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 September 30, 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 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 ☒
TABLE OF CONTENTS
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PART I.
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FINANCIAL
INFORMATION
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Page
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3
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3
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4
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5
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24
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30
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30
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PART II.
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OTHER INFORMATION
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31
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31
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32
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32
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32
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33
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34
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PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
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Three Months
Ended
September
30,
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Nine Months
Ended
September
30,
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(Unaudited)
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2020
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2019
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2020
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2019
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Revenue:
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Sales
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$38,810,884
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$22,861,201
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$85,185,634
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$59,818,168
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Cost of goods
sold
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31,647,487
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17,674,747
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68,629,699
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49,047,917
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Gross
margin
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7,163,397
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5,186,454
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16,935,935
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10,770,251
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Expenses:
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Selling, General &
Administrative Expenses
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3,869,673
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3,893,618
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11,311,543
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8,311,199
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Depreciation and
Amortization
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179,782
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67,886
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539,217
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227,558
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Total cost of
revenue
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4,049,455
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3,961,504
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11,850,760
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8,538,757
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Operating income
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3,113,942
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1,224,950
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5,085,175
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2,231,494
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Other income,
net
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(26,954)
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(955)
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(120,510)
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(54,285)
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Interest expense
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155,799
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148,720
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445,411
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240,778
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Income before income
taxes
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2,985,824
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1,077,185
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4,760,274
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2,045,001
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Income tax
expense
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273
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41,710
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35,127
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65,364
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0
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Net income
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$2,984,824
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$1,035,475
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$4,725,147
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$1,979,637
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Basic earnings per
share:
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Net income
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$0.11
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$0.04
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$0.18
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$0.08
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Diluted earnings per
share:
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Net income
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$0.10
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$0.04
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$0.18
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$0.08
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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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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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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.
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
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September
30,
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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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$7,269,258
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$4,510,660
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Trade
receivables, net of allowances
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4,659,074
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2,997,743
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Inventories
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10,617,516
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9,509,454
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Current
right-of-use assets from operating leases
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1,173,733
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1,160,658
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Prepaid
expenses
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328,354
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172,834
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Total current
assets
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24,047,935
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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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2,998,838
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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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3,089,648
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3,394,073
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Operating
lease right-of-use assets
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3,815,058
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2,335,040
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Other
long-term assets
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299,614
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204,784
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Total
assets
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$37,118,202
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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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$2,553,145
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$1,467,845
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Notes
payable, related party
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302,485
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1,084,072
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Notes
payable
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1,719,036
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-
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Current
operating lease liabilities
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1,132,411
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1,175,109
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Accrued
expenses
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837,554
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916,509
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Customer
deposits and other liabilities
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189,315
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165,404
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Total current
liabilities
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6,733,946
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4,808,939
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Notes payable,
related party, less current portion
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9,128,146
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8,554,980
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Notes payable,
less current portion
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1,395,875
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-
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Long-term
operating lease liabilities, less current
portion
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3,940,914
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2,445,301
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Total
liabilities
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21,198,881
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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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(24,522,600)
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(29,247,747)
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Total
stockholders’ equity
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15,919,321
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11,194,174
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Total
liabilities and stockholders’ equity
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$37,118,202
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$27,003,394
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
ENVELA
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
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For the Nine Months Ended September 30,
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2020
|
2019
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(Unaudited)
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(Unaudited)
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Operations
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Net
income
|
$4,725,147
|
$1,979,637
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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
|
539,217
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227,558
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Changes
in operating assets and liabilities:
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Trade
receivables
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(1,661,332)
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(920,929)
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Inventories
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(1,108,062)
|
(256,103)
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Prepaid
expenses
|
(155,518)
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(212,866)
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Other
assets
|
(94,830)
|
(47,884)
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Accounts
payable and accrued expenses
|
1,006,345
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(627,911)
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Accounts
payable, related party
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-
|
(3,074,021)
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Operating
leases
|
(40,179)
|
120,673
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Customer
deposits and other liabilities
|
23,911
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79,358
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Net
cash provided by (used in) operations
|
3,234,699
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(2,732,488)
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Investing
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Investment
in note receivable
|
(1,500,000)
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-
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Intangible
assets
|
-
|
(45,000)
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Acquisition
of the Echo Entities, net of cash acquired
|
-
|
(5,876,517)
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Payments
for acquisition of property and equipment
|
(430,591)
|
-
|
|
Purchase
of property and equipment, financed through proceeds from
notes
|
(1,452,000)
|
(102,989)
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Net
cash used in investing
|
(3,382,591)
|
(6,024,506)
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Financing
|
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Financing
for the acquisition of the Echo Entities
|
-
|
6,925,979
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Financing
to pay off accounts payable, related party
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-
|
3,074,021
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Line
of credit
|
-
|
151,000
|
|
Proceeds
from Paycheck Protection Program Note
|
1,668,200
|
-
|
|
Proceeds
from notes to purchase property
|
1,452,000
|
-
|
|
Payments
on notes payable
|
(5,289)
|
-
|
|
Payments
on notes payable, related party
|
(208,421)
|
(292,568)
|
|
|
|
|
|
Net
cash provided by financing
|
2,906,490
|
9,858,432
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
2,758,598
|
1,101,438
|
|
Cash
and cash equivalents, beginning of period
|
4,510,660
|
1,453,941
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
$7,269,258
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$2,555,379
|
|
|
|
|
|
Supplemental Disclosures
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Cash
paid during the period for:
|
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Interest
|
$443,415
|
$240,778
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Income
taxes
|
$30,025
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$43,578
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months ended September 30, 2019 and 2020
(Unaudited)
|
|
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Additional
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Total
|
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|
Common
Stock
|
Preferred
Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Balances at
June 30, 2019
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(31,084,298)
|
$9,357,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
1,035,475
|
1,035,475
|
|
|
|
|
|
|
|
|
|
|
Balances at
September 30, 2019
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(30,048,823)
|
$10,393,098
|
|
|
|
|
|
|
Additional
|
|
Total
|
|
|
Common Stock
|
Preferred Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30,
2020
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(27,507,424)
|
$12,934,497
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
2,984,824
|
2,984,824
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30,
2020
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(24,522,600)
|
$15,919,321
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
For the Nine Months ended September 30, 2019 and 2020
(Unaudited)
|
|
|
|
|
|
Additional
|
|
Total
|
|
|
Common Stock
|
Preferred Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Defecit
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2018
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(32,028,460)
|
$8,413,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
1,979,637
|
1,979,637
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30,
2019
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(30,048,823)
|
$10,393,098
|
|
|
|
|
|
|
Additional
|
|
Total
|
|
|
Common Stock
|
Preferred Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Defecit
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2019
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(29,247,747)
|
$11,194,174
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
4,725,147
|
4,725,147
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30,
2020
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(24,522,600)
|
$15,919,321
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The
condensed consolidated interim financial statements of Envela
Corporation, a Nevada corporation, and its subsidiaries (together
with 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 SEC’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
engages in diverse business activities within the recommerce
sector. These include recommercializing luxury hard assets,
consumer electronics and IT equipment, as well as providing
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 primarily operates 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 (collectively and together with DGSE, LLC,
“DGSE”). Through ECHG, LLC, the Company operates Echo
Environmental Holdings (“Echo”), ITAD USA Holdings
(ITAD” and together with Echo, the “Echo
Entities”), and Teladvance (“Teladvance” and
together with ECHG, LLC and the Echo Entities, “ECHG”),
which primarily recommercializes 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 headquartered in
Dallas, Texas.
During the first quarter of fiscal 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 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 the 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, each
of which constitutes a distinct segment within recommerce. 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.
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 currently operates four stores
at the wholesale and retail levels, transacting throughout the
United States via its facilities in Texas and South Carolina.
DGSE’s lease in Southlake, Texas expired during the quarter
ended September 30, 2020 and DGSE vacated that retail location.
DGSE purchased two new retail locations in the Dallas area
Metroplex in Lewisville and Grapevine, respectively. The buildouts
are expected to be completed and the two new retail locations are
expected to open before the Christmas season.
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 as 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 valuable metals (or other materials) for sale to
downstream recycling companies who further process the metal for
subsequent resale. Our customers include 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 conserves energy and raw materials required to make new
products and turns obsolete IT assets into revenue.
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, ITAD 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, accrued expenses and notes payable approximate
fair value because of the
immediate or short-term nature of these financial instruments. Note
receivable, notes payable and 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
requiring the Company 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 the ECHG segment 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 Accounting Standards Codification
(“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 September 30, 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.
NOTE 4 — INVENTORIES
A
summary of inventories is as follows:
|
|
September
30,
|
December
31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Resale
|
$9,323,477
|
$8,213,551
|
|
Recycle
|
119,767
|
401,468
|
|
|
|
|
|
Subtotal
|
9,443,244
|
8,615,019
|
|
|
|
|
|
ECHG
|
|
|
|
Resale
|
642,598
|
351,958
|
|
Recycle
|
531,674
|
542,477
|
|
|
|
|
|
Subtotal
|
1,174,272
|
894,435
|
|
|
|
|
|
|
$10,617,516
|
$9,509,454
|
NOTE 5 — 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
conditins. 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 6 — PROPERTY AND EQUIPMENT
Property and equipment consist of the
following:
|
|
September
30,
|
December
31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Land
|
$720,786
|
$55,000
|
|
Buildings
|
1,181,896
|
-
|
|
Leasehold
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
|
-
|
|
|
4,986,089
|
3,109,361
|
|
Less:
accumulated depreciation
|
(2,087,694)
|
(1,904,948)
|
|
|
|
|
|
Sub-Total
|
2,898,395
|
1,204,413
|
|
|
|
|
|
ECHG
|
|
|
|
Leashold
improvements
|
81,149
|
81,149
|
|
Machinery
and equipment
|
33,360
|
27,497
|
|
Furniture
and fixtures
|
93,827
|
93,827
|
|
|
208,336
|
202,473
|
|
Less:
accumulated depreciation
|
(107,893)
|
(55,847)
|
|
|
|
|
|
Sub-Total
|
100,443
|
146,626
|
|
|
|
|
|
|
$2,998,838
|
$1,351,039
|
NOTE 7 — GOODWILL
The changes in goodwill is as follows:
|
|
September
30,
|
December
31,
|
|
|
2020
|
2019
|
|
|
|
|
|
Opening
balance
|
$1,367,109
|
$-
|
|
Additions
(1)
|
-
|
1,367,109
|
|
Acquisition
adjustment
|
-
|
-
|
|
Impairment
adjustment
|
-
|
-
|
|
|
|
|
|
Goodwill
|
$1,367,109
|
$1,367,109
|
(1)
Goodwill was allocated in connection with the acquisition of the
Echo Entities (the “Echo Transaction”) on May 20,
2019.
NOTE 8 — INTANGIBLE ASSETS
Intangible assets consist of the
following:
|
|
September
30,
|
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
|
(190,227)
|
(137,502)
|
|
|
|
|
|
Subtotal
|
181,125
|
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
|
(447,477)
|
(195,777)
|
|
|
|
|
|
Subtotal
|
2,908,523
|
3,160,223
|
|
|
|
|
|
|
$3,089,648
|
$3,394,073
|
The
following table outlines the estimated future amortization expense
related to intangible assets held as of September 30,
2020:
|
|
DGSE
|
ECHG
|
Total
|
|
|
|
|
|
|
2020
(excluding the nine months ended September 30, 2020)
|
$13,275
|
$83,900
|
$97,175
|
|
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
|
|
|
|
|
|
|
|
$181,125
|
$2,908,523
|
$3,089,648
|
NOTE 9 — ACCRUED EXPENSES
Accrued expenses consist
of the following:
|
|
September
30,
|
December
31,
|
|
|
2020
|
2019
|
|
DGSE
|
|
|
|
Accrued
interest
|
$9,954
|
$7,374
|
|
Professional
fees
|
80,978
|
125,200
|
|
Board
member fees
|
3,750
|
7,500
|
|
Insurance
|
7,597
|
30,508
|
|
Payroll
|
147,466
|
157,148
|
|
Property
taxes
|
132,750
|
-
|
|
Sales
tax
|
44,385
|
115,451
|
|
State
income tax
|
14,432
|
33,907
|
|
Other
|
613
|
-
|
|
|
|
|
|
Subtotal
|
441,925
|
477,088
|
|
|
|
|
|
ECHG
|
|
|
|
Accrued
interest
|
16,139
|
16,724
|
|
Professional
fees
|
80,977
|
77,900
|
|
Board
member fees
|
3,750
|
-
|
|
Insurance
|
7,596
|
-
|
|
Payroll
|
189,060
|
79,342
|
|
Property
taxes
|
21,067
|
-
|
|
Sales
tax
|
-
|
7,852
|
|
State
income tax
|
14,431
|
27,963
|
|
Credit
card
|
-
|
22,279
|
|
Material
& shipping costs (COGS)
|
62,609
|
207,361
|
|
|
|
|
|
Subtotal
|
395,629
|
439,421
|
|
|
|
|
|
|
$837,554
|
$916,509
|
NOTE 10 — SEGMENT INFORMATION
During the first quarter of fiscal 2020, Envela views the way it
views and reports 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, in each case for either resale or recycling. Envela
continues to report its revenue and operating expenses based on its
DGSE and ECHG operating segments, and as in the first three
quarters of 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.
The DGSE segment includes Dallas Gold and Silver Exchange, having
three locations throughout the Dallas/Fort Worth Metroplex, with
two new locations expected to open during the fourth quarter of
2020, Charleston Gold and Diamond Exchange, with one location in
Charleston, South Carolina and Bullion Express.
The
ECHG segment includes Echo, ITAD and Teladvance. These three
companies focus on reusing and recycling electronics. Echo and ITAD
were acquired by the Company on May 20, 2019, and Teladvance was
acquired on August 2, 2019, and therefore the results of operations
may not be comparable for the three and nine months ending
September 30, 2019 and September 30, 2020.
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 and ECHG’s financial results of
operations for the three months ending September 30,
2020:
The following separates DGSE and ECHG’s financial results of
operations for the nine months ended September 30,
2020:
NOTE 11 — 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, we 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 disaggregated 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 for the three months ended September 30, 2020
and 2019:
The
following disaggregation of total revenue is listed by sales
category and segment for the nine months ended September 30, 2020
and 2019:
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 either made immediately or
via receivable obligation. We also recognize revenue upon the
shipment of goods when resale and wholesale customers have
fulfilled their obligation to pay or made a 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 and 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 sales based on historical returns and reduced
our reported revenues and cost of sales accordingly. Our return
allowance as of September 30, 2019 and September 30, 2020 remained
the same for both periods, at approximately $28,000.
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 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 recognizes 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 a 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.
Some of
ECHG’s customers are on payment terms, and although low risk,
occasionally the need arises to record an allowance for receivables
that are deemed high risk to collect. We have established an
allowance for estimated uncollectable receivables related to sales
based on historical collections. Our allowance as of September 30,
2019 and September 30, 2020 was $0 and $20,428,
respectively.
NOTE 12 — LEASES
When
the 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.
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 when we purchased the Echo Entities on
May 20, 2019. 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.
The
Company has six operating leases—five in the Dallas/Fort
Worth Metroplex and one in Charleston, South Carolina. One lease
expired during the quarter ended September 30, 2020. The lease for
DGSE’s Southlake, Texas location expired July 31, 2020, with
no renewal options. We decided not to renew the lease and vacated
the premises on July 31, 2020. The lease
for DGSE’s flagship-store at 13022 Preston Road, Dallas,
Texas will expire October 31, 2021, with no current renewal
options. This location is under review as to whether to pursue a
lease renewal. The lease for DGSE’s Grand Prairie, Texas
location expires June 30, 2022, and has no current renewal options.
The lease for DGSE’s Charleston, South Carolina location
expires April 30, 2025, with no additional renewal options. The
lease for DGSE’s Euless, Texas location expires June 30,
2025, with an option for an additional five years. ECHG’s
Echo Environmental, located on W. Belt Line Road, in Carrollton,
Texas, renewed their lease starting January 1, 2021 for 61 months,
expiring January 31, 2026. 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’s location on McKenzie
Drive in Carrollton, Texas expires July 31, 2021 and has no renewal
option. All of the Company’s six 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 ended September 30, 2020 and 2019 was $421,790 and $338,402,
respectively. Leasing costs for the nine months ended September 30,
2020 and 2019 was $1,071,066 and 814,572, respectively, comprised
of a combination of minimum lease payments and variable lease
costs.
As of
September 30, 2020, the weighted average remaining lease term and
weighted average discount rate for operating leases was 2.5 years
and 5.5%, respectively. For the three months ending September 30,
2020 and 2019, the Company’s cash paid for operating lease
liabilities was $428,241 and $348,955, respectively. The
Company’s cash paid for operating lease liabilities for the
nine months ended September 30, 2020 and 2019 was $1,100,280 and
$826,745, respectively.
Future
annual minimum lease payments as of September 30,
2020:
|
|
Operating
|
|
|
Leases
|
|
DGSE
|
|
|
2020
(excluding the nine months ending September 30, 2020)
|
$130,612
|
|
2021
|
479,162
|
|
2022
|
235,674
|
|
2023
|
212,854
|
|
2024
|
213,884
|
|
2025
and thereafter
|
64,087
|
|
|
|
|
Total
minimum lease payments
|
1,336,273
|
|
Less
imputed interest
|
(126,541)
|
|
|
|
|
Subtotal
|
1,209,732
|
|
|
|
|
ECHG
|
|
|
2020
(excluding the nine months ending September 30, 2020)
|
147,707
|
|
2021
|
855,423
|
|
2022
|
784,598
|
|
2023
|
806,175
|
|
2024
|
828,346
|
|
2025
and thereafter
|
924,003
|
|
|
|
|
Total
minimum lease payments
|
4,346,252
|
|
Less
imputed interest
|
(482,659)
|
|
|
|
|
Subtotal
|
3,863,593
|
|
|
|
|
|
5,073,325
|
|
Less
current portion
|
(1,132,411)
|
|
|
|
|
Long
term operating lease liability
|
$3,940,914
|
|
|
|
NOTE 13 — BASIC AND DILUTED AVERAGE SHARES
A
reconciliation of basic and diluted weighted average common shares
for the three months ended September 30, 2020 and 2019 is as
follows:
A
reconciliation of basic and diluted weighted average common shares
for the nine months ended September 30, 2020 and 2019 is as
follows:
For the
three and nine months ended September 30, 2020 and 2019, there were
15,250 and 15,250 common stock options, warrants, and Restricted
Stock Units (RSUs) unexercised, respectively.
NOTE 14 — LONG-TERM DEBT
(1) On
May 20, 2019, in connection with the acquisition of the Echo
Entities (the “Echo Transaction”) the Company entered
into two loan agreements with John R. Loftus, the Company’s
CEO, President and Chairman of the Board of Directors of the
Company (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 Elemetal, LLC (“Elemetal”) 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.
(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) 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 will
apply 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 notes payable and notes
payable, related party, as of September 30, 2020 are as
follows:
|
Note payable - Envela Corporation
|
|
|
|
|
|
Year
Ending December 31,
|
Amount
|
|
|
|
|
2020
(excluding the nine months ended September 30, 2020)
|
1,668,200
|
|
|
|
|
Subtotal
|
1,668,200
|
|
|
|
|
|
$12,545,542
|
NOTE 15 — 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.
Stock-based compensation expense for the three months and nine
months ended September 30, 2020 and 2019 was $0 and $0,
respectively.
NOTE 16 — RELATED PARTY TRANSACTIONS
The
Company has a corporate policy governing the identification,
review, consideration and approval or ratification of transactions
with related persons (each such person, a “Related
Party”), as that term is defined in the Instructions to Item
404(a) of Regulation S-K, promulgated under the Securities Act of
1933, as amended (the “Securities Act”). 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 it is in the best interest of the
Company and 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.
Through
a series of transactions beginning in 2010, Elemetal, NTR Metals,
LLC (“NTR”) and Truscott Capital, LLC
(“Truscott” and together with Elemetal and NTR, the
“Related Entities”), became the largest shareholders of
our common stock. On August 29, 2018, NTR transferred all of its
common stock in the Company to Eduro Holdings, LLC
(“Eduro”), which is controlled by John R. Loftus, the
Company’s CEO, President and Chairman of the Board. A certain
Related Entity (the “Related Trading Partner”) has been
the Company’s primary refiner and bullion trading partner.
For the nine months ended September 30, 2019, the Related Trading
Partner accounted for 3% of sales and 1% of purchases. For the nine
months ended September 30, 2020, the Related Trading Partner was no
longer a Related Party. On May 20, 2019, through a series of
transactions, the Related Entities sold their shares of the Company
to Mr. Loftus. As of May 20, 2019, the Related Entities were no
longer Related Parties. As of September 30, 2020, the Company was
obligated to pay $0 to the Related Trading Party as a trade
payable, and had a $0 receivable from the Related Trading Partner.
As of September 30, 2019, the Company was obligated to pay $0 to
the Related Trading Partner as a trade payable and had a $0
receivable from the Related Trading Partner. For the nine months
ended September 30, 2020 and 2019, the Company paid the Related
Entities $0 and $46,068, respectively, in interest on the
Company’s outstanding payable.
Through
a series of transactions, as reported on its Schedule 13D filed
with the SEC on May 24, 2019, Truscott sold its 12,814,727 shares
of the Company’s common stock, which then represented 47.7%
of the Company’s common stock outstanding, to John R. Loftus,
the Company’s CEO, President and Chairman of the Board. In
connection therewith, Mr. Loftus assumed all rights under the
existing registration rights agreements. On the same day, Mr.
Loftus contributed his 12,814,727 shares of the Company’s
common stock 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 shares of the Company’s common stock that Eduro and N10TR
directly beneficially own. Also on the same day, the Company
entered into two loan agreements with Mr. Loftus. ECHG, LLC
executed a 5-year, $6,925,979 note in connection with 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 Elemetal, 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 nine months ended September 30, 2020
and 2019, the Company paid Mr. Loftus $442,550 and $194,081,
respectively, in interest on the Company’s outstanding note
payables, related party.
NOTE
17 — SUBSEQUENT EVENTS
On
September 14, 2020, the Company signed an initial agreement for the
purchase of an office building to relocate its corporate
headquarters, in Irving, Texas, for $3.521 million. The building
has approximately 73,000 rentable square feet, and is approximately
70% leased. We closed the purchase of the building on November 4,
2020. The purchase was partly financed through a $2.96 million, 5
year loan, bearing an annual interest rate of 3.25%, amortized over
20 years, payable to Texas Bank & Trust. The Company will
continue to sublet the building to offset the note
payments.
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 COVID-19 pandemic, the ultimate impact is highly
uncertain and subject to change. We saw an adverse impact on the
Company’s sales for the quarter ended June 30, 2020, and the
pandemic may have a negative impact on our operations into year
2021. The duration of any such impact cannot be predicted, and the
Company believes additional liquidity may be necessary to support
ongoing operations during this period of uncertainty. The Company
entered into a Federal Loan effective April 20, 2020 with Truist
Bank (f/k/a BB&T Bank) as the lender in an aggregate principal
amount of approximately $1.67 million pursuant to the Paycheck
Protection Program under the Coronavirus Aid Relief, and Economic
Security (CARES) Act. Subject to the terms of the note, the Federal
Loan bears interest at a fixed rate of 1% per annum, with interest
deferred up to 7 months payable monthly thereafter, has an initial
term of two years and is unsecured and guaranteed by the Small
Business Administration. The loan is intended to pay employees and
cover certain rent and utility-related costs during the COVID-19
pandemic. The Federal Loan is forgivable to the extent that certain
criteria are met. We will apply for the forgiveness of the Federal
Loan during the fourth quarter ending December 31, 2020. There is
no assurance that the Company will be granted forgiveness of the
Federal Loan.
ITEM 2. MANAGEMENT’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, and all of its direct
and indirect subsidiaries.
Forward-Looking Statements
This
Quarterly Report on Form 10-Q for the quarter ended September 30,
2020 (this “Form 10-Q”), including but not limited to:
(i) the section of this Form 10-Q entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations;” (ii) information
concerning our business prospects or future financial performance,
anticipated revenues, expenses, profitability or other financial
items; and, (iii) our strategies, plans and objectives,
together with other statements that are not historical facts,
includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Forward-looking statements generally can be identified
by the use of forward-looking terminology, such as
“may,” “will,” “would,”
“expect,” “intend,” “could,”
“estimate,” “should,”
“anticipate” or “believe.” We intend that
all forward-looking statements be subject to the safe harbors
created by these laws. All statements other than statements of
historical information provided herein are forward-looking
statements based on current expectations regarding important risk
factors. Many of these risks and uncertainties are beyond our
ability to control, and, in many cases, we cannot predict all of
the risks and uncertainties that could cause our actual results to
differ materially from those expressed in the forward-looking
statements. Actual results could differ materially from those
expressed in the forward-looking statements, and readers should not
regard those statements as a representation by us or any other
person that the results expressed in the statements will be
achieved. Important risk factors that could cause results or events
to differ from current expectations are described under the section
of this Form 10-Q entitled “Risk Factors” and elsewhere
in this Form 10-Q as well as under the section entitled “Risk
Factors” in our Fiscal 2019 10-K. These factors are not
intended to be an all-encompassing list of risks and uncertainties
that may affect the operations, performance, development and
results of our business. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as
of the date hereof. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements,
which may be made to reflect events or circumstances after the date
thereon, including without limitation, changes in our business
strategy or planned capital expenditures, or store growth plans, or
to reflect the occurrence of unanticipated events.
Results of Operations
General
The COVID-19 pandemic’s effects, including limited Company operations due to a portion of our retail stores
being unable to sell certain products, mandated by governing
authorities, and dramatic changes in consumer behavior, led to a
decline in DGSE sales during the second quarter of fiscal year
2020. As the activity has grown rapidly, from increased business,
at both DSGE's retail locations and ECHG's warehouses during the
quarter ended September 30, 2020, we continue to exercise the
safety protocols established by the Company at the start of the
pandemic. The Company continues to operate at full strength and
will take measures to keep our employees safe where possible. The
Company established safety protocols by wearing masks and social
distancing where possible. The Company had no layoffs or
terminations due to the pandemic, although there had been reduced
revenue from governmental shut-in orders for the second quarter
ended June 30, 2020. As the
activity has grown rapidly, from increased business, at both DGSE's
retail locations and ECHG's warehouses during the quarter ended
September 30, 2020, we continue to exercise the safety protocols
established by the Company at the start of the pandemic. The
Company continues to operate at full strength and will take
measures to keep our employees safe where possible.
Although retail
investors’
demand for precious-metal coins appeared to have
contributed to higher gold
prices, jewelry
consumption and recycled-gold supply
plunged during the second
quarter as consumers were
confined to their homes for most of the
quarter in an
effort to stem the spread
of COVID-19, according to the World Gold Council (the
“WGC”). Over the longer term, the WGC noted it believed
that recycled-gold volumes could likely rise once restrictions
are lifted, with consumers looking for liquid
assets—such as
gold—to help alleviate economic hardship caused by the
lockdown. Consumer demand for our products rose following the
lifting of governmental orders to refrain from selling
non-essential items in our retail stores due to the COVID-19
pandemic and a related spiking of gold prices.
The
following disaggregation of total revenue is listed by sales
category and segment for the three months ended September 30, 2020
and September 30, 2019:
The
following disaggregation of total revenue is listed by sales
category and segment for the nine months ended September 30, 2020
and September 30, 2019:
Three Months Ended September 30, 2020 compared to Three Months
Ended September 30, 2019
Revenue. Revenue related to DGSE’s continuing
operations increased by $11,484,247, or 69%, during the three
months ended September 30, 2020, to $28,137,174, as compared
to $16,652,927 during the same period in 2019. Resale revenue, such
as bullion, jewelry, watches and rare coins, increased by
$12,996,462, or 92%, during the three months ended September 30,
2020, to $27,101,477 as compared to $14,105,015 during the same
period in 2019. Recycled-material sales decreased 59% to $1,035,697
for the three months ended September 30, 2020, as compared to
$2,547,912 for the three months ended September 30, 2019. Revenue
increased for resale items for the three months ended September 30,
2020, compared to the three months ended September 30, 2019,
primarily due to the apparent increase in consumer demand following
the lifting of governmental orders to refrain from selling
non-essential items in our retail stores due to the COVID-19
pandemic and the related spiking of gold prices due to the
pandemic. The decrease in recycled-materials revenue is primarily
due to the spike in resale revenue stemming from the COVID-19
pandemic, as we purchased inventory for the quarter ended September
30, 2020, more inventory was kept for our retail stores as compared
to the three months ended September 30, 2019, and recycled
less.
Revenue
related to ECHG’s continuing operations for the three months
ended September 30, 2020 increased by $4,465,436, or 72%, to
$10,673,710, as compared to $6,208,274 during the same period in
2019. Resale revenue increased by $2,679,372, or 52%, to $7,182,553
as compared to $5,133,181 during the three months ended September
30, 2019. Recycled sales increased by $1,786,064 or 166%, to
$2,861,157 as compared to $1,075,093 for the three months ended
September 30, 2019. Teladvance was acquired on August 2, 2019;
therefore, the revenue for the three months ended September 30,
2019 may not be fully comparable to the three months ended
September 30, 2020.
The Company has no layoffs to-date or terminations due to the
pandemic, although revenue declined from governmental shut-in
orders for the second quarter ended June 30, 2020.
Gross Profit. Gross profit related to DGSE’s
operations for the three months ended September 30, 2020, increased
by $1,414,108, or 70%, to $3,432,960 as compared to $2,018,852
during the same period in 2019. The increase in total gross profit
was due primarily to the increase in sales velocity of resale items
due to the apparent increase in consumer demand following lifting
of the governmental restrictions from the COVID-19 pandemic and the
aforementioned related spike in gold prices. Although there was
increased revenue for the resale items, there was also a slightly
lower gross-margin percentages due to DGSE’s desire to
increase the sales velocity after the lifting of governmental
orders due to the COVID-19 pandemic.
Gross
profit related to ECHG for the three months ended September 30,
2020 was $3,730,437 as compared to $3,167,602 during the same
period in 2019. Gross profit for resale revenue for the three
months ended September 30, 2020 was $2,376,406, or 64% of
ECHG’s gross profit, compared to recycled gross profit during
the same period of $1,354,031, or 36%. Teladvance was acquired on
August 2, 2019; therefore, the gross profit for the three months
ended September 30, 2019 may not be fully comparable to the three
months ended September 30, 2020.
Selling, General and Administrative Expenses. For the three
months ended September 30, 2020, Selling, General and
Administrative (“SG&A”) expenses for DGSE decreased
by $164,750, or 9%, to $1,703,394, as compared to $1,868,144 during
the same period in 2019. The decrease in SG&A was primarily due
to corporate overhead expenses being shared between both the DGSE
and ECHG segments.
The
SG&A expenses for ECHG totaled $2,166,279 for the three months
ended September 30, 2020. Teladvance was acquired on August 2,
2019, therefore, the SG&A expense for the three months ended
September 30, 2019 may not be fully comparable to the three months
ended September 30, 2020.
Depreciation and Amortization. For the three months ended
September 30, 2020, depreciation and amortization expense for DGSE
was $79,190, compared to $44,368 for the same period in 2019, an
increase of $34,822, or 78%. The increase of $34,822 from the three
months ending September 30, 2020 compared to the three months
ending September 30, 2019 is primarily due to a vehicle purchase
during the first quarter of 2020 and amortization expenses from
additional point of sale “POS” costs during the year to
be amortized.
The
Depreciation and Amortization expense for ECHG consisted of
depreciation of $16,692 and amortization of $83,900 for the three
months ending September 30, 2020. Amortization for the three months
ended September 30, 2020, is from the Echo Entities’ Purchase
Price Allocation of intangibles amortized over 10 years. Teladvance
was acquired on August 2, 2019; therefore, the depreciation and
amortization expense for the three months ended September 30, 2019
may not be fully comparable to the three months ended September 30,
2020.
Interest Expense. For the three months ended September 30,
2020, interest expense for DGSE was $53,931, an increase of $7,167
or 15%, compared to $46,764 during the same period in 2019. This
increase was primarily the result of additional loans to DGSE to
finance recent real estate acquisitions for retail operations, as
discussed above.
The
interest expense for ECHG was $101,868 for the three months ended
September 30, 2020, as compared to $101,956 for the same period in
2019, a slight decrease due to a paid down principal balance on the
note payable, related party. The interest paid and accrued interest
for the three months ended September 30, 2020 is from the note
payable, related party, the proceeds of which were used for the
purchase of the Echo Entities.
Income Tax Expense. For the three months ending September
30, 2020, income tax expense was $273 a decrease of $41,437,
compared to $41,710 for the three months ending September 30, 2019.
The effective income tax rate was 0% and 3.9% for the three months
ending September 30, 2020 and 2019, respectively. Differences
between our effective income tax rate and the U.S. federal
statutory rate are the result of state taxes, non-deductible
expenses and changes in the valuation allowance in relation to the
deferred tax asset for NOL carryforwards.
Net Income. We recorded a
net income of $2,984,824 for the three months ended September 30,
2020, compared to a net income of $1,035,475 for the three months
ended September 30, 2019, an increase in net income of $1,949,349,
which is due primarily to an almost 70% increase in revenue between
the periods.
Earnings Per Share. For the
three months ending September 30, 2020, our net income per basic
and diluted shares attributable to common stockholders was $0.11,
compared to $0.04 per basic and diluted shares for the three months
ending September 30, 2019. This increase is again due primarily to
an almost 70% increase in revenue between the
periods.
Nine Months Ended September 30, 2020 compared to Nine Months Ended
September 30, 2019
Revenues. Revenue related to
DGSE’s operations increased by $11,598,693, or 23%, during
the nine months ended September 30, 2020, to $62,849,787, as
compared to $51,251,094 during the same period in 2019. Resale
revenue, such as bullion, jewelry, watches and rare coins,
increased $13,328,341, or 29%, compared to the nine months ended
September 30, 2019. Recycled revenue decreased by approximately
31%, compared to the prior year nine months. Revenue increased for
the nine months ending September 30, 2020, compared to the nine
months ending September 30, 2019, primarily due an apparent
increase in consumer demand following the lifting of governmental
orders to refrain from selling non-essential items in our retail
stores because of the COVID-19 pandemic and the spiking of gold
prices due to the pandemic.
Revenue
related to ECHG for the nine months ended September 30, 2020 was
$22,335,847, consisting of $15,595,813 of resale revenue, or 70% of
ECHG sales, compared to $6,740,034 of recycled sales, or 30%. The
Echo Entities were acquired on May 20, 2019, and Teladvance was
acquired on August 2, 2019; therefore, the revenue for the nine
months ended September 30, 2019 is not comparable to the nine
months ended September 30, 2020.
Gross Profit. Gross profit for the nine months ended
September 30, 2020, related to DGSE, increased by $904,745, or 14%,
to $7,411,907, as compared to $6,507,162 during the same period in
2019. The increase in gross profit was primarily due to increased
sales. As a percentage of revenue, gross margin decreased to 11.8%
for the nine months ended September 30, 2020, compared to 12.7% for
the same period in 2019.
Gross
profit related to ECHG for the nine months ended September 30,
2020, was $9,524,028, consisting of gross profit for resale revenue
of $5,818,672, or 61% of ECHG’s gross profit, and recycled
gross profit accounting for $3,705,356, or 39%. The Echo Entities
were acquired on May 20, 2019, and Teladvance was acquired on
August 2, 2019; therefore, the gross profit for the nine months
ended September 30, 2019 is not comparable to the nine months ended
September 30, 2020.
Selling, General and Administrative Expenses. For the nine
months ended September 30, 2020, DGSE’s SG&A expenses
decreased by $362,514, or 7%, to $5,121,568, as compared to
$5,484,082 during the same period in 2019. The decrease in SG&A
was primarily due to corporate overhead expenses being shared
between both the DGSE and ECHG segments.
The
SG&A expenses for ECHG totaled $6,189,975 for the nine months
ended September 30, 2020. The Echo Entities were acquired on May
20, 2019, and Teladvance was acquired on August 2, 2019; therefore,
the SG&A expense for the nine months ended September 30, 2019
is not comparable to the nine months ended September 30,
2020.
Depreciation and Amortization. For the nine months ended
September 30, 2020, DGSE’s depreciation and amortization
expense was $235,471, compared to $193,141 for the same period in
2019. The increase is primarily due to additional POS costs that
are being amortized and a vehicle purchased during the first
quarter of 2020.
The
Depreciation and Amortization expense for ECHG consisted of
depreciation of $52,046 and amortization of $251,700 for the nine
months ended September 30, 2020. Amortization for the nine months
ended September 30, 2020 is due to the Echo Entities’
Purchase Price Allocation of intangibles being amortized over 10
years. The Echo Entities were acquired on May 20, 2019, and
Teladvance was acquired on August 2, 2019; therefore, the
depreciation and amortization expense for the nine months ended
September 30, 2019 is not comparable to the nine months ended
September 30, 2020.
Interest Expense. For the nine months ended September 30,
2020, the interest expense for DGSE was $142,824, an increase of
$35,854, or 34%, compared to $106,970 during the same period in
2019. The increase is primarily due to an increased interest rate
on the note payable, related party, that paid off the accounts
payable, related party, outstanding balance on May 20,
2019.
The
interest expense for ECHG was $302,587 for the nine months ended
September 30, 2020, which is the interest paid and accrued for the
nine months ended September 30, 2020 for the note payable, related
party, the proceeds of which were used for the purchase of the Echo
Entities. The Echo Entities were acquired on May 20, 2019;
therefore, the interest expense for the nine months ended September
30, 2019 is not comparable to the nine months ended September 30,
2020.
Income Tax Expense. For the nine months ended September 30,
2020, income tax expense was $35,127, a decrease of $30,238, or
46%, compared to $65,365 for the nine months ended September 30,
2019. The effective income tax rate was 1.0% and 3.2% for the nine
months ended September 30, 2020 and 2019, respectively. Differences
between our effective income tax rate and the U.S. federal
statutory rate are the result of state taxes, non-deductible
expenses and changes in the valuation allowance in relation to the
deferred tax asset for NOL carryforwards.
Net Income. The Company
recorded a net income of $4,725,147 for the nine months ended
September 30, 2020, compared to a net income of $1,979,637 for the
nine months ended September 30, 2019, an increase in net income of
$2,745,510, which is due primarily from the additional net income
attributable to ECHG and increased sales in both the DGSE and ECHG
segments, for the nine months ended September 2020, compared to the
nine months ended September 30, 2019.
Earnings Per Share. For the
nine months ended September 30, 2020, our net income per basic and
diluted shares attributable to common stockholders was $0.18,
compared to $0.08 per basic and diluted shares for the nine months
ended September 30, 2019.
Liquidity and Capital Resources
During
the nine months ended September 30, 2020, cash flows provided by
operations totaled $3,234,699, and during the nine months ended
September 30, 2019 cash flows used in operations totaled
$2,732,488, an increase of $5,967,187. Cash provided by operations
for the nine months ended September 30, 2020 was driven
largely by the increase of accounts payable and accrued expenses of
$1,006,345 and net income added to non-cash items of depreciation
and amortization of $5,264,364, offset by an increase in trade
receivables of $1,661,332 and an increase in inventories of
$1,108,062. Cash used in operations for the nine months ended
September 30, 2019 was driven largely by the reduction of accounts
payable and accrued expenses of $1,006,345, the reduction of
accounts payable, related party of $3,074,021, the increase of
trade receivables of $920,929, the increase in inventories of
$256,103 and the increase in prepaid expenses of $212,866, offset
by net income added non-cash items of depreciation, amortization,
bad debt expense of $2,207,195.
During
the nine months ended September 30, 2020 and 2019, cash flows used
in investing activities totaled $3,382,591 and $6,024,506,
respectively, a period-over-period decrease of $2,641,915. The use
of cash in investing activities during the nine months ended
September 30, 2020 was primarily due to investing in a note
receivable of $1,500,000 to CExchange and purchasing two new retail
locations for DGSE totaling $1,815,000, of which $363,000 was cash
payments applied against the purchases of the retail locations and
the remainder of the balance purchased was financed through notes
payable. The use of cash in investing activities during the nine
months ended September 30, 2019 was primarily due to purchasing the
Echo Entities for $5,876,517, net of cash.
During
the nine months ended September 30, 2020 and 2019, cash flows
provided by financing totaled $2,906,490 and $9,858,432,
respectively, a period-over-period decrease of $6,951,942. The cash
provided by financing during the nine months ended September 30,
2020 were payments made against the notes payable, related party of
$208,421, offset by the Federal Loan received of $1,668,200 and two
loans from Texas Bank and Trust for $496,000 and Truist Bank (f/k/a
BB&T Bank) for $956,000. The cash provided by financing during
the nine months ended September 30, 2019 represented payments made
against the notes payable, related party of $292,568, offset by
financing to pay off the accounts payable, related party of
$3,074,021 and financing for the acquisition of the Echo Entities
of $6,925,979.
The
COVID-19 pandemic has adversely affected global economic business
conditions. Future sales of products like ours have and may
continue to decline due to increased commodities prices,
particularly gold. Although we are continuing to monitor and assess
the effects of the COVID-19 pandemic, the ultimate impact,
including the impact on our liquidity and capital resources, is
highly uncertain and subject to change. The duration of any such
impact cannot be predicted, and the Company believes additional
liquidity may be necessary to support ongoing operations during
this period of uncertainty. The Company entered into a Payment
Protection Term Note effective April 20, 2020 with Truist Bank
(f/k/a BB&T Bank) as the lender in an aggregate principal
amount of approximately $1.67 million pursuant to the Paycheck
Protection Program under the Coronavirus Aid Relief, and Economic
Security (CARES) Act, the Federal Loan. On May 18, 2020, the
Company renewed and increased its Texas Bank & Trust Co. line
of credit (the “Truist Credit Facility”) from
$1,000,000 to $3,500,000, and from a one-year term to a two-year
term, of which $0 is currently drawn. The loan agreement for the
Truist Credit Facility includes a 30-day clean-up provision. From
time to time we adjust our inventory levels to meet seasonal demand
or working-capital requirements. Management believes we have
sufficient capital resources (including the Federal Loan) to meet
working-capital requirements. If additional working capital is
required, we will seek additional loans from individuals or other
commercial banks. The availability of such loans on acceptable
terms is uncertain.
We
expect our capital expenditures to total approximately $150,000
during the next twelve months. These expenditures will be driven by
build-out expenses for properties purchased by DGSE for retail
locations, and the purchase of the office building discussed
below.
On September 14,
2020, the Company signed an initial agreement for the purchase of
an office building to relocate its corporate headquarters, in
Irving, Texas, for $3.521 million. The building has approximately
73,000 rentable square feet, and is approximately 70% leased. We
closed the purchase of the building on November 4, 2020. The
purchase was partly financed through a $2.96 million, 5 year loan,
bearing an annual interest rate of 3.25%, amortized over 20 years,
payable to Texas Bank & Trust. The Company will continue to
sublet the building to offset the note
payments.
Off-Balance Sheet Arrangements
We have
no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders.
ITEM 3. QUANTITATIVE 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. CONTROLS 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 September 30, 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.
We
believe, however, that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the
objectives of the controls systems are met, 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.
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.
PART II - OTHER INFORMATION
ITEM 1. 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 adverse effect on the
Company’s financial condition, results of operations or cash
flow. Management is also not aware of any legal proceedings
contemplated by government agencies of which the outcome is
reasonable likely to have a material adverse effect on the
Company's financial condition, results of operations or cash
flow.
ITEM
1A. RISK 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 has been widespread infection
throughout the United States and abroad. National, state and local
authorities have recommended social distancing and imposed
quarantine and isolation measures on large portions of the
population, including mandatory business and partial-business
closures. These measures, while intended to protect human life, are
having serious adverse impacts on domestic and foreign economies.
The effectiveness of economic-stabilization efforts, including
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 COVID-19 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 partial store
closures, as before. 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.
Except as set forth above, there have been no material changes to
the risk factors previously disclosed under Part I, Item 1A,
“Risk Factors” in our Annual Report, filed with the SEC
on March 26, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF
PROCEEDS
Not
applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable
ITEM 5. OTHER INFORMATION
As
noted above, On July 9, 2020 and September 14, 2020, DGSE closed
the purchases of new retail buildings located in Lewisville, Texas
and Grapevine, Texas, respectively. The agreements for the
purchases of these retail buildings were signed on May 22, 2020 and
June 24, 2020. The purchase of the Lewisville location was for
consideration of $1.195 million and the purchase of the Grapevine
location was for consideration of $620,000. Each was financed in
substantial part by long-term loans, as discussed above. The
purchase agreements of these retail locations are attached to this
quarterly report on Form 10-Q as Exhibit 10.1 and 10.2,
respectively, and are incorporated by reference into this item
5.
On September 14,
2020, the Company signed an initial agreement for the purchase of
an office building to relocate its corporate headquarters, in
Irving, Texas, for $3.521 million. The building has approximately
73,000 rentable square feet, and is approximately 70% leased. We
closed the purchase of the building on November 4, 2020. The
purchase was partly financed through a $2.96 million, 5 year loan,
bearing an annual interest rate of 3.25%, amortized over 20 years,
payable to Texas Bank & Trust. The Company will continue to
sublet the building to offset the note payments
The
purchase agreement of this office building is attached to this
quarterly report on Form 10-Q as Exhibit 10.3 and is incorporated
by reference into this Item 5.
As
previously disclosed, On January 1, 2020, revisions were made on
the notes payable, related party. 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 revised notes payable, related party are attached to this
quarterly report on Form 10-Q as Exhibit 10.4 and 10.5,
respectively, and are incorporated by reference into this Item
5.
ITEM 6. EXHIBITS
|
Exhibit
Number
|
|
Description
|
|
Filed
Herein
|
|
Incorporated
by
Reference
|
|
Form
|
|
Date Filed with
SEC
|
|
Exhibit
Number
|
|
|
|
Purchase agreement,
dated May 22, 2020, for the Lewisville, Texas property purchased by
DGSE, LLC
|
|
X
|
|
X
|
|
10-Q
|
|
November 5,
2020
|
|
10.1
|
|
|
|
Purchase agreement, dated June 24, 2020, for
the Grapevine, Texas property purchased by 1106 NWH Holdings, LLC,
wholly owned by DGSE, LLC
|
|
X
|
|
X
|
|
10-Q
|
|
November 5,
2020
|
|
10.2
|
|
|
|
Purchase agreement, dated September 14,
2020, for the Irving, Texas office building purchased by Envela
Corporation
|
|
X
|
|
X
|
|
10-Q
|
|
November 5,
2020
|
|
10.3
|
|
|
|
Revised note payable, related party, dated
January 1, 2020, between DGSE, LLC and John R.
Loftus.
|
|
X
|
|
X
|
|
10-Q
|
|
November 5,
2020
|
|
10.4
|
|
|
|
Revised note payable, related party, dated
January 1, 2020, between ECHG, LLC and John R.
Loftus
|
|
X
|
|
X
|
|
10-Q
|
|
November 5,
2020
|
|
10.5
|
|
|
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
|
|
|
|
|
|
|
|
|
SIGNATURES
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: November 5, 2020
|
By:
|
/s/ JOHN R. LOFTUS
|
|
|
|
|
John R. Loftus
|
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
Date: November 5, 2020
|
|
/s/ BRET A. PEDERSEN
|
|
|
|
|
Bret A. Pedersen
|
|
|
|
|
Chief Financial Officer
(Principal Accounting Officer)
|
|
34
