flows arising from customer contracts, including significant
judgements and changes in judgements and assets recognized from
cost incurred to obtain or fulfill a contract.
36
PART II
Item
8
ASC 606 provides
guidance to identify performance obligations for revenue-generating
transactions. The initial step is to identify the contract with a
customer created with the sales invoice or a repair ticket.
Secondly, to identify the performance obligations in the contract
as we promise to deliver the purchased item or promised repairs in
return for payment or future payment as a receivable. The third
step is determining the transaction price of the contract
obligation as in the full ticket price, negotiated price or a
repair price. The next step is to allocate the transaction price to
the performance obligations as we designate a separate price for
each item. The final step in the guidance is to recognize revenue
as each performance obligation is satisfied.
The following
disaggregation of total revenue is listed by sales category and
segment for the years ended December 31, 2020 and
2019:
|
|
For the Years
Ended
|
|||||
|
|
December 31,
2020
|
December 31,
2019
|
||||
|
|
Revenues
|
Gross
Profit
|
Margin
|
Revenues
|
Gross Profit
|
Margin
|
|
DGSE
|
|
|
|
|
|
|
|
Resale
|
$
79,790,419
|
9,215,494
|
11.5
%
|
$
60,088,405
|
$
7,760,365
|
12.9
%
|
|
Recycled
|
5,870,972
|
1,154,376
|
19.7
%
|
7,431,749
|
1,157,459
|
15.6
%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
85,661,391
|
10,369,870
|
12.1
%
|
67,520,154
|
8,917,824
|
13.2
%
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
|
|
Resale
|
19,395,834
|
9,504,607
|
49.0
%
|
8,722,281
|
4,692,114
|
53.8
%
|
|
Recycled
|
8,864,790
|
3,194,486
|
36.0
%
|
5,782,062
|
2,645,904
|
45.8
%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
28,260,624
|
12,699,093
|
44.9
%
|
14,504,343
|
7,338,018
|
50.6
%
|
|
|
|
|
|
|
|
|
|
|
$
113,922,015
|
$
23,068,963
|
20.2
%
|
$
82,024,497
|
$
16,255,842
|
19.8
%
|
For
DGSE, revenue for monetary transactions (i.e., cash and
receivables) with dealers and the retail public are recognized when
the merchandise is delivered, and payment has been made either by
immediate payment or through a receivable obligation at one of our
over-the-counter retail stores. We also recognize revenue upon the
shipment of goods when retail and wholesale customers have
fulfilled their obligation to pay, or promise to pay, through
e-commerce or phone sales. We have elected to account for shipping
and handling costs as fulfillment costs after the customer obtains
control of the goods. Crafted-precious-metal items at the end of
their useful lives are sold to a Dallas refiner, who was a related
party until May 20, 2019. Since this refiner is located in the
Dallas area, we deliver the metal to the refiner. The metal is
assayed, price is determined from the assay and payment is made
usually within two days. Revenue is recognized from the sale once
payment is received.
We also offer a
structured layaway plan. When a retail customer utilizes the
layaway plan, we collect a minimum payment of 25% of the sales
price, establish a payment schedule for the remaining balance and
hold the merchandise as collateral as security against the
customer’s deposit until all amounts due are paid in full.
Revenue for layaway sales is recognized when the merchandise is
paid in full and delivered to the retail customer. Layaway revenue
is also recognized when a customer fails to pay in accordance with
the sales contract and the sales item is returned to inventory with
the forfeit of deposited funds, typically after 90
days.
37
PART II
Item
8
In limited
circumstances, we exchange merchandise for similar merchandise
and/or monetary consideration with both dealers and retail
customers, for which we recognize revenue in accordance with
Accounting Standards Codification (“ASC”) 845,
Nonmonetary Transactions. When we exchange merchandise for similar
merchandise and there is no monetary component to the exchange, we
do not recognize any revenue. Instead, the basis of the merchandise
relinquished becomes the basis of the merchandise received, less
any indicated impairment of value of the merchandise relinquished.
When we exchange merchandise for similar merchandise and there is a
monetary component to the exchange, we recognize revenue to the
extent of the monetary assets received and determines the cost of
sale based on the ratio of monetary assets received to monetary and
non-monetary assets received multiplied by the cost of the assets
surrendered.
The Company offers
the option of third party financing for customers wishing to borrow
money for the purchase. The customer applies on-line with the third
party and upon going through the credit check will be approved or
denied. If accepted, the customer is allowed to purchase according
to the limits set by the financing company. We recognize the
revenue of the sale upon the promise of the financing company to
pay.
We have a return
policy (money-back guarantee). The policy covers retail
transactions involving jewelry, graded rare coins and currency
only. Customers may return jewelry, graded rare coins and currency
purchased within 30 days of the receipt of the items for a full
refund as long as the items are returned in exactly the same
condition as they were delivered. In the case of jewelry, graded
rare coins and currency sales on account, customers may cancel the
sale within 30 days of making a commitment to purchase the items.
The receipt of a deposit and a signed purchase order evidences the
commitment. Any customer may return a jewelry item or graded rare
coins and currency if they can demonstrate that the item is not
authentic, or there was an error in the description of a graded
coin or currency piece. Returns are accounted for as a reversal of
the original transaction, with the effect of reducing revenues, and
cost of sales, and returning the merchandise to inventory. We have
established an allowance for estimated returns related to Fiscal
2020 sales, which is based on our review of historical returns
experience, and reduces our reported revenues and cost of sales
accordingly. As of December 31, 2020 and 2019, our allowance for
returns remained the same at approximately $28,000 for both
years.
ECHG has several
revenue streams and recognize revenue according to ASC 606 at an
amount that reflects the consideration to which the entities expect
to be entitled in exchange for transferring goods or services to
the customer. The revenue streams are as
follows;
●
Outright sales are
recorded when product is shipped. Once the price is established and
the terms are agreed to and the product is shipped, the revenue is
recognized. ECHG has fulfilled its performance obligation with an
agreed upon transaction price, payment terms and shipping the
product.
●
ECHG recognizes
refining revenue when our inventory arrives at the destination port
and the performance obligation is satisfied by transferring the
control of the promised goods that are identified in the customer
contract. Ninety percent (90%) of our refining revenue is generated
from one refining partner with an international refining
facility. This refining partner pays us sixty percent (60%) of
an Invoice within five working days upon the receipt of the Ocean
Bill of Lading issued by the Ocean Carrier. Our initial
Invoice is recognized in full when our performance obligation is
satisfied, as stated in the first sentence. Under the guidance of
ASC 606, an estimate of the variable consideration that we expect
to be entitled is included in the transaction price stated at the
current precious metal spot price and weight of the precious metal.
An adjustment to revenue is made in the period once the underlying
weight and any precious metal spot price movement is resolved,
which is usually around six (6) weeks. Any adjustment from the
resolution of the underlying uncertainty is netted with the
remaining forty percent (40%) due from the original
contract.
●
Hard drive sales
by ECHG are limited to customers who are required to prepay
shipments. Once the commodity price is established and agreed upon
by both parties, customers send payment in advance. The Company
releases the shipment on the same day when payment receipt is
confirmed and revenue is recognized on day of shipment. If payment
is received on the last day of the month and shipment goes out the
following day the payment received is deferred revenue and
recognized the following month when the shipment is
made.
●
ECHG also provides
recycling services according to a Scope of Work. Services are
recognized based on the number of units processed by a preset price
per unit. Activity reports are produced weekly with the counts and
revenue is recognized based on the billing from the weekly reports.
Recycling services can be conducted at our ECHG facility or we can
design and perform the recycling service at the client’s
facility. The Scope of Work will determine the charges and whether
the service will be completed at ECHG or at the client’s
facility. Payment terms are also dictated in the Scope of
Work.
38
PART II
Item
8
Shipping and Handling
Costs
Shipping and
handling costs amounted to $1,025,215 and $803,015, for 2020 and
2019, respectively. We have determined that shipping and handling
costs should be included in cost of goods sold since inventory is
what is shipped to and from store locations or to and from
vendors.
Taxes Collected from
Customers
The
Company’s policy is to present taxes collected from customers
and remitted to governmental authorities on a net basis. The
Company records the amounts collected as a current liability and
relieves such liability upon remittance to the taxing authority
without impacting revenues or expenses.
Earnings Per
Share
Basic earnings per
share of our Common Stock is computed by dividing net earnings
available to holders of our Common Stock by the weighted average
number of common shares outstanding for the reporting period.
Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock. For the calculation
of diluted earnings per share, the basic weighted average number of
shares is increased by the dilutive effect of stock options and
warrants outstanding determined using the treasury stock
method.
Stock-Based
Compensation
The Company
accounts for stock-based compensation by measuring the cost of the
employee services received in exchange for an award of equity
instruments, including grants of stock options, based on the fair
value of the award at the date of grant. In addition, to the extent
that the Company receives an excess tax benefit upon exercise of an
award, such benefit is reflected as cash flow from financing
activities in the consolidated statement of cash flows. Stock-based
compensation expense for Fiscal 2020 and Fiscal 2019 amounted to
$325 and $0 respectively.
The following
table represents our total compensation cost related to non-vested
awards not yet recognized at year end December 31, 2020 and
December 31, 2019:
|
Date of
grant
|
Employee
|
Price of stock at grant
date
|
Number of shares granted
unvested December 31, 2020
|
Unrecognized expense at
December 31, 2020
|
Number of shares granted
unvested December 31, 2019
|
Unrecognized expense at
December 31, 2019
|
|
|
|
|
|
|
|
|
|
January 23,
2014
|
Robert
Burnside
|
$
2.18
|
0
|
-
|
250
|
$
545.00
|
|
|
|
|
|
|
|
|
|
Total cost
unrecognized
|
|
|
|
-
|
|
$
545.00
|
No stock awards
remained unexercised as of December 31, 2020 and only 250
unexercised stock awards remained unexercised as of December 31,
2019.
Use of
Estimates
The preparation of
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, and expenses.
Examples of estimates and assumptions include: for revenue
recognition, determining the nature and timing of satisfaction of
performance obligations, and determining the standalone selling
price of performance obligations, variable consideration, and other
obligations such as product returns and refunds; loss
contingencies; the fair value of and/or potential impairment of
goodwill and intangible assets for our reporting units; useful
lives of our tangible and intangible assets; allowances for
doubtful accounts; valuation allowance; the market value of, and
demand for, our inventory and the potential outcome of uncertain
tax positions that have been recognized on our consolidated
financial statements or tax returns. Actual results and outcomes
may differ from management’s estimates and
assumptions.
39
PART II
Item
8
New Accounting
Pronouncements
In January 2017, the FASB issued ASU
2017-04,
Intangibles - Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. This ASU
simplifies the accounting for goodwill impairment for all entities
by requiring impairment changes to be based on the first step in
today’s two-step impairment test, thus eliminating step two
from the goodwill impairment test. In addition, the
amendment eliminates the requirements for any reporting unit with a
zero or negative carrying amount to perform a qualitative
assessment and, if it fails that qualitative test, to perform step
two of the goodwill impairment test. For public companies, ASU
2017-04 is effective for fiscal years beginning after December 15,
2019 with early adoption permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1,
2017. We adopted this pronouncement on January 1, 2020.
The adoption did not have an impact on the Company’s
consolidated financial statements.
On January 1, 2019, we adopted Accounting
Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02)
using the modified retrospective transition approach by applying
the new standard to all leases existing at the date of initial
application. Results and disclosure requirements for reporting
periods beginning after January 1, 2019, are presented under Topic
842, while prior period amounts have not been adjusted and continue
to be reported in accordance with our historical accounting under
Topic 840. Upon adoption, we recognized
right-of-use
assets of approximately $2.0 million,
with corresponding lease liabilities of approximately $2.0 million
on the consolidated balance sheets. The
right-of-use
assets include adjustments for
deferred rent liabilities. The adoption did not impact our
beginning retained earnings, or our prior year consolidated
statements of income and statements of cash
flows.
In June
2016, the FASB issued a new credit loss accounting standard ASU
2016-13. The new accounting standard introduces the current
expected credit losses methodology (CECL) for estimating allowances
for credit losses which will be based on expected losses rather
than incurred losses. We will be required to use a forward-looking
expected credit loss model for accounts receivable, loans and other
financial instruments. The standard will be adopted upon the
effective date for us beginning January 1, 2023 by using a modified
retrospective transition approach to align our credit loss
methodology with the new standard. The company is evaluating the
financial statement implications of ASU 2016-13.
NOTE 2 —
CONCENTRATION OF CREDIT RISK
The Company
maintains cash balances in financial institutions in excess of
federally insured limits.
A significant
amount of DGSE’s revenue and expenses stem from sales to and
purchases from one Dallas refining partner, which relationship
constitutes Envela’s single largest source of revenues and
expenses. In addition,
a significant amount of
ECHG’s refining revenue comes from one refining partner with
an international refining facility. Any adverse break in either
relationship could reduce the flow of refining materials and
revenue. While the pandemic continues to be a global threat, any
potential interruptions in travel and business disruptions with
respect to us, our customers or our supply chain could adversely
affect our sales, costs and liquidity position, possibly to a
significant degree. The effects of the coronavirus pandemic on our
business, the ultimate impact remains uncertain and subject to
change. The duration of any such impact cannot be
predicted.
NOTE 3 —
INVENTORIES
Inventories
consist of the following:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Resale
|
$
8,971,815
|
$
8,213,551
|
|
Recycle
|
191,677
|
401,468
|
|
|
|
|
|
Subtotal
|
9,163,492
|
8,615,019
|
|
|
|
|
|
ECHG
|
|
|
|
Resale
|
557,959
|
351,958
|
|
Recycle
|
285,446
|
542,477
|
|
|
|
|
|
Subtotal
|
843,405
|
894,435
|
|
|
|
|
|
|
$
10,006,897
|
$
9,509,454
|
40
PART II
Item
8
NOTE
4 — NOTE RECEIVABLE
ECHG, LLC, which
is wholly owned by the Company, entered into an agreement with
CExchange, LLC (“CExchange”) on February 15, 2020,
pursuant to which it agreed to loan CExchange $1,500,000 bearing
interest at eight and one-half percent (8.5%) with interest only
payments due quarterly. The loan matures on February 20, 2023. The
parties also agreed to warrant and call-option agreements through
which ECHG, LLC may acquire all of CExchange’s equity
interests upon the occurrence of certain events and on certain
conditions. On November 7, 2020, the Company entered into an
amended agreement, whereby, increasing the loan from $1,500,000 to
$2,100,000. CExchange is a leader in retail trade-in services,
providing in-store and online solutions for most of the major
consumer electronics retailers in the United States. CExchange
helps retailers provide in-store trade-in programs designed to
allow customers to exchange their old technology for cash in
minutes. These services and programs fit well with ECHG’s
core business of refurbishing and reusing consumer electronics and
IT equipment. Starting with the quarter ending June 30, 2020,
CExchange helped DGSE facilitate their bullion on-line sales. There
is no assurance that the Company will exercise its warrant or call
option to acquire all of CExchange’s equity
interests.
NOTE
5 — PROPERTY AND EQUIPMENT
Property and
equipment consist of the following:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Land
|
$
720,786
|
$
55,000
|
|
Buildings and
improvements
|
1,317,906
|
-
|
|
Leasehold
improvements
|
1,435,742
|
1,561,649
|
|
Machinery and
equipment
|
1,056,315
|
1,039,013
|
|
Furniture and
fixtures
|
504,430
|
453,699
|
|
Vehicles
|
22,859
|
-
|
|
|
5,058,038
|
3,109,361
|
|
Less: accumulated
depreciation
|
(2,054,294
)
|
(1,904,948
)
|
|
|
|
|
|
Sub-Total
|
3,003,744
|
1,204,413
|
|
|
|
|
|
ECHG
|
|
|
|
Leasehold
improvements
|
81,149
|
81,149
|
|
Machinery and
equipment
|
220,417
|
27,497
|
|
Furniture and
fixtures
|
93,827
|
93,827
|
|
|
395,393
|
202,473
|
|
Less: accumulated
depreciation
|
(71,058
)
|
(55,847
)
|
|
|
|
|
|
Sub-Total
|
324,335
|
146,626
|
|
|
|
|
|
Envela
|
|
|
|
Land
|
1,106,664
|
-
|
|
Buildings and
improvements
|
2,456,324
|
-
|
|
Machinery and
equipment
|
5,407
|
-
|
|
|
3,568,395
|
-
|
|
Less: accumulated
depreciation
|
(7,873
)
|
-
|
|
|
|
|
|
Sub-Total
|
3,560,522
|
-
|
|
|
|
|
|
|
$
6,888,601
|
$
1,351,039
|
Depreciation
expense was $327,026 and $264,021 for Fiscal 2020 and Fiscal 2019,
respectively.
41
PART II
Item
8
NOTE 6 —
ACQUISITION
On May 20, 2019,
ECHG, a wholly owned subsidiary of the Company, entered into an
asset purchase agreement with each of Echo Environmental, LLC and
its wholly owned subsidiary ITAD USA, LLC (collectively, the
“Echo Legacy Entities”), pursuant to which the Echo
Legacy Entities agreed to sell all of their assets and rights and
interests thereto (the “Acquired Assets”) for
$6,925,979 (the “Echo Transaction”). The Echo Legacy
Entities were wholly owned subsidiaries of a former Related Party.
John R. Loftus is the Company’s CEO, President and Chairman
and owned approximately one-third of the equity interests of the
former Related Party prior to the Echo Transaction. The Company
also paid a closing fee of $85,756 that was not part of the
purchase price allocation. The fee is included in selling, general
and administrative expenses.
On the same day,
Mr. Loftus became the largest beneficial owner of the
Company’s stock by purchasing all of the Company’s
stock beneficially owned by the former Related Party. As part of
the transaction of acquiring the stock from the former Related
Party, Mr. Loftus no longer owns an equity interest in that entity.
As an interested party, Mr. Loftus was familiar with the operations
of the Echo Legacy Entities.
In connection with
the Echo Transaction, on May 20, 2019, ECHG executed and delivered
to Mr. Loftus, a promissory note to which ECHG borrowed from Mr.
Loftus $6,925,979, the proceeds of which were used to purchase the
Acquired Assets.
As part of the
Echo Transaction, goodwill was realized of $1,367,109, which is the
purchase price less the fair value of the net assets purchased, as
shown in the purchase price allocation in the following table.
Goodwill is not amortized but evaluated for impairment on an annual
basis during the fourth quarter of our fiscal year or earlier if
events or circumstances indicate the carrying value may be
impaired. The Company’s goodwill is related to ECHG only and
not the whole Company. The Company has evaluated goodwill based on
cash flows for the ECHG segment. For federal income tax purposes,
goodwill is amortized and deductible over fifteen
years.
The purchase price
was allocated to the fair value of assets and liabilities acquired
as of May 20, 2019:
|
Description
|
Amount
|
|
|
|
|
Assets
|
|
|
Cash
|
$
1,049,462
|
|
Account
receivables
|
1,025,615
|
|
Inventories
|
1,209,203
|
|
Prepaids
|
88,367
|
|
Fixed
assets
|
191,208
|
|
Right-of-use
assets
|
2,350,781
|
|
Intangible
Assets
|
3,356,000
|
|
Other
assets
|
88,998
|
|
|
|
|
Liabilities
|
|
|
Account
payables
|
(723,043
)
|
|
Accrued
liabilities
|
(721,483
)
|
|
Operating lease
liabilities
|
(2,350,781
)
|
|
Other long-term
liabilities
|
(5,457
)
|
|
|
|
|
Net
assets
|
5,558,870
|
|
|
|
|
Goodwill
|
1,367,109
|
|
|
|
|
Total
Purchase Price
|
$
6,925,979
|
42
PART II
Item
8
The following pro forma presents
the Company's results of the Echo Entities and the Company's
results of operations for the twelve months ended December 31, 2019
as if they were combined the entire twelve
months:
|
|
Pro forma Combined
|
|
|
For the Twelve Months Ended
|
|
|
December 31, 2019
|
|
|
(unaudited)
|
|
|
|
|
Revenue
|
$
87,921,642
|
|
|
|
|
Income
(loss) from continuing operations
|
$
1,931,558
|
|
|
|
|
Net
income
|
$
1,931,558
|
|
|
|
|
Basic
net income per common share
|
$
0.07
|
|
|
|
|
Diluted
net income per common share
|
$
0.07
|
43
PART II
Item
8
NOTE 7 —
GOODWILL
The changes in the carrying
amount of goodwill for the years ended December 31, 2020 and 2019,
are as follows:
|
|
Year Ended December
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Opening
balance
|
$
1,367,109
|
$
-
|
|
Additions
|
-
|
1,367,109
|
|
Acquisition
adjustment
|
-
|
-
|
|
Impairment
adjustment
|
-
|
-
|
|
|
|
|
|
Goodwill
|
$
1,367,109
|
$
1,367,109
|
Our 2019 acquisition of the assets of the Echo
Legacy Entities resulted in the addition to our goodwill balance in
2019.
The Company’s goodwill is related to the ECHG
segment only and not the whole Company.
We evaluate goodwill for impairment annually in
the fourth quarter, or when there is reason to believe that the
value has been diminished or impaired.
Based on the
Company’s evaluations, no impairment was required as of
December 31, 2020 and 2019.
NOTE
8 — INTANGIBLE ASSETS
Intangible assets
consist of:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Domain
names
|
$
41,352
|
$
41,352
|
|
Point of sale
system
|
330,000
|
330,000
|
|
|
371,352
|
371,352
|
|
Less: accumulated
amortization
|
(203,502
)
|
(137,502
)
|
|
|
|
|
|
Subtotal
|
167,850
|
233,850
|
|
|
|
|
|
ECHG
|
|
|
|
Trademarks
|
1,483,000
|
1,483,000
|
|
Customer
Contracts
|
1,873,000
|
1,873,000
|
|
|
3,356,000
|
3,356,000
|
|
Less: accumulated
amortization
|
(531,377
)
|
(195,777
)
|
|
|
|
|
|
Subtotal
|
2,824,623
|
3,160,223
|
|
|
|
|
|
Total
|
$
2,992,473
|
$
3,394,073
|
Amortization
expense was $401,600 and $256,277 for Fiscal 2020 and Fiscal 2019,
respectively.
44
PART II
Item
8
The estimated
aggregate amortization expense for each of the five succeeding
fiscal years follows:
|
|
DGSE
|
ECHG
|
Total
|
|
|
|
|
|
|
2021
|
$
66,000
|
$
335,600
|
$
401,600
|
|
2022
|
66,000
|
335,600
|
401,600
|
|
2023
|
30,350
|
335,600
|
365,950
|
|
2024
|
5,500
|
335,600
|
341,100
|
|
2025
|
-
|
335,600
|
335,600
|
|
Thereafter
|
-
|
1,146,623
|
1,146,623
|
|
|
|
|
|
|
|
$
167,850
|
$
2,824,623
|
$
2,992,473
|
NOTE 9 –
ACCRUED EXPENSES
Accrued expenses
consist of the following:
|
|
December
31
|
December
31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Accrued
Interest
|
$
10,057
|
$
7,374
|
|
Professional
fees
|
-
|
125,200
|
|
Board member
fees
|
7,500
|
7,500
|
|
Insurance
|
-
|
30,508
|
|
Payroll
|
155,635
|
157,148
|
|
Property
tax
|
26,435
|
-
|
|
Sales
tax
|
180,609
|
115,451
|
|
Other
administrative expenses
|
13,525
|
-
|
|
State income
tax
|
-
|
33,907
|
|
|
|
|
|
Subtotal
|
393,761
|
477,088
|
|
|
|
|
|
ECHG
|
|
|
|
Accrued
Interest
|
17,086
|
16,724
|
|
Professional
fees
|
-
|
77,900
|
|
Payroll
|
119,327
|
79,342
|
|
Property
tax
|
20,500
|
-
|
|
Sales
tax
|
-
|
7,852
|
|
Credit
card
|
-
|
22,279
|
|
Other accrued
expenses
|
10,574
|
-
|
|
State income
tax
|
-
|
27,963
|
|
Material &
shipping costs (COGS)
|
-
|
207,361
|
|
|
|
|
|
Subtotal
|
167,487
|
439,421
|
|
|
|
|
|
Envela
|
|
|
|
Accrued
Interest
|
7,884
|
-
|
|
Payroll
|
10,745
|
-
|
|
Professional
fees (1)
|
142,635
|
-
|
|
Other
administrative expenses
|
8,433
|
-
|
|
State income
tax (1)
|
113,379
|
-
|
|
|
|
|
|
Subtotal
|
283,076
|
-
|
|
|
|
|
|
|
$
844,324
|
$
916,509
|
(1) State income
tax and professional fee accruals have been recorded at the segment
level in prior periods. Proceeding forward, we will allocate those
expenses at the segment level but accrue the consolidated balances
at the corporate level.
45
PART II
Item
8
NOTE 10 —
LONG-TERM DEBT
Long-term debt
consists of the following:
|
|
Outstanding
Balance
|
|
|
|
|
|
December
31,
|
December
31,
|
Current
|
|
|
|
2020
|
2019
|
Interest
Rate
|
Maturity
|
|
DGSE
|
|
|
|
|
|
Note payable, related party
(1)
|
$
2,863,715
|
$
2,949,545
|
6.00
%
|
|
|
Note payable, Truist Bank
(2)
|
942,652
|
-
|
3.65
%
|
July 9, 2030
|
|
Note payable, Texas Bank
& Trust (3)
|
491,852
|
-
|
3.75
%
|
September 14,
2025
|
|
|
|
|
|
|
|
DGSE
Sub-Total
|
4,298,219
|
2,949,545
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
Note payable, related party
(1)
|
6,496,127
|
6,689,507
|
6.00
%
|
May 16, 2024
|
|
|
|
|
|
|
|
Envela
|
|
|
|
|
|
Note payable, Texas Bank
& Trust (4)
|
2,951,379
|
-
|
3.25
%
|
November 4, 2025
|
|
Note payable
(5)
|
1,668,200
|
-
|
|
|
|
|
|
|
|
|
|
Envela
Sub-Total
|
4,619,579
|
-
|
|
|
|
|
|
|
|
|
|
Sub-Total
|
15,413,925
|
9,639,052
|
|
|
|
|
|
|
|
|
|
Current
portion
|
2,120,457
|
1,084,072
|
|
|
|
|
|
|
|
|
|
|
$
13,293,468
|
$
8,554,980
|
|
|
(1) On May 20,
2019, in connection with the Echo Transaction, the Company entered
into two loan agreements with John R. Loftus, the Company’s
CEO, President and Chairman of the Board. ECHG, LLC executed a
5-year, $6,925,979 note for the Echo Transaction, amortized over 20
years at a 6% annual interest rate. DGSE, LLC executed a 5-year,
$3,074,021 note to pay off the accounts payable – related
party balance to a former Related Party as of May 20, 2019. That
promissory note is also amortized over 20 years at a 6% annual
interest rate. On January 1, 2020, revisions were made on the
original documents for both DGSE and ECHG notes. Originally, the
DGSE note stated that the monthly interest and principal payment
due was $41,866 and the ECHG note stated that the monthly interest
and principal payment due was $94,327. The revised interest and
principal payment due monthly on the note for DGSE is $22,203. The
revised interest and principal payment due monthly on the note for
ECHG is $49,646. The allocation between short-term and long-term
notes payable, related party was revised accordingly starting with
the three months ending March 31, 2020.
46
PART II
Item
8
(2) On July 9,
2020, DGSE closed the purchase of a new retail building located at
610 E. Round Grove Road in Lewisville, Texas for $1.195 million.
The purchase was partly financed through a $956,000, 10 year loan,
bearing an annual interest rate of 3.65%, amortized over 20 years,
payable to Truist Bank (f/k/a BB&T Bank). The note has monthly
interest and principal payments of $5,645.
(3) On September
14, 2020, 1106 NWH Holdings, LLC, a wholly owned subsidiary of
DGSE, closed on the purchase of a new retail building located at
1106 W. Northwest Highway in Grapevine, Texas for $620,000. The
purchase was partly financed through a $496,000, 5 year loan,
bearing an annual interest rate of 3.75%, amortized over 20 years,
payable to Texas Bank & Trust. The note has monthly interest
and principal payments of $2,941.
(4) On November 4,
2020, 1901 Gateway Holdings, LLC, a wholly owned subsidiary of
Envela Corporation, closed on the purchase of a new office building
located at 1901 Gateway Drive, Irving, Texas for $3.521 million.
The building was partially financed through a $2.96 million, 5 year
loan, bearing an interest rate of 3.25%, amortized over 20 years,
payable to Texas Bank & Trust. The note has monthly interest
and principal payments of $16,792.
(5) The Company
applied for and received, on April 20, 2020, approximately $1.67
million, 1% interest, federally backed loan intended to pay
employees and cover certain rent and utility-related costs during
the COVID-19 pandemic (the “Federal Loan”), with Truist
Bank (f/k/a BB&T Bank) as lender. The Federal Loan is
forgivable to the extent that certain criteria are met. We have
applied for the forgiveness of the Federal Loan during the fourth
quarter ending December 31, 2020; therefore, we are classifying the
loan as short-term.
Future scheduled principal
payments of our note payables and note payables, related party, as
of December 31, 2020 are as follows:
|
Note
payable, related party - DGSE
|
|
|
|
|
|
Year Ending December
31,
|
Amount
|
|
|
|
|
2021
|
$
95,129
|
|
2022
|
100,996
|
|
2023
|
107,225
|
|
2024
|
2,560,365
|
|
|
|
|
Subtotal
|
$
2,863,715
|
|
Note
payable, Truist Bank - DGSE
|
|
|
|
|
|
Year Ending December
31,
|
Amount
|
|
|
|
|
2021
|
$
33,904
|
|
2022
|
35,163
|
|
2023
|
36,468
|
|
2024
|
37,821
|
|
2025
|
39,216
|
|
Thereafter
|
760,080
|
|
|
|
|
Subtotal
|
$
942,652
|
47
PART II
Item
8
|
Note
payable, Texas Bank & Trust - DGSE
|
|
|
|
|
|
Year Ending December
31,
|
Amount
|
|
|
|
|
2021
|
$
17,399
|
|
2022
|
18,053
|
|
2023
|
18,732
|
|
2024
|
19,437
|
|
2025
|
418,231
|
|
|
|
|
Subtotal
|
$
491,852
|
|
Note
payable, related party - ECHG
|
|
|
|
|
|
Year Ending December
31,
|
Amount
|
|
|
|
|
2021
|
$
211,903
|
|
2022
|
224,973
|
|
2023
|
238,849
|
|
2024
|
5,820,402
|
|
|
|
|
Subtotal
|
$
6,496,127
|
|
Note
payable, Texas Bank & Trust - Envela
|
|
|
|
|
|
Year Ending December
31,
|
Amount
|
|
|
|
|
2021
|
$
93,922
|
|
2022
|
97,455
|
|
2023
|
101,122
|
|
2024
|
104,926
|
|
2025
|
2,553,954
|
|
|
|
|
Subtotal
|
$
2,951,379
|
|
Note payable - Envela Corporation
|
|
|
Year Ending December
31,
|
Amount
|
|
|
|
|
2021
|
$
1,668,200
|
|
|
|
|
Subtotal
|
$
1,668,200
|
|
|
|
|
|
$
15,413,925
|
48
PART II
Item
8
NOTE 11 —
SEGMENT INFORMATION
We determine our
business segments based upon an internal reporting structure. Our
financial performance is based on the following segments: DGSE and
ECHG.
The DGSE segment
includes Dallas Gold & Silver Exchange, which has five retail
stores in the Dallas/Fort Worth Metroplex, and Charleston Gold
& Diamond Exchange, which has one retail store in Charleston,
South
Carolina.
The ECHG segment
includes Echo, ITAD USA and Teladvance. These three companies were
added during 2019 and are involved in recycling and the reuse of
electronic waste.
We allocate our
corporate costs and expenses, including rental income and expenses
relating to our new corporate headquarters, to our business
segments. These income and expenses are included in selling,
general and administrative expenses, depreciation and amortization,
other income, interest expense and income tax expense. Our
management team evaluates the operating performance of each segment
and makes decisions about the allocation of resources according to
each segment profit. The allocations are generally amounts agreed
upon by management, which may differ from an arms-length
amount.
The following
table segments the financial results of DGSE and ECHG for Fiscal
2020:
|
|
Fiscal 2020
|
||
|
|
DGSE
|
ECHG
|
Consolidated
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
Sales
|
$
85,661,391
|
$
28,260,624
|
$
113,922,015
|
|
Cost of goods
sold
|
75,291,521
|
15,561,531
|
90,853,052
|
|
|
|
|
|
|
Gross
profit
|
10,369,870
|
12,699,093
|
23,068,963
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Selling, general and
administrative expenses
|
6,933,259
|
8,620,015
|
15,553,274
|
|
Depreciation and
amortization
|
321,833
|
406,793
|
728,626
|
|
|
|
|
|
|
|
7,255,092
|
9,026,808
|
16,281,900
|
|
|
|
|
|
|
Operating
income
|
3,114,778
|
3,672,285
|
6,787,063
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
Other
income
|
(113,974
)
|
(193,023
)
|
(306,997
)
|
|
Interest
expense
|
209,295
|
411,204
|
620,499
|
|
|
|
|
|
|
Income before income
taxes
|
3,019,457
|
3,454,104
|
6,473,561
|
|
|
|
|
|
|
Income tax
expense
|
40,283
|
49,335
|
89,618
|
|
|
|
|
|
|
Income
from continuing operations
|
$
2,979,174
|
$
3,404,769
|
$
6,383,943
|
|
|
|
|
|
49
PART II
Item
8
NOTE
12 — BASIC AND DILUTED AVERAGE
SHARES
A reconciliation
of basic and diluted average common shares is as
follows:
|
|
Year Ended December
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Basic weighted average
shares
|
26,924,631
|
26,924,381
|
|
Effect of potential
dilutive securities
|
15,000
|
15,250
|
|
Diluted weighted average
shares
|
26,939,631
|
26,939,631
|
For the years
ended December 31, 2020 and 2019, there were 15,000 and 15,250
Common Stock options, warrants, and Restricted Stock Units (RSUs)
unexercised respectively. For the years ended December 31, 2020 and
2019, there were no anti-dilutive shares.
NOTE
13 — COMMON STOCK
In January 2014,
the Company’s Board granted 112,000 RSUs to its officers and
certain key employees. As of December 31, 2020, no RSUs remain
unexercised and dilutive.
NOTE
14 — STOCK OPTIONS AND RESTRICTED STOCK
UNITS
On June 21, 2004,
our shareholders approved the adoption of the 2004 Employee Stock
Option Plan (the “2004 Employee Stock Option Plan”)
t
hat provided for incentive stock
options and nonqualified stock options to be granted to key
employee and certain directors.
Each option vested on either
January 1, 2004 or immediately upon issuance thereafter. The
exercise price of each option issued pursuant to the 2004 Plan is
equal to the market value of our Common Stock on the date of grant,
as determined by the closing bid price for our Common Stock on the
Exchange on the date of grant or, if no trading occurred on the
date of grant, on the last day prior to the date of grant on which
our securities were listed and traded on the Exchange. Of the
options issued under the 2004 Employee Stock Option Plan, 15,000
remain outstanding. Options issued pursuant to the 2004 Employee
Stock Option Plan have no expiration date. The Company previously
determined there will be no additional grants under the 2004
Employee Stock Option Plan.
On December 7,
2016, our shareholders approved the adoption of the 2016 Equity
Incentive Plan (the “2016 Plan”), which reserved
1,100,000 shares for issuance pursuant to awards issued thereunder.
As of December 31, 2020, no awards had been made under the 2016
Plan.
The following
table summarizes the activity in common shares subject to options
and warrants:
|
|
Years Ended December
31,
|
|||
|
|
2020
|
2019
|
||
|
|
Shares
|
Weighted average exercise
price
|
Shares
|
Weighted average exercise
price
|
|
|
|
|
|
|
|
Outstanding at beginning or
year
|
15,000
|
$
2.17
|
15,000
|
$
2.17
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding at end of
year
|
15,000
|
$
2.17
|
15,000
|
$
2.17
|
|
|
|
|
|
|
|
Options exercisable at end
of year
|
15,000
|
$
2.17
|
15,000
|
$
2.17
|
|
|
|
|
|
|
The 15,000 options
exercisable at the end of the year are potential dilutive
shares.
50
PART II
Item
8
Information about
stock options outstanding at December 31, 2020 is summarized as
follows:
|
|
Options Outstanding and
Exercisable
|
||||
|
|
|
|
|
|
|
|
Exercise
price
|
Number outstanding
|
Weighted average remaining contractual life
(Years)
|
|
Weighted average exercise
price
|
Aggregate intrinsic
value
|
|
$
2.13
|
10,000
|
NA
|
(1
)
|
$
2.13
|
$
32,450
|
|
$
2.25
|
5,000
|
NA
|
(1
)
|
$
2.25
|
$
15,600
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
$
48,050
|
(1)
Options currently
issued pursuant to the Company’s 2004 Employee Stock Option
Plans have no expiration date.
The aggregate
intrinsic values in the above table were based on the closing price
of our Common Stock of $5.37 as of December 31,
2020.
A summary of the
status of our non-vested RSU grants issued under our 2006 Plan is
presented below:
|
|
Year Ended December 31,
|
|||
|
|
2020
|
2019
|
||
|
|
Shares
|
Weighted average exercise
price
|
Shares
|
Weighted average exercise
price
|
|
|
|
|
|
|
|
Nonvested at beginning or
year
|
250
|
$
1.30
|
250
|
$
1.30
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
250
|
1.30
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding at end of
year
|
-
|
$
-
|
250
|
$
1.30
|
As a result of the
expiration of the 2006 Plan, as of December 31, 2019, no further
shares could be issued under the 2006 Plan. As of January 1, 2020,
the remaining 250 RSU grants have vested and were exercised during
Fiscal 2020. A total of 1,100,000 shares remain available for
future grants pursuant to the 2016 Plan.
During Fiscal 2020
we recognized $325 of stock-based compensation expense compared to
$0 in Fiscal 2019.
NOTE 15 —
INCOME TAXES
The income tax
provision reconciled to the tax computed at the statutory from
continuing operations Federal rate follows:
|
|
2020
|
2019
|
|
|
|
|
|
Tax Expense at
Statutory Rate
|
$
1,364,191
|
$
626,468
|
|
Valuation
Allowance
|
(1,371,195
)
|
(631,775
)
|
|
Non-Deductible
Expenses and Other
|
7,004
|
5,307
|
|
State Taxes, Net of
Federal Benefit
|
89,618
|
95,116
|
|
Income tax
expense
|
$
89,618
|
$
95,116
|
|
|
|
|
|
Current
|
$
89,618
|
$
95,116
|
|
Total
|
$
89,618
|
$
95,116
|
51
PART II
Item
8
Deferred
income taxes are comprised of the following at December 31, 2020
and 2019:
|
|
2020
|
2019
|
|
Deferred
tax assets (liabilities):
|
|
|
|
Inventories
|
$
22,620
|
$
21,495
|
|
Stock
options and other
|
6,836
|
57,019
|
|
Contingencies
and accruals
|
28,580
|
32,154
|
|
Property
and equipment
|
(256,065
)
|
(180,300
)
|
|
Net
operating loss carryforward
|
6,527,548
|
7,763,103
|
|
Goodwill
and intangibles
|
27,085
|
34,328
|
|
Total
deferred tax assets, net
|
6,356,604
|
7,727,799
|
|
|
|
|
|
Valuation
allowance
|
$
(6,356,604
)
|
$
(7,727,799
)
|
|
Net
Deferred tax asset
|
-
|
-
|
As of December 31,
2020, the Company had $2,729,636 of net operating loss
carry-forwards, related to the Superior Galleries acquisition which
may be available to reduce taxable income in future years, subject
to the applicable Internal Revenue Code Section 382 limitations. As
of December 31, 2020, the Company had approximately $28,353,926 of
net operating loss carry-forwards related to Superior
Galleries’ post acquisition operating losses and other
operating losses incurred by the Company’s other operations.
These carry-forwards will expire, starting in 2026 if not
utilized.
The
Company is uncertain of our ability to accurately project income
into the future due to the economic conditions caused by the
pandemic, therefore, the Company is waiving any adjustment to the
current valuation allowance.
As of December 31,
2020, the Company determined based on consideration of all
available evidence, including but not limited to historical,
current and future anticipated financial results as well as
applicable IRS limitations and expiration dates related to the
Company’s net operating losses, a full valuation allowance
should be recorded for its net deferred tax
assets.
NOTE
16 — LEASES
On February 25,
2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). We adopted
ASC 842 on January 1, 2019, by applying its provisions
prospectively. The financial results reported in periods prior to
January 1, 2019 are unchanged. Upon adoption, we recognized all of
our leases on the balance sheet as right-of-use assets and lease
liabilities. For income statement purposes, the FASB retained a
dual model, requiring leases to be classified as either operating
of finance. Classification is based on certain criteria and we have
determined that all of our retail building leases fall into the
operating lease category. Our leases are included in our
consolidated balance sheet as right-of-use assets along with the
current operating lease liabilities and long-term operating lease
liabilities.
When the provision
was first adopted by the Company on January 1, 2019, we recognized
$1,994,840 of operating lease right-of-use assets, $446,462 in
short-term operating lease liabilities and $1,609,891 in long-term
operating lease liabilities on the consolidated balance sheet. The
operating lease liabilities were determined based on the present
value of the remaining minimum rental payments and the operating
lease right-of-use asset was determined based on the value of the
lease liabilities, adjusted for deferred rent balances of $61,500,
which were previously included in other
liabilities.
Due to the
acquisition, referred in Note 6, we recognized an additional
$2,350,781 of operating lease right-of-use assets, $703,523 in
short-term operating lease liabilities and $1,647,258 in long-term
operating lease liabilities on the consolidated balance sheet. The
operating lease liabilities were determined based on the present
value of the remaining minimum rental payments and the operating
lease right-of-use asset was determined based on the value of the
lease liabilities.
52
PART II
Item
8
In determining our
right-of-use assets and lease liabilities, we apply a discount rate
to the minimum lease payments within each lease agreement. ASC 842
requires us to use the rate of interest that a lessee would have to
pay to borrow on a collateralized basis over a similar term an
amount equal to the lease payments in a similar economic
environment. If we cannot readily determine the discount rate
implicit in the lease agreement, we utilize our incremental
borrowing rate.
The Company has
six operating leases, five in the Dallas/Fort Worth Metroplex and
one in Charleston South Carolina. We have two leases expiring
during Fiscal year 2021. Our Southlake, Texas location expired July
31, 2020 with no current options. We evaluated the lease in the
present location and decided to vacate the property as of July 31,
2020. Our lease on the main flagship store located at 13022 Preston
Road, Dallas, Texas will be expiring October 31, 2021, with no
current lease options. The Grand Prairie, Texas lease expires June
30, 2022, and has no current lease options. The Charleston,
South Carolina lease
expires April 30, 2025, and has no current lease options. The
Euless, Texas lease expires June 30, 2025 with an option for an
additional five (5) year term. On September 9, 2020, we entered
into a new lease agreement with the landlord of the Echo Belt Line
building starting January 1, 2021, expiring January 31, 2026, with
one option period of an additional 60 months. A portion of the Echo
Belt Line building was sublet and the rent received was applied
against the rental expense for the building. The new Echo Belt Line
lease, starting January 1, 2021, will not contain a subletter. The
McKenzie ITAD lease expires July 31, 2021 with no current lease
options. All six leases are triple net leases that we pay our
proportionate amount of common area maintenance, property taxes and
property insurance. Leasing costs for Fiscal 2020 and Fiscal 2019
was $1,452,689 and $1,151,619, respectively. These lease costs
consist of a combination of minimum lease payments and variable
lease costs.
As of December 31,
2019, the weighted average remaining lease term and weighted
average discount rate for operating leases was 2.81 years and 5.5%,
respectively. The Company’s future operating lease
obligations that have not yet commenced are immaterial. The cash
paid for operating lease liabilities for Fiscal 2020 and Fiscal
2019 was $1,314,285 and $1,809,514,
respectively.
Future annual
minimum lease payments as of December 31, 2020:
|
|
Operating
|
|
|
Leases
|
|
DGSE
|
|
|
2021
|
$
479,161
|
|
2022
|
235,674
|
|
2023
|
212,855
|
|
2024
|
213,885
|
|
2025
and thereafter
|
64,087
|
|
|
|
|
Total
minimum lease payments
|
1,205,662
|
|
Less
imputed interest
|
(110,429
)
|
|
|
|
|
DGSE
Sub-Total
|
1,095,233
|
|
|
|
|
ECHG
|
|
|
2021
|
869,209
|
|
2022
|
786,396
|
|
2023
|
808,022
|
|
2034
|
830,244
|
|
2025
and thereafter
|
853,076
|
|
|
|
|
Total
minimum lease payments
|
4,146,947
|
|
Less
imputed interest
|
(439,452
)
|
|
|
|
|
Envela
Sub-Total
|
3,707,495
|
|
|
|
|
Total
|
4,802,728
|
|
|
|
|
Current
portion
|
1,148,309
|
|
|
|
|
|
$
3,654,419
|
53
PART II
Item
8
NOTE 17 —
RELATED-PARTY TRANSACTIONS
The Company has a
corporate policy governing the identification, review,
consideration and approval or ratification of transactions with
related persons, as that term is defined in the Instructions to
Item 404(a) of Regulation S-K, promulgated under the Securities Act
(“Related Party”). Under this policy, all Related Party
transactions are identified and approved prior to consummation of
the transaction to ensure they are consistent with the
Company’s best interests and the best interests of its
stockholders. Among other factors, the Company’s Board
considers the size and duration of the transaction, the nature and
interest of the of the Related Party in the transaction, whether
the transaction may involve a conflict of interest and if the
transaction is on terms that are at least as favorable to the
Company as would be available in a comparable transaction with an
unaffiliated third party. Envela’s Board reviews all Related
Party transactions at least annually to determine if it is in the
Board’s best interests and the best interests of the
Company’s stockholders to continue, modify, or terminate any
of the Related Party transactions. Envela’s Related Person
Transaction Policy is available for review in its entirety under
the “Investors” menu of the Company’s corporate
relations website at www.envela.com.
Through a series
of transactions beginning in 2010, Elemetal, NTR and Truscott
(“Related Entities”) became the largest shareholders of
our Common Stock. NTR transferred all of its Common Stock to Eduro
Holdings, LLC (“Eduro”) on August 29, 2018. A certain
Related Entity has been the Company’s primary refiner and
bullion trading partner. From January 1, 2019 through May 20, 2019
a certain Related Entity accounted for 4% of sales and 6% of
purchases. Fiscal 2018, these transactions represented 11% of the
Company’s sales and 2% of the Company’s purchases. On
May 20, 2019, through a series of transactions, the Related Entity
sold their shares of the Company to John R. Loftus, The
Company’s CEO, President and Chairman of the Board. As of May
20, 2019, they were no longer a Related Entity. On December 9,
2016, the Company and a certain Related Entity closed the
transactions contemplated by the Debt Exchange Agreement whereby
the Company issued a certain Related Entity 8,536,585 shares of its
common stock and a warrant to purchase an additional 1,000,000
shares to be exercised within two years after December 9, 2016, in
exchange for the cancellation and forgiveness of $3,500,000 of
trade payables owed to a certain Related Entity as a result of
bullion-related transactions. The warrant to purchase an additional
1,000,000 shares expired in December 2018 and was not exercised. As
of December 31, 2020, the Company was obligated to pay $0 to the
certain Related Entity as a trade payable and had a $0 receivable
from the certain Related Entity. As of December 31, 2019, the
Company was obligated to pay $0 to the certain Related Entity as a
trade payable and had a $0 receivable from the certain Related
Entity. For the year ended December 31, 2020 and 2019, the Company
paid the Related Entities $0 and $61,869, respectively, in interest
on the Company’s outstanding payable.
Through a series
of transactions reported on Schedule 13D on May 24, 2019, Truscott
sold their 12,814,727 shares, 47.7% of DGSE Companies Common Stock
to John R. Loftus. Mr. Loftus assumed all rights under the existing
registration rights agreements. On the same day, Mr. Loftus
contributed his 12,814,727 Common Stock shares to N10TR, LLC
(“N10TR”) which is wholly owned by Mr. Loftus. Mr.
Loftus, by virtue of his relationship with Eduro and N10TR may be
deemed to indirectly beneficially own the Common Shares that Eduro
and N10TR directly beneficially own. On the same day the Company
entered into two (2) loan agreements with John R. Loftus, the
Company’s CEO, President and Chairman of the Board. The first
note of $6,925,979, pursuant to the Echo Entities purchase
agreement, is a 5-year promissory note amortized over 20 years at
6% annual interest rate. As of December 31, 2020 and 2019, ECHG was
obligated to pay $6,496,127 and $6,689,507, respectively, to Mr.
Loftus as a note payable, related party. The second note of
$3,074,021 paid off the accounts payable – related party
balance to Elemetal as of May 20, 2019. The promissory note is a
5-year note amortized over 20 years at 6% annual interest rate. As
of December 31, 2020 and 2019, DGSE was obligated to pay $2,863,715
and $2,949,545, respectively, to Mr. Loftus as a note payable,
related party. Both notes are being serviced by operational cash
flow. For the year ended December 31, 2020 and 2019, the Company
paid Mr. Loftus $580,957 and $325,749, respectively, in interest on
the Company’s outstanding note payables, related
party.
NOTE
18 — DEFINED CONTRIBUTION PLAN
The Company
sponsors a defined contribution 401(k) plan that is subject to the
provisions of the Employee Retirement Income Security Act of 1974.
The plan covers substantially all employees who have completed one
month of service. Participants can contribute up to 15% of their
annual salary subject to Internal Revenue Service limitations. The
Company matched 10% of the employee’s contribution up to 6%
of the employee’s salary for the Fiscal 2020 and Fiscal 2019
plans.
NOTE
19 — SUBSEQUENT EVENTS
The outbreak of
COVID-19, coronavirus pandemic has already adversely affected
global economic business conditions. Future sales on products like
ours could decline due to increased commodities prices,
particularly gold. Although we are continuing to monitor and assess
the effects of the coronavirus pandemic, the ultimate impact is
highly uncertain and subject to change. The duration of any such
impact cannot be predicted, nor can the timing of the development
and distribution of an effective vaccine or treatments for
COVID-19.
54
PART II
Item 9,
9A
I
TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
I
TEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures
Our management,
with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
December 31, 2020. We maintain disclosure controls and procedures
that are designed to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms and that such information is accumulated and communicated to
our management, including our principal executive officer and
principal financial officer, as appropriate, to allow for timely
decisions regarding required disclosure. Based on the evaluation of
our disclosure controls and procedures as of December 31, 2020, our
principal executive officer and principal financial officer
concluded that, as of such date, our disclosure controls and
procedures were effective to be provide the reasonable assurance of
the foregoing.
We believe,
however, that any controls and procedures, no matter how well
designed and operated, cannot provide absolute assurance of
achieving their objectives,
and no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud or error, if any, within a
company have been detected.
Management’s Annual
Report on Internal Control Over Financial
Reporting
Our management has
the responsibility for establishing and maintaining adequate
internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f)
under the Exchange Act, with respect to us as a process designed
by, or under the supervision of, our principal executive and
principal financial officer and effected by our Board, management
and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles that achieve certain specified
controls over the records of business
transactions.
Because of its
inherent limitations, internal control over financial reporting
only provides reasonable assurance with respect to financial
statement presentation and preparation. Projections of any
evaluation of effectiveness to future periods are subject to the
risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial
reporting as of December 31, 2020. In making this assessment,
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework (2013). Based on its
assessments, management believes that, as of December 31, 2020, our
internal control over financial reporting is
effective.
We are not
required to provide an attestation report of our registered public
accounting firm pursuant to rules promulgated by the
SEC.
Changes in Internal Control
Over Financial Reporting
During the fiscal
year ended December 31, 2020, no changes occurred that our
management believes have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
55
PART II
Item
9B
I
TEM 9B. OTHER INFORMATION
None.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Envela
Corporation
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Envela
Corporation (the “Company”) as of December 31, 2020 and
2019, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then
ended, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
56
PART II
Item
9B
Critical Audit Matter
The
critical audit matter communicated below is a matter arising from
the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved especially
challenging, subjective, or complex judgments. The communication of
the critical audit matter does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Assessment of Realizability of Deferred Tax Assets
Description of the Matter
As
discussed in Note 15 to the financial statements, the Company
records a valuation allowance based on their assessment of the
realizability of the Company’s deferred tax assets. As of
December 31, 2020, the Company had net deferred tax assets, before
valuation allowance, of approximately $5.8 million. A significant
portion of the deferred tax assets are subject to future expiration
and management uses subjective estimations to determine whether
sufficient future taxable income will be generated to support the
realization of the existing deferred tax assets before
expiration.
Auditing
management’s assessment of recoverability of deferred tax
assets for U. S Federal income tax purposes involved a high degree
of auditor judgment in evaluating the estimates and assumptions
used in the projections of future taxable income.
How We Addressed the Matter in Our Audit
We
obtained an understanding of internal controls that address the
risks of material misstatement relating to the realizability of
deferred tax assets, including controls over management’s
projections of future taxable income.
The
primary procedures performed included evaluating the assumptions
used by the Company to develop projections of future taxable income
and testing the completeness and accuracy of the underlying data
used in the projections. For example, we compared the support for
future taxable income with prior period results and
management’s projections. We also compared the projections of
future taxable income with other forecasted financial information
prepared by the Company. In addition, we evaluated the impact on
taxable income of temporary differences including the expected
timing of when these temporary differences would be
realized.
We have
served as the Company’s auditor since 2012.
Dallas,
Texas
March
23, 2021
57
PART III
Item
10, 11, 12, 13, 14
P
ART
III
I
TEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information with
respect to this Item will be included in our definitive Proxy
Statement with respect to our 2021 Annual Meeting, which we intend
to file with the SEC no later than 120 days after the end of the
fiscal year covered by this annual report on Form
10-K.
I
TEM 11. EXECUTIVE COMPENSATION
Information with
respect to this Item will be included in our definitive Proxy
Statement with respect to our 2021 Annual Meeting, which we intend
to file with the SEC no later than 120 days after the end of the
fiscal year covered by this annual report on Form
10-K.
I
TEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information with
respect to this Item will be included in our definitive Proxy
Statement with respect to our 2021 Annual Meeting, which we intend
to file with the SEC no later than 120 days after the end of the
fiscal year covered by this annual report on Form
10-K.
I
TEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with
respect to this Item will be included in our definitive Proxy
Statement with respect to our 2021 Annual Meeting, which we intend
to file with the SEC no later than 120 days after the end of the
fiscal year covered by this annual report on Form
10-K.
I
TEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
Information with
respect to this Item will be included in our definitive Proxy
Statement with respect to our 2021 Annual Meeting, which we intend
to file with the SEC no later than 120 days after the end of the
fiscal year covered by this annual report on Form
10-K.
58
PART
IV
Items
15
P
ART
IV
I
TEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
Documents filed as part of
this report
Index to Financial
Statements
Note:
All financial statement schedules have been omitted, since the
required information is not applicable or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements and notes thereto. The information required by this Item
pursuant to Item 601 of Regulation S-K is set forth on the
financial statement index and exhibit index that follows the
signature page of this report.
Index
to Exhibits
|
Index to Financial
Statements
|
Page
|
|
|
|
|
29
|
|
|
|
|
|
30
|
|
|
|
|
|
31
|
|
|
|
|
|
32
|
|
|
|
|
|
33
|
|
|
|
|
|
55
|
59
PART IV
Item
15
|
Exhibit
Number
|
|
Description
|
|
Filed
Herein
|
|
Incorporated by
Reference
|
|
Form
|
|
Date Filed with
SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.10
|
|
|
|
|
X
|
|
8-A12G
|
|
June 23, 1999
|
|
3.7
|
|
|
3.11
|
|
|
|
|
X
|
|
8-K
|
|
September 11,
2015
|
|
3.1
|
|
|
3.12
|
|
|
|
|
X
|
|
8-K
|
|
October 9, 2015
|
|
3.1
|
|
|
3.13
|
|
|
|
|
X
|
|
8-K
|
|
December 16, 2019
|
|
3.1
|
|
|
4.1
|
|
|
|
|
X
|
|
S-4
|
|
February 26, 2007
|
|
4.1
|
|
|
10.1
|
|
|
|
|
X
|
|
8-K
|
|
September 16,
2011
|
|
10.5
|
|
|
10.2
|
|
|
|
|
X
|
|
8-K
|
|
September 16,
2011
|
|
10.7
|
|
|
10.3
|
|
|
|
|
X
|
|
8-K
|
|
October 28, 2011
|
|
10.2
|
|
|
10.4
|
|
|
|
|
X
|
|
8-K
|
|
February 12, 2016
|
|
10.1
|
|
|
10.5
|
|
Registration Rights
Agreement by and among DGSE Companies, Inc., Elemetal, LLC, and NTR
Metals, LLC dated as of December 9, 2016
|
|
|
|
X
|
|
8-K
|
|
December 9, 2016
|
|
10.1
|
|
10.6
|
|
Purchase agreement,
dated September 14, 2020, for the Irving, Texas office building
purchased by Envela Corporation
|
|
|
|
X
|
|
10-Q
|
|
October 5, 2020
|
|
10.3
|
|
10.7
|
|
Revised note
payable, related party, dated January 1, 2020, between DGSE, LLC
and John R. Loftus
|
|
|
|
X
|
|
10-Q
|
|
October 5, 2020
|
|
10.4
|
|
10.8
|
|
Revised note
payable, related party, dated January 1, 2020, between ECHG, LLC
and John R. Loftus
|
|
|
|
X
|
|
10-Q
|
|
October 5, 2020
|
|
10.5
|
|
14.1
|
|
|
|
|
X
|
|
10-K/A
|
|
2012
|
|
14.1
|
|
|
21.1
|
|
|
|
|
X
|
|
10-K
|
|
March 27, 2014
|
|
21.1
|
60
PART IV
Item
15
|
|
|
|
|
X
|
|
|
|
|
|
|
||
|
|
Certification pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934 implementing Section 302 of the
Sarbanes-Oxley Act of 2002 by John R.
Loftus
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Certification pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934 implementing Section 302 of the
Sarbanes-Oxley Act of 2002 by Bret A.
Pedersen
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by John R. Loftus
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by Bret A. Pedersen
|
|
X
|
|
|
|
|
|
|
|
|
|
|
101.INS
|
|
XBRL Instance
Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL Taxonomy
Extension Schema Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL Taxonomy
Calculation Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.DEF
|
|
XBRL Taxonomy
Definition Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Label
Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy
Presentation Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
61
PART
IV
Item
15
I
TEM 16. FORM 10-K SUMMARY
None.
62
S
IGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
ENVELA
CORPORATION
|
By:
/s/
John R. Loftus
|
Dated: March 23,
2021
|
|
John R.
Loftus
|
|
|
Chairman of the Board,
|
|
|
Chief Executive Officer,
|
|
|
President
(Principal Executive
Officer)
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates
indicated.
|
By:
/s/
John R. Loftus
|
Dated: March 23,
2021
|
|
John R.
Loftus
|
|
|
Chairman of the Board,
|
|
|
Chief Executive Officer,
|
|
|
President
(Principal Executive
Officer)
|
|
|
By:
/s/
Bret A.
Pedersen
|
Dated: March 23,
2021
|
|
Bret A. Pedersen
|
|
|
Chief Financial Officer
|
|
|
(Principal Accounting
Officer)
|
|
|
|
|
|
By:
/s/
Joel S. Friedman
|
Dated: March 23,
2021
|
|
Joel S. Friedman
|
|
| Director |
|
|
|
|
| By: /s/ Alexandra C. Griffin |
Dated: March 23,
2021
|
|
Alexandra C. Griffin
|
|
| Director |
|
|
|
|
|
By:
/s/
Jim R. Ruth
|
Dated: March 23,
2021
|
| Jim R. Ruth |
|
| Director |
|
|
|
|
|
By:
/s/
Allison M. DeStefano
|
Dated: March 23,
2021
|
| Allison M. DeStefano |
|
| Director |
|
63
TABLE OF CONTENTS
Part IItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart II Item 5Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters, and Issuer Purchases Of Equity SecuritiesPart II Item 6, 7Item 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsPart II Item 7Part II Item 7, 7AItem 7, 7AItem 7A. Quantitative and Qualitative Disclosures About Market RiskPart II Item 8Item 8. Financial Statements and Supplementary DataNote 1 Accounting Policies and Nature Of OperationsNote 2 Concentration Of Credit RiskNote 3 InventoriesNote 4 Note ReceivableNote 5 Property and EquipmentNote 6 AcquisitionNote 7 GoodwillNote 8 Intangible AssetsNote 9 Accrued ExpensesNote 10 Long-term DebtNote 11 Segment InformationNote 12 Basic and Diluted Average SharesNote 13 Common StockNote 14 Stock Options and Restricted Stock UnitsNote 15 Income TaxesNote 16 LeasesNote 17 Related-party TransactionsNote 18 Defined Contribution PlanNote 19 Subsequent EventsPart II Item 9, 9AItem 9, 9AItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPart II Item 9BItem 9B. Other InformationPart III Item 10, 11, 12, 13, 14Part IIIItem 10, 11, 12, 13, 14Item 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IV Items 15Part IVItem 15. Exhibits, Financial Statement SchedulesPart IV Item 15Item 16. Form 10-k Summary