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Envela Corp - Quarter Report: 2020 March (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 March 31, 2020
 
 
OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From                  to                 
 
Commission File Number 001-11048
 
 
ENVELA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
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 March 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $19.285 million based on the closing sale price as reported on the NYSE American. As of March 31, 2020, there were 26,924,381 shares of common stock outstanding.
 

 
 
 
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
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PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
(Unaudited)
 
 
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
 
2019
 
Revenue:
 
 
 
 
 
 
   Sales
 $25,829,143 
 $16,019,530 
   Cost of goods sold
  20,527,863 
  13,801,048 
 
    
    
      Gross margin
  5,301,280 
  2,218,482 
 
    
    
Expenses:
    
    
   Selling, General & Administrative Expenses
  3,825,200 
  1,741,340 
   Depreciation and Amortization
  179,729 
  74,324 
 
    
    
      Total cost of revenue
  4,004,929 
  1,815,664 
 
    
    
Operating income
  1,296,351 
  402,818 
Other (income) expense, net
  (41,690)
  3,398 
Interest expense
  145,315 
  34,549 
 
    
    
Income before income taxes
  1,192,726 
  364,871 
Income tax expense
  18,577 
  10,236 
 
    
    
Net income
 $1,174,149 
 $354,635 
 
    
    
Basic earnings per share:
    
    
   Net income
 $0.04 
 $0.01 
 
    
    
Diluted earnings per share:
    
    
   Net income
 $0.04 
 $0.01 
 
    
    
Weighted average shares outstanding:
    
    
   Basic
  26,924,381 
  26,924,381 
   Diluted
  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
 
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
Assets
 
(unaudited)
 
 
 
 
Current assets:
 
 
 
 
 
 
   Cash and cash equivalents
 $3,943,925 
 $4,510,660 
   Trade receivables, net of allowances
  2,472,225 
  2,997,743 
   Inventories
  9,397,523 
  9,509,454 
   Current right-of-use assets from operating leases
  1,162,438 
  1,160,658 
   Prepaid expenses
  336,147 
  172,834 
 
    
Total current assets
  17,312,258 
  18,351,349 
Note receivable
  1,500,000 
  - 
Property and equipment, net
  1,300,756 
  1,351,039 
Goodwill
  1,367,109 
  1,367,109 
Intangible assets, net
  3,293,673 
  3,394,073 
Operating lease right-of-use assets
  2,012,024 
  2,335,040 
Other long-term assets
  199,663 
  204,784 
Total assets
 $26,985,483 
 $27,003,394 
 
    
    
 
    
    
Liabilities and stockholders’ equity
    
    
Current liabilities:
    
    
   Accounts payable-Trade
 $806,820 
 $1,467,845 
   Notes payable, related party
  293,779 
  1,084,072 
   Current operating lease liabilities
  1,161,157 
  1,175,109 
   Accrued expenses
  929,730 
  916,509 
   Customer deposits and other liabilities
  46,694 
  165,404 
 
    
Total current liabilities
  3,238,180 
  4,808,939 
Notes payable, related party, less current portion
  9,275,869 
  8,554,980 
Long-term operating lease liabilities, less current portion
  2,103,111 
  2,445,301 
Total liabilities
  14,617,160 
  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
  (28,073,598)
  (29,247,747)
 
    
Total stockholders’ equity
  12,368,323 
  11,194,174 
 
    
Total liabilities and stockholders’ equity
 $26,985,483 
 $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 Three Months Ended March 31,
 
2020
 
 
2019
 
 
 
(Unaudited)
 
 
(Unaudited)
 
Operations
 
 
 
 
 
 
Net income
 $1,174,149 
 $354,635 
Adjustments to reconcile net income to net cash provided by (used in) operations:
    
    
   Depreciation, amortization, and other
  179,729 
  74,324 
   Bad debt expense
  - 
  30,000 
   Changes in operating assets and liabilities:
    
    
      Trade receivables
  525,519 
  (105,606)
      Inventories
  111,931 
  (550,567)
      Prepaid expenses
  (163,312)
  (185,536)
      Intangible Assets
  - 
  (15,000)
      Other assets
  5,120 
  (451)
      Accounts payable and accrued expenses
  (647,804)
  (564,868)
      Accounts payable, related party
  - 
  (13,853)
      Operating leases
  (34,907)
  59,848 
      Customer deposits and other liabilities
  (118,710)
  (43,132)
         Net cash provided by (used in) operations
  1,031,715 
  (960,206)
 
    
    
Investing
    
    
Investment in note receivable
  (1,500,000)
  - 
Purchase of property and equipment
  (29,046)
  (14,175)
         Net cash used in investing
  (1,529,046)
  (14,175)
 
    
    
Financing
    
    
Payments on notes payable, related party
  (69,404)
  - 
         Net cash used in financing
  (69,404)
  - 
 
    
    
 
    
    
Net change in cash and cash equivalents
  (566,735)
  (960,206)
Cash and cash equivalents, beginning of period
  4,510,660 
  1,453,941 
Cash and cash equivalents, end of period
 $3,943,925 
 $493,735 
 
    
    
  Supplemental Disclosures
    
    
  Cash paid during the period for:
    
    
          Interest
 $121,718 
 $34,549 
          Income taxes
 $- 
 $- 
 
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 March 31, 2019 and 2020
(Unaudited)
 
 
 
 
 
Common Stock
 
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Accumulated Deficit
 
 
Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(32,028,460)
 $8,413,461 
 
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
 Net Income
  - 
  - 
  - 
  - 
  - 
  354,635 
  354,635 
 
    
    
    
    
    
    
    
Balances at March 31, 2019
    
    
    
    
    
    
    
 
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(31,673,825)
 $8,768,096 
 
 
 
 
Common Stock
 
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Accumulated Deficit
 
 
Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(29,247,747)
 $11,194,174 
 
    
    
    
    
    
    
    
 Net Income
  - 
  - 
  - 
  - 
  - 
  1,174,149 
  1,174,149 
 
    
    
    
    
    
    
    
Balances at March 31, 2020
    
    
    
    
    
    
    
 
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(28,073,598)
 $12,368,323 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4
 
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 Commission’s rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company suggests that these financial statements be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (such fiscal year, “Fiscal 2019” and such Annual Report on Form 10-K, the “Fiscal 2019 10-K”). In the opinion of the management of the Company, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly its results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Certain reclassifications were made to the prior year's consolidated financial statements to conform to the current year presentation.
 
NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
 
 
Envela and its subsidiaries engage in diverse business activities within the recommerce sector. These include recommercializing luxury hard assets, consumer electronics and IT equipment; and end-of-life recycling solutions. Envela assesses its inventory of recommerce purchases for their potential to be refurbished and resold as whole goods or component parts, or to be recycled for precious-metal value. Envela also offers comprehensive recycling solutions for a variety of other companies seeking responsibly to dispose of end-of-life products. Envela operates primarily via two recommerce business segments. Through DGSE, LLC the Company recommercializes luxury hard assets via Dallas Gold and Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands (collectively, “DGSE”). Through ECHG, LLC, the Company operates Echo Environmental Holdings, ITAD USA Holdings, and Teladvance (collectively, “ECHG”), which recommercialize primarily consumer electronics and IT equipment, and provide end-of-life recycling services for various companies across many industries. Envela conducts its recommerce operations at retail and wholesale levels, through distributors, resellers, dedicated stores and online. The Company also owns and operates other businesses and brands engaged in a variety of activities, as identified herein. Envela is a Nevada corporation, headquartered in Dallas, Texas.
 
During the first quarter of fiscal 2020, Envela revised the way we review our financial information to align more closely with the Company’s strategy to engage in diverse recommerce activities through two principle business units—DGSE and ECHG. The objective of segment reporting is to provide information about the different types of business activities in which a public entity engages. Although our Company’s overall strategy is recommerce we feel there are several distinct segments within recommerce. DGSE buys hard assets, and ECHG buys consumer electronics and IT equipment, for either resale or recycling. Envela will continue to report its revenue and operating expenses based on its DGSE and ECHG operating segments, and beginning in fiscal year 2020, Envela will disaggregate its revenue, within the operating segments, based on its resale and recycle presentation basis. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation.
 
DGSE buys to resell or recycle luxury hard assets, including jewelry, diamonds, fine watches, rare coins and currency, precious-metal bullion, collectables and other valuables. DGSE reconditions items for resale as a whole good or component parts, or recycles them by refining their precious metals for sale. These metals include gold, silver, platinum and palladium. DGSE operates five stores at the wholesale and retail levels, transacting throughout the United States via its facilities in Texas and South Carolina.
 
For over 40 years, DGSE has been a destination location for those seeking value and liquidity in reselling or trading jewelry, and in recycling the precious metals of items it elects not to sell as a whole good or as component parts. DGSE’s in-house staff of experts, including horologists, gemologists and authenticators, inspect items for authenticity and value, and share their market knowledge with its customers.
 
ECHG buys consumer electronics and IT equipment for resale or recycling from businesses and other organizations, such as school districts. Items designated for resale as a whole or component parts get extended operational life by first erasing any existing data and then refurbishing them before resale. ECHG recycles goods by removing usable components for resale as components, or by extracting the goods’ valuable metals (or other materials) for sale to downstream recycling companies who further process our metal for subsequent resale. Our customers are companies and organizations that are based domestically and internationally.
 
ECHG also provides transportation and product tracking, when needed, as part of its comprehensive end-of-life recycling and responsible-disposal services. Our goal is to extend the useful life of electronics through recommerce whenever possible. Resale and reuse conserve energy and raw materials required to make new products and turn obsolete IT assets into revenue.
 
 
5
 
 
 
 
 
The interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated.

The Company operates its business as two operating and reportable segments under a variety of banners. As referenced above, DGSE includes Charleston Gold & Diamond Exchange and Dallas Gold & Silver Exchange. ECHG includes Echo Environmental Holdings, ITAD USA Holdings and Teladvance.
 
      NOTE 3 — ACCOUNTING POLICIES AND ESTIMATES
 
Financial Instruments
 
The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, accounts payable and accrued expenses approximate fair value because of the immediate or short-term nature of these financial instruments. Notes payable, related party approximate fair value due to the market interest rate charged.
 
Earnings Per Share
 
Basic earnings per common share is computed by dividing net earnings available to holders of the Company’s common stock by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method.
 
Goodwill
 
Goodwill is not amortized, but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year, or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to ECHG only and not the entire Company. ECHG has its own, separate financial information to perform goodwill impairment testing at least annually or if events indicate that those assets may be impaired. As a result of the current market and economic conditions related to COVID-19, in accordance with step 1 of the guidelines set forth in ASC 350-20-35-3A, the Company concluded there were no impairments of goodwill that resulted from triggering events due to COVID-19 as of March 31, 2020. The Company will continue to evaluate goodwill for the ECHG segment. For tax purposes, goodwill is amortized and deductible over fifteen years.
 
Recent Accounting Pronouncements
 
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment changes to be based on the first step in today’s two-step impairment test, thus eliminating step two from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step two of the goodwill impairment test. For public companies, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted this pronouncement on January 1, 2020. There was no impact in our condensed consolidated financial statements.
 
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The FASB issued several ASUs after ASU 2016-13 to clarify implementation guidance and to provide transition relief for certain entities. ASU 2016-13, due to Envela being a smaller reporting company, is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact of adopting ASU 2016-13 and related amendments will have on its consolidated financial position, results of operations and cash flows.
 
 
 
6
 
 
NOTE 4 — INVENTORIES
 
A summary of inventories is as follows:
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Resale
 $8,440,885 
 $8,213,551 
Recycle
  147,783 
  401,468 
 
    
    
       Subtotal
  8,588,668 
  8,615,019 
 
    
    
ECHG
    
    
Resale
  202,512 
  351,958 
Recycle
  606,343 
  542,477 
 
    
    
       Subtotal
  808,855 
  894,435 
 
    
    
 
 $9,397,523 
 $9,509,454 
 
      NOTE 5 — NOTE RECEIVABLE
 
 
ECHG, LLC, wholly owned by the Company, entered into an agreement with CExchange, LLC on February 15, 2020, to lend $1,500,000 bearing interest at eight and one-half percent (8.5%) with interest only payments due quarterly. The loan matures on February 20, 2023. The parties also agreed to warrant and call-option agreements to acquire all of CExchange’s equity interests. CExchange is the leader in retail trade-in services, providing in-store and online solutions for most of the major consumer electronics retailers in the United States. CExchange helps retailers provide in-store trade-in programs designed to allow customers to exchange their old technology for cash in minutes. This fits well with ECHG’s core business of refurbishing and reusing cell telephones. There is no assurance that the Company will exercise its warrant or call option.
 
A summary of note receivables is as follows:
 
 
 
March 31,
 
 
March 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Opening balance
 $- 
 $- 
Additions
  1,500,000 
  - 
Reductions
  - 
  - 
 
    
    
 
 $1,500,000 
 $- 
 

 
7
 

      NOTE 6 — PROPERTY AND EQUIPMENT
 
 
 Property and equipment consist of the following:
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Land
 $55,000 
 $55,000 
Building and improvements
  1,561,649 
  1,561,649 
Machinery and equipment
  1,045,200 
  1,039,013 
Furniture and fixtures
  453,699 
  453,699 
Vehicles
  22,859 
  - 
 
  3,138,407 
  3,109,361 
Less: accumulated depreciation
  (1,965,489)
  (1,904,948)
 
    
    
  Sub-Total
  1,172,918 
  1,204,413 
 
    
    
ECHG
    
    
Building and improvements
  81,149 
  81,149 
Machinery and equipment
  27,497 
  27,497 
Furniture and fixtures
  93,827 
  93,827 
 
  202,473 
  202,473 
Less: accumulated depreciation
  (74,635)
  (55,847)
 
    
    
     Sub-Total
  127,838 
  146,626 
 
    
    
 
 $1,300,756 
 $1,351,039 
 
NOTE 7 — ACQUISITION
 
On May 20, 2019, ECHG, LLC (f/k/a Corrent Resources, LLC), a wholly owned subsidiary of the Company, entered into an asset purchase agreement with each of Echo Environmental, LLC and its wholly owned subsidiary ITAD USA, LLC (collectively, “Sellers”), pursuant to which the Sellers agreed to sell all of their assets, rights and interests of Echo Environmental, LLC and ITAD USA, LLC the (the “Acquired Assets”) for $6,925,979 (the “Echo Transaction”). The Sellers were wholly owned subsidiaries of Elemetal, LLC (“Elemetal”). John R. Loftus is the Company’s CEO, President and Chairman and owned approximately one-third of the equity interests of Elemetal prior to the Echo Transaction. The Company also paid a closing fee of $85,756 that was not part of the purchase price allocation. The fee is included in selling, general and administrative expenses.
 
On the same day, Mr. Loftus became the largest beneficial owner of the Company’s stock by purchasing all of the Company’s stock beneficially owned by Elemetal. As part of the transaction of acquiring the stock from Elemetal, Mr. Loftus no longer owns an equity interest in Elemetal. As an interested party, Mr. Loftus was familiar with Sellers’ operations.
 
In connection with the Echo Transaction, on May 20, 2019, ECHG, LLC executed and delivered to Mr. Loftus, a promissory note to which ECHG, LLC borrowed from Mr. Loftus $6,925,979, the proceeds of which were used to purchase the Acquired Assets.
 
 
8
 
 
As part of the Echo Transaction, goodwill was realized of $1,367,109, which is the purchase price less the fair value of the net assets purchased, as shown in the purchase price allocation in the following table. Goodwill is not amortized but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to ECHG only and not the whole Company. For federal income tax purposes, goodwill is amortized and deductible over fifteen years.

The purchase price was allocated to the fair value of assets and liabilities acquired as follows:
 
Description
 
Amount
 
 
 
 
 
Assets
 
 
 
Cash
 $1,049,462 
Account receivables
  1,025,615 
Inventories
  1,209,203 
Prepaids
  88,367 
Fixed assets
  191,208 
Right-of-use assets
  2,350,781 
Intangible Assets
  3,356,000 
Other assets
  88,998 
 
    
Liabilities
    
Account payables
  (723,043)
Accrued liabilities
  (721,483)
Operating lease liabilities
  (2,350,781)
Other long-term liabilities
  (5,457)
 
    
Net assets
  5,558,870 
 
    
Goodwill
  1,367,109 
 
    
Total Purchase Price
 $6,925,979 
 
The following pro forma combines the results of ECHG and the Company’s results of operations for the three months ended March 31, 2020 and 2019 as if they were combined the whole quarter:
 
 
 
Combined
 
 
Pro forma Combined
 
 
 
For the Three Months Ended
 
 
For the Three Months Ended
 
 
 
 March 31, 2020
 
 
 March 31, 2019
 
 
 
 (unaudited)
 
 
 (unaudited)
 
 
 
 
 
 
 
 
Revenue
 $25,829,143 
 $19,302,869 
 
    
    
Income (loss) from continuing operations
 $1,174,149 
 $(1,694,654)
 
    
    
Net income (loss)
 $1,174,149 
 $(1,694,654)
 
    
    
Basic net income (loss) per common share
 $0.04 
 $(0.06)
 
    
    
Diluted net income (loss) per common share
 $0.04 
 $(0.06)
 
 
9
 
 
NOTE 8 — GOODWILL
 
The changes in the carrying amount of goodwill for the three months ended March 31, 2020 and 2019, are as follows:
 
 
 
March 31,
 
 
March 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Opening balance
 $1,367,109 
 $- 
Additions
  - 
  - 
Acquisition adjustment
  - 
  - 
Impairment adjustment
  - 
  - 
 
    
    
   Goodwill
 $1,367,109 
 $- 
 
NOTE 9 — INTANGIBLE ASSETS
 
Intangible assets consist of the following:
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Domain names
 $41,352 
 $41,352 
Point of sale system
  330,000 
  330,000 
 
  371,352 
  371,352 
Less: accumulated amortization
  (154,002)
  (137,502)
 
    
    
     Subtotal
  217,350 
  233,850 
 
    
    
ECHG
    
    
Trademarks
  1,483,000 
  1,483,000 
Customer Contracts
  1,873,000 
  1,873,000 
 
  3,356,000 
  3,356,000 
Less: accumulated amortization
  (279,677)
  (195,777)
 
    
    
     Subtotal
  3,076,323 
  3,160,223 
 
    
    
 
 $3,293,673 
 $3,394,073 

 
 
10
 
The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2020:
 
 
 
DGSE
 
 
ECHG
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
2020 (excluding the three months ended March 31, 2020)
 $49,500 
 $251,700 
 $301,200 
2021
  66,000 
  335,600 
  401,600 
2022
  66,000 
  335,600 
  401,600 
2023
  35,850 
  335,600 
  371,450 
2024
  - 
  335,600 
  335,600 
Thereafter
  - 
  1,482,223 
  1,482,223 
 
    
    
    
 
 $217,350 
 $3,076,323 
 $3,293,673 
 
NOTE 10 — ACCRUED EXPENSES
 
      Accrued expenses consist of the following:
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Accrued interest
 $7,220 
 $7,374 
Professional fees
  67,993 
  125,200 
Board member fees
  - 
  7,500 
Insurance
  43,121 
  30,508 
Payroll
  162,361 
  157,148 
Property taxes
  51,000 
  - 
Sales tax
  76,927 
  115,451 
State income tax
  49,995 
  33,907 
 
    
    
     Subtotal
  458,617 
  477,088 
 
    
    
ECHG
    
    
Accrued interest
  16,376 
  16,724 
Insurance
  11,573 
  - 
Professional fees
  94,410 
  77,900 
Payroll
  145,423 
  79,342 
Sales tax
  11,271 
  7,852 
Credit card
  12,952 
  22,279 
State income tax
  38,111 
  27,963 
Material & shipping costs (COGS)
  140,997 
  207,361 
 
    
    
     Subtotal
  471,113 
  439,421 
 
    
    
 
 $929,730 
 $916,509 
 
 
 
11
 
 
 
NOTE 11 — SEGMENT INFORMATION
 
 
During the first quarter of fiscal 2020, Envela revised the way it views its financial information to align more closely with the Company’s strategy to engage in diverse recommerce activities through two principle business units—DGSE and ECHG. DGSE buys hard assets, and ECHG buys consumer electronics and IT equipment, all for either resale or recycling. Envela will continue to report its revenue and operating expenses based on its DGSE and ECHG operating segments, and beginning in fiscal year 2020, Envela will disaggregate its revenue, within the operating segments, based on its resale and recycle presentation basis. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation.
  
The DGSE segment includes Dallas Gold and Silver Exchange, having four locations throughout the Dallas/Ft Worth Metroplex, and Charleston Gold and Diamond Exchange, with one location in Charleston, South Carolina. 
 
The ECHG segment includes Echo Environmental Holdings, ITAD USA Holdings and Teladvance. These three companies focus on reusing and recycling electronics. Echo and ITAD were added to the Company on May 20, 2019, and Teladvance was added on August 2, 2019, therefore there is not a comparison for the three months ending March 31, 2019.
 
We allocate a portion of certain corporate costs and expenses, including information technology, to our business segments that is included in Selling, General and Administrative (“SG&A”) expenses. Our management team evaluates each segment’s operating performance and allocates resources based on each segment’s profits. Allocation amounts are generally agreed upon by management, and may differ from arms-length allocations.  
 
The following separates DGSE’s and ECHG’s financial results of operations for the three months ending March 31, 2020:
 
 
 
For The Three Months Ended
 
 
 
March 31, 2020
 
 
 
DGSE
 
 
ECHG
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Sales
 $20,363,584 
 $5,465,559 
 $25,829,143 
Cost of goods sold
  17,999,402 
  2,528,461 
  20,527,863 
 
    
    
    
     Gross profit
  2,364,182 
  2,937,098 
  5,301,280 
 
    
    
    
Expenses:
    
    
    
Selling, general and administrative expenses
  1,873,006 
  1,952,194 
  3,825,200 
Depreciation and amortization
  77,041 
  102,688 
  179,729 
 
    
    
    
 
  1,950,047 
  2,054,882 
  4,004,929 
 
    
    
    
     Operating income
  414,135 
  882,216 
  1,296,351 
 
    
    
    
Other (income) expense:
    
    
    
     Other (income) expense, net
  (27,368)
  (14,322)
  (41,690)
     Interest expense
  44,793 
  100,522 
  145,315 
 
    
    
    
Income before income taxes
  396,710 
  796,016 
  1,192,726 
 
    
    
    
Income tax expense
  8,285 
  10,292 
  18,577 
 
    
    
    
               Net income
 $388,425 
 $785,724 
 $1,174,149 
 
 
12
 
 
 
NOTE 12 — REVENUE RECOGNITION
 
ASC 606 provided guidance to identify performance obligations for revenue-generating transactions. The initial step is to identify the contract with a customer created with the sales invoice or a repair ticket. Secondly, to identify the performance obligations in the contract as we promise to deliver the purchased item or promised repairs in return for payment or future payment as a receivable. The third step is determining the transaction price of the contract obligation as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied.
 
Beginning in fiscal year 2020, Envela will disaggregate its revenue, within the operating segments, based on its resale and recycle presentation basis to more closely align with the Company’s activities. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation.
 
The following disaggregation of total revenue is listed by sales category and segment:
 
CONSOLIDATED
 
Three Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $18,541,897 
 $2,047,433 
  11.0%
 $14,801,379 
 $2,033,435 
  13.7%
Recycled
  1,821,687 
  316,749 
  17.4%
  1,218,151 
  185,047 
  15.2%
 
    
    
    
    
    
    
     Subtotal
  20,363,584 
  2,364,182 
  11.6%
  16,019,530 
  2,218,482 
  13.8%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  3,526,228 
  1,420,176 
  40.3%
  - 
  - 
  - 
Recycled
  1,939,331 
  1,516,922 
  78.2%
  - 
  - 
  - 
 
    
    
    
    
    
    
    Subtotal
  5,465,559 
  2,937,098 
  53.7%
  - 
  - 
  - 
 
    
    
    
    
    
    
 
 $25,829,143 
 $5,301,280 
  20.5%
 $16,019,530 
 $2,218,482 
  13.8%
 
DGSE recognizes revenue from its over-the-counter retail and resale transactions, and its wholesale- dealer transactions when the merchandise is delivered and payment is made (whether immediate or via receivable obligation at one of our retail stores). We also recognize revenue upon the shipment of goods when resale and wholesale customers have fulfilled their obligation to pay or promise to pay through e-commerce or telephone sales. We account for shipping and handling costs as fulfillment costs after customers obtain control of the goods. We recycle material deemed to be past its useful life primarily to recover its precious-metal content. This material is sold to a Dallas-based refiner that was a related party until May 20, 2019. We recognize revenue from these recycling sales when we receive payment.
 
DGSE offers layaway purchases, requiring a deposit, a 25% payment within two weeks, and full payment of the remaining balance within 90 days after the deposit. If customers fail to make either the 25% payment or final-balance payment within 90 days, then the items are returned to inventory, and such customers forfeit any payments made. We recognize revenue for layaway sales when the items are paid in full and delivered to the customers, or upon payment forfeiture.
 
Sales of fine watches; bullion; clearance/final-sale items; and custom, sized or engraved items are final. All other purchased items may be returned by customers to DGSE within 30 days from purchase for a full refund, less a 10% restocking fee. Returns are accounted for as reversals of the original transactions, with the effect of reducing revenues and cost of sales, and returning the merchandise to inventory. We have established an allowance for estimated returns related to Fiscal 2019 sales based on historical returns and reduced our reported revenues and cost of sales accordingly. Our return allowance for 2019 and as of March 31, 2020 remained the same for both periods, approximately $28,000.
 
 
13
 
 
 
In limited circumstances, for wholesale dealers or resale customers, DGSE exchanges resale items for (a) similar resale items, or (b) similar resale items plus money payment. We recognize revenue for these exchanges in accordance with Accounting Standards Codification (“ASC”) 845, Nonmonetary Transactions. For resale item/resale item exchanges, without payments, we do not recognize any revenue; the basis of the resale items relinquished becomes the basis of the resale items received, less any indicated impairment of value of the resale items relinquished. For resale item/resale item-plus- payment exchanges, we recognize revenue to the extent of payments received, and determine the cost of sale based on the ratio of payments received to payments plus items received, multiplied by the cost of items surrendered.
 
ECHG has several revenue streams and recognize revenue according to ASC 606 at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to customers. The revenue streams are described below.
 
Resale transactions are recorded when product is shipped. Revenue is recognized when prices are established, terms agreed, and products shipped (i.e., upon ECHG fulfilling its performance obligations). ECHG typically requires resale customers to make prepayment based on an agreed commodity price. ECHG releases shipments upon confirming payment receipt and recognizes revenue on the shipping date. If payment is received on the last day of a month, and shipment occurs the following day, the payment is deferred revenue, recognized the following month when the shipment is made.
 
ECHG recycles material deemed to be past its useful life to recover precious and other non-ferrous metals. As part of its recycling operations, ECHG recognizes refining revenue when its performance obligations are satisfied, i.e., when its inventory arrives at the agreed destination and control of the contracted goods is transferred to the refiner. Our initial invoice is recognized in full when our performance obligation is satisfied, as referenced above. Under the guidance of ASC 606, an estimate of the variable consideration that we expect to receive is included in the transaction price, stated at the current precious-metal spot price and precious-metal weight. We adjust revenue in the period once the underlying metal’s weight and any movement in metal spot price is resolved, generally within six weeks. Adjustments from resolving the underlying uncertainty is netted with the remaining 40% due under the original contract.
 
ECHG also provides recycling services under agreed scopes of work. It recognizes services based on the number of units processed at a preset price per unit. ECHG produces weekly activity reports reflecting numbers of units processed; revenue is recognized based on billing from the weekly reports. ECHG performs recycling services either at its facilities or at clients’ facilities, as confirmed in the scope of work, together with the associated costs and payment terms.
 
NOTE 13 — LEASES
 
 
When ASC 842 lease provision was first adopted by the Company on January 1, 2019, we recognized $1,994,840 of operating lease right-of-use assets, $446,462 in short-term operating lease liabilities and $1,609,891 in long-term operating lease liabilities on our consolidated balance sheet. Operating lease liabilities were determined based on the present value of remaining minimum rental payments, and operating lease right-of-use assets were determined based on the value of lease liabilities, adjusted for deferred rent balances of $61,500, which were previously included in other liabilities.
 
Due to the Echo Transaction referenced in Note (7), we recognized an additional $2,350,781 of operating lease right-of-use assets, $703,523 in short-term operating lease liabilities and $1,647,258 in long-term operating lease liabilities on our consolidated balance sheet. Operating lease liabilities were determined based on the present value of remaining minimum rental payments, and operating lease right-of-use assets were determined based on the value of lease liabilities.
 
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the interest rate that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. If we cannot readily determine the discount rate implicit in lease agreements, we utilize our incremental borrowing rate.
 
14
 
 
 
The Company has seven operating leases—six in the Dallas/Fort Worth Metroplex and one in Charleston, South Carolina. Two leases expire this year. Our DGSE Southlake, Texas lease expires July 31, 2020, with no renewal options, therefore we will evaluate whether to continue leasing in this location. DGSE’s flagship-store lease at 13022 Preston Road, Dallas, Texas will expire October 31, 2021, with no current renewal options. DGSE’s Grand Prairie, Texas lease expires June 30, 2022, and has no current renewal options. DGSE’s Charleston, South Carolina lease expires April 30, 2025, with no additional renewal options. We just extended our DGSE Euless, Texas lease through June 30, 2025 with an option for an additional five years. ECHG’s lease on Belt Line Road in Addison, Texas expires on December 31, 2020, with an initial 24-month renewal option, and a second renewal option for an additional 60 months. A portion of this building is sublet, and the rent received is applied against the rental expense for the building. ECHG’s lease for ITAD on McKenzie Drive in Carrollton, Texas expires July 31, 2021 and has no renewal option. All of the Company’s seven leases are triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance. Leasing costs for the three months ending March 31, 2020 and 2019 were $306,537 and $174,347, respectively, comprised of a combination of minimum lease payments and variable lease costs.
 
As of March 31, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases was 2.4 years and 5.5%, respectively. The Company’s future operating lease obligations that have not yet commenced are immaterial. For the three months ending March 31, 2020 and 2019, the Company’s cash paid for operating lease liabilities was $335,227 and $133,791, respectively.
 
 
15
 
 
Future annual minimum lease payments as of March 31, 2020:
 
 
 
Operating
 
 
 
Leases
 
DGSE
 
 
 
2020 (excluding the three months ending March 31, 2020)
 $382,608 
2021
  479,162 
2022
  235,674 
2023
  212,854 
2024
  213,884 
2025 and thereafter
  64,087 
 
    
Total minimum lease payments
  1,588,269 
Less imputed interest
  (163,368)
 
    
      Subtotal
  1,424,901 
 
    
ECHG
    
2020 (excluding the three months ending March 31, 2020)
  596,190 
2021
  736,320 
2022
  644,702 
 
    
Total minimum lease payments
  1,977,212 
Less imputed interest
  (137,845)
 
    
      Subtotal
  1,839,367 
 
    
 
 $3,264,268 
 
NOTE 14 — BASIC AND DILUTED AVERAGE SHARES
 
A reconciliation of basic and diluted weighted average common shares for the three months ended March 31, 2020 and 2019 is as follows:
 
 
 
For the Three Months Ended
 
 
 
March 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Basic weighted average shares
  26,924,381 
  26,924,381 
Effect of potential dilutive securities
  15,250 
  - 
Diluted weighted average shares
  26,939,631 
  26,924,381 
 
For the three months ended March 31, 2020 and 2019, there were 15,250 and 15,250 Common Stock options, warrants, and Restricted Stock Units (RSUs) unexercised, respectively.
 
 
16
 
 
NOTE 15 — LONG-TERM DEBT
 
 
 
Outstanding Balance
 
 
 
 
 
 
 
March 31,
 
 
December 31,
 
 
Current
 
 
 
 
2020
 
 
2019
 
 
Interest Rate
 
Maturity
DGSE
 
 
 
 
 
 
 
 
 
 
Note payable, related party (1)
 $2,928,210 
 $2,949,545 
  6.00%
 May 16, 2024
 
    
    
    
 
ECHG
    
    
    
 
Note payable, related party (1)
  6,641,438 
  6,689,507 
  6.00%
 May 16, 2024
 
    
    
    
 
Sub-Total
  9,569,648 
  9,639,052 
    
 
 
    
    
    
 
Current portion
  293,779 
  1,084,072 
    
 
 
    
    
    
 
 
 $9,275,869 
 $8,554,980 
    
 
 
(1) On May 20, 2019, the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board. ECHG, LLC (f.k.a. Corrent Resources, LLC) executed a 5-year, $6,925,979 note for the Echo Transaction, amortized over 20 years at a 6% annual interest rate. DGSE, LLC (f.k.a. DGSE Companies, LLC) executed a 5-year, $3,074,021 note to pay off the accounts payable – related party balance to Elemetal, LLC as of May 20, 2019. That promissory note is also amortized over 20 years at a 6% annual interest rate. An error was made on the original promissory loan documents for both DGSE and ECHG notes. Originally, the DGSE note stated the total monthly interest and principal payment due was $41,866 and the monthly ECHG interest and principal payment due was $94,327. The correct total of interest and principal payments due monthly on the revised note for DGSE is $22,203. The correct total of interest and principal payments due monthly on the revised note for ECHG is $49,646. The allocation between short-term and long-term Notes payable, related party was adjusted accordingly starting with the three months ending March 31, 2020.
 
 
17
 
 
Future scheduled principal payments of our note payables, related party, as of March 31, 2020 are as follows:
 
Note payable, related party - DGSE
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the three months ended March 31, 2020)
  67,184 
2021
  95,243 
2022
  101,117 
2023
  107,354 
2024
  2,557,312 
 
    
   Subtotal
  2,928,210 
 
Note payable, related party - ECHG
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the three months ended March 31, 2020)
  149,580 
2021
  212,086 
2022
  225,167 
2023
  239,055 
2024
  5,815,550 
 
    
   Subtotal
  6,641,438 
 
    
 
  9,569,648 
 
NOTE 16 — STOCK-BASED COMPENSATION
 
The Company accounts for share-based compensation by measuring the cost of employee services received in exchange for an award of equity instruments, including grants of stock options, based on the fair value of the award at the date of grant. In addition, to the extent that the Company receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in the consolidated statement of cash flows.
 
NOTE 17 — RELATED PARTY TRANSACTIONS
 
The Company has a corporate policy governing the identification, review, consideration and approval or ratification of transactions with related persons, as that term is defined in the Instructions to Item 404(a) of Regulation S-K, promulgated under the Securities Act (“Related Party”). Under this policy, all Related Party transactions are identified and approved prior to their consummation to ensure they are consistent with the Company’s and the stockholders’ best interests. Among other factors, the Company’s Board considers the size and duration of the transaction, the nature and interest of the of the Related Party in the transaction, whether the transaction may involve a conflict of interest, and if the transaction is on terms that are at least as favorable to the Company as would be available in a comparable transaction with an unaffiliated third party. Envela’s Board reviews all Related Party transactions at least annually to determine if they are in the best interest of the Board and of the Company’s stockholders to continue, modify, or terminate any Related Party transactions. Envela’s Related Person Transaction Policy is available for review in its entirety under the “Investors” menu of the Company’s corporate relations website at www.envela.com.
 
 
18
 
 
Through a series of transactions beginning in 2010, Elemetal, NTR Metals, LLC (“NTR”) and Truscott Capital, LLC (“Related Entities”) became the largest shareholders of our Common Stock. NTR transferred all of its Common Stock to Eduro Holdings, LLC (“Eduro”) on August 29, 2018. A certain Related Entity has been the Company’s primary refiner and bullion trading partner. For the three months ended March 31, 2019, the certain Related Entity accounted for 4% of sales and 6% of purchases. For the three months ended March 31, 2020, they were no longer a related party. On May 20, 2019, through a series of transactions, the Related Entities sold their shares of the Company to John R. Loftus, the Company’s CEO, President and Chairman of the Board. As of May 20, 2019, they were no longer Related Entities. As of March 31, 2020, the Company was obligated to pay $0 to the certain Related Entity as a trade payable, and had a $0 receivable from the certain Related Entity. As of March 31, 2019, the Company was obligated to pay $3,075,120 to the certain Related Entity as a trade payable and had a $0 receivable from the certain Related Entity. For the three months ended March 31, 2020 and 2019, the Company paid the Related Entities $0 and $34,549, respectively, in interest on the Company’s outstanding payable.
 
Through a series of transactions reported on Schedule 13D on May 24, 2019, Truscott sold its 12,814,727 shares, 47.7% of DGSE Companies Common Stock to John R. Loftus. Mr. Loftus assumed all rights under the existing registration rights agreements. On the same day, Mr. Loftus contributed his 12,814,727 Common Stock shares to N10TR, LLC (“N10TR”), which is controlled by Mr. Loftus. Mr. Loftus, by virtue of his relationship with Eduro and N10TR may be deemed to indirectly beneficially own the Common Shares that Eduro and N10TR directly beneficially own. On the same day, the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board. ECHG, LLC (f.k.a. Corrent Resources, LLC) executed a 5-year, $6,925,979 note for the Echo Transaction, amortized over 20 years at a 6% annual interest rate. DGSE, LLC (f.k.a. DGSE Companies, LLC) executed a 5-year, $3,074,021 note to pay off the accounts payable – related party balance to Elemetal, LLC as of May 20, 2019. That promissory note is also amortized over 20 years at a 6% annual interest rate. Both notes are being serviced by operational cash flow. For the three months ended March 31, 2020 and 2019, the Company paid Mr. Loftus $145,315 and $0, respectively, in interest on the Company’s outstanding note payables, related party.
 
 NOTE 18 — SUBSEQUENT EVENTS
 
 
On February 18, 2020, the Company signed an initial agreement for the purchase of a retail building for its next Dallas Gold & Silver Exchange location, in Lewisville, Texas for $1.4 million. We have sought and received an extension of time until May 11, 2020 to complete the associated inspections and due diligence. We expect to close the purchase of the retail building during the second fiscal quarter of 2020. We also expect to obtain a ten-year, approximately 3% mortgage of eighty percent loan to value. There is no assurance that the Company will close the building purchase.
 
The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global economic business conditions. Future sales on products like ours could decline due to increased commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the coronavirus pandemic, the ultimate impact is highly uncertain and subject to change. The duration of any such impact cannot be predicted, and the Company believes additional liquidity is necessary to support ongoing operations during this period of uncertainty. The Company applied and received approval for an approximately $1.67 million, 1% interest, federally backed loan intended to pay employees and cover certain rent and utility-related costs during the COVID-19 pandemic (the “Federal Loan”). The loan is forgivable to the extent that certain criteria are met.
 
 
 
 
19
 
ITEM 2. 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 March 31, 2020 (this “Form 10-Q”), including but not limited to: (i) the section of this Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” (ii) information concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items; and, (iii) our strategies, plans and objectives, together with other statements that are not historical facts, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate” or “believe.” We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements other than statements of historical information provided herein are forward-looking statements based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ from current expectations are described under the section of this Form 10-Q entitled “Risk Factors” and elsewhere in this Form 10-Q as well as under the section entitled “Risk Factors” in our Fiscal 2019 10-K. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to-release publicly the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital expenditures, store growth plans, or to reflect the occurrence of unanticipated events.
 
Results of Operations
 
General
 
The COVID-19 pandemic’s effects, including limited Company operations and dramatic changes in consumer behavior, led to a marked decline in sales during the second half of March and significantly affected the Company's first-quarter results.
 
 Although retail investors’ demand for precious-metal coins appears to have contributed to higher gold pricesjewelry consumption and recycled-gold supply plunged during the first quarter as consumers were confined to their homes for some of the quarter in an effort to stem the spread of coronavirus, according to the World Gold Council (“WGC”). Over the longer term, the WGC believes that recycled-gold volumes could likely rise once restrictions are lifted, with consumers looking for liquid assetssuch as goldto help alleviate economic hardship caused by the lockdown.
 
 
 
20
 
 
The following disaggregation of total revenue is listed by sales category and segment:
 
CONSOLIDATED
 
Three Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $18,541,897 
 $2,047,433 
  11.0%
 $14,801,379 
 $2,033,435 
  13.7%
Recycled
  1,821,687 
  316,749 
  17.4%
  1,218,151 
  185,047 
  15.2%
 
    
    
    
    
    
    
     Subtotal
  20,363,584 
  2,364,182 
  11.6%
  16,019,530 
  2,218,482 
  13.8%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  3,526,228 
  1,420,176 
  40.3%
  - 
  - 
  - 
Recycled
  1,939,331 
  1,516,922 
  78.2%
  - 
  - 
  - 
 
    
    
    
    
    
    
    Subtotal
  5,465,559 
  2,937,098 
  53.7%
  - 
  - 
  - 
 
    
    
    
    
    
    
 
 $25,829,143 
 $5,301,280 
  20.5%
 $16,019,530 
 $2,218,482 
  13.8%
 
Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019
 
Revenues. Revenues related to DGSE’s continuing operations increased by $4,344,054 or 27%, during the three months ended March 31, 2020, to $20,363,584, as compared to $16,019,530 during the same period in 2019. Resale revenue, such as bullion, jewelry, watches and rare coins, increased $3,740,518, or 25%, during the three months ended March 31, 2020, to $18,541,897, as compared to the $14,801,379 for the prior three months ended March 31, 2019. Recycled-material sales increased 50% to $1,821,687 for the three months ended March 31, 2020, as compared to $1,218,151, for the three months ended March 31, 2019. Revenues increased for resale items for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to higher gold prices. The increase in recycled-materials revenue is primarily due to the increase in gold prices. Revenue related to ECHG for the three months ended March 31, 2020 was $5,465,559. Recycled-material sales accounted for 58% of the total sales at $3,173,761, and resale revenue accounted for 42% of the total sales at $2,291,798.
 
Gross Profit. Gross Profit related to DGSE’s operations for the three months ended March 31, 2020, increased by $145,700 to $2,364,182 as compared to $2,218,482 during the same period in 2019. The increase in total gross profit was due primarily to the increase in sales velocity for the resale items and the recycled materials. Even though there were additional revenues for the resale items, there were also lower gross-margin percentages due to the change in market conditions.
 
Gross Profits related to ECHG support a larger profit margin compared to the DGSE segment. ECHG’s profit margin of $2,937,098 on $5,465,559 sales comprises 53.7% overall.
 
Selling, General and Administrative Expenses. For the three months ended March 31, 2020, Selling, General and Administrative (“SG&A”) expenses for DGSE increased $131,666, or 7.6%, to $1,873,006, as compared to $1,741,340 during the same period in 2019. The increase in SG&A was primarily due to increased corporate expenses loaded to both the DGSE and ECHG segments.
 
The SG&A expenses for ECHG totaled $1,952,194, which primarily consists of payroll, payroll taxes and employee benefits of $1,104,418; rent and variable rent costs, net of sublet income, of $136,232; warehouse and office supplies of $35,803; insurance costs of $23,068; travel expenses of $23,772; professional fees of $44,650; and other administrative expenses totaling $226,430.
 
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Depreciation and Amortization. For the three months ended March 31, 2020, depreciation and amortization expense for DGSE was $77,041, compared to $74,324 for the same period in 2019, an increase of $2,717, or 3.6%. The increase of $2,717 from the three months ending March 31, 2020 compared to the three months ending March 31, 2019 is primarily due to a vehicle purchase during the quarter.
 
The Depreciation and Amortization expense for ECHG consisted of depreciation of $18,788 and amortization of $83,900 for the three months ending March 31, 2020. Amortization for the three months ended March 31, 2020 is the amortization of intangibles from the Purchase Price Allocation.
 
Interest Expense. For the three months ended March 31, 2020, interest expense for DGSE was $44,793, an increase of $10,236, or 29%, compared to $34,549 during the same period in 2019. The increase is primarily due to an increased interest rate on the note payable - trade, related party, that paid off the accounts payable, related party, outstanding balance of $2,928,210 as of March 31, 2020.
 
The interest expense for ECHG was $100,522 for the three months ending March 31, 2020, which was related to the note payable, related party, with an outstanding balance of $6,641,438 as of March 31, 2020.
 
Income Tax Expense. For the three months ending March 31, 2020, our income tax expense was $18,577, an increase of $8,341, or 81%, compared to $10,236 for the three months ending March 31, 2019. The effective income tax rate was 1.6% and 2.9% for the three months ending March 31, 2020 and 2019, respectively. Differences between our effective income tax rate and the U.S federal statutory rate are the result of state taxes, non-deductible expenses, changes in reserves for uncertain tax positions and unused NOL carryforwards.
 
Net Income. We recorded a net income of $1,174,149 for the three months ended March 31, 2020, compared to a net income of $354,635 for the three months ended March 31, 2019, an increase in net income of $819,514, which is due primarily from the addition of ECHG adding $785,724 of net income for the three months ended March 31, 2020.
 
Earnings Per Share. For the three months ending March 31, 2020, our net income per basic and diluted shares attributable to common stockholders was $.04, compared to $.01 per basic and diluted shares for the three months ending March 31, 2019, an increase of $.03 per share. The increase is primarily due to the addition of ECHG’s net income for the three months ending March 31, 2020.
  
Liquidity and Capital Resources
 
During the three months ended March 31, 2020, cash flows provided from operating activities totaled $1,031,715, and during the three months ended March 31, 2019 cash flows used in operating activities totaled $960,206, an increase of $1,991,921. Cash provided from operating activities for the three months ended March 31, 2020, was driven largely by the reduction of trade receivables of $525,519, a reduction of inventories of $111,931 and net income added to non-cash items of depreciation and amortization of $1,353,878, offset by a decrease in accounts payable and accrued expenses of $647,804, an increase in prepaid expenses of $163,312 and a reduction of customer deposits and other liabilities of $118,710. Cash used in operating activities for the three months ended March 31, 2019, was driven largely by the reduction of accounts payable and accrued expenses of $564,868, the increase of inventories of $550,567, the increase in trade receivables of $105,606 and the increase in prepaid expenses of $185,536, offset by net income, without non-cash items of depreciation, amortization, bad debt expense of $458,959.
 
During the three months ended March 31, 2020 and 2019, cash flows used in investing activities totaled $1,529,046 and $14,175, respectively, an increase of $1,514,871. The use of cash in investing activities during the three months ended March 31, 2020 was primarily due to investing in a note receivable of $1,500,000 to CExchange. The use of cash in investing activities during the three months ended March 31, 2019 was the result of purchasing of equipment.
 
During the three months ended March 31, 2020 and 2019, cash flows used in financing activities totaled $69,404 and $0, respectively, an increase of $69,404. The use of cash in financing activities during the three months ended March 31, 2020 was payments made against the notes payable, related party.
 
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The COVID-19 pandemic has adversely affected global economic business conditions. Future sales of products like ours could decline due to increased commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the coronavirus pandemic, the ultimate impact, including the impact on our liquidity and capital resources, is highly uncertain and subject to change. The duration of any such impact cannot be predicted, and the Company believes additional liquidity is necessary to support ongoing operations during this period of uncertainty. We have applied and received approval for the Federal Loan to provide approximately $1.67 million in additional liquidity. On May 17, 2019, the Company secured a one-year, $1,000,000 revolving line of credit loan from Texas Bank and Trust Co. The loan agreement includes a 30-day clean-up provision. Although Texas Bank and Trust Co. has communicated approval of a two-year extension and increased credit limit for this credit line, the Company is awaiting definitive documents reflecting these terms. If not renewed, the existing credit line will expire on May 17, 2020. From time to time we adjust our inventory levels to meet seasonal demand or working-capital requirements. Management believes we have sufficient capital resources (including the Federal Loan) to meet working-capital requirements. If additional working capital is required, we will seek additional loans from individuals or other commercial banks. The availability of such loans on acceptable terms is uncertain.
 
We expect our capital expenditures to total approximately $50,000 during the next twelve months. These expenditures will be largely driven by miscellaneous equipment needed to recycle electronic waste.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
 
ITEM 3. 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 March 31, 2020, the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in that the reports that we file or submit under the Exchange Act and are effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
 
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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 is a possibility of widespread infection in the United States and abroad. National, state and local authorities have recommended social distancing and imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic-stabilization efforts, including proposed government payments to affected citizens and industries, is uncertain. Some economists are predicting the United States will soon enter a recession.
 
The sweeping nature of the coronavirus pandemic makes it extremely difficult to predict how our business and operations will be affected in the long term, though the likely overall economic impact of the pandemic is viewed as highly negative to the general economy. While it remains a developing situation, any continuing quarantines, interruptions in travel and business disruptions with respect to us, our customers or our supply chain could adversely affect our sales, costs and liquidity position, possibly to a significant degree. We may also become subject to store closures. Although we are continuing to monitor and assess the effects of the coronavirus pandemic on our business, the ultimate impact is highly uncertain and subject to change. The duration of any such impact cannot be predicted.
 
The coronavirus pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable reductions in demand for certain of our products and services.
 
DGSE’s business, similar to the jewelry industry overall, is affected by fluctuations in precious-metals prices. Such fluctuations, particularly with respect to gold, which accounts for the majority of DGSE’s merchandise costs, could adversely impact its earnings and cash availability. Additionally, DGSE depends on purchasing products and materials from secondary markets. At any given time, we may be unable to obtain an adequate supply of products and materials at prices or other terms acceptable to us.
 
ECHG’s recycling business is affected by precious and other non-ferrous metals’ prices, which fluctuate based upon global supply-and-demand dynamics, among other things, with the greatest impact relating to gold. Additionally, ECHG depends on purchasing products and materials from secondary markets. At any given time, we may be unable to obtain an adequate supply of products and materials at prices and other terms acceptable to us. Compliance with future environmental laws and regulations, or current environmental laws and regulations reinterpreted in the future, could result in costs that have a material adverse effect on our business, results of operations and financial condition.
 
 
 
24
 
 
ITEM 2. 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
 
Not applicable
 
ITEM 6. EXHIBITS
 
Exhibit Number
 
Description
 
Filed
Herein
 
Incorporated by Reference
 
Form
 
Date Filed with SEC
 
Exhibit Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
 
X
 
 
 
 

 
 
 
 
 
 
 
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen
 
 X
 
 
 
 
 
 
 
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
 
X
 
 
 
 
 
 
 
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen
 
X
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
X
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
X
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
X
 
 
 
 
 
 
 
 
 
 
 
25
 
 
 
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: May 12, 2020   
By:  
/s/ JOHN R. LOFTUS
 
 
 
John R. Loftus
 
 
 
Chief Executive Officer
(Principal Executive Officer) 
 
 
 
 
Date: May 12, 2020   
 
/s/ BRET A. PEDERSEN
 
 
 
Bret A. Pedersen
 
 
 
Chief Financial Officer
(Principal Accounting Officer) 
 
 
 
 
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