ENVELA CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended March 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)
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NEVADA
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88-0097334
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(STATE
OF INCORPORATION)
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(I.R.S.
EMPLOYER IDENTIFICATION NO.)
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13022 PRESTON ROAD, DALLAS, TEXAS 75240-5202
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
(972) 587-4049
(REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
www.envela.com
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Trading
Symbol
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Name of
exchange on which registered
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COMMON STOCK, $0.01 par value per share
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ELA
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NYSE American
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Securities
registered pursuant to Section 12(g) of the Act:
NONE
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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.
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Large
accelerated filer
☐
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Accelerated filer
☐
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Non-accelerated filer
☐
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Smaller reporting company
☒
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Emerging
growth company
☐
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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 is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). Yes
☐
No
☒
As of March 31, 2020, the
aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $19.285 million based on
the closing sale price as reported on the NYSE American. As of
March 31, 2020, there were 26,924,381 shares of common stock
outstanding.
TABLE OF CONTENTS
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26
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PART I.
F
INANCIAL
INFORMATION
Item 1. Financial Statements
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
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(Unaudited)
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Three Months Ended March 31,
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2020
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2019
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Revenue:
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Sales
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$
25,829,143
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$
16,019,530
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Cost
of goods sold
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20,527,863
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13,801,048
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Gross
margin
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5,301,280
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2,218,482
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Expenses:
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Selling,
General & Administrative Expenses
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3,825,200
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1,741,340
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Depreciation
and Amortization
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179,729
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74,324
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Total
cost of revenue
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4,004,929
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1,815,664
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Operating
income
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1,296,351
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402,818
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Other
(income) expense, net
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(41,690
)
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3,398
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Interest
expense
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145,315
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34,549
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Income
before income taxes
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1,192,726
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364,871
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Income
tax expense
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18,577
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10,236
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Net
income
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$
1,174,149
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$
354,635
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Basic
earnings per share:
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Net
income
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$
0.04
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$
0.01
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Diluted
earnings per share:
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Net
income
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$
0.04
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$
0.01
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Weighted
average shares outstanding:
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Basic
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26,924,381
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26,924,381
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Diluted
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26,939,631
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26,924,381
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
1
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED
B
ALANCE
SHEETS
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March 31,
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December
31,
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2020
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2019
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Assets
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(unaudited)
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Current
assets:
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Cash
and cash equivalents
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$
3,943,925
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$
4,510,660
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Trade
receivables, net of allowances
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2,472,225
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2,997,743
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Inventories
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9,397,523
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9,509,454
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Current
right-of-use assets from operating leases
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1,162,438
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1,160,658
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Prepaid
expenses
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336,147
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172,834
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Total
current assets
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17,312,258
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18,351,349
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Note
receivable
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1,500,000
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-
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Property
and equipment, net
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1,300,756
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1,351,039
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Goodwill
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1,367,109
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1,367,109
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Intangible
assets, net
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3,293,673
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3,394,073
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Operating
lease right-of-use assets
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2,012,024
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2,335,040
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Other
long-term assets
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199,663
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204,784
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Total
assets
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$
26,985,483
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$
27,003,394
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Liabilities and stockholders’ equity
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Current
liabilities:
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Accounts
payable-Trade
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$
806,820
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$
1,467,845
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Notes
payable, related party
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293,779
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1,084,072
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Current
operating lease liabilities
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1,161,157
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1,175,109
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Accrued
expenses
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929,730
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916,509
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Customer
deposits and other liabilities
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46,694
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165,404
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Total
current liabilities
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3,238,180
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4,808,939
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Notes
payable, related party, less current portion
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9,275,869
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8,554,980
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Long-term
operating lease liabilities, less current portion
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2,103,111
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2,445,301
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Total
liabilities
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14,617,160
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15,809,220
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Commitments
and contingencies
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Stockholders’
equity:
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Preferred
stock, $0.01 par value; 5,000,000 shares authorized;
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no
shares issued and outstanding
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-
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-
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Common
stock, $0.01 par value; 60,000,000 shares authorized;
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26,924,381
shares issued and outstanding
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269,244
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269,244
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Additional
paid-in capital
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40,172,677
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40,172,677
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Accumulated
deficit
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(28,073,598
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(29,247,747
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Total
stockholders’ equity
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12,368,323
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11,194,174
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Total
liabilities and stockholders’ equity
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$
26,985,483
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$
27,003,394
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
C
ASH FLOWS
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For the Three Months Ended March 31,
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2020
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2019
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(Unaudited)
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(Unaudited)
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Operations
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Net
income
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$
1,174,149
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$
354,635
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Adjustments
to reconcile net income to net cash provided by (used in)
operations:
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Depreciation,
amortization, and other
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179,729
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74,324
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Bad
debt expense
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-
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30,000
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Changes
in operating assets and liabilities:
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Trade
receivables
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525,519
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(105,606
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Inventories
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111,931
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(550,567
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Prepaid
expenses
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(163,312
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(185,536
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Intangible
Assets
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-
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(15,000
)
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Other
assets
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5,120
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(451
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Accounts
payable and accrued expenses
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(647,804
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(564,868
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Accounts
payable, related party
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-
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(13,853
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Operating
leases
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(34,907
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59,848
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Customer
deposits and other liabilities
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(118,710
)
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(43,132
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Net
cash provided by (used in) operations
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1,031,715
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(960,206
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Investing
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Investment
in note receivable
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(1,500,000
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-
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Purchase
of property and equipment
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(29,046
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(14,175
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Net
cash used in investing
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(1,529,046
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(14,175
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Financing
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Payments
on notes payable, related party
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(69,404
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-
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Net
cash used in financing
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(69,404
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-
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Net
change in cash and cash equivalents
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(566,735
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(960,206
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Cash
and cash equivalents, beginning of period
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4,510,660
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1,453,941
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Cash
and cash equivalents, end of period
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$
3,943,925
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$
493,735
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Supplemental Disclosures
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Cash
paid during the period for:
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Interest
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$
121,718
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$
34,549
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Income
taxes
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$
-
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$
-
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
3
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
E
QUITY
For the Three Months ended March 31, 2019 and 2020
(Unaudited)
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Common
Stock
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Preferred
Stock
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Shares
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Amount
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Shares
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Amount
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Additional
Paid-in Capital
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Accumulated
Deficit
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Total
Stockholders' Equity
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Balances at December 31,
2018
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26,924,381
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$
269,244
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-
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$
-
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$
40,172,677
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$
(32,028,460
)
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$
8,413,461
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Net
Income
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-
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-
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-
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-
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-
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354,635
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354,635
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Balances at March 31,
2019
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26,924,381
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$
269,244
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-
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$
-
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$
40,172,677
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$
(31,673,825
)
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$
8,768,096
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Common
Stock
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Preferred
Stock
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Shares
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Amount
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Shares
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Amount
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Additional
Paid-in Capital
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Accumulated
Deficit
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Total
Stockholders' Equity
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Balances at December 31,
2019
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26,924,381
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$
269,244
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-
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$
-
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$
40,172,677
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$
(29,247,747
)
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$
11,194,174
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Net
Income
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-
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-
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-
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-
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-
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1,174,149
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1,174,149
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Balances at March 31,
2020
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26,924,381
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$
269,244
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-
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$
-
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$
40,172,677
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$
(28,073,598
)
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$
12,368,323
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
4
N
OTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION
The
condensed consolidated interim financial statements of Envela
Corporation, a Nevada corporation, and its subsidiaries (the
“Company” or “Envela”), included herein
have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) have been condensed or omitted
pursuant to the Commission’s rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. The Company suggests that
these financial statements be read in conjunction with the
financial statements and notes included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2019 (such fiscal year, “Fiscal 2019” and such Annual
Report on Form 10-K, the “Fiscal 2019 10-K”). In
the opinion of the management of the Company, the accompanying
unaudited interim financial statements contain all adjustments,
consisting only of those of a normal recurring nature, necessary to
present fairly its results of operations and cash flows for the
periods presented. The results of operations for the periods
presented are not necessarily indicative of the results to be
expected for the full year. Certain reclassifications were made to
the prior year's consolidated financial statements to conform to
the current year presentation.
NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF
OPERATIONS
Envela
and its subsidiaries engage in diverse business activities within
the recommerce sector. These include recommercializing luxury hard
assets, consumer electronics and IT equipment; and end-of-life
recycling solutions. Envela assesses its inventory of recommerce
purchases for their potential to be refurbished and resold as whole
goods or component parts, or to be recycled for precious-metal
value. Envela also offers comprehensive recycling solutions for a
variety of other companies seeking responsibly to dispose of
end-of-life products. Envela operates primarily via two recommerce
business segments. Through DGSE, LLC the Company recommercializes
luxury hard assets via Dallas Gold and Silver Exchange, Charleston
Gold & Diamond Exchange, and Bullion Express brands
(collectively, “DGSE”). Through ECHG, LLC, the Company
operates Echo Environmental Holdings, ITAD USA Holdings, and
Teladvance (collectively, “ECHG”), which
recommercialize primarily consumer electronics and IT equipment,
and provide end-of-life recycling services for various companies
across many industries. Envela conducts its recommerce operations
at retail and wholesale levels, through distributors, resellers,
dedicated stores and online. The Company also owns and operates
other businesses and brands engaged in a variety of activities, as
identified herein. Envela is a Nevada corporation, headquartered in
Dallas, Texas.
During the first quarter of fiscal 2020, Envela revised the way we
review our financial information to align more closely with the
Company’s strategy to engage in diverse recommerce activities
through two principle business units—DGSE and ECHG. The
objective of segment reporting is to provide information about the
different types of business activities in which a public entity
engages. Although our Company’s overall strategy is
recommerce we feel there are several distinct segments within
recommerce. DGSE buys 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 will disaggregate 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.
DGSE
buys to resell or recycle luxury hard assets, including jewelry,
diamonds, fine watches, rare coins and currency, precious-metal
bullion, collectables and other valuables. DGSE reconditions items
for resale as a whole good or component parts, or recycles them by
refining their precious metals for sale. These metals include gold,
silver, platinum and palladium. DGSE operates five stores at the
wholesale and retail levels, transacting throughout the United
States via its facilities in Texas and South Carolina.
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 elects not 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.
ECHG
buys consumer electronics and IT equipment for resale or recycling
from businesses and other organizations, such as school districts.
Items designated for resale as a whole or component parts get
extended operational life by first erasing any existing data and
then refurbishing them before resale. ECHG recycles goods by
removing usable components for resale as components, or by
extracting the goods’ valuable metals (or other materials)
for sale to downstream recycling companies who further process our
metal for subsequent resale. Our customers are companies and
organizations that are based domestically and
internationally.
ECHG
also provides transportation and product tracking, when needed, as
part of its comprehensive end-of-life recycling and
responsible-disposal services. Our goal is to extend the useful
life of electronics through recommerce whenever possible. Resale
and reuse conserve energy and raw materials required to make new
products and turn obsolete IT assets into revenue.
5
The
interim condensed 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 its business as two operating and reportable
segments under a variety of banners. As referenced above, DGSE
includes Charleston Gold & Diamond Exchange and Dallas Gold
& Silver Exchange. ECHG includes Echo Environmental Holdings,
ITAD USA Holdings and Teladvance.
NOTE 3 — ACCOUNTING POLICIES AND
ESTIMATES
Financial
Instruments
The carrying amounts reported in the condensed
consolidated balance sheets for cash equivalents,
trade
receivables,
accounts payable and accrued expenses approximate fair value
because of the immediate or
short-term nature of these financial instruments.
Notes payable, related party approximate fair value due to the
market interest rate charged.
Earnings Per Share
Basic earnings per common share is computed by dividing net
earnings available to holders of the Company’s 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.
Goodwill
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 entire
Company. ECHG has its own, separate financial information to
perform goodwill impairment testing at least annually or if events
indicate that those assets may be impaired. As a result of the
current market and economic conditions related to COVID-19, in
accordance with step 1 of the guidelines set forth in ASC
350-20-35-3A, the Company concluded there were no impairments of
goodwill that resulted from triggering events due to COVID-19 as of
March 31, 2020. The Company will continue to evaluate goodwill for
the ECHG segment. For tax purposes, goodwill is amortized and
deductible over fifteen years.
Recent 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.
There was no impact in our condensed consolidated financial
statements.
In June 2016, the FASB issued ASU No.
2016-13,
Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments,
which amends the impairment model by requiring
entities to use a forward-looking approach based on expected losses
rather than incurred losses to estimate credit losses on certain
types of financial instruments, including trade receivables. This
may result in the earlier recognition of allowances for losses. The
FASB issued several ASUs after ASU 2016-13 to clarify
implementation guidance and to provide transition relief for
certain entities. ASU 2016-13, due to Envela being a smaller
reporting company, is effective for fiscal years beginning after
December 15, 2022, with early adoption permitted. The Company is
evaluating the impact of adopting ASU 2016-13 and related
amendments will have on its consolidated financial position,
results of operations and cash flows.
6
NOTE 4 — INVENTORIES
A
summary of inventories is as follows:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Resale
|
$
8,440,885
|
$
8,213,551
|
|
Recycle
|
147,783
|
401,468
|
|
|
|
|
|
Subtotal
|
8,588,668
|
8,615,019
|
|
|
|
|
|
ECHG
|
|
|
|
Resale
|
202,512
|
351,958
|
|
Recycle
|
606,343
|
542,477
|
|
|
|
|
|
Subtotal
|
808,855
|
894,435
|
|
|
|
|
|
|
$
9,397,523
|
$
9,509,454
|
NOTE 5 — NOTE
RECEIVABLE
ECHG,
LLC, wholly owned by the Company, 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. 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.
A
summary of note receivables is as follows:
|
|
March 31,
|
March 31,
|
|
|
2020
|
2019
|
|
|
|
|
|
Opening
balance
|
$
-
|
$
-
|
|
Additions
|
1,500,000
|
-
|
|
Reductions
|
-
|
-
|
|
|
|
|
|
|
$
1,500,000
|
$
-
|
7
NOTE 6 — PROPERTY AND
EQUIPMENT
Property and equipment consist of the
following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Land
|
$
55,000
|
$
55,000
|
|
Building
and improvements
|
1,561,649
|
1,561,649
|
|
Machinery
and equipment
|
1,045,200
|
1,039,013
|
|
Furniture
and fixtures
|
453,699
|
453,699
|
|
Vehicles
|
22,859
|
-
|
|
|
3,138,407
|
3,109,361
|
|
Less:
accumulated depreciation
|
(1,965,489
)
|
(1,904,948
)
|
|
|
|
|
|
Sub-Total
|
1,172,918
|
1,204,413
|
|
|
|
|
|
ECHG
|
|
|
|
Building
and improvements
|
81,149
|
81,149
|
|
Machinery
and equipment
|
27,497
|
27,497
|
|
Furniture
and fixtures
|
93,827
|
93,827
|
|
|
202,473
|
202,473
|
|
Less:
accumulated depreciation
|
(74,635
)
|
(55,847
)
|
|
|
|
|
|
Sub-Total
|
127,838
|
146,626
|
|
|
|
|
|
|
$
1,300,756
|
$
1,351,039
|
NOTE 7 — ACQUISITION
On May
20, 2019, ECHG, LLC (f/k/a Corrent Resources, LLC), 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, “Sellers”),
pursuant to which the Sellers agreed to sell all of their assets,
rights and interests of Echo Environmental, LLC and ITAD USA, LLC
the (the “Acquired Assets”) for $6,925,979 (the
“Echo Transaction”). The Sellers were wholly owned
subsidiaries of Elemetal, LLC (“Elemetal”). John R.
Loftus is the Company’s CEO, President and Chairman and owned
approximately one-third of the equity interests of Elemetal 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 Elemetal. As part of the transaction of
acquiring the stock from Elemetal, Mr. Loftus no longer owns an
equity interest in Elemetal. As an interested party, Mr. Loftus was
familiar with Sellers’ operations.
In
connection with the Echo Transaction, on May 20, 2019, ECHG, LLC
executed and delivered to Mr. Loftus, a promissory note to which
ECHG, LLC borrowed from Mr. Loftus $6,925,979, the proceeds of
which were used to purchase the Acquired Assets.
8
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. 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 follows:
|
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
|
The
following pro forma combines the results of ECHG and the
Company’s results of operations for the three months ended
March 31, 2020 and 2019 as if they were combined the whole
quarter:
|
|
Combined
|
Pro forma Combined
|
|
|
For the Three Months Ended
|
For the Three Months Ended
|
|
|
March 31, 2020
|
March 31, 2019
|
|
|
(unaudited)
|
(unaudited)
|
|
|
|
|
|
Revenue
|
$
25,829,143
|
$
19,302,869
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$
1,174,149
|
$
(1,694,654
)
|
|
|
|
|
|
Net
income (loss)
|
$
1,174,149
|
$
(1,694,654
)
|
|
|
|
|
|
Basic
net income (loss) per common share
|
$
0.04
|
$
(0.06
)
|
|
|
|
|
|
Diluted
net income (loss) per common share
|
$
0.04
|
$
(0.06
)
|
9
NOTE 8 — GOODWILL
The changes in the carrying amount of goodwill for the three months
ended March 31, 2020 and 2019, are as follows:
|
|
March 31,
|
March 31,
|
|
|
2020
|
2019
|
|
|
|
|
|
Opening
balance
|
$
1,367,109
|
$
-
|
|
Additions
|
-
|
-
|
|
Acquisition
adjustment
|
-
|
-
|
|
Impairment
adjustment
|
-
|
-
|
|
|
|
|
|
Goodwill
|
$
1,367,109
|
$
-
|
NOTE 9 — INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
March 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
|
(154,002
)
|
(137,502
)
|
|
|
|
|
|
Subtotal
|
217,350
|
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
|
(279,677
)
|
(195,777
)
|
|
|
|
|
|
Subtotal
|
3,076,323
|
3,160,223
|
|
|
|
|
|
|
$
3,293,673
|
$
3,394,073
|
10
The
following table outlines the estimated future amortization expense
related to intangible assets held as of March 31,
2020:
|
|
DGSE
|
ECHG
|
Total
|
|
|
|
|
|
|
2020
(excluding the three months ended March 31, 2020)
|
$
49,500
|
$
251,700
|
$
301,200
|
|
2021
|
66,000
|
335,600
|
401,600
|
|
2022
|
66,000
|
335,600
|
401,600
|
|
2023
|
35,850
|
335,600
|
371,450
|
|
2024
|
-
|
335,600
|
335,600
|
|
Thereafter
|
-
|
1,482,223
|
1,482,223
|
|
|
|
|
|
|
|
$
217,350
|
$
3,076,323
|
$
3,293,673
|
NOTE 10 — ACCRUED EXPENSES
Accrued expenses consist
of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Accrued
interest
|
$
7,220
|
$
7,374
|
|
Professional
fees
|
67,993
|
125,200
|
|
Board
member fees
|
-
|
7,500
|
|
Insurance
|
43,121
|
30,508
|
|
Payroll
|
162,361
|
157,148
|
|
Property
taxes
|
51,000
|
-
|
|
Sales
tax
|
76,927
|
115,451
|
|
State
income tax
|
49,995
|
33,907
|
|
|
|
|
|
Subtotal
|
458,617
|
477,088
|
|
|
|
|
|
ECHG
|
|
|
|
Accrued
interest
|
16,376
|
16,724
|
|
Insurance
|
11,573
|
-
|
|
Professional
fees
|
94,410
|
77,900
|
|
Payroll
|
145,423
|
79,342
|
|
Sales
tax
|
11,271
|
7,852
|
|
Credit
card
|
12,952
|
22,279
|
|
State
income tax
|
38,111
|
27,963
|
|
Material
& shipping costs (COGS)
|
140,997
|
207,361
|
|
|
|
|
|
Subtotal
|
471,113
|
439,421
|
|
|
|
|
|
|
$
929,730
|
$
916,509
|
11
NOTE 11 — SEGMENT INFORMATION
During the first quarter of fiscal 2020, Envela revised the way it
views its financial information to align more closely with the
Company’s strategy to engage in diverse recommerce activities
through two principle business units—DGSE and ECHG. DGSE buys
hard assets, and ECHG buys consumer electronics and IT equipment,
all 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 will
disaggregate 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 DGSE segment includes Dallas Gold and Silver Exchange, having
four locations throughout the Dallas/Ft Worth Metroplex, and
Charleston Gold and Diamond Exchange, with one location in
Charleston, South Carolina.
The
ECHG segment includes Echo Environmental Holdings, ITAD USA
Holdings and Teladvance. These three companies focus on reusing and
recycling electronics. Echo and ITAD were added to the Company on
May 20, 2019, and Teladvance was added on August 2, 2019, therefore
there is not a comparison for the three months ending March 31,
2019.
We allocate a portion of certain corporate costs and expenses,
including information technology, to our business segments that is
included in Selling, General and Administrative
(“SG&A”) expenses. Our management team evaluates
each segment’s operating performance and allocates resources
based on each segment’s profits. Allocation amounts are
generally agreed upon by management, and may differ from
arms-length allocations.
The following separates DGSE’s and ECHG’s financial
results of operations for the three months ending March 31,
2020:
|
|
For The Three Months Ended
|
||
|
|
March 31, 2020
|
||
|
|
DGSE
|
ECHG
|
Consolidated
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
Sales
|
$
20,363,584
|
$
5,465,559
|
$
25,829,143
|
|
Cost
of goods sold
|
17,999,402
|
2,528,461
|
20,527,863
|
|
|
|
|
|
|
Gross
profit
|
2,364,182
|
2,937,098
|
5,301,280
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Selling,
general and administrative expenses
|
1,873,006
|
1,952,194
|
3,825,200
|
|
Depreciation
and amortization
|
77,041
|
102,688
|
179,729
|
|
|
|
|
|
|
|
1,950,047
|
2,054,882
|
4,004,929
|
|
|
|
|
|
|
Operating
income
|
414,135
|
882,216
|
1,296,351
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
Other
(income) expense, net
|
(27,368
)
|
(14,322
)
|
(41,690
)
|
|
Interest
expense
|
44,793
|
100,522
|
145,315
|
|
|
|
|
|
|
Income
before income taxes
|
396,710
|
796,016
|
1,192,726
|
|
|
|
|
|
|
Income
tax expense
|
8,285
|
10,292
|
18,577
|
|
|
|
|
|
|
Net
income
|
$
388,425
|
$
785,724
|
$
1,174,149
|
12
NOTE 12 — REVENUE RECOGNITION
ASC 606
provided 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.
Beginning in fiscal year 2020, Envela will disaggregate its
revenue, within the operating segments, based on its resale and
recycle presentation basis to more closely align with the
Company’s activities. The Company’s historical
disaggregation of revenue has been recast to conform to our current
presentation.
The
following disaggregation of total revenue is listed by sales
category and segment:
|
CONSOLIDATED
|
Three Months Ended March 31,
|
|||||
|
|
2020
|
2019
|
||||
|
|
Revenues
|
Gross Profit
|
Margin
|
Revenues
|
Gross
Profit
|
Margin
|
|
DGSE
|
|
|
|
|
|
|
|
Resale
|
$
18,541,897
|
$
2,047,433
|
11.0
%
|
$
14,801,379
|
$
2,033,435
|
13.7
%
|
|
Recycled
|
1,821,687
|
316,749
|
17.4
%
|
1,218,151
|
185,047
|
15.2
%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
20,363,584
|
2,364,182
|
11.6
%
|
16,019,530
|
2,218,482
|
13.8
%
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
|
|
Resale
|
3,526,228
|
1,420,176
|
40.3
%
|
-
|
-
|
-
|
|
Recycled
|
1,939,331
|
1,516,922
|
78.2
%
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Subtotal
|
5,465,559
|
2,937,098
|
53.7
%
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
$
25,829,143
|
$
5,301,280
|
20.5
%
|
$
16,019,530
|
$
2,218,482
|
13.8
%
|
DGSE
recognizes revenue from its over-the-counter retail and resale
transactions, and its wholesale- dealer transactions when the
merchandise is delivered and payment is made (whether immediate or
via receivable obligation at one of our retail stores). We also
recognize revenue upon the shipment of goods when resale and
wholesale customers have fulfilled their obligation to pay or
promise to pay through e-commerce or telephone sales. We account
for shipping and handling costs as fulfillment costs after
customers obtain control of the goods. We recycle material deemed
to be past its useful life primarily to recover its precious-metal
content. This material is sold to a Dallas-based refiner that was a
related party until May 20, 2019. We recognize revenue from these
recycling sales when we receive payment.
DGSE
offers layaway purchases, requiring a deposit, a 25% payment within
two weeks, and full payment of the remaining balance within 90 days
after the deposit. If customers fail to make either the 25% payment
or final-balance payment within 90 days, then the items are
returned to inventory, and such customers forfeit any payments
made. We recognize revenue for layaway sales when the items are
paid in full and delivered to the customers, or upon payment
forfeiture.
Sales
of fine watches; bullion; clearance/final-sale items; and custom,
sized or engraved items are final. All other purchased items may be
returned by customers to DGSE within 30 days from purchase for a
full refund, less a 10% restocking fee. Returns are accounted for
as reversals of the original transactions, 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 2019 sales based on historical returns
and reduced our reported revenues and cost of sales accordingly.
Our return allowance for 2019 and as of March 31, 2020 remained the
same for both periods, approximately $28,000.
13
In
limited circumstances, for wholesale dealers or resale customers,
DGSE exchanges resale items for (a) similar resale items, or (b)
similar resale items plus money payment. We recognize revenue for
these exchanges in accordance with Accounting Standards
Codification (“ASC”) 845, Nonmonetary Transactions. For
resale item/resale item exchanges, without payments, we do not
recognize any revenue; the basis of the resale items relinquished
becomes the basis of the resale items received, less any indicated
impairment of value of the resale items relinquished. For resale
item/resale item-plus- payment exchanges, we recognize revenue to
the extent of payments received, and determine the cost of sale
based on the ratio of payments received to payments plus items
received, multiplied by the cost of items surrendered.
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 customers. The revenue streams are described
below.
Resale
transactions are recorded when product is shipped. Revenue is
recognized when prices are established, terms agreed, and products
shipped (i.e., upon ECHG fulfilling its performance obligations).
ECHG typically requires resale customers to make prepayment based
on an agreed commodity price. ECHG releases shipments upon
confirming payment receipt and recognizes revenue on the shipping
date. If payment is received on the last day of a month, and
shipment occurs the following day, the payment is deferred revenue,
recognized the following month when the shipment is
made.
ECHG
recycles material deemed to be past its useful life to recover
precious and other non-ferrous metals. As part of its recycling
operations, ECHG recognizes refining revenue when its performance
obligations are satisfied, i.e., when its inventory arrives at the
agreed destination and control of the contracted goods is
transferred to the refiner. Our initial invoice is recognized in
full when our performance obligation is satisfied, as referenced
above. Under the guidance of ASC 606, an estimate of the variable
consideration that we expect to receive is included in the
transaction price, stated at the current precious-metal spot price
and precious-metal weight. We adjust revenue in the period once the
underlying metal’s weight and any movement in metal spot
price is resolved, generally within six weeks. Adjustments from
resolving the underlying uncertainty is netted with the remaining
40% due under the original contract.
ECHG
also provides recycling services under agreed scopes of work. It
recognizes services based on the number of units processed at a
preset price per unit. ECHG produces weekly activity reports
reflecting numbers of units processed; revenue is recognized based
on billing from the weekly reports. ECHG performs recycling
services either at its facilities or at clients’ facilities,
as confirmed in the scope of work, together with the associated
costs and payment terms.
NOTE 13 — LEASES
When
ASC 842 lease 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 our
consolidated balance sheet. Operating lease liabilities were
determined based on the present value of remaining minimum rental
payments, and operating lease right-of-use assets were determined
based on the value of lease liabilities, adjusted for deferred rent
balances of $61,500, which were previously included in other
liabilities.
Due to
the Echo Transaction referenced in Note (7), 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 our consolidated
balance sheet. Operating lease liabilities were determined based on
the present value of remaining minimum rental payments, and
operating lease right-of-use assets were determined based on the
value of lease liabilities.
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 interest rate 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 lease agreements, we utilize our incremental
borrowing rate.
14
The
Company has seven operating leases—six in the Dallas/Fort
Worth Metroplex and one in Charleston, South Carolina. Two leases
expire this year. Our DGSE Southlake, Texas lease expires July 31,
2020, with no renewal options, therefore we will evaluate whether
to continue leasing in this location. DGSE’s flagship-store
lease at 13022 Preston Road, Dallas, Texas will expire October 31,
2021, with no current renewal options. DGSE’s Grand Prairie,
Texas lease expires June 30, 2022, and has no current renewal
options. DGSE’s Charleston, South Carolina lease expires
April 30, 2025, with no additional renewal options. We just
extended our DGSE Euless, Texas lease through June 30, 2025 with an
option for an additional five years. ECHG’s lease on Belt
Line Road in Addison, Texas expires on December 31, 2020, with an
initial 24-month renewal option, and a second renewal option for an
additional 60 months. A portion of this building is sublet, and the
rent received is applied against the rental expense for the
building. ECHG’s lease for ITAD on McKenzie Drive in
Carrollton, Texas expires July 31, 2021 and has no renewal option.
All of the Company’s seven leases are triple net, for which
it pays its proportionate share of common area maintenance,
property taxes and property insurance. Leasing costs for the three
months ending March 31, 2020 and 2019 were $306,537 and $174,347,
respectively, comprised of a combination of minimum lease payments
and variable lease costs.
As of
March 31, 2020, the weighted average remaining lease term and
weighted average discount rate for operating leases was 2.4 years
and 5.5%, respectively. The Company’s future operating lease
obligations that have not yet commenced are immaterial. For the
three months ending March 31, 2020 and 2019, the Company’s
cash paid for operating lease liabilities was $335,227 and
$133,791, respectively.
15
Future
annual minimum lease payments as of March 31, 2020:
|
|
Operating
|
|
|
Leases
|
|
DGSE
|
|
|
2020
(excluding the three months ending March 31, 2020)
|
$
382,608
|
|
2021
|
479,162
|
|
2022
|
235,674
|
|
2023
|
212,854
|
|
2024
|
213,884
|
|
2025
and thereafter
|
64,087
|
|
|
|
|
Total
minimum lease payments
|
1,588,269
|
|
Less
imputed interest
|
(163,368
)
|
|
|
|
|
Subtotal
|
1,424,901
|
|
|
|
|
ECHG
|
|
|
2020
(excluding the three months ending March 31, 2020)
|
596,190
|
|
2021
|
736,320
|
|
2022
|
644,702
|
|
|
|
|
Total
minimum lease payments
|
1,977,212
|
|
Less
imputed interest
|
(137,845
)
|
|
|
|
|
Subtotal
|
1,839,367
|
|
|
|
|
|
$
3,264,268
|
NOTE 14 — BASIC AND DILUTED AVERAGE SHARES
A
reconciliation of basic and diluted weighted average common shares
for the three months ended March 31, 2020 and 2019 is as
follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Basic
weighted average shares
|
26,924,381
|
26,924,381
|
|
Effect
of potential dilutive securities
|
15,250
|
-
|
|
Diluted
weighted average shares
|
26,939,631
|
26,924,381
|
For the
three months ended March 31, 2020 and 2019, there were 15,250 and
15,250 Common Stock options, warrants, and Restricted Stock Units
(RSUs) unexercised, respectively.
16
NOTE 15 — LONG-TERM DEBT
|
|
Outstanding Balance
|
|
|
|
|
|
March 31,
|
December 31,
|
Current
|
|
|
|
2020
|
2019
|
Interest Rate
|
Maturity
|
|
DGSE
|
|
|
|
|
|
Note
payable, related party (1)
|
$
2,928,210
|
$
2,949,545
|
6.00
%
|
May
16, 2024
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
Note
payable, related party (1)
|
6,641,438
|
6,689,507
|
6.00
%
|
May
16, 2024
|
|
|
|
|
|
|
|
Sub-Total
|
9,569,648
|
9,639,052
|
|
|
|
|
|
|
|
|
|
Current
portion
|
293,779
|
1,084,072
|
|
|
|
|
|
|
|
|
|
|
$
9,275,869
|
$
8,554,980
|
|
|
(1) On
May 20, 2019, the Company entered into two loan agreements with
John R. Loftus, the Company’s CEO, President and Chairman of
the Board. ECHG, LLC (f.k.a. Corrent Resources, 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 (f.k.a. DGSE
Companies, LLC) executed a 5-year, $3,074,021 note to pay off the
accounts payable – related party balance to Elemetal, LLC as
of May 20, 2019. That promissory note is also amortized over 20
years at a 6% annual interest rate. An error was made on the
original promissory loan documents for both DGSE and ECHG notes.
Originally, the DGSE note stated the total monthly interest and
principal payment due was $41,866 and the monthly ECHG interest and
principal payment due was $94,327. The correct total of interest
and principal payments due monthly on the revised note for DGSE is
$22,203. The correct total of interest and principal payments due
monthly on the revised note for ECHG is $49,646. The allocation
between short-term and long-term Notes payable, related party was
adjusted accordingly starting with the three months ending March
31, 2020.
17
Future
scheduled principal payments of our note payables, related party,
as of March 31, 2020 are as follows:
|
Note
payable, related party - DGSE
|
|
|
|
|
|
Year Ending December 31,
|
Amount
|
|
|
|
|
2020
(excluding the three months ended March 31, 2020)
|
67,184
|
|
2021
|
95,243
|
|
2022
|
101,117
|
|
2023
|
107,354
|
|
2024
|
2,557,312
|
|
|
|
|
Subtotal
|
2,928,210
|
|
Note
payable, related party - ECHG
|
|
|
|
|
|
Year Ending December 31,
|
Amount
|
|
|
|
|
2020
(excluding the three months ended March 31, 2020)
|
149,580
|
|
2021
|
212,086
|
|
2022
|
225,167
|
|
2023
|
239,055
|
|
2024
|
5,815,550
|
|
|
|
|
Subtotal
|
6,641,438
|
|
|
|
|
|
9,569,648
|
NOTE 16 — STOCK-BASED COMPENSATION
The
Company accounts for share-based compensation by measuring the cost
of 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.
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 their
consummation to ensure they are consistent with the Company’s
and the stockholders’ best interests. 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 they are in the best interest of the Board and of the
Company’s stockholders to continue, modify, or terminate any
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.
18
Through
a series of transactions beginning in 2010, Elemetal, NTR Metals,
LLC (“NTR”) and Truscott Capital, LLC (“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. For the three months ended March 31, 2019, the
certain Related Entity accounted for 4% of sales and 6% of
purchases. For the three months ended March 31, 2020, they were no
longer a related party. On May 20, 2019, through a series of
transactions, the Related Entities 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 Related
Entities. As of March 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 March 31, 2019,
the Company was obligated to pay $3,075,120 to the certain Related
Entity as a trade payable and had a $0 receivable from the certain
Related Entity. For the three months ended March 31, 2020 and 2019,
the Company paid the Related Entities $0 and $34,549, respectively,
in interest on the Company’s outstanding
payable.
Through
a series of transactions reported on Schedule 13D on May 24, 2019,
Truscott sold its 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 controlled 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 loan agreements with John R. Loftus, the
Company’s CEO, President and Chairman of the Board. ECHG, LLC
(f.k.a. Corrent Resources, 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 (f.k.a. DGSE Companies, LLC) executed a
5-year, $3,074,021 note to pay off the accounts payable –
related party balance to Elemetal, LLC as of May 20, 2019. That
promissory note is also amortized over 20 years at a 6% annual
interest rate. Both notes are being serviced by operational cash
flow. For the three months ended March 31, 2020 and 2019, the
Company paid Mr. Loftus $145,315 and $0, respectively, in interest
on the Company’s outstanding note payables, related
party.
NOTE
18 — SUBSEQUENT EVENTS
On
February 18, 2020, the Company signed an initial agreement for the
purchase of a retail building for its next Dallas Gold & Silver
Exchange location, in Lewisville, Texas for $1.4 million. We have
sought and received an extension of time until May 11, 2020 to
complete the associated inspections and due diligence. We expect to
close the purchase of the retail building during the second fiscal
quarter of 2020. We also expect to obtain a ten-year, approximately
3% mortgage of eighty percent loan to value. There is no assurance
that the Company will close the building purchase.
The
coronavirus disease 2019 (COVID-19) pandemic has 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, and the Company believes additional
liquidity is necessary to support ongoing operations during this
period of uncertainty. The Company applied and received approval
for an 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”). The loan is forgivable to the extent
that certain criteria are met.
19
ITEM 2.
M
ANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Unless the context indicates otherwise, references to
“we,” “us,” “our,” “the
Company” and “Envela” refer to the consolidated
business operations of Envela Corporation, the parent, and all of
its direct and indirect subsidiaries.
Forward-Looking Statements
This
Quarterly Report on Form 10-Q for the quarter ended March 31, 2020
(this “Form 10-Q”), including but not limited to:
(i) the section of this Form 10-Q entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations;” (ii) information
concerning our business prospects or future financial performance,
anticipated revenues, expenses, profitability or other financial
items; and, (iii) our strategies, plans and objectives,
together with other statements that are not historical facts,
includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Forward-looking statements generally can be identified
by the use of forward-looking terminology, such as
“may,” “will,” “would,”
“expect,” “intend,” “could,”
“estimate,” “should,”
“anticipate” or “believe.” We intend that
all forward-looking statements be subject to the safe harbors
created by these laws. All statements other than statements of
historical information provided herein are forward-looking
statements based on current expectations regarding important risk
factors. Many of these risks and uncertainties are beyond our
ability to control, and, in many cases, we cannot predict all of
the risks and uncertainties that could cause our actual results to
differ materially from those expressed in the forward-looking
statements. Actual results could differ materially from those
expressed in the forward-looking statements, and readers should not
regard those statements as a representation by us or any other
person that the results expressed in the statements will be
achieved. Important risk factors that could cause results or events
to differ from current expectations are described under the section
of this Form 10-Q entitled “Risk Factors” and elsewhere
in this Form 10-Q as well as under the section entitled “Risk
Factors” in our Fiscal 2019 10-K. These factors are not
intended to be an all-encompassing list of risks and uncertainties
that may affect the operations, performance, development and
results of our business. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as
of the date hereof. We undertake no obligation to-release publicly
the results of any revisions to these forward-looking statements,
which may be made to reflect events or circumstances after the date
thereon, including without limitation, changes in our business
strategy or planned capital expenditures, store growth plans, or to
reflect the occurrence of unanticipated events.
Results of Operations
General
The COVID-19
pandemic’s effects, i
ncluding limited
Company
operations and dramatic changes in consumer
behavior, led to a marked decline in sales during the second half
of March and significantly affected the Company's
first
-
quarter results.
Although
retail investors
’ demand
for
precious-metal coins appears to have contributed to
higher
gold
prices
,
jewelry
consumption and recycled
-
gold supply
plunged
during the first
quarter
as consumers were
confined to their homes for some of the
quarter
in an
effort
to stem the spread
of
coronavirus
,
according to the World Gold Council (“WGC”). Over the
longer term, the WGC believes that recycled
-gold
volumes could likely rise once restrictions
are lifted, with consumers looking for liquid
assets
—
such as
gold
—
to help alleviate economic hardship caused by the
lockdown.
20
The
following disaggregation of total revenue is listed by sales
category and segment:
|
CONSOLIDATED
|
Three Months Ended March 31,
|
|||||
|
|
2020
|
2019
|
||||
|
|
Revenues
|
Gross Profit
|
Margin
|
Revenues
|
Gross
Profit
|
Margin
|
|
DGSE
|
|
|
|
|
|
|
|
Resale
|
$
18,541,897
|
$
2,047,433
|
11.0
%
|
$
14,801,379
|
$
2,033,435
|
13.7
%
|
|
Recycled
|
1,821,687
|
316,749
|
17.4
%
|
1,218,151
|
185,047
|
15.2
%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
20,363,584
|
2,364,182
|
11.6
%
|
16,019,530
|
2,218,482
|
13.8
%
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
|
|
Resale
|
3,526,228
|
1,420,176
|
40.3
%
|
-
|
-
|
-
|
|
Recycled
|
1,939,331
|
1,516,922
|
78.2
%
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Subtotal
|
5,465,559
|
2,937,098
|
53.7
%
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
$
25,829,143
|
$
5,301,280
|
20.5
%
|
$
16,019,530
|
$
2,218,482
|
13.8
%
|
Three Months Ended March 31, 2020 compared to Three Months Ended
March 31, 2019
Revenues.
Revenues related to DGSE’s continuing
operations increased by $4,344,054 or 27%, during the three months
ended March 31, 2020, to $20,363,584, as compared to
$16,019,530 during the same period in 2019. Resale revenue, such as
bullion, jewelry, watches and rare coins, increased $3,740,518, or
25%, during the three months ended March 31, 2020, to $18,541,897,
as compared to the $14,801,379 for the prior three months ended
March 31, 2019. Recycled-material sales increased 50% to $1,821,687
for the three months ended March 31, 2020, as compared to
$1,218,151, for the three months ended March 31, 2019. Revenues
increased for resale items for the three months ended March 31,
2020, compared to the three months ended March 31, 2019, primarily
due to higher gold prices. The increase in recycled-materials
revenue is primarily due to the increase in gold prices. Revenue
related to ECHG for the three months ended March 31, 2020 was
$5,465,559. Recycled-material sales accounted for 58% of the total
sales at $3,173,761, and resale revenue accounted for 42% of the
total sales at $2,291,798.
Gross Profit.
Gross Profit related to DGSE’s
operations for the three months ended March 31, 2020, increased by
$145,700 to $2,364,182 as compared to $2,218,482 during the same
period in 2019. The increase in total gross profit was due
primarily to the increase in sales velocity for the resale items
and the recycled materials. Even though there were additional
revenues for the resale items, there were also lower gross-margin
percentages due to the change in market conditions.
Gross
Profits related to ECHG support a larger profit margin compared to
the DGSE segment. ECHG’s profit margin of $2,937,098 on
$5,465,559 sales comprises 53.7% overall.
Selling, General and Administrative Expenses.
For the three
months ended March 31, 2020, Selling, General and Administrative
(“SG&A”) expenses for DGSE increased $131,666, or
7.6%, to $1,873,006, as compared to $1,741,340 during the same
period in 2019. The increase in SG&A was primarily due to
increased corporate expenses loaded to both the DGSE and ECHG
segments.
The
SG&A expenses for ECHG totaled $1,952,194, which primarily
consists of payroll, payroll taxes and employee benefits of
$1,104,418; rent and variable rent costs, net of sublet income, of
$136,232; warehouse and office supplies of $35,803; insurance costs
of $23,068; travel expenses of $23,772; professional fees of
$44,650; and other administrative expenses totaling
$226,430.
21
Depreciation and Amortization
. For the three months ended
March 31, 2020, depreciation and amortization expense for DGSE was
$77,041, compared to $74,324 for the same period in 2019, an
increase of $2,717, or 3.6%. The increase of $2,717 from the three
months ending March 31, 2020 compared to the three months ending
March 31, 2019 is primarily due to a vehicle purchase during the
quarter.
The
Depreciation and Amortization expense for ECHG consisted of
depreciation of $18,788 and amortization of $83,900 for the three
months ending March 31, 2020. Amortization for the three months
ended March 31, 2020 is the amortization of intangibles from the
Purchase Price Allocation.
Interest Expense
. For the three months ended March 31, 2020,
interest expense for DGSE was $44,793, an increase of $10,236, or
29%, compared to $34,549 during the same period in 2019. The
increase is primarily due to an increased interest rate on the note
payable - trade, related party, that paid off the accounts payable,
related party, outstanding balance of $2,928,210 as of March 31,
2020.
The
interest expense for ECHG was $100,522 for the three months ending
March 31, 2020, which was related to the note payable, related
party, with an outstanding balance of $6,641,438 as of March 31,
2020.
Income Tax Expense.
For the three months ending March 31,
2020, our income tax expense was $18,577, an increase of $8,341, or
81%, compared to $10,236 for the three months ending March 31,
2019. The effective income tax rate was 1.6% and 2.9% for the three
months ending March 31, 2020 and 2019, respectively. Differences
between our effective income tax rate and the U.S federal statutory
rate are the result of state taxes, non-deductible expenses,
changes in reserves for uncertain tax positions and unused NOL
carryforwards.
Net Income
.
We recorded a
net income of $1,174,149 for the three months ended March 31, 2020,
compared to a net income of $354,635 for the three months ended
March 31, 2019, an increase in net income of $819,514, which is due
primarily from the addition of ECHG adding $785,724 of net income
for the three months ended March 31, 2020.
Earnings Per Share.
For the
three months ending March 31, 2020, our net income per basic and
diluted shares attributable to common stockholders was $.04,
compared to $.01 per basic and diluted shares for the three months
ending March 31, 2019, an increase of $.03 per share. The increase
is primarily due to the addition of ECHG’s net income for the
three months ending March 31, 2020.
Liquidity and Capital Resources
During
the three months ended March 31, 2020, cash flows provided from
operating activities totaled $1,031,715, and during the three
months ended March 31, 2019 cash flows used in operating activities
totaled $960,206, an increase of $1,991,921. Cash provided from
operating activities for the three months ended March 31,
2020, was driven largely by the reduction of trade receivables of
$525,519, a reduction of inventories of $111,931 and net income
added to non-cash items of depreciation and amortization of
$1,353,878, offset by a decrease in accounts payable and accrued
expenses of $647,804, an increase in prepaid expenses of $163,312
and a reduction of customer deposits and other liabilities of
$118,710. Cash used in operating activities for the three months
ended March 31, 2019, was driven largely by the reduction of
accounts payable and accrued expenses of $564,868, the increase of
inventories of $550,567, the increase in trade receivables of
$105,606 and the increase in prepaid expenses of $185,536, offset
by net income, without non-cash items of depreciation,
amortization, bad debt expense of $458,959.
During
the three months ended March 31, 2020 and 2019, cash flows used in
investing activities totaled $1,529,046 and $14,175, respectively,
an increase of $1,514,871. The use of cash in investing activities
during the three months ended March 31, 2020 was primarily due to
investing in a note receivable of $1,500,000 to CExchange. The use
of cash in investing activities during the three months ended March
31, 2019 was the result of purchasing of equipment.
During
the three months ended March 31, 2020 and 2019, cash flows used in
financing activities totaled $69,404 and $0, respectively, an
increase of $69,404. The use of cash in financing activities during
the three months ended March 31, 2020 was payments made against the
notes payable, related party.
22
The
COVID-19 pandemic has adversely affected global economic business
conditions. Future sales of 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, including the impact on our
liquidity and capital resources, is highly uncertain and subject to
change. The duration of any such impact cannot be predicted, and
the Company believes additional liquidity is necessary to support
ongoing operations during this period of uncertainty. We have
applied and received approval for the Federal Loan to provide
approximately $1.67 million in additional liquidity. On May 17,
2019, the Company secured a one-year, $1,000,000 revolving line of
credit loan from Texas Bank and Trust Co. The loan agreement
includes a 30-day clean-up provision. Although Texas Bank and Trust
Co. has communicated approval of a two-year extension and increased
credit limit for this credit line, the Company is awaiting
definitive documents reflecting these terms. If not renewed, the
existing credit line will expire on May 17, 2020. From time to time
we adjust our inventory levels to meet seasonal demand or
working-capital requirements. Management believes we have
sufficient capital resources (including the Federal Loan) to meet
working-capital requirements. If additional working capital is
required, we will seek additional loans from individuals or other
commercial banks. The availability of such loans on acceptable
terms is uncertain.
We
expect our capital expenditures to total approximately $50,000
during the next twelve months. These expenditures will be largely
driven by miscellaneous equipment needed to recycle electronic
waste.
Off-Balance Sheet Arrangements
We have
no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders
.
ITEM 3.
Q
UANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Because
we are a “smaller reporting company,” we are not
required to disclose the information required by this
item.
ITEM 4.
C
ONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
our management, including our principal executive officer and our
principal financial officer, conducted an evaluation, as of the end
of the period covered by the Quarterly Report on Form 10-Q of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, management has
concluded that as of March 31, 2020, the Company’s disclosure
controls and procedures were effective, at a reasonable assurance
level, in recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by us in that
the reports that we file or submit under the Exchange Act and are
effective in ensuring that the information required to be disclosed
by us in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting during the period covered by this Quarterly Report on
Form 10-Q that materially affected, or were reasonably likely to
materially affect, our internal control over financial
reporting.
23
PART II - OTHER INFORMATION
ITEM 1.
L
EGAL 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.
ITEM
1A.
R
ISK FACTORS
Because we are a “smaller reporting company”, we are
not required to disclose the information required by this
item. Although we are not required to address this item, we
feel it is prudent to do so.
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 is a possibility of widespread
infection in the United States and abroad. National, state and
local authorities have recommended social distancing and imposed or
are considering quarantine and isolation measures on large portions
of the population, including mandatory business closures. These
measures, while intended to protect human life, are expected to
have serious adverse impacts on domestic and foreign economies of
uncertain severity and duration. The effectiveness of
economic-stabilization efforts, including proposed government
payments to affected citizens and industries, is uncertain. Some
economists are predicting the United States will soon enter a
recession.
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. While it remains a developing situation, any continuing
quarantines, 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. We may also become subject to store closures.
Although we are continuing to monitor and assess the effects of the
coronavirus pandemic on our business, the ultimate impact is highly
uncertain and subject to change. The duration of any such impact
cannot be predicted.
The coronavirus pandemic is adversely affecting, and is expected to
continue to adversely affect, our operations, supply chains and
distribution systems, and we have experienced and expect to
continue to experience unpredictable reductions in demand for
certain of our products and services.
DGSE’s business, similar to the jewelry industry overall, is
affected by fluctuations in precious-metals prices. Such
fluctuations, particularly with respect to gold, which accounts for
the majority of DGSE’s merchandise costs, could adversely
impact its earnings and cash availability. Additionally, DGSE
depends on purchasing products and materials from secondary
markets. At any given time, we may be unable to obtain an adequate
supply of products and materials at prices or other terms
acceptable to us.
ECHG’s recycling business is affected by precious and other
non-ferrous metals’ prices, which fluctuate based upon global
supply-and-demand dynamics, among other things, with the greatest
impact relating to gold. Additionally, ECHG depends on purchasing
products and materials from secondary markets. At any given time,
we may be unable to obtain an adequate supply of products and
materials at prices and other terms acceptable to
us. Compliance with future environmental laws and regulations,
or current environmental laws and regulations reinterpreted in the
future, could result in costs that have a material adverse effect
on our business, results of operations and financial
condition.
24
ITEM
2.
U
NREGISTERED SALES OF EQUITY
SECURITIES AND USE OF
PROCEEDS
Not
applicable
ITEM
3.
D
EFAULTS UPON SENIOR
SECURITIES
Not
applicable
ITEM
4.
M
INE SAFETY
DISCLOSURES
Not
applicable
ITEM
5.
O
THER INFORMATION
Not
applicable
ITEM 6.
E
XHIBITS
|
Exhibit
Number
|
|
Description
|
|
Filed
Herein
|
|
Incorporated by
Reference
|
|
Form
|
|
Date Filed with
SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
25
S
IGNATURES
Pursuant to the
requirements 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
(Registrant)
|
|
|
|
Date: May 12, 2020
|
By:
|
/s/
JOHN R. LOFTUS
|
|
|
|
|
John R. Loftus
|
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
Date: May 12, 2020
|
|
/s/
BRET A. PEDERSEN
|
|
|
|
|
Bret A. Pedersen
|
|
|
|
|
Chief Financial Officer
(Principal Accounting Officer)
|
|
26
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Basis Of PresentationNote 2 Principles Of Consolidation and Nature Of OperationsNote 3 Accounting Policies and EstimatesNote 4 InventoriesNote 5 Note ReceivableNote 6 Property and EquipmentNote 7 AcquisitionNote 8 GoodwillNote 9 Intangible AssetsNote 10 Accrued ExpensesNote 11 Segment InformationNote 12 Revenue RecognitionNote 13 LeasesNote 14 Basic and Diluted Average SharesNote 15 Long-term DebtNote 16 Stock-based CompensationNote 17 Related Party TransactionsNote 18 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use OfItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits