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Envela Corp - Quarter Report: 2020 June (Form 10-Q)

 

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 June 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)
 
NEVADA
 
88-0097334
(STATE OF INCORPORATION)
 
(I.R.S. EMPLOYER IDENTIFICATION NO.)
 
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
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
 
 
 
 
Title of each class
 
Trading Symbol
 
Name of exchange on which registered
 
 
 
 
 
COMMON STOCK, $0.01 par value per share
 
ELA
 
NYSE American
Securities registered pursuant to Section 12(g) of the Act: NONE
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes      No  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
 
Accelerated filer 
Non-accelerated filer 
 
Smaller reporting company 
 
 
Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
 
As of June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $46.647 million based on the closing sale price as reported on the NYSE American. As of June 30, 2020, there were 26,924,381 shares of common stock outstanding.
 

 
 
  
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
Page No.
 
 
 
 
 
1
 
 
2
 
 
3
 
 
4
 
 
5
 
 
6
 
 
23
 
 
28
 
 
28
 
 
PART II. OTHER INFORMATION
 
 
 
29
 
 
29
 
 
29
 
 
30
 
 
30
 
 
30
 
 
30
 
 
31
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
(Unaudited)
 
2020
 
 
2019
 
 
2020
 
 
2019
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
   Sales
 $20,545,607 
 $20,937,437 
 $46,374,750 
 $36,956,967 
   Cost of goods sold
  16,074,349 
  17,572,122 
  36,602,212 
  31,373,170 
 
     
     
     
     
      Gross margin
  4,471,258 
  3,365,315 
  9,772,538 
  5,583,797 
 
     
     
     
     
Expenses:
     
     
     
     
   Selling, General & Administrative Expenses
  3,616,670 
  2,676,240 
  7,441,870 
  4,417,581 
   Depreciation and Amortization
  179,706 
  85,348 
  359,435 
  159,672 
 
     
     
     
     
      Total cost of revenue
  3,796,376 
  2,761,588 
  7,801,305 
  4,577,253 
 
     
     
     
     
Operating income
  674,882 
  603,727 
  1,971,233 
  1,006,544 
Other income, net
  (51,866)
  (56,728)
  (93,556)
  (53,330)
Interest expense
  144,297 
  57,509 
  289,612 
  92,058 
 
     
     
     
     
Income before income taxes
  582,451 
  602,946 
  1,775,177 
  967,816 
Income tax expense
  16,277 
  13,419 
  34,854 
  23,654 
 
     
     
     
     
Net income
 $566,174 
 $589,527 
 $1,740,323 
 $944,162 
 
     
     
     
     
Basic earnings per share:
     
     
     
     
   Net income
 $0.02 
 $0.02 
 $0.07 
 $0.04 
 
     
     
     
     
Diluted earnings per share:
     
     
     
     
   Net income
 $0.02 
 $0.02 
 $0.07 
 $0.04 
 
     
     
     
     
Weighted average shares outstanding:
     
     
     
     
   Basic
  26,924,381 
  26,924,381 
  26,924,381 
  26,924,381 
   Diluted
  26,939,631 
  26,924,381 
  26,939,631 
  26,924,381 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
1
 
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
Assets
 
(unaudited)
 
 
 
 
Current assets:
 
 
 
 
 
 
   Cash and cash equivalents
 $5,052,617 
 $4,510,660 
   Trade receivables, net of allowances
  2,857,515 
  2,997,743 
   Inventories
  9,364,073 
  9,509,454 
   Current right-of-use assets from operating leases
  1,165,444 
  1,160,658 
   Prepaid expenses
  1,442,353 
  172,834 
 
     
     
Total current assets
  19,882,002 
  18,351,349 
Note receivable
  1,500,000 
  - 
Property and equipment, net
  1,223,062 
  1,351,039 
Goodwill
  1,367,109 
  1,367,109 
Intangible assets, net
  3,191,661 
  3,394,073 
Operating lease right-of-use assets
  1,718,297 
  2,335,040 
Other long-term assets
  300,478 
  204,784 
 
     
Total assets
 $29,182,609 
 $27,003,394 
 
     
     
Liabilities and stockholders’ equity
     
     
Current liabilities:
     
     
   Accounts payable-trade
 $829,843 
 $1,467,845 
   Notes payable, related party
  298,014 
  1,084,072 
   Notes payable
  1,668,200 
  - 
   Current operating lease liabilities
  1,194,553 
  1,175,109 
   Accrued expenses
  723,113 
  916,509 
   Customer deposits and other liabilities
  534,915 
  165,404 
 
     
Total current liabilities
  5,248,638 
  4,808,939 
Notes payable, related party, less current portion
  9,202,355 
  8,554,980 
Long-term operating lease liabilities, less current portion
  1,797,119 
  2,445,301 
 
     
Total liabilities
  16,248,112 
  15,809,220 
 
     
Commitments and contingencies
     
     
 
     
     
Stockholders’ equity:
     
     
   Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding
  - 
  - 
   Common stock, $0.01 par value; 60,000,000 shares authorized; 26,924,381 shares issued and outstanding
  269,244 
  269,244 
   Additional paid-in capital
  40,172,677 
  40,172,677 
   Accumulated deficit
  (27,507,424)
  (29,247,747)
 
     
Total stockholders’ equity
  12,934,497 
  11,194,174 
 
     
Total liabilities and stockholders’ equity
 $29,182,609 
 $27,003,394 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
2
 
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Six Months Ended June 30,
 
2020
 
 
2019
 
 
 
(Unaudited)
 
 
(Unaudited)
 
Operations
 
 
 
 
 
 
Net income
 $1,740,323 
 $944,162 
Adjustments to reconcile net income to net cash provided by (used in) operations:
     
     
   Depreciation, amortization, and other
  359,435 
  159,672 
   Bad debt expense
  - 
  30,000 
   Changes in operating assets and liabilities:
     
     
      Trade receivables
  140,228 
  (361,079)
      Inventories
  145,381 
  (138,509)
      Prepaid expenses
  (1,269,517)
  (248,178)
      Other assets
  (95,695)
  (55,700)
      Accounts payable and accrued expenses
  (831,398)
  (949,957)
      Accounts payable, related party
  - 
  (3,074,021)
      Operating leases
  (16,782)
  105,764 
      Customer deposits and other liabilities
  369,511 
  (74,322)
 
     
     
         Net cash provided by (used in) operations
  541,486 
  (3,662,168)
 
     
     
Investing
     
     
Investment in note receivable
  (1,500,000)
  - 
Intangible assets
  - 
  (30,000)
Acquisition of the Echo Entities, net of cash acquired
  - 
  (5,770,350)
Purchase of property and equipment
  (29,046)
  (91,441)
 
     
     
         Net cash used in investing
  (1,529,046)
  (5,891,791)
 
     
     
Financing
     
     
Financing for the acquisition of the Echo Entities
  - 
  6,925,979 
Financing to pay off accounts payable, related party
  - 
  3,074,021 
Proceeds from Paycheck Protection Program Note
  1,668,200 
  - 
Payments on notes payable, related party
  (138,683)
  (225,653)
 
     
     
         Net cash provided by financing
  1,529,517 
  9,774,347 
 
     
     
 
     
     
 
     
     
Net change in cash and cash equivalents
  541,957 
  220,388 
Cash and cash equivalents, beginning of period
  4,510,660 
  1,453,941 
 
     
     
Cash and cash equivalents, end of period
 $5,052,617 
 $1,674,329 
 
     
     
  Supplemental Disclosures
     
     
  Cash paid during the period for:
     
     
          Interest
 $291,845 
 $92,058 
          Income taxes
 $- 
 $43,578 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3
 
  
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months ended June 30, 2019 and 2020
(Unaudited)
 
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional Paid-in
 
 
Accumulated
 
 
TotalStockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at March 31, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(31,673,825)
 $8,768,096 
 
     
     
     
     
     
     
     
 
     
     
     
     
     
     
     
 Net Income
  - 
  - 
  - 
  - 
  - 
  589,527 
  589,527 
 
     
     
     
     
     
     
     
Balances at June 30, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(31,084,298)
 $9,357,623 
 
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional Paid-in
 
 
Accumulated
 
 
TotalStockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at March 31, 2020
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(28,073,598)
 $12,368,323 
 
     
     
     
     
     
     
     
 Net Income
  - 
  - 
  - 
  - 
  - 
  566,174 
  566,174 
 
     
     
     
     
     
     
     
Balances at June 30, 2020
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(27,507,424)
 $12,934,497 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
  
 
4
 
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Six Months ended June 30, 2019 and 2020
(Unaudited)
 
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional Paid-in
 
 
Accumulated
 
 
Total Stockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(32,028,460)
 $8,413,461 
 
     
     
     
     
     
     
     
 
     
     
     
     
     
     
     
 Net Income
  - 
  - 
  - 
  - 
  - 
  944,162 
  944,162 
 
     
     
     
     
     
     
     
Balances at June 30, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(31,084,298)
 $9,357,623 
 
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional Paid-in
 
 
Accumulated
 
 
Total Stockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(29,247,747)
 $11,194,174 
 
     
     
     
     
     
     
     
 Net Income
  - 
  - 
  - 
  - 
  - 
  1,740,323 
  1,740,323 
 
     
     
     
     
     
     
     
Balances at June 30, 2020
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(27,507,424)
 $12,934,497 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5
 
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 — BASIS OF PRESENTATION
 
The condensed consolidated interim financial statements of Envela Corporation, a Nevada corporation, and its subsidiaries (the “Company” or “Envela”), included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the 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 and its subsidiaries engage in diverse business activities within the recommerce sector. These include recommercializing luxury hard assets, consumer electronics and IT equipment; and end-of-life recycling solutions. Envela assesses its inventory of recommerce purchases for their potential to be refurbished and resold as whole goods or component parts, or to be recycled for precious-metal value. Envela also offers comprehensive recycling solutions for a variety of other companies seeking responsibly to dispose of end-of-life products. Envela 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, “DGSE”). Through ECHG, LLC, the Company operates Echo Environmental Holdings (“Echo”), ITAD USA Holdings (ITAD” and together with Echo, the “Echo Entities”), and Teladvance (together with 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 a Nevada corporation, 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 operates five stores at the wholesale and retail levels, transacting throughout the United States via its facilities in Texas and South Carolina.
 
For over 40 years, DGSE has been a destination location for those seeking value and liquidity in reselling or trading jewelry, and in recycling the precious metals of items it elects not to sell as a whole good or as component parts. DGSE’s in-house staff of experts, including horologists, gemologists and authenticators, inspect items for authenticity and value, and share their market knowledge with its customers.
 
 
6
 
 
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 turn 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 Environmental Holdings, ITAD USA Holdings and Teladvance.
 
      NOTE 3 — ACCOUNTING POLICIES AND ESTIMATES
 
Financial Instruments
 
The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, accounts payable, accrued expenses and notes payable approximate fair value because of the immediate or short-term nature of these financial instruments.  Note receivable, note 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 to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method.
 
Goodwill
 
Goodwill is not amortized, but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year, or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to ECHG only and not the entire Company. ECHG has its own, separate financial information to perform goodwill impairment testing at least annually or if events indicate that those assets may be impaired. As a result of the current market and economic conditions related to COVID-19, in accordance with step 1 of the guidelines set forth in 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 June 30, 2020. The Company will continue to evaluate goodwill for the ECHG segment. For tax purposes, goodwill is amortized and deductible over fifteen years.
 
 
7
 
 
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:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Resale
 $8,533,714 
 $8,213,551 
Recycle
  210,418 
  401,468 
 
     
     
       Subtotal
  8,744,132 
  8,615,019 
 
     
     
ECHG
     
     
Resale
  140,162 
  351,958 
Recycle
  479,779 
  542,477 
 
     
     
       Subtotal
  619,941 
  894,435 
 
     
     
 
 $9,364,073 
 $9,509,454 
 
 
8
 
 
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 to acquire all of CExchange’s equity interests. 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. 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:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Land
 $55,000 
 $55,000 
Building and improvements
  1,561,649 
  1,561,649 
Machinery and equipment
  1,045,200 
  1,039,013 
Furniture and fixtures
  453,699 
  453,699 
Vehicles
  22,859 
  - 
 
  3,138,407 
  3,109,361 
Less: accumulated depreciation
  (2,026,616)
  (1,904,948)
 
     
     
     Sub-Total
  1,111,791 
  1,204,413 
 
     
     
ECHG
     
     
Building and improvements
  81,149 
  81,149 
Machinery and equipment
  27,497 
  27,497 
Furniture and fixtures
  93,827 
  93,827 
 
  202,473 
  202,473 
Less: accumulated depreciation
  (91,202)
  (55,847)
 
     
     
     Sub-Total
  111,271 
  146,626 
 
     
     
 
 $1,223,062 
 $1,351,039 
 
 
9
 
 
NOTE 7 — GOODWILL
 
The changes in goodwill is as follows:
 
 
 
June 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:
 
 
 
June 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
  (172,114)
  (137,502)
 
     
     
     Subtotal
  199,238 
  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
  (363,577)
  (195,777)
 
     
     
     Subtotal
  2,992,423 
  3,160,223 
 
     
     
 
 $3,191,661 
 $3,394,073 
 
 
10
 
 
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2020:
 
 
 
DGSE
 
 
ECHG
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
2020 (excluding the six months ended June 30, 2020)
 $31,388 
 $167,800 
 $199,188 
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 
 
     
     
     
 
 $199,238 
 $2,992,423 
 $3,191,661 
 
NOTE 9 — ACCRUED EXPENSES
 
      Accrued expenses consist of the following:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Accrued interest
 $6,690 
 $7,374 
CExchange fees
  48,000 
  - 
Professional fees
  64,553 
  125,200 
Board member fees
  - 
  7,500 
Insurance
  17,092 
  30,508 
Payroll
  52,013 
  157,148 
Property taxes
  85,000 
  - 
Sales tax
  44,936 
  115,451 
State income tax
  49,995 
  33,907 
 
     
     
     Subtotal
  368,279 
  477,088 
 
     
     
ECHG
     
     
Accrued interest
  15,174 
  16,724 
Insurance
  17,092 
  - 
Professional fees
  64,552 
  77,900 
Payroll
  58,939 
  79,342 
Property taxes
  6,833 
  - 
Sales tax
  11,271 
  7,852 
Credit card
  4,322 
  22,279 
State income tax
  43,388 
  27,963 
Material & shipping costs (COGS)
  133,262 
  207,361 
 
     
     
     Subtotal
  354,833 
  439,421 
 
     
     
 
 $723,112 
 $916,509 
 
 
11
 
 
NOTE 10 — SEGMENT INFORMATION
 
During the first quarter of fiscal 2020, Envela revised the way it views its financial information to align more closely with the Company’s strategy to engage in diverse recommerce activities through two principle business units—DGSE and ECHG. DGSE buys hard assets, and ECHG buys consumer electronics and IT equipment, all for either resale or recycling. Envela continues to report its revenue and operating expenses based on its DGSE and ECHG operating segments, and as in the first quarter 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 four locations throughout the Dallas/Fort Worth Metroplex, and Charleston Gold and Diamond Exchange, with one location in Charleston, South Carolina.
 
The ECHG segment includes Echo Environmental Holdings, ITAD USA Holdings and Teladvance. These three companies focus on reusing and recycling electronics. Echo and ITAD were acquired by the Company on May 20, 2019, and Teladvance was acquired on August 2, 2019, and therefore may not be comparable for the three and six months ending June 30, 2019 and June 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’s and ECHG’s financial results of operations for the three months ending June 30, 2020:
 
 
 
For The Three Months Ended
 
 
 
June 30, 2020
 
 
 
DGSE
 
 
ECHG
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Sales
 $14,349,029 
 $6,196,578 
 $20,545,607 
Cost of goods sold
  12,734,264 
  3,340,085 
  16,074,349 
 
     
     
     
     Gross profit
  1,614,765 
  2,856,493 
  4,471,258 
 
     
     
     
Expenses:
     
     
     
Selling, general and administrative expenses
  1,545,168 
  2,071,502 
  3,616,670 
Depreciation and amortization
  79,240 
  100,466 
  179,706 
 
     
     
     
 
  1,624,408 
  2,171,968 
  3,796,376 
 
     
     
     
     Operating income (loss)
  (9,643)
  684,525 
  674,882 
 
     
     
     
Other (income) expense:
     
     
     
     Other income, net
  (9,078)
  (42,788)
  (51,866)
     Interest expense
  44,100 
  100,197 
  144,297 
 
     
     
     
Income (loss) before income taxes
  (44,665)
  627,116 
  582,451 
 
     
     
     
Income tax expense
  4,262 
  12,015 
  16,277 
 
     
     
     
               Net income (loss)
 $(48,927)
 $615,101 
 $566,174 
 
 
12
 
 
The following separates DGSE’s and ECHG’s financial results of operations for the six months ending June 30, 2020:
 
 
 
For The Six Months Ended
 
 
 
June 30, 2020
 
 
 
DGSE
 
 
ECHG
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Sales
 $34,712,613 
 $11,662,137 
 $46,374,750 
Cost of goods sold
  30,733,666 
  5,868,546 
  36,602,212 
 
     
     
     
     Gross profit
  3,978,947 
  5,793,591 
  9,772,538 
 
     
     
     
Expenses:
     
     
     
Selling, general and administrative expenses
  3,418,174 
  4,023,696 
  7,441,870 
Depreciation and amortization
  156,281 
  203,154 
  359,435 
 
     
     
     
 
  3,574,455 
  4,226,850 
  7,801,305 
 
     
     
     
     Operating income
  404,492 
  1,566,741 
  1,971,233 
 
     
     
     
Other (income) expense:
     
     
     
     Other income, net
  (36,446)
  (57,110)
  (93,556)
     Interest expense
  88,893 
  200,719 
  289,612 
 
     
     
     
Income before income taxes
  352,045 
  1,423,132 
  1,775,177 
 
     
     
     
Income tax expense
  12,547 
  22,307 
  34,854 
 
     
     
     
               Net income
 $339,498 
 $1,400,825 
 $1,740,323 
 
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, to identify the performance obligations in the contract as we promise to deliver the purchased item or promised repairs in return for payment or future payment as a receivable. The third step is determining the transaction price of the contract obligation as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied.
 
Beginning in fiscal year 2020, Envela 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.
 
 
13
 
 
The following disaggregation of total revenue is listed by sales category and segment for the three months ended June 30, 2020 and 2019:
 
CONSOLIDATED
 
Three Months Ended June 30,            
 
 
  2020           
  2019           
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $13,421,969 
 $1,444,814 
  10.8%
 $16,830,609 
 $2,012,914 
  12.0%
Recycled
  927,060 
  169,951 
  18.3%
  1,748,028 
  256,914 
  14.7%
 
    
    
    
    
    
    
     Subtotal
  14,349,029 
  1,614,765 
  11.3%
  18,578,637 
  2,269,828 
  12.2%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  4,257,032 
  2,022,090 
  47.5%
  1,588,084 
  747,819 
  47.1%
Recycled
  1,939,546 
  834,403 
  43.0%
  770,716 
  347,668 
  45.1%
 
    
    
    
    
    
    
    Subtotal
  6,196,578 
  2,856,493 
  46.1%
  2,358,800 
  1,095,487 
  46.4%
 
    
    
    
    
    
    
 
 $20,545,607 
 $4,471,258 
  21.8%
 $20,937,437 
 $3,365,315 
  16.1%
 
The following disaggregation of total revenue is listed by sales category and segment for the six months ended June 30, 2020 and 2019:
 
CONSOLIDATED
 
Six Months Ended June 30,                
 
 
  2020           
  2019           
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $31,963,866 
 $3,492,247 
  10.9%
 $31,631,988 
 $4,046,349 
  12.8%
Recycled
  2,748,747 
  486,700 
  17.7%
  2,966,179 
  441,961 
  14.9%
 
    
    
    
    
    
    
     Subtotal
  34,712,613 
  3,978,947 
  11.5%
  34,598,167 
  4,488,310 
  13.0%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  7,783,260 
  3,442,266 
  44.2%
  1,588,084 
  747,819 
  47.1%
Recycled
  3,878,877 
  2,351,325 
  60.6%
  770,716 
  347,668 
  45.1%
 
    
    
    
    
    
    
    Subtotal
  11,662,137 
  5,793,591 
  49.7%
  2,358,800 
  1,095,487 
  46.4%
 
    
    
    
    
    
    
 
 $46,374,750 
 $9,772,538 
  21.1%
 $36,956,967 
 $5,583,797 
  15.1%
 
 
14
 
 
DGSE recognizes revenue from its over-the-counter retail and resale transactions, and its wholesale- dealer transactions when the merchandise is delivered and payment is made (whether immediate or via receivable obligation at one of our retail stores). We also recognize revenue upon the shipment of goods when resale and wholesale customers have fulfilled their obligation to pay or promise to pay through e-commerce or telephone sales. We account for shipping and handling costs as fulfillment costs after customers obtain control of the goods. We recycle material deemed to be past its useful life primarily to recover its precious-metal content. This material is sold to a Dallas-based refiner 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 June 30, 2019 and June 30, 2020 remained the same for both periods, 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.
 
 
15
 
 
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 seven operating leases—six in the Dallas/Fort Worth Metroplex and one in Charleston, South Carolina. Two leases expire this year. The lease for DGSE’s Southlake, Texas location expires July 31, 2020, with no renewal options. We have decided not to renew the lease and will be vacating the premises as of 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. We recently extended the lease for DGSE’s Euless, Texas location through June 30, 2025, with an option for an additional five years. ECHG’s lease for its location on Belt Line Road in Addison, Texas expires on December 31, 2020, with an initial 24-month renewal option, and a second renewal option for an additional 60 months. A portion of this building is sublet, and the rent received is applied against the rental expense for the building. ECHG’s lease for ITAD’s location on McKenzie Drive in Carrollton, Texas expires July 31, 2021 and has no renewal option. All of the Company’s seven leases are triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance. Leasing costs for the three months ended June 30, 2020 and 2019 was $342,740 and $276,581, respectively. Leasing costs for the six months ended June 30, 2020 and 2019 was $649,276 and 450,928, respectively, comprised of a combination of minimum lease payments and variable lease costs.
 
As of June 30, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases was 2.1 years and 5.5%, respectively. The Company’s future operating lease obligations that have not yet commenced are immaterial. For the three months ending June 30, 2020 and 2019, the Company’s cash paid for operating lease liabilities was $327,608 and $257,560, respectively. The Company’s cash paid for operating lease liabilities for the six months ended June 30, 2020 and 2019 was $672,039 and $431,906, respectively.
  
 
16
 
 
Future annual minimum lease payments as of June 30, 2020:
 
 
 
Operating
 
 
 
Leases
 
DGSE
 
 
 
2020 (excluding the six months ending June 30, 2020)
 $264,381 
2021
  479,162 
2022
  235,674 
2023
  212,854 
2024
  213,884 
2025 and thereafter
  64,087 
 
    
Total minimum lease payments
  1,470,042 
Less imputed interest
  (144,225)
 
    
      Subtotal
  1,325,817 
 
    
ECHG
    
2020 (excluding the six months ending June 30, 2020)
  398,364 
2021
  736,320 
2022
  644,702 
 
    
Total minimum lease payments
  1,779,386 
Less imputed interest
  (113,531)
 
    
      Subtotal
  1,665,855 
 
    
 
  2,991,672 
Less current portion
  (1,194,553)
 
    
Long term operating lease liability
 $1,797,119 
 
 
17
 
 
NOTE 13 — BASIC AND DILUTED AVERAGE SHARES
 
A reconciliation of basic and diluted weighted average common shares for the three months ended June 30, 2020 and 2019 is as follows:
 
 
 
For the Three Months Ended
 
 
 
June 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Basic weighted average shares
  26,924,381 
  26,924,381 
Effect of potential dilutive securities
  15,250 
  - 
Diluted weighted average shares
  26,939,631 
  26,924,381 
 
A reconciliation of basic and diluted weighted average common shares for the six months ended June 30, 2020 and 2019 is as follows:
 
 
 
For the Six Months Ended
 
 
 
June 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Basic weighted average shares
  26,924,381 
  26,924,381 
Effect of potential dilutive securities
  15,250 
  - 
Diluted weighted average shares
  26,939,631 
  26,924,381 
 
For the three and six months ended June 30, 2020 and 2019, there were 15,250 and 15,250 common stock options, warrants, and Restricted Stock Units (RSUs) unexercised, respectively.
 
 
18
 
 
NOTE 14 — LONG-TERM DEBT
 
 
 
 
Outstanding Balance
 
 
 
 
 
 
 
June 30,
 
 
December 31,
 
 
Current
 
 
 
 
2020
 
 
2019
 
 
Interest Rate
 
Maturity
DGSE
 
 
 
 
 
 
 
 
 
 
Note payable, related party (1)
 $2,906,914 
 $2,949,545 
  6.00%
 May 16, 2024
 
     
     
     
 
ECHG
     
     
     
 
Note payable, related party (1)
  6,593,455 
  6,689,507 
  6.00%
 May 16, 2024
 
     
     
     
 
Envela
     
     
     
 
Note payable (2)
  1,668,200 
  - 
     
 
 
     
     
     
 
Sub-Total
  11,168,569 
  9,639,052 
     
 
 
     
     
     
 
Current portion
  1,966,214 
  1,084,072 
     
 
 
     
     
     
 
 
 $9,202,355 
 $8,554,980 
     
 
 
(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. 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. 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) 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”). The Federal Loan is forgivable to the extent that certain criteria are met. We expect to apply for the forgiveness of the Federal Loan during the third quarter ending September 30, 2020, therefore, we are classifying the loan as short-term.
 
 
19
 
 
Future scheduled principal payments of our note payables, related party, as of June 30, 2020 are as follows:
 
Note payable, related party - DGSE
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the six months ended June 30, 2020)
 $45,888 
2021
  95,243 
2022
  101,117 
2023
  107,354 
2024
  2,557,312 
 
    
   Subtotal
  2,906,914 
 
    
Note payable, related party - ECHG
    
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the six months ended June 30, 2020)
  101,597 
2021
  212,086 
2022
  225,167 
2023
  239,055 
2024
  5,815,550 
 
    
   Subtotal
  6,593,455 
 
Note payable - Envela
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the six months ended June 30, 2020)
  1,668,200 
 
    
   Subtotal
  1,668,200 
 
    
 
 $11,168,569 
 
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 six months ended June 30, 2020 and 2019 was $0 and $0, respectively. 
 
 
20
 
 
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 three months ended June 30, 2019, the Related Trading Partner accounted for 2% of sales and 3% of purchases. For the three months ended June 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 June 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 June 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 six months ended June 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 common stock, which then represented 47.7% of the Company’s common stock outstanding, to John R. Loftus, he 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 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, 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 six months ended June 30, 2020 and 2019, the Company paid Mr. Loftus $289,167 and $45,990, respectively, in interest on the Company’s outstanding note payables, related party.
 
 NOTE 17 — SUBSEQUENT EVENTS
 
On February 18, 2020, the Company signed an initial agreement for the purchase of a retail building for its next Dallas Gold & Silver Exchange location, in Lewisville, Texas for $1.4 million. The Company renegotiated the agreement and signed a new purchase contract on May 22, 2020 for $1.195 million. We closed the purchase of the retail building on July 9, 2020. We financed 80% of the purchase price for this location with a loan from Truist Bank (f/k/a BB&T Bank) in the amount of $956,000 priced at a fixed interest rate of 3.65% per annum, amortized over 20 years, with a 10 year term.
 
 
21
 
 
On June 24, 2020, the Company signed an initial agreement for the purchase of a retail building for its next Dallas Gold & Silver Exchange location, in Grapevine, Texas for $620,000. We have until August 13, 2020 to complete the associated inspections and due diligence. We expect to close the purchase of the retail building during the third fiscal quarter of 2020. We expect to finance approximately 80% of the purchase price for this location with a bank loan similar to those described above for the Lewisville, Texas location. The Company chose to include this as a subsequent event due to the uncertainty of the transaction becoming binding since we have until August 13, 2020 to perform our due diligence and associated inspections. There is no assurance that the Company will close the building purchase.
 
The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global economic business conditions. Future sales on products like ours could decline due to increased commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic, the ultimate impact is highly uncertain and subject to change. We have seen an adverse impact on the Company’s sales for the quarter ended June 30, 2020, and the pandemic may continue to have a negative impact on our operations. The duration of any such impact cannot be predicted, and the Company believes additional liquidity is necessary to support ongoing operations during this period of uncertainty. The Company 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 “PPP Loan”). Subject to the terms of the note, the PPP 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 expect to apply for the forgiveness of the Federal Loan during the third quarter ending September 30, 2020. There is no assurance that the Company will be granted forgiveness of the Federal Loan.
 
 
 
22
 
 
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, the parent, and all of its direct and indirect subsidiaries.
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q for the quarter ended June 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, 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 marked decline in DGSE sales during the second quarter of fiscal year 2020, and significantly affected the Company's current-quarter results. The Company established safety protocols by wearing masks and social distancing where possible. If possible, administrative personnel currently work from home. The Company had no layoffs or terminations due to the pandemic, although there has been reduced revenue from governmental shut-in orders. Although retail investors’ demand for precious-metal coins appears to have contributed to higher gold pricesjewelry 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 (“WGC”). Over the longer term, the WGC believes that recycled-gold volumes could likely rise once restrictions are lifted, with consumers looking for liquid assetssuch as goldto help alleviate economic hardship caused by the lockdown.
 
 
23
 
 
The following disaggregation of total revenue is listed by sales category and segment for the three months ended June 30, 2020:
 
CONSOLIDATED
 
Three Months Ended June 30,              
 
 
 
2020        
 
 
2019        
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $13,421,969 
 $1,444,814 
  10.8%
 $16,830,609 
 $2,012,914 
  12.0%
Recycled
  927,060 
  169,951 
  18.3%
  1,748,028 
  256,914 
  14.7%
 
    
    
    
    
    
    
     Subtotal
  14,349,029 
  1,614,765 
  11.3%
  18,578,637 
  2,269,828 
  12.2%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  4,257,032 
  2,022,090 
  47.5%
  1,588,084 
  747,819 
  47.1%
Recycled
  1,939,546 
  834,403 
  43.0%
  770,716 
  347,668 
  45.1%
 
    
    
    
    
    
    
    Subtotal
  6,196,578 
  2,856,493 
  46.1%
  2,358,800 
  1,095,487 
  46.4%
 
    
    
    
    
    
    
 
 $20,545,607 
 $4,471,258 
  21.8%
 $20,937,437 
 $3,365,315 
  16.1%
 
The following disaggregation of total revenue is listed by sales category and segment for the six months ended June 30, 2020:
 
CONSOLIDATED
 
Six Months Ended June 30,                
 
 
 
2020        
 
 
2019        
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $31,963,866 
 $3,492,247 
  10.9%
 $31,631,988 
 $4,046,349 
  12.8%
Recycled
  2,748,747 
  486,700 
  17.7%
  2,966,179 
  441,961 
  14.9%
 
    
    
    
    
    
    
     Subtotal
  34,712,613 
  3,978,947 
  11.5%
  34,598,167 
  4,488,310 
  13.0%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  7,783,260 
  3,442,266 
  44.2%
  1,588,084 
  747,819 
  47.1%
Recycled
  3,878,877 
  2,351,325 
  60.6%
  770,716 
  347,668 
  45.1%
 
    
    
    
    
    
    
    Subtotal
  11,662,137 
  5,793,591 
  49.7%
  2,358,800 
  1,095,487 
  46.4%
 
    
    
    
    
    
    
 
 $46,374,750 
 $9,772,538 
  21.1%
 $36,956,967 
 $5,583,797 
  15.1%
 
 
24
 
 
Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019
 
Revenues. Revenues related to DGSE’s continuing operations decreased by $4,229,608, or 23%, during the three months ended June 30, 2020, to $14,349,029, as compared to $18,578,637 during the same period in 2019. Resale revenue, such as bullion, jewelry, watches and rare coins, decreased by $3,408,640, or 20%, during the three months ended June 30, 2020, to $13,421,969 as compared to $16,830,609 during the same period in 2019. Recycled-material sales decreased 47% to $927,060 for the three months ended June 30, 2020, as compared to $1,748,028 for the three months ended June 30, 2019. Revenues decreased for resale items for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to the COVID-19 pandemic. As a result of the COVID-19 pandemic, the governing authorities limited what could be sold for most of the three months ended June 30, 2020. Although the retail stores remained open, their sales were limited to bullion and bullion-related products for a majority of the three months ended June 30, 2020. The decrease in recycled-materials revenue is primarily due to the COVID-19 pandemic. As a result of the COVID-19 pandemic, people were instructed to remain inside their homes and practice social distancing, and consequently customer traffic was down for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
 
Revenue related to ECHG for the three months ended June 30, 2020 was $6,196,578. Resale revenue was $4,257,032, or 69% of ECHG sales compared to recycled sales of $1,939,546 or 31%. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the three months ended June 30, 2019 is not comparable to the three months ended June 30, 2020.
 
Gross Profit. Gross Profit related to DGSE’s operations for the three months ended June 30, 2020, decreased by $655,063, to $1,614,765 as compared to $2,269,828 during the same period in 2019. The decrease in total gross profit was due primarily to the decrease in sales velocity for both the resale items and the recycled sales due to the effects of the COVID-19 pandemic. Even though there were decreased revenues for the resale items, there were also lower gross-margin percentages due to the change in market conditions resulting from the COVID-19 pandemic.
 
Gross Profit related to ECHG for the three months ended June 30, 2020 was $2,856,493. Gross profit for resale revenue was $2,022,090, or 71% of ECHG gross profit, compared to recycled gross profit of $834,403, or 29%. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the three months ended June 30, 2019 is not comparable to the three months ended June 30, 2020.
 
Selling, General and Administrative Expenses. For the three months ended June 30, 2020, Selling, General and Administrative (“SG&A”) expenses for DGSE decreased by $329,430, or 17.6%, to $1,545,168, as compared to $1,874.598 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 $2,071,946 for the three months ended June 30, 2020. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the three months ended June 30, 2019 is not comparable to the three months ended June 30, 2020.
 
Depreciation and Amortization. For the three months ended June 30, 2020, depreciation and amortization expense for DGSE was $79,240, compared to $74,449 for the same period in 2019, an increase of $4,791, or 6.4%. The increase of $4,791 from the three months ending June 30, 2020 compared to the three months ending June 30, 2019, is primarily due to a vehicle purchase during the first quarter of 2020 and amortization expenses from additional POS costs during the year to be amortized.
 
The Depreciation and Amortization expense for ECHG consisted of depreciation of $16,566 and amortization of $83,900 for the three months ending June 30, 2020. Amortization for the three months ended June 30, 2020, is from the Echo Entities’ Purchase Price Allocation of intangibles amortized over 10 years. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the three months ended June 30, 2019 is not comparable to the three months ended June 30, 2020.
 
Interest Expense. For the three months ended June 30, 2020, interest expense for DGSE was $44,100, an increase of $18,443, or 72%, compared to $25,657 during the same period in 2019. The increase is primarily due to an increased interest rate on the note payable - trade, related party, that paid off the accounts payable, related party, outstanding balance on May 20, 2019.
 
 
25
 
 
The interest expense for ECHG was $100,197 for the three months ending June 30, 2020, which is the interest paid and accrued for the three months ended June 30, 2020 for the note payable, related party from the purchase of the Echo Entities. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the three months ended June 30, 2019 is not comparable to the three months ended June 30, 2020.
 
Income Tax Expense. For the three months ending June 30, 2020, income tax expense was $16,277, an increase of $2,858, or 21%, compared to $13,419 for the three months ending June 30, 2019. The effective income tax rate was 2.8% and 2.2% for the three months ending June 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, changes in reserves for uncertain tax positions and unused NOL carryforwards.
 
Net Income. We recorded a net income of $566,174 for the three months ended June 30, 2020, compared to a net income of $589,527 for the three months ended June 30, 2019, a decrease in net income of $23,353, which is due primarily from the economic effects of the COVID-19 pandemic, offset by the addition of the Echo Entities acquired on May 20, 2019.
 
Earnings Per Share. For the three months ending June 30, 2020, our net income per basic and diluted shares attributable to common stockholders was $.02, compared to $.02 per basic and diluted shares for the three months ending June 30, 2019.
 
Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019
 
Revenues. Revenues related to DGSE’s operations increased by $114,446, or 1%, during the six months ended June 30, 2020, to $34,712,613, as compared to $34,598,167 during the same period in 2019. Resale revenue, such as bullion, jewelry, watches and rare coins, increased $331,878, or 1%, compared to the six months ended June 30, 2019. Recycled revenue decreased by approximately 1%, compared to the prior year six months. Revenues increased slightly for the six months ending June 30, 2020, compared to the six months ending June 30, 2019, primarily due to the COVID-19 pandemic, which slowed down the increase in our velocity of sales.
 
Revenue related to ECHG for the six months ended June 30, 2020 was $11,662,137, consisting of $7,783,260 of resale revenue, or 67% of ECHG sales, compared to $3,878,877 of recycled sales, or 33%. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the six months ended June 30, 2019 is not comparable to the six months ended June 30, 2020.
 
Gross Profit. Gross profit for the six months ended June 30, 2020, related to DGSE, decreased by $509,363, or 11%, to $3,978,947, as compared to $4,488,310 during the same period in 2019. The decrease in gross profit was primarily due to increased sales with lower margins and a decrease in sales of inventory with higher margin. The shift was due to the COVID-19 pandemic. As a percentage of revenue, gross margin decreased to 11.5% for the six months ended June 30, 2020, compared to 13.0% for the same period in 2019.
 
Gross profit related to the Echo Entities for the six months ended June 30, 2020, was $5,793,591, consisting of gross profit for resale revenue of $3,442,266, or 59% of ECHG gross profit, and recycled gross profit accounting of $2,351,325, or 41%. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the six months ended June 30, 2019 is not comparable to the six months ended June 30, 2020.
 
Selling, General and Administrative Expenses. For the six months ended June 30, 2020, DGSE’s SG&A expenses decreased by $197,765, or 5%, to $3,418,174, as compared to $3,615,939 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 $4,023,696 for the six months ended June 30, 2020. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the six months ended June 30, 2019 is not comparable to the six months ended June 30, 2020.
 
 
26
 
 
Depreciation and Amortization. For the six months ended June 30, 2020, DGSE’s depreciation and amortization expense was $156,281, compared to $148,773 for the same period in 2019. The increase is primarily due to additional POS costs that are being amortized.
 
The Depreciation and Amortization expense for ECHG consisted of depreciation of $35,354 and amortization of $167,800 for the six months ended June 30, 2020. Amortization for the six months ended June 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 six months ended June 30, 2019 is not comparable to the six months ended June 30, 2020.
 
Interest Expense. For the six months ended June 30, 2020, the interest expense for DGSE was $88,893, an increase of $28,687, or 48%, compared to $60,206 during the same period in 2019. The increase is primarily due to an increased interest rate on the note payable - trade, related party, that paid off the accounts payable, related party, outstanding balance on May 20, 2019.
 
The interest expense for ECHG was $200,719 for the six months ended June 30, 2020, which is the interest paid and accrued for the six months ended June 30, 2020 for the note payable, related party from the purchase of the Echo Entities. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019, therefore, the six months ended June 30, 2019 is not comparable to the six months ended June 30, 2020.
  
Income Tax Expense. For the six months ending June 30, 2020, income tax expense was $34,854, an increase of $11,199, or 47%, compared to $23,655 for the six months ended June 30, 2019. The effective income tax rate was 1.9% and 2.4% for the six months ended June 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, changes in reserves for uncertain tax positions and unused NOL carryforwards.
 
Net Income. We recorded a net income of $1,740,323 for the six months ended June 30, 2020, compared to a net income of $944,162 for the six months ended June 30, 2019, an increase in net income of $796,161, which is due primarily from the additional net income attributable to ECHG.
 
Earnings Per Share. For the six months ended June 30, 2020, our net income per basic and diluted shares attributable to common stockholders was $.07, compared to $.04 per basic and diluted shares for the six months ended June 30, 2019.
 
Liquidity and Capital Resources
 
During the six months ended June 30, 2020, cash flows provided by operations totaled $541,486, and during the six months ended June 30, 2019 cash flows used in operations totaled $3,662,168, an increase of $4,203,654. Cash provided by operations for the six months ended June 30, 2020, was driven largely by the reduction of trade receivables of $140,228, a reduction of inventories of $145,381, an increase of customer deposits and other liabilities of $369,511 and net income added to non-cash items of depreciation and amortization of $2,099,758, offset by a decrease in accounts payable and accrued expenses of $831,398 and an increase in prepaid expenses of $1,269,517. Cash used in operations for the six months ended June 30, 2019, was driven largely by the reduction of accounts payable and accrued expenses of $949,957, the increase of prepaid expenses of $248,178, the increase in trade receivables of $361,079 and the reduction of accounts payable, related party of $3,074,021, offset by net income added non-cash items of depreciation, amortization, bad debt expense of $1,133,834.
 
During the six months ended June 30, 2020 and 2019, cash flows used in investing activities totaled $1,529,046 and $5,891,791, respectively, a period-over-period decrease of $4,362,745. The use of cash in investing activities during the six months ended June 30, 2020 was primarily due to investing in a note receivable of $1,500,000 to CExchange. The use of cash in investing activities during the six months ended June 30, 2019 was the result of purchasing the Echo Entities for $5,770,350, net of cash.
 
During the six months ended June 30, 2020 and 2019, cash flows provided by financing totaled $1,529,517 and $9,774,347, respectively, a period-over-period decrease of $8,244,830. The cash provided by financing during the six months ended June 30, 2020 were payments made against the notes payable, related party of $138,683, offset by the Federal Loan received of $1,668,200. The cash provided by financing during the six months ended June 30, 2019 was payments made against the notes payable, related party of $225,653, 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.
 
 
27
 
 
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 is 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 “PPP Loan”). On May 18, 2020, the Company renewed and increased our Texas Bank & Trust Co. line of credit from $1,000,000 to $3,500,000, and from a one-year term to a two-year term. The loan agreement 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 $75,000 during the next twelve months. These expenditures will be driven by build-out expenses of properties purchased for DGSE retail locations.
 
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 June 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.
 
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.
 
 
28
 
 
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 effect on the Company's financial condition, results of operations or cash flows.
 
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.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
Not applicable
 
 
29
 
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
Not applicable
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable
 
ITEM 5. OTHER INFORMATION
 
Not applicable
 
ITEM 6. EXHIBITS
 
ExhibitNumber
 
Description
 
Filed
Herein
 
Incorporated by Reference
 
Form
 
Date Filed with SEC
 
Exhibit Number
 
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
 
X
 
 
 
 
 
 
 
 
 
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen
 
X
 
 
 
 
 
 
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
 
X
 
 
 
 
 
 
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen
 
X
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
X
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
X
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
X
 
 
 
 
 
 
 
 
 
 
 
30
 
 
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: August 6, 2020   
By:  
/s/ JOHN R. LOFTUS
 
 
 
John R. Loftus
 
 
 
Chief Executive Officer
(Principal Executive Officer) 
 
 
 
 
Date: August 6, 2020   
 
/s/ BRET A. PEDERSEN
 
 
 
Bret A. Pedersen
 
 
 
Chief Financial Officer
(Principal Accounting Officer) 
 
 
 
 
 
 
 
31