Envela Corp - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

For the quarterly period ended March 31, 2021

OR

For the Transition Period From                  to                 

Commission File Number 001-11048

 

ENVELA CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

NEVADA		88-0097334
(STATE OF INCORPORATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

 

1901 GATEWAY DRIVE, STE 100, IRVING, TX 75038

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(972) 587-4049

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

www.envela.com

Securities registered pursuant to Section 12(b) of the Act:
Title of each class		Trading Symbol		Name of exchange on which registered
COMMON STOCK, par value $0.01 per share		ELA		NYSE American

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 May 4, 2021, the registrant had 26,924,631 shares of common stock outstanding.

 

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements	1
	Condensed Consolidated Statement of Income for the three months ended March 31, 2021 and 2020 (unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	2
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)	3
	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2021 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
SIGNATURES		27

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

	(Unaudited)	(Unaudited)
Three Months Ended March 31,	2021	2020
Revenue:
Sales	$25,490,441	$25,829,143
Cost of goods sold	19,186,177	20,527,863
Gross margin	6,304,264	5,301,280
Expenses:
Selling, General & Administrative Expenses	4,153,229	3,825,200
Depreciation and Amortization	204,912	179,729
Total operating expenses	4,358,141	4,004,929
Operating income	1,946,123	1,296,351
Other income, net	271,941	41,690
Interest expense	179,022	145,315
Income before income taxes	2,039,042	1,192,726
Income tax expense	30,770	18,577
Net income	$2,008,272	$1,174,149
Basic earnings per share:
Net income	$0.07	$0.04
Diluted earnings per share:
Net income	$0.07	$0.04
Weighted average shares outstanding:
Basic	26,924,631	26,924,381
Diluted	26,939,631	26,939,631

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

	March 31,	December 31,
	2021	2020
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$8,396,997	$9,218,036
Trade receivables, net of allowances	3,184,473	2,846,619
Notes receivable	123,472	-
Inventories	11,630,383	10,006,897
Current right-of-use assets from operating leases	1,057,511	1,157,077
Prepaid expenses	858,299	281,719
Total current assets	25,251,135	23,510,348
Notes receivable, less current portion	2,100,000	2,100,000
Property and equipment, net	6,984,653	6,888,601
Goodwill	1,367,109	1,367,109
Intangible assets, net	2,892,073	2,992,473
Operating lease right-of-use assets	3,344,732	3,522,923
Other long-term assets	297,638	197,638
Total assets	$42,237,340	$40,579,092
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable-Trade	$1,192,454	$1,510,697
Notes payable, related party	311,067	307,032
Notes payable	1,825,487	1,813,425
Current operating lease liabilities	1,054,599	1,148,309
Accrued expenses	922,159	844,324
Customer deposits and other liabilities	689,592	428,976
Total current liabilities	5,995,358	6,052,763
Notes payable, related party, less current portion	8,976,922	9,052,810
Notes payable, less current portion	4,188,357	4,240,658
Long-term operating lease liabilities, less current portion	3,489,989	3,654,419
Total liabilities	22,650,626	23,000,650
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;
26,924,631 shares issued and outstanding	269,246	269,246
Additional paid-in capital	40,173,000	40,173,000
Accumulated deficit	(20,855,532)	(22,863,804)
Total stockholders’ equity	19,586,714	17,578,442
Total liabilities and stockholders’ equity	$42,237,340	$40,579,092

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

For the Three Months Ended March 31,	2021	2020
	(Unaudited)	(Unaudited)
Operations
Net income	$2,008,272	$1,174,149
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation, amortization, and other	204,912	179,729
Bad debt expense	6,249	-
Changes in operating assets and liabilities:
Trade receivables	(344,103)	525,519
Inventories	(1,623,485)	111,931
Prepaid expenses	(576,578)	(163,312)
Other assets	(100,000)	5,120
Accounts payable and accrued expenses	(240,410)	(647,804)
Operating leases	19,616	(34,907)
Customer deposits and other liabilities	260,615	(118,710)
Net cash provided by (used in) operations	(384,912)	1,031,715
Investing
Investment in note receivable	(123,472)	(1,500,000)
Purchase of property and equipment	(200,563)	(29,046)
Net cash used in investing	(324,035)	(1,529,046)
Financing
Payments on notes payable, related party	(71,853)	(69,404)
Payments on notes payable	(40,239)	-
Net cash used in financing	(112,092)	(69,404)
Net change in cash and cash equivalents	(821,039)	(566,735)
Cash and cash equivalents, beginning of period	9,218,036	4,510,660
Cash and cash equivalents, end of period	$8,396,997	$3,943,925
Supplemental Disclosures
Cash paid during the period for:
Interest	$179,082	$121,718
Income taxes	$-	$-

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended March 31, 2020 and 2021

(Unaudited)

 

	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

	Common Stock		Preferred Stock
	Shares	Amount	Shares	Amount	Additional Paid-in Capital	Accumulated Deficit	Total Stockholders' Equity
Balances at December 31, 2020	26,924,631	$269,246	-	$-	$40,173,000	$(22,863,804)	$17,578,442
Net Income	-	-	-	-	-	2,008,272	2,008,272
Balances at March 31, 2021
	26,924,631	$269,246	-	$-	$40,173,000	$(20,855,532)	$19,586,714

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The interim condensed consolidated financial statements of Envela Corporation, a Nevada corporation, and its subsidiaries (together with its subsidiaries, the “Company” or “Envela”), included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). 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, 2020 filed with the SEC on March 23, 2021(as amended, the “2020 Annual Report”). 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. The information provided as of March 31, 2021 in these notes to the interim condensed consolidated financial statements is unaudited.

 

NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS

Envela and its subsidiaries engage in diverse business activities within the recommerce sector. These activities include being one of the nation's premier authenticated recommerce retailers of luxury hard assets; providing end-of-life asset recycling; offering data destruction and IT asset management; and providing products, services and solutions to industrial and commercial companies. Envela operates primarily via two operating and reportable segments. Through DGSE, LLC (“DGSE”), it operates Dallas Gold & Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands. Through ECHG, LLC (“ECHG”), it operates Echo Environmental Holdings, LLC (“Echo”), ITAD USA Holdings, LLC (“ITAD USA”) and Teladvance, LLC (“Teladvance”). Envela is a Nevada corporation, headquartered in Irving, Texas.

DGSE primarily buys and resells or recycles luxury hard assets like jewelry, diamonds, gemstones, fine watches, rare coins and related collectibles, precious-metal bullion products, gold, silver and other precious-metals. DGSE operates six jewelry stores at both the retail and wholesale levels throughout the United States via its facilities in Texas and South Carolina. Buying and selling items for their precious-metals content is a major method by which DGSE markets itself. DGSE also offers jewelry repair services, custom-made jewelry and consignment items, and maintains relationships with refiners for precious-metal items that are not appropriate for resale. The Company also maintains a presence in the retail market through its websites, www.dgse.com and www.cgdeinc.com.

ECHG owns and operates Echo, ITAD USA and Teladvance, through which it primarily buys the electronic components from business and other organizations, such as school districts, for end-of-life recycling and resale, or to add life to economic devices by data destruction and refurbishment for reuse. Echo focuses on end-of-life electronics recycling and sustainability, ITAD USA provides IT equipment disposition, including compliance and data sanitization services, and Teladvance operates as a value-added reseller by providing offerings and services to companies looking either to upgrade capabilities or dispose of equipment. Like DGSE, ECHG also maintains relationships with refiners or recyclers to which it sells valuable materials it extracts from electronics and IT equipment that are not appropriate for resale or reuse. ECHG’s customers are companies and organizations that are based domestically and internationally.

For additional information on the businesses of both DGSE and ECHG, see “Item 1. Business – Operating Segments” in the Company’s 2020 Annual Report.

The interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated.

      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. Notes receivable, notes payable and notes payable, related party approximate fair value due to the market interest rate charged.

 

Earnings Per Share

 

Basic earnings per share of our common stock, par value $0.01 per share (our “Common Stock”), is computed by dividing net earnings available to holders of the Company’s Common Stock by the weighted average number of shares of Common Stock outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts requiring the Company to issue Common Stock were exercised or converted into Common Stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method.

 

Goodwill

Goodwill is not amortized but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year, or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to 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 March 31, 2021. The Company will continue to evaluate goodwill for the ECHG segment. For tax purposes, goodwill is amortized and deductible over fifteen years.

ECHG goodwill was allocated in connection with the acquisition (the “Echo Transaction”) of the assets now held by Echo and ITAD USA (the “Echo Entities”) on May 20, 2019. There has been no additions, acquisition adjustments or impairment charges to goodwill since the allocation on May 20, 2019. As of March 31, 2021 and 2020, goodwill was $1,367,109.

Recent Accounting Pronouncements

In June 2016, the FASB issued a new credit loss accounting standard ASU 2016-13. The new accounting standard introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses which will be based on expected losses rather than incurred losses. We will be required to use a forward-looking expected credit loss model for accounts receivable, loans and other financial instruments. The standard will be adopted upon the effective date for us beginning January 1, 2023 by using a modified retrospective transition approach to align our credit loss methodology with the new standard. The Company is evaluating the financial statement implications of ASU 2016-13.

NOTE 4 — INVENTORIES

A summary of inventories is as follows:

	March 31,	December 31,
	2021	2020
DGSE
Resale	$9,184,314	$8,971,815
Recycle	87,907	191,677
Subtotal	9,272,221	9,163,492
ECHG
Resale	1,962,929	557,959
Recycle	395,233	285,446
Subtotal	2,358,162	843,405
	$11,630,383	$10,006,897

      NOTE 5 — NOTES RECEIVABLE

 

ECHG, LLC, entered into an agreement with CExchange, LLC on February 15, 2020, to lend $1,500,000 bearing interest at eight and one-half percent (8.5%) with interest only payments due quarterly. The loan matures on February 20, 2023. The parties also agreed to warrant and call-option agreements to acquire all of CExchange’s equity interests. On November 7, 2020, the Company entered into an amended agreement, to increase the loan from $1,500,000 to $2,100,000. CExchange is the leader in retail trade-in services, providing in-store and online solutions for most of the major consumer electronics retailers in the United States. CExchange helps retailers provide in-store trade-in programs designed to allow customers to exchange their old technology for cash in minutes. This fits well with ECHG’s core business of refurbishing and reusing cell telephones. There is no assurance that the Company will exercise its warrant or call option.

 

ECHG entered into an agreement with Committed Agency, LLC (“Committed Agency”) on February 4, 2021, pursuant to which it agreed (the “CA Facility Agreement”) to provide Committed Agency a line-of-credit not to exceed $1,000,000 (the “CA Facility”). Committed Agency intends to, directly or indirectly, sell or dispose of electronic devices previously owned by major electronic carriers. In addition to the CA Facility Agreement, ECHG has contracted with Committed Agency beginning February 4, 2021 to exclusively facilitate their sales through the Company’s warehousing and cleaning of electronic devices, wiping of existing data, and inspecting, packaging and shipping of devises to purchasers, in exchange ECHG will receive a per unit service fee (the “CA Service Agreement”). The CA Service Agreement will terminate no later than July 30, 2021. Under the terms of the agreement, the borrower cannot borrow any additional funds, under this facility, after May 31, 2021. Committed Agency is required to pay back any principal and accrued interest no later than 60 days after withdrawing funds. Amount borrowed under the CA Facility bears an interest rate of 6% per annum. Principal and accrued interest are due and payable no later than 60 days after such advance and the CA Facility has a current maturity of July 30, 2021. As of March 31, 2021, Committed Agency has drawn $123,472 on the CA Facility.

 

 

NOTE 6 — PROPERTY AND EQUIPMENT

 

 

 Property and equipment consist of the following:

 

	March 31,	December 31,
	2021	2020
DGSE
Land	$720,786	$720,786
Building and improvements	1,331,887	1,317,906
Leasehold improvements	1,450,695	1,435,742
Machinery and equipment	1,056,315	1,056,315
Furniture and fixtures	511,247	504,430
Vehicles	22,859	22,859
	5,093,789	5,058,038
Less: accumulated depreciation	(2,126,518)	(2,054,294)
Sub-Total	2,967,271	3,003,744
ECHG
Building and improvements	81,149	81,149
Machinery and equipment	375,686	220,417
Furniture and fixtures	93,827	93,827
	550,662	395,393
Less: accumulated depreciation	(87,150)	(71,058)
Sub-Total	463,512	324,335
Envela
Land	1,106,664	1,106,664
Building and improvements	2,456,324	2,456,324
Machinery and equipment	14,951	5,407
	3,577,939	3,568,395
Less: accumulated depreciation	(24,069)	(7,873)
Sub-Total	3,553,870	3,560,522
	$6,984,653	$6,888,601

 

 

NOTE 7 — INTANGIBLE ASSETS

 

 

   Intangible assets consist of the following:

 

	March 31,	December 31,
	2021	2020
DGSE
Domain names	$41,352	$41,352
Point of sale system	330,000	330,000
	371,352	371,352
Less: accumulated amortization	(220,002)	(203,502)
Subtotal	151,350	167,850
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	(615,277)	(531,377)
Subtotal	2,740,723	2,824,623
	$2,892,073	$2,992,473

 

The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2021:

 

	DGSE	ECHG	Total
2021 (excluding the three months ending March 31, 2021)	$49,500	$251,700	$301,200
2022	66,000	335,600	401,600
2023	30,350	335,600	365,950
2024	5,500	335,600	341,100
2025	-	335,600	335,600
Thereafter	-	1,146,623	1,146,623
	$151,350	$2,740,723	$2,892,073

 

 

    NOTE 8 — ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

	March 31,	December 31,
	2021	2020
DGSE
Accrued interest	$9,250	$10,057
Board member fees	-	7,500
Payroll	126,596	155,635
Property taxes	66,831	26,435
Sales tax	53,427	180,609
Other administrative expenss	9,488	13,525
Subtotal	265,592	393,761
ECHG
Accrued interest	16,955	17,086
Payroll	224,666	119,327
Property tax	20,500	20,500
Other accrued expenses	38,472	10,574
Subtotal	300,593	167,487
Envela
Accrued interest	7,811	7,884
Payroll	52,802	10,745
Professional fees	144,889	142,635
Property Tax	24,900	-
Other administrative expenses	11,423	8,433
State income tax	114,149	113,379
Subtotal	355,974	283,076
	$922,159	$844,324

 

NOTE 9 — SEGMENT INFORMATION

We determine our business segments based upon an internal reporting structure. Our financial performance is based on the following segments: DGSE and ECHG.

The DGSE segment includes Dallas Gold & Silver Exchange, which has five retail stores in the Dallas/Fort Worth Metroplex, and Charleston Gold & Diamond Exchange, which has one retail store in Mt. Pleasant, South Carolina.

The ECHG segment includes Echo, ITAD USA and Teladvance. These three companies were added during 2019 and are involved in recycling and the reuse of electronic components.

We allocate a portion of certain corporate costs and expenses, including information technology as well as rental income and expenses relating to our new corporate headquarters, to our business segments. These income and expenses are included in selling, general and administrative expenses, depreciation and amortization, other income, interest expense and income tax expense. Our management team evaluates each segment and makes decisions about the allocation of resources according to each segment’s profit. Allocation amounts are generally agreed upon by management and may differ from arms-length allocations.  

The following separates DGSE and ECHG’s financial results of operations for the three months ending March 31, 2021 and 2020:

	For The Three Months Ended March 31,
	2021			2020
	DGSE	ECHG	Consolidated	DGSE	ECHG	Consolidated
Revenue:
Sales	$18,914,501	$6,575,940	$25,490,441	$20,363,584	$5,465,559	$25,829,143
Cost of goods sold	16,106,866	3,079,311	19,186,177	17,999,402	2,528,461	20,527,863
Gross profit	2,807,635	3,496,629	6,304,264	2,364,182	2,937,098	5,301,280
Expenses:
Selling, general and administrative expenses	1,782,437	2,370,792	4,153,229	1,873,006	1,952,194	3,825,200
Depreciation and amortization	96,822	108,090	204,912	77,041	102,688	179,729
	1,879,259	2,478,882	4,358,141	1,950,047	2,054,882	4,004,929
Operating income	928,376	1,017,747	1,946,123	414,135	882,216	1,296,351
Other income/expense:
Other income	111,731	160,210	271,941	27,368	14,322	41,690
Interest expense	68,485	110,537	179,022	44,793	100,522	145,315
Income before income taxes	971,622	1,067,420	2,039,042	396,710	796,016	1,192,726
Income tax expense	13,705	17,065	30,770	8,285	10,292	18,577
Net income	$957,917	$1,050,355	$2,008,272	$388,425	$785,724	$1,174,149

 

 

NOTE 10 — REVENUE RECOGNITION

ASC 606 provides guidance to identify performance obligations for revenue-generating transactions. The initial step is to identify the contract with a customer created with the sales invoice or a repair ticket. Secondly, we identify the performance obligations in the contract, as we promise to deliver the purchased item or promised repairs in return for payment or future payment as a receivable. The third step is determining the transaction price of the contract obligation, as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations, as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied.

Beginning in fiscal year 2020, Envela disaggregated its revenue, within the operating segments, based on its resale and recycle presentation basis to more closely align with the Company’s activities. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation.

 

The following disaggregation of total revenue is listed by sales category and segment for the three months ended March 31, 2021 and 2020:

 

CONSOLIDATED	Three Months Ended March 31,
	2021			2020
	Revenues	Gross Profit	Margin	Revenues	Gross Profit	Margin
DGSE
Resale	$17,320,641	$2,457,144	14.2%	$18,541,897	$2,047,433	11.0%
Recycled	1,593,860	350,491	22.0%	1,821,687	316,749	17.4%
Subtotal	18,914,501	2,807,635	14.8%	20,363,584	2,364,182	11.6%
ECHG
Resale	4,740,992	2,612,184	55.1%	3,526,228	1,420,176	40.3%
Recycled	1,834,948	884,445	48.2%	1,939,331	1,516,922	78.2%
Subtotal	6,575,940	3,496,629	53.2%	5,465,559	2,937,098	53.7%
	$25,490,441	$6,304,264	24.7%	$25,829,143	$5,301,280	20.5%

 

 

 

DGSE’s over-the-counter sales with the retail public and wholesale dealers are recognized when merchandise is delivered, and payment has been made either by immediate payment or through a receivable obligation at one of our retail locations. We also recognize revenue upon the shipment of goods when retail and wholesale customers have fulfilled their obligation to pay, or promise to pay through e-commerce or phone sales. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. Crafted-precious-metal items at the end of their useful lives are sold to a refiner. Since the local refiner is located in the Dallas/Fort Worth area, we deliver the metal to the refiner. The metal is melted and assayed, price is determined from the assay and payment is made usually in a day or two. Revenue is recognized from the sale once the payment is received.

DGSE also offers a structured layaway plan. When a retail customer utilizes the layaway plan, we collect a minimum payment of 25% of the sales price, establish a payment schedule for the remaining balance and hold the merchandise as collateral as security against the customer’s deposit until all amounts due are paid in full. Revenue for layaway sales is recognized when the merchandise is paid in full and delivered to the retail customer. Layaway revenue is also recognized when a customer fails to pay in accordance with the sales contract and the sales item is returned to inventory with the forfeit of deposited funds, typically after 90 days.

In limited circumstances, we exchange merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which we recognize revenue in accordance with Accounting Standards Codification (“ASC”) 845, Nonmonetary Transactions. When we exchange merchandise for similar merchandise and there is no monetary component to the exchange, we do not recognize any revenue. Instead, the basis of the merchandise relinquished becomes the basis of the merchandise received, less any indicated impairment of value of the merchandise relinquished. When we exchange merchandise for similar merchandise and there is a monetary component to the exchange, we recognize revenue to the extent of the monetary assets received and determines the cost of sale based on the ratio of monetary assets received to monetary and non-monetary assets received multiplied by the cost of the assets surrendered.

The Company offers the option of third-party financing to customers wishing to borrow money for the purchase. The customer applies on-line with the financing company and upon going through the credit check will be approved or denied. If accepted, the customer is allowed to purchase according to the limits set by the financing company. Once the customer does purchase merchandise, based on their financing agreement, we record and recognize the sale at that point, based on the promise to pay by the finance company up to the customer’s approved limit.

We have a return policy (money-back guarantee). The policy covers retail transactions involving jewelry, graded rare coins and currency only. Customers may return jewelry, graded rare coins and currency purchased within 30 days of the receipt of the items for a full refund as long as the items are returned in exactly the same condition as they were delivered. In the case of jewelry, graded rare coins and currency sales on account, customers may cancel the sale within 30 days of making a commitment to purchase the items. The receipt of a deposit and a signed purchase order evidences the commitment. Any customer may return a jewelry item or graded rare coins and currency if they can demonstrate that the item is not authentic, or there was an error in the description of a graded coin or currency piece. Returns are accounted for as a reversal of the original transaction, with the effect of reducing revenues and cost of sales, and returning the merchandise to inventory. We have established an allowance for estimated returns related to sales based on historical returns and reduced our reported revenues and cost of sales accordingly. Our return allowance as of March 31, 2021 and March 31, 2020 remained the same for both periods, at approximately $28,000.

The Echo Entities have several revenue streams and recognize revenue according to ASC 606 at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to the customer. The revenue streams are as follows.

 

 

 

Some of ECHG’s customers are on payment terms, and although low risk, occasionally the need arises to record an allowance for receivables that are deemed high risk to collect. We have established an allowance for estimated uncollectable receivables related to sales based on historical collections. Our allowance as of March 31, 2021 and 2020 was $6,249 and $0, respectively.

 

In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the interest rate that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. If we cannot readily determine the discount rate implicit in lease agreements, we utilize our incremental borrowing rate.

 

The Company has six operating leases—five in the Dallas/Fort Worth Metroplex and one in Charleston, South Carolina. 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 Mt Pleasant, South Carolina location expires April 30, 2025, with no additional renewal options. The lease for DGSE’s Euless, Texas location expires June 30, 2025, with an option for an additional five years. ECHG’s Echo Environmental, located on W. Belt Line Road, in Carrollton, Texas, renewed their lease starting January 1, 2021 for 61 months, expiring January 31, 2026. Echo Environmental sublet a portion of the building through December 31, 2020. The subletting company has subsequently vacated the premises and plans are being made to transfer ITAD USA’s operations to share the building with Echo Environmental. ECHG’s lease for ITAD USA’s location on McKenzie Drive in Carrollton, Texas expires July 31, 2021 and the lease will not be pursued for renewal. All of the Company’s six leases are triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance. Leasing costs for the three months ended March 31, 2021 and 2020 was $449,486 and $306,537, respectively, comprised of a combination of minimum lease payments and variable lease costs.

 

As of March 31, 2021, the weighted average remaining lease term and weighted average discount rate for operating leases was 2.4 years and 5.5%, respectively. For the three months ending March 31, 2021 and 2020, the Company’s cash paid for operating lease liabilities was $501,907 and $335,227 respectively.

 

Future annual minimum lease payments as of March 31, 2021:

 

	Operating Leases
DGSE
2021 (excluding the three months ending March 31, 2021)	$348,556
2022	235,674
2023	212,854
2024	213,884
2025	64,087
2026 and thereafter	-
Total minimum lease payments	1,075,055
Less imputed interest	(94,456)
DGSE Subtotal	980,599

 

ECHG
2021 (excluding the three months ending March 31, 2021)	632,048
2022	784,599
2023	806,175
2024	828,345
2025	851,125
2026 and thereafter	72,878
Total minimum lease payments	3,975,170
Less imputed interest	(411,181)
ECHG Subtotal	3,563,989
Total	4,544,588
Less current portion	(1,054,599)
Long-term operating lease liability	$3,489,989