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.
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.
NOTE 4 — INVENTORIES
A
summary of inventories is as follows:
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening
balance
|
$-
|
$-
|
|
Additions
|
1,500,000
|
-
|
|
Reductions
|
-
|
-
|
|
|
|
|
|
|
$1,500,000
|
$-
|
NOTE 6 — PROPERTY AND
EQUIPMENT
Property and equipment consist of the
following:
|
|
|
|
|
|
|
|
|
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.
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
|
|
|
|
|
|
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:
|
|
|
|
|
|
For the Three Months Ended
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
NOTE 8 — GOODWILL
The changes in the carrying amount of goodwill for the three months
ended March 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening
balance
|
$1,367,109
|
$-
|
|
Additions
|
-
|
-
|
|
Acquisition
adjustment
|
-
|
-
|
|
Impairment
adjustment
|
-
|
-
|
|
|
|
|
|
Goodwill
|
$1,367,109
|
$-
|
NOTE 9 — INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
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
|
The
following table outlines the estimated future amortization expense
related to intangible assets held as of March 31,
2020:
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
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
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
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.
Future
annual minimum lease payments as of March 31, 2020:
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
NOTE 15 — LONG-TERM DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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,
|
|
|
|
|
|
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,
|
|
|
|
|
|
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.
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.