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EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Envela Corpdgse_ex322.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Envela Corpdgse_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Envela Corpdgse_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Envela Corpdgse_ex311.htm
EX-10.5 - REVISED NOTE PAYABLE, RELATED PARTY, DATED JANUARY 1, 2020, BETWEEN ECHG, LLC AN - Envela Corpdgse_ex105.htm
EX-10.4 - REVISED NOTE PAYABLE, RELATED PARTY, DATED JANUARY 1, 2020, BETWEEN DGSE, LLC AN - Envela Corpdgse_ex104.htm
EX-10.3 - PURCHASE AGREEMENT, DATED SEPTEMBER 14, 2020, FOR THE IRVING, TEXAS OFFICE BUILD - Envela Corpdgse_ex103.htm
EX-10.2 - PURCHASE AGREEMENT, DATED JUNE 24, 2020, FOR THE GRAPEVINE, TEXAS PROPERTY PURCH - Envela Corpdgse_ex102.htm
EX-10.1 - PURCHASE AGREEMENT, DATED MAY 22, 2020, FOR THE LEWISVILLE, TEXAS PROPERTY PURCH - Envela Corpdgse_ex101.htm
 
 
  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2020  
 
OR
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the Transition Period From                  to          
 
Commission File Number 001-11048
 
 
 
ENVELA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
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 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 October 30, 2020, the registrant had 26,924,631 shares of common stock outstanding.
 

 

 
 
 
 
 
TABLE OF CONTENTS
 
PART I.
FINANCIAL INFORMATION
Page
 
 
 
3

 
 

3
 
 
 

4

 
 

5
 

 
 
6
 
 
 

8
 

 
24
 
 
 
30
 
 
 
30
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
31
 
 
 
31
 
 
 
32
 
 
 
32
 
 
 
32
 
 
 
32
 
 
 
33
 
 
 

34

 

 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
   
 
 
  Three Months Ended
September 30,  
 
 
  Nine Months Ended
September 30,  
 
(Unaudited)  
 
 2020
 
 
 2019
 
 
 2020
 
 
 2019
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 Sales
 
 $38,810,884 
 $22,861,201 
 $85,185,634 
 $59,818,168 
 
 Cost of goods sold
 
  31,647,487 
  17,674,747 
  68,629,699 
  49,047,917 
 
 
 
    
    
    
    
 
  Gross margin
 
  7,163,397 
  5,186,454 
  16,935,935 
  10,770,251 
 
 
 
    
    
    
    
 
Expenses:
 
    
    
    
    
 
  Selling, General & Administrative Expenses    
  3,869,673 
  3,893,618 
  11,311,543 
  8,311,199 
 
 Depreciation and Amortization
 
  179,782 
  67,886 
  539,217 
  227,558 
 
 
 
    
    
    
    
 
 Total cost of revenue
 
  4,049,455 
  3,961,504 
  11,850,760 
  8,538,757 
 
 
 
    
    
    
    
 
Operating income
 
  3,113,942 
  1,224,950 
  5,085,175 
  2,231,494 
 
Other income, net
 
  (26,954)
  (955)
  (120,510)
  (54,285)
 
Interest expense
 
  155,799 
  148,720 
  445,411 
  240,778 
 
 
 
    
    
    
    
 
Income before income taxes
 
  2,985,824 
  1,077,185 
  4,760,274 
  2,045,001 
 
Income tax expense
 
  273 
  41,710 
  35,127 
  65,364 
  0 
    
    
    
    
 
Net income
 
 $2,984,824 
 $1,035,475 
 $4,725,147 
 $1,979,637 
    
    
    
    
    
 
Basic earnings per share:
 
    
    
    
    
 
 Net income
 
 $0.11 
 $0.04 
 $0.18 
 $0.08 
    
    
    
    
    
 
Diluted earnings per share:
 
    
    
    
    
 
 Net income
 
 $0.10 
 $0.04 
 $0.18 
 $0.08 
    
    
    
    
    
 
Weighted average shares outstanding:
 
    
    
    
    
 
 Basic
 
  26,924,381 
  26,924,381 
  26,924,381 
  26,924,381 
 
 Diluted
 
  26,939,631 
  26,924,381 
  26,939,631 
  26,924,381 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3
 
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
September 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
Assets
 
(unaudited)
 
 
 
 
Current assets:
 
 
 
 
 
 
   Cash and cash equivalents
 $7,269,258 
 $4,510,660 
   Trade receivables, net of allowances
  4,659,074 
  2,997,743 
   Inventories
  10,617,516 
  9,509,454 
   Current right-of-use assets from operating leases
  1,173,733 
  1,160,658 
   Prepaid expenses
  328,354 
  172,834 
 
    
    
Total current assets
  24,047,935 
  18,351,349 
Note receivable
  1,500,000 
  - 
Property and equipment, net
  2,998,838 
  1,351,039 
Goodwill
  1,367,109 
  1,367,109 
Intangible assets, net
  3,089,648 
  3,394,073 
Operating lease right-of-use assets
  3,815,058 
  2,335,040 
Other long-term assets
  299,614 
  204,784 
 
    
    
Total assets
 $37,118,202 
 $27,003,394 
 
    
    
Liabilities and stockholders’ equity
    
    
Current liabilities:
    
    
   Accounts payable-trade
 $2,553,145 
 $1,467,845 
   Notes payable, related party
  302,485 
  1,084,072 
   Notes payable
  1,719,036 
  - 
   Current operating lease liabilities
  1,132,411 
  1,175,109 
   Accrued expenses
  837,554 
  916,509 
   Customer deposits and other liabilities
  189,315 
  165,404 
 
    
    
Total current liabilities
  6,733,946 
  4,808,939 
Notes payable, related party, less current portion
  9,128,146 
  8,554,980 
Notes payable, less current portion
  1,395,875 
  - 
Long-term operating lease liabilities, less current portion
  3,940,914 
  2,445,301 
 
    
    
Total liabilities
  21,198,881 
  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
  (24,522,600)
  (29,247,747)
 
    
    
Total stockholders’ equity
  15,919,321 
  11,194,174 
 
    
    
Total liabilities and stockholders’ equity
 $37,118,202 
 $27,003,394 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4
 
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30,
 
2020
 
 
2019
 
 
 
(Unaudited)
 
 
(Unaudited)
 
Operations
 
 
 
 
 
 
Net income
 $4,725,147 
 $1,979,637 
Adjustments to reconcile net income to net cash provided by (used in) operations:
    
    
   Depreciation, amortization, and other
  539,217 
  227,558 
   Changes in operating assets and liabilities:
    
    
      Trade receivables
  (1,661,332)
  (920,929)
      Inventories
  (1,108,062)
  (256,103)
      Prepaid expenses
  (155,518)
  (212,866)
      Other assets
  (94,830)
  (47,884)
      Accounts payable and accrued expenses
  1,006,345 
  (627,911)
      Accounts payable, related party
  - 
  (3,074,021)
      Operating leases
  (40,179)
  120,673 
      Customer deposits and other liabilities
  23,911 
  79,358 
 
    
    
         Net cash provided by (used in) operations
  3,234,699 
  (2,732,488)
 
    
    
Investing
    
    
Investment in note receivable
  (1,500,000)
  - 
Intangible assets
  - 
  (45,000)
Acquisition of the Echo Entities, net of cash acquired
  - 
  (5,876,517)
Payments for acquisition of property and equipment
  (430,591)
  - 
Purchase of property and equipment, financed through proceeds from notes
  (1,452,000)
  (102,989)
 
    
    
         Net cash used in investing
  (3,382,591)
  (6,024,506)
 
    
    
Financing
    
    
Financing for the acquisition of the Echo Entities
  - 
  6,925,979 
Financing to pay off accounts payable, related party
  - 
  3,074,021 
Line of credit
  - 
  151,000 
Proceeds from Paycheck Protection Program Note
  1,668,200 
  - 
Proceeds from notes to purchase property
  1,452,000 
  - 
Payments on notes payable
  (5,289)
  - 
Payments on notes payable, related party
  (208,421)
  (292,568)
 
    
    
         Net cash provided by financing
  2,906,490 
  9,858,432 
 
    
    
 
    
    
Net change in cash and cash equivalents
  2,758,598 
  1,101,438 
Cash and cash equivalents, beginning of period
  4,510,660 
  1,453,941 
 
    
    
Cash and cash equivalents, end of period
 $7,269,258 
 $2,555,379 
 
    
    
  Supplemental Disclosures
    
    
  Cash paid during the period for:
    
    
          Interest
 $443,415 
 $240,778 
          Income taxes
 $30,025 
 $43,578 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5
 
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months ended September 30, 2019 and 2020
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
Total
 
 
    Common Stock   
 
Preferred Stock
 
 
  Paid-in
 
 
Accumulated
 
 
Stockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
  Capital
 
 
  Deficit
 
 
Equity 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at June 30, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(31,084,298)
 $9,357,623 
 
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
 Net Income
  - 
  - 
  - 
  - 
  - 
  1,035,475 
  1,035,475 
 
    
    
    
    
    
    
    
Balances at September 30, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(30,048,823)
 $10,393,098 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Additional  
   
 Total  
 
 
Common Stock
 
 
Preferred Stock
 
 
Paid-in
 
 Accumulated 
 Stockholders' 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 Capital  
 Deficit  
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at June 30, 2020
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(27,507,424)
 $12,934,497 
 
    
    
    
    
    
    
    
 Net Income
  - 
  - 
  - 
  - 
  - 
  2,984,824 
  2,984,824 
 
    
    
    
    
    
    
    
Balances at September 30, 2020
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(24,522,600)
 $15,919,321 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
6
 
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Nine Months ended September 30, 2019 and 2020
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Additional  
   
 Total  
 
 
Common Stock
 
 
Preferred Stock
 
 
Paid-in
 
 Accumulated  
 Stockholders'  
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 Capital  
 Defecit  
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(32,028,460)
 $8,413,461 
 
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
 Net Income
  - 
  - 
  - 
  - 
  - 
  1,979,637 
  1,979,637 
 
    
    
    
    
    
    
    
Balances at September 30, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(30,048,823)
 $10,393,098 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Additional 
   
 Total  
 
 
Common Stock
 
 
Preferred Stock
 
 
  Paid-in
 
 Accumulated    
 Stockholders'  
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
   Capital 
 Defecit  
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2019
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(29,247,747)
 $11,194,174 
 
    
    
    
    
    
    
    
 Net Income
  - 
  - 
  - 
  - 
  - 
  4,725,147 
  4,725,147 
 
    
    
    
    
    
    
    
Balances at September 30, 2020
  26,924,381 
 $269,244 
  - 
 $- 
 $40,172,677 
 $(24,522,600)
 $15,919,321 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
7
 
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
NOTE 1 — BASIS OF PRESENTATION
 
The condensed consolidated interim financial statements of Envela Corporation, a Nevada corporation, and its subsidiaries (together with its subsidiaries, the “Company” or “Envela”), included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company suggests that these financial statements be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (such fiscal year, “Fiscal 2019” and such Annual Report on Form 10-K, the “Fiscal 2019 10-K”). In the opinion of the management of the Company, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly its results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Certain reclassifications were made to the prior year's consolidated financial statements to conform to the current year presentation.
 
NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
 
Envela engages in diverse business activities within the recommerce sector. These include recommercializing luxury hard assets, consumer electronics and IT equipment, as well as providing end-of-life recycling solutions. Envela assesses its inventory of recommerce purchases for their potential to be refurbished and resold as whole goods or component parts, or to be recycled for precious-metal value. Envela also offers comprehensive recycling solutions for a variety of other companies seeking responsibly to dispose of end-of-life products. Envela primarily operates via two recommerce business segments. Through DGSE, LLC the Company recommercializes luxury hard assets via Dallas Gold and Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express (collectively and together with DGSE, LLC, “DGSE”). Through ECHG, LLC, the Company operates Echo Environmental Holdings (“Echo”), ITAD USA Holdings (ITAD” and together with Echo, the “Echo Entities”), and Teladvance (“Teladvance” and together with ECHG, LLC and the Echo Entities, “ECHG”), which primarily recommercializes consumer electronics and IT equipment, and provide end-of-life recycling services for various companies across many industries. Envela conducts its recommerce operations at retail and wholesale levels, through distributors, resellers, dedicated stores and online. The Company also owns and operates other businesses and brands engaged in a variety of activities, as identified herein. Envela is headquartered in Dallas, Texas.
 
 
During the first quarter of fiscal 2020, we revised the way we review and report our financial information to align more closely with the Company’s strategy to engage in diverse recommerce activities through two principle business units—DGSE and ECHG. The objective of segment reporting is to provide information about the different types of business activities in which a public entity engages. Although the Company’s overall strategy is recommerce, we feel there are several distinct segments within recommerce. DGSE buys hard assets, and ECHG buys consumer electronics and IT equipment, for either resale or recycling, each of which constitutes a distinct segment within recommerce. Envela continues to report its revenue and operating expenses based on its DGSE and ECHG operating segments, and beginning in fiscal year 2020, disaggregated its revenue, within the operating segments, based on its resale and recycle presentation basis. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation.
 
 
8
 
 
 
DGSE buys to resell or recycle luxury hard assets, including jewelry, diamonds, fine watches, rare coins and currency, precious-metal bullion, collectables and other valuables. DGSE reconditions items for resale as a whole good or component parts, or recycles them by refining their precious metals for sale. These metals include gold, silver, platinum and palladium. DGSE currently operates four stores at the wholesale and retail levels, transacting throughout the United States via its facilities in Texas and South Carolina. DGSE’s lease in Southlake, Texas expired during the quarter ended September 30, 2020 and DGSE vacated that retail location. DGSE purchased two new retail locations in the Dallas area Metroplex in Lewisville and Grapevine, respectively. The buildouts are expected to be completed and the two new retail locations are expected to open before the Christmas season.
 
For over 40 years, DGSE has been a destination location for those seeking value and liquidity in reselling or trading jewelry, and in recycling the precious metals of items it elects not to sell as a whole good or as component parts. DGSE’s in-house staff of experts, including horologists, gemologists and authenticators, inspect items for authenticity and value, and share their market knowledge with its customers.
 
ECHG buys consumer electronics and IT equipment for resale or recycling from businesses and other organizations, such as school districts. Items designated for resale as a whole or as component parts get extended operational life by first erasing any existing data and then refurbishing them before resale. ECHG recycles goods by removing usable components for resale as components, or by extracting the valuable metals (or other materials) for sale to downstream recycling companies who further process the metal for subsequent resale. Our customers include companies and organizations that are based domestically and internationally.
 
ECHG also provides transportation and product tracking, when needed, as part of its comprehensive end-of-life recycling and responsible-disposal services. Our goal is to extend the useful life of electronics through recommerce whenever possible. Resale and reuse conserves energy and raw materials required to make new products and turns obsolete IT assets into revenue.
 
The interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated.
 
The Company operates its business as two operating and reportable segments under a variety of banners. As referenced above, DGSE includes Charleston Gold & Diamond Exchange and Dallas Gold & Silver Exchange. ECHG includes Echo, ITAD and Teladvance.
 
 
      NOTE 3 — ACCOUNTING POLICIES AND ESTIMATES
 
Financial Instruments
 
 The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, accounts payable, accrued expenses and notes payable approximate fair value because of the immediate or short-term nature of these financial instruments. Note receivable, notes payable and notes payable, related party approximate fair value due to the market interest rate charged.
 
Earnings Per Share
 
Basic earnings per common share is computed by dividing net earnings available to holders of the Company’s common stock by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts requiring the Company to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method.
 
9
 
 
Goodwill
 
Goodwill is not amortized, but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year, or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to the ECHG segment only and not the entire Company. ECHG has its own, separate financial information to perform goodwill impairment testing at least annually or if events indicate that those assets may be impaired. As a result of the current market and economic conditions related to COVID-19, in accordance with step 1 of the guidelines set forth in Accounting Standards Codification (“ASC”) 350-20-35-3A, the Company concluded there were no impairments of goodwill that resulted from triggering events due to COVID-19 as of September 30, 2020. The Company will continue to evaluate goodwill for the ECHG segment. For tax purposes, goodwill is amortized and deductible over fifteen years.
 
Recent Accounting Pronouncements
 
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment changes to be based on the first step in today’s two-step impairment test, thus eliminating step two from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step two of the goodwill impairment test. For public companies, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted this pronouncement on January 1, 2020. There was no impact in our condensed consolidated financial statements.
 
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The FASB issued several ASUs after ASU 2016-13 to clarify implementation guidance and to provide transition relief for certain entities. ASU 2016-13, due to Envela being a smaller reporting company, is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact of adopting ASU 2016-13 and related amendments will have on its consolidated financial position, results of operations and cash flows.
 
NOTE 4 — INVENTORIES
A summary of inventories is as follows:
 
 
 
September 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Resale
 $9,323,477 
 $8,213,551 
Recycle
  119,767 
  401,468 
 
    
    
       Subtotal
  9,443,244 
  8,615,019 
 
    
    
ECHG
    
    
Resale
  642,598 
  351,958 
Recycle
  531,674 
  542,477 
 
    
    
       Subtotal
  1,174,272 
  894,435 
 
    
    
 
 $10,617,516 
 $9,509,454 
 
 
 
 
10
 
 

      NOTE 5 — NOTE RECEIVABLE
 
ECHG, LLC, which is wholly owned by the Company, entered into an agreement with CExchange, LLC (“CExchange”) on February 15, 2020, pursuant to which it agreed to loan CExchange $1,500,000 bearing interest at eight and one-half percent (8.5%) with interest only payments due quarterly. The loan matures on February 20, 2023. The parties also agreed to warrant and call-option agreements through which ECHG, LLC may acquire all of CExchange’s equity interests upon the occurrence of certain events and on certain conditins. CExchange is a leader in retail trade-in services, providing in-store and online solutions for most of the major consumer electronics retailers in the United States. CExchange helps retailers provide in-store trade-in programs designed to allow customers to exchange their old technology for cash in minutes. These services and programs fit well with ECHG’s core business of refurbishing and reusing consumer electronics and IT equipment. Starting with the quarter ending June 30, 2020, CExchange helped DGSE facilitate their bullion on-line sales. There is no assurance that the Company will exercise its warrant or call option to acquire all of CExchange’s equity interests.
 
 
NOTE 6 — PROPERTY AND EQUIPMENT
 
 Property and equipment consist of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Land
 $720,786 
 $55,000 
Buildings
  1,181,896 
  - 
Leasehold improvements
  1,561,649 
  1,561,649 
Machinery and equipment
  1,045,200 
  1,039,013 
Furniture and fixtures
  453,699 
  453,699 
Vehicles
  22,859 
  - 
 
  4,986,089 
  3,109,361 
Less: accumulated depreciation
  (2,087,694)
  (1,904,948)
 
    
    
     Sub-Total
  2,898,395 
  1,204,413 
 
    
    
ECHG
    
    
Leashold improvements
  81,149 
  81,149 
Machinery and equipment
  33,360 
  27,497 
Furniture and fixtures
  93,827 
  93,827 
 
  208,336 
  202,473 
Less: accumulated depreciation
  (107,893)
  (55,847)
 
    
    
     Sub-Total
  100,443 
  146,626 
 
    
    
 
 $2,998,838 
 $1,351,039 
 
 
11
 
 
NOTE 7 — GOODWILL
 
The changes in goodwill is as follows:
 
 
 
September 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Opening balance
 $1,367,109 
 $- 
Additions (1)
  - 
  1,367,109 
Acquisition adjustment
  - 
  - 
Impairment adjustment
  - 
  - 
 
    
    
   Goodwill
 $1,367,109 
 $1,367,109 
 
(1) Goodwill was allocated in connection with the acquisition of the Echo Entities (the “Echo Transaction”) on May 20, 2019.
 
NOTE 8 — INTANGIBLE ASSETS
 
   Intangible assets consist of the following:
 
 
September 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Domain names
 $41,352 
 $41,352 
Point of sale system
  330,000 
  330,000 
 
  371,352 
  371,352 
Less: accumulated amortization
  (190,227)
  (137,502)
 
    
    
     Subtotal
  181,125 
  233,850 
 
    
    
ECHG
    
    
Trademarks
  1,483,000 
  1,483,000 
Customer Contracts
  1,873,000 
  1,873,000 
 
  3,356,000 
  3,356,000 
Less: accumulated amortization
  (447,477)
  (195,777)
 
    
    
     Subtotal
  2,908,523 
  3,160,223 
 
    
    
 
 $3,089,648 
 $3,394,073 
 
 
12
 
 
The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2020:
 
 
 
DGSE
 
 
ECHG
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
2020 (excluding the nine months ended September 30, 2020)
 $13,275 
 $83,900 
 $97,175 
2021
  66,000 
  335,600 
  401,600 
2022
  66,000 
  335,600 
  401,600 
2023
  35,850 
  335,600 
  371,450 
2024
  - 
  335,600 
  335,600 
Thereafter
  - 
  1,482,223 
  1,482,223 
 
    
    
    
 
 $181,125 
 $2,908,523 
 $3,089,648 
 
NOTE 9 — ACCRUED EXPENSES
 
      Accrued expenses consist of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
DGSE
 
 
 
 
 
 
Accrued interest
 $9,954 
 $7,374 
Professional fees
  80,978 
  125,200 
Board member fees
  3,750 
  7,500 
Insurance
  7,597 
  30,508 
Payroll
  147,466 
  157,148 
Property taxes
  132,750 
  - 
Sales tax
  44,385 
  115,451 
State income tax
  14,432 
  33,907 
Other
  613 
  - 
 
    
    
     Subtotal
  441,925 
  477,088 
 
    
    
ECHG
    
    
Accrued interest
  16,139 
  16,724 
Professional fees
  80,977 
  77,900 
Board member fees
  3,750 
  - 
Insurance
  7,596 
  - 
Payroll
  189,060 
  79,342 
Property taxes
  21,067 
  - 
Sales tax
  - 
  7,852 
State income tax
  14,431 
  27,963 
Credit card
  - 
  22,279 
Material & shipping costs (COGS)
  62,609 
  207,361 
 
    
    
     Subtotal
  395,629 
  439,421 
 
    
    
 
 $837,554 
 $916,509 
 
 
 
13
 
 
NOTE 10 — SEGMENT INFORMATION
 
During the first quarter of fiscal 2020, Envela views the way it views and reports its financial information to align more closely with the Company’s strategy to engage in diverse recommerce activities through two principle business units—DGSE and ECHG. DGSE buys hard assets, and ECHG buys consumer electronics and IT equipment, in each case for either resale or recycling. Envela continues to report its revenue and operating expenses based on its DGSE and ECHG operating segments, and as in the first three quarters of fiscal year 2020, disaggregated its revenue, within the operating segments, based on its resale and recycle presentation basis. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation.
 
The DGSE segment includes Dallas Gold and Silver Exchange, having three locations throughout the Dallas/Fort Worth Metroplex, with two new locations expected to open during the fourth quarter of 2020, Charleston Gold and Diamond Exchange, with one location in Charleston, South Carolina and Bullion Express.
 
The ECHG segment includes Echo, ITAD and Teladvance. These three companies focus on reusing and recycling electronics. Echo and ITAD were acquired by the Company on May 20, 2019, and Teladvance was acquired on August 2, 2019, and therefore the results of operations may not be comparable for the three and nine months ending September 30, 2019 and September 30, 2020.
 
We allocate a portion of certain corporate costs and expenses, including information technology, to our business segments that is included in Selling, General and Administrative (“SG&A”) expenses. Our management team evaluates each segment’s operating performance and allocates resources based on each segment’s profits. Allocation amounts are generally agreed upon by management, and may differ from arms-length allocations.  
 
The following separates DGSE and ECHG’s financial results of operations for the three months ending September 30, 2020:
 
 
 
For The Three Months Ended
 
 
 
September 30, 2020
 
 
 
DGSE
 
 
ECHG
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Sales
 $28,137,174 
 $10,673,710 
 $38,810,884 
Cost of goods sold
  24,704,214 
  6,943,273 
  31,647,487 
 
    
    
    
     Gross profit
  3,432,960 
  3,730,437 
  7,163,397 
 
    
    
    
Expenses:
    
    
    
Selling, general and administrative expenses
  1,703,394 
  2,166,279 
  3,869,673 
Depreciation and amortization
  79,190 
  100,592 
  179,782 
 
    
    
    
 
  1,782,584 
  2,266,871 
  4,049,455 
 
    
    
    
     Operating income (loss)
  1,650,376 
  1,463,566 
  3,113,942 
 
    
    
    
Other (income) expense:
    
    
    
     Other income, net
  (1,208)
  (25,746)
  (26,954)
     Interest expense
  53,931 
  101,868 
  155,799 
 
    
    
    
Income (loss) before income taxes
  1,597,653 
  1,387,444 
  2,985,097 
 
    
    
    
Income tax expense
  167 
  106 
  273 
 
    
    
    
               Net income (loss)
 $1,597,486 
 $1,387,338 
 $2,984,824 
 
 
 
14
 
 
The following separates DGSE and ECHG’s financial results of operations for the nine months ended September 30, 2020:
 
 
 
For The Nine Months Ended
 
 
 
September 30, 2020
 
 
 
DGSE
 
 
ECHG
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Sales
 $62,849,787 
 $22,335,847 
 $85,185,634 
Cost of goods sold
  55,437,880 
  12,811,819 
  68,249,699 
 
    
    
    
     Gross profit
  7,411,907 
  9,524,028 
  16,935,935 
 
    
    
    
Expenses:
    
    
    
Selling, general and administrative expenses
  5,121,568 
  6,189,975 
  11,311,543 
Depreciation and amortization
  235,471 
  303,746 
  539,217 
 
    
    
    
 
  5,357,039 
  6,493,721 
  11,850,760 
 
    
    
    
     Operating income
  2,054,868 
  2,655,307 
  5,085,175 
 
    
    
    
Other (income) expense:
    
    
    
     Other income, net
  (37,654)
  (82,856)
  (120,510)
     Interest expense
  142,824 
  302,587 
  445,411 
 
    
    
    
Income before income taxes
  1,949,698 
  2,810,576 
  4,760,274 
 
    
    
    
Income tax expense
  12,714 
  22,413 
  35,127 
 
    
    
    
               Net income
 $1,936,984 
 $2,788,163 
 $4,725,147 
 
NOTE 11 — REVENUE RECOGNITION
 
ASC 606 provided guidance to identify performance obligations for revenue-generating transactions. The initial step is to identify the contract with a customer created with the sales invoice or a repair ticket. Secondly, we identify the performance obligations in the contract, as we promise to deliver the purchased item or promised repairs in return for payment or future payment as a receivable. The third step is determining the transaction price of the contract obligation, as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations, as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied.
 
Beginning in fiscal year 2020, Envela disaggregated its revenue, within the operating segments, based on its resale and recycle presentation basis to more closely align with the Company’s activities. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation.
 
15
 
  
The following disaggregation of total revenue is listed by sales category and segment for the three months ended September 30, 2020 and 2019:
 
 
CONSOLIDATED
 
  Three Months Ended September 30,
 
 
 
  2020      
 
 
  2019         
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $27,101,477 
 $3,139,884 
  11.6% 
 $14,105,015 
 $1,659,597 
  11.8% 
Recycled
  1,035,697 
  293,076 
  28.3% 
  2,547,912 
  359,255 
  14.1% 
 
    
    
    
    
    
    
     Subtotal
  28,137,174 
  3,432,960 
  12.2% 
  16,652,927 
  2,018,852 
  12.%1 
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  7,812,553 
  2,376,406 
  30.4%
  5,133,181 
  2,408,416 
  46.9%
Recycled
  2,861,157 
  1,354,031 
  47.3%
  1,075,093 
  759,186 
  70.6%
 
    
    
    
    
    
    
    Subtotal
  10,673,710 
  3,730,437 
  34.9%
  6,208,274 
  3,167,602 
  51.0%
 
    
    
    
    
    
    
 
 $38,810,884 
 $7,163,397 
  18.5%
 $22,861,201 
 $5,186,454 
  22.7%
  
The following disaggregation of total revenue is listed by sales category and segment for the nine months ended September 30, 2020 and 2019:
 
CONSOLIDATED
 
  Nine Months Ended September 30, 
 
 
 
  2020       
 
 
  2019         
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $59,065,343 
 $6,632,131 
  11.2%
 $45,737,002 
 $5,705,946 
  12.5%
Recycled
  3,784,444 
  779,776 
  20.6%
  5,514,091 
  801,216 
  14.5%
 
    
    
    
    
    
    
     Subtotal
  62,849,787 
  7,411,907 
  11.8%
  51,251,093 
  6,507,162 
  12.7%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  15,595,813 
  5,818,672 
  37.3%
  5,116,345 
  2,335,781 
  45.7%
Recycled
  6,740,034 
  3,705,356 
  55.0%
  3,450,730 
  1,927,308 
  55.9%
 
    
    
    
    
    
    
    Subtotal
  22,335,847 
  9,524,028 
  42.6%
  8,567,075 
  4,263,089 
  49.8%
 
    
    
    
    
    
    
 
 $85,185,634 
 $16,935,935 
  19.9%
 $59,818,168 
 $10,770,251 
  18.0%
 
 
 
16
 
 
DGSE recognizes revenue from its over-the-counter retail and resale transactions, and its wholesale-dealer transactions when the merchandise is delivered and payment is either made immediately or via receivable obligation. We also recognize revenue upon the shipment of goods when resale and wholesale customers have fulfilled their obligation to pay or made a promise to pay through e-commerce or telephone sales. We account for shipping and handling costs as fulfillment costs after customers obtain control of the goods. We recycle material deemed to be past its useful life primarily to recover its precious-metal content. This material is sold to a Dallas-based refiner and we recognize revenue from these recycling sales when we receive payment.
 
DGSE offers layaway purchases, requiring a deposit, a 25% payment within two weeks, and full payment of the remaining balance within 90 days after the deposit. If customers fail to make either the 25% payment or final-balance payment within 90 days, then the items are returned to inventory, and such customers forfeit any payments made. We recognize revenue for layaway sales when the items are paid in full and delivered to the customers, or upon payment forfeiture.
 
Sales of fine watches, bullion, clearance/final-sale items, and custom, sized or engraved items are final. All other purchased items may be returned by customers to DGSE within 30 days from purchase for a full refund, less a 10% restocking fee. Returns are accounted for as reversals of the original transactions, with the effect of reducing revenues and cost of sales, and returning the merchandise to inventory. We have established an allowance for estimated returns related to sales based on historical returns and reduced our reported revenues and cost of sales accordingly. Our return allowance as of September 30, 2019 and September 30, 2020 remained the same for both periods, at approximately $28,000.
 
In limited circumstances, for wholesale dealers or resale customers, DGSE exchanges resale items for (a) similar resale items, or (b) similar resale items plus money payment. We recognize revenue for these exchanges in accordance with ASC 845, Nonmonetary Transactions. For resale item/resale item exchanges, without payments, we do not recognize any revenue; the basis of the resale items relinquished becomes the basis of the resale items received, less any indicated impairment of value of the resale items relinquished. For resale item/resale item-plus- payment exchanges, we recognize revenue to the extent of payments received, and determine the cost of sale based on the ratio of payments received to payments plus items received, multiplied by the cost of items surrendered.
 
ECHG has several revenue streams and recognizes revenue according to ASC 606 at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to customers. The revenue streams are described below.
 
Resale transactions are recorded when a product is shipped. Revenue is recognized when prices are established, terms agreed, and products shipped (i.e., upon ECHG fulfilling its performance obligations). ECHG typically requires resale customers to make prepayment based on an agreed commodity price. ECHG releases shipments upon confirming payment receipt and recognizes revenue on the shipping date. If payment is received on the last day of a month, and shipment occurs the following day, the payment is deferred revenue, recognized the following month when the shipment is made.
 
ECHG recycles material deemed to be past its useful life to recover precious and other non-ferrous metals. As part of its recycling operations, ECHG recognizes refining revenue when its performance obligations are satisfied, i.e., when its inventory arrives at the agreed destination and control of the contracted goods is transferred to the refiner. Our initial invoice is recognized in full when our performance obligation is satisfied, as referenced above. Under the guidance of ASC 606, an estimate of the variable consideration that we expect to receive is included in the transaction price, stated at the current precious-metal spot price and precious-metal weight. We adjust revenue in the period once the underlying metal’s weight and any movement in metal spot price is resolved, generally within six weeks. Adjustments from resolving the underlying uncertainty is netted with the remaining 40% due under the original contract.
 
 
17
 
 
ECHG also provides recycling services under agreed scopes of work. It recognizes services based on the number of units processed at a preset price per unit. ECHG produces weekly activity reports reflecting numbers of units processed; revenue is recognized based on billing from the weekly reports. ECHG performs recycling services either at its facilities or at clients’ facilities, as confirmed in the scope of work, together with the associated costs and payment terms.
 
Some of ECHG’s customers are on payment terms, and although low risk, occasionally the need arises to record an allowance for receivables that are deemed high risk to collect. We have established an allowance for estimated uncollectable receivables related to sales based on historical collections. Our allowance as of September 30, 2019 and September 30, 2020 was $0 and $20,428, respectively.
 
NOTE 12 — LEASES
 
When the ASC 842 lease provision was first adopted by the Company on January 1, 2019, we recognized $1,994,840 of operating lease right-of-use assets, $446,462 in short-term operating lease liabilities and $1,609,891 in long-term operating lease liabilities on our consolidated balance sheet. Operating lease liabilities were determined based on the present value of remaining minimum rental payments, and operating lease right-of-use assets were determined based on the value of lease liabilities, adjusted for deferred rent balances of $61,500, which were previously included in other liabilities.
 
We recognized an additional $2,350,781 of operating lease right-of-use assets, $703,523 in short-term operating lease liabilities and $1,647,258 in long-term operating lease liabilities on our consolidated balance sheet when we purchased the Echo Entities on May 20, 2019. Operating lease liabilities were determined based on the present value of remaining minimum rental payments, and operating lease right-of-use assets were determined based on the value of lease liabilities.
 
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the interest rate that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. If we cannot readily determine the discount rate implicit in lease agreements, we utilize our incremental borrowing rate.
 
The Company has six operating leases—five in the Dallas/Fort Worth Metroplex and one in Charleston, South Carolina. One lease expired during the quarter ended September 30, 2020. The lease for DGSE’s Southlake, Texas location expired July 31, 2020, with no renewal options. We decided not to renew the lease and vacated the premises on July 31, 2020. The lease for DGSE’s flagship-store at 13022 Preston Road, Dallas, Texas will expire October 31, 2021, with no current renewal options. This location is under review as to whether to pursue a lease renewal. The lease for DGSE’s Grand Prairie, Texas location expires June 30, 2022, and has no current renewal options. The lease for DGSE’s Charleston, South Carolina location expires April 30, 2025, with no additional renewal options. The lease for DGSE’s Euless, Texas location expires June 30, 2025, with an option for an additional five years. ECHG’s Echo Environmental, located on W. Belt Line Road, in Carrollton, Texas, renewed their lease starting January 1, 2021 for 61 months, expiring January 31, 2026. A portion of this building is sublet, and the rent received is applied against the rental expense for the building. ECHG’s lease for ITAD’s location on McKenzie Drive in Carrollton, Texas expires July 31, 2021 and has no renewal option. All of the Company’s six leases are triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance. Leasing costs for the three months ended September 30, 2020 and 2019 was $421,790 and $338,402, respectively. Leasing costs for the nine months ended September 30, 2020 and 2019 was $1,071,066 and 814,572, respectively, comprised of a combination of minimum lease payments and variable lease costs.
 
As of September 30, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases was 2.5 years and 5.5%, respectively. For the three months ending September 30, 2020 and 2019, the Company’s cash paid for operating lease liabilities was $428,241 and $348,955, respectively. The Company’s cash paid for operating lease liabilities for the nine months ended September 30, 2020 and 2019 was $1,100,280 and $826,745, respectively.
 
 
18
 
 
Future annual minimum lease payments as of September 30, 2020:
 
 
 
 
Operating
 
 
 
Leases
 
DGSE
 
 
 
2020 (excluding the nine months ending September 30, 2020)
 $130,612 
2021
  479,162 
2022
  235,674 
2023
  212,854 
2024
  213,884 
2025 and thereafter
  64,087 
 
    
Total minimum lease payments
  1,336,273 
Less imputed interest
  (126,541)
 
    
      Subtotal
  1,209,732 
 
    
ECHG
    
2020 (excluding the nine months ending September 30, 2020)
  147,707 
2021
  855,423 
2022
  784,598 
2023
  806,175 
2024
  828,346 
2025 and thereafter
  924,003 
 
    
Total minimum lease payments
  4,346,252 
Less imputed interest
  (482,659)
 
    
      Subtotal
  3,863,593 
 
    
 
  5,073,325 
Less current portion
  (1,132,411)
 
    
Long term operating lease liability
 $3,940,914 
 
    
 
NOTE 13 — BASIC AND DILUTED AVERAGE SHARES
 
A reconciliation of basic and diluted weighted average common shares for the three months ended September 30, 2020 and 2019 is as follows:
 
 
 
For the Three Months Ended
 
 
 
September 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Basic weighted average shares
  26,924,381 
  26,924,381 
Effect of potential dilutive securities
  15,250 
  - 
Diluted weighted average shares
  26,939,631 
  26,924,381 
 
    
    
 
 
 
19
 
 
A reconciliation of basic and diluted weighted average common shares for the nine months ended September 30, 2020 and 2019 is as follows:
 
 
 
For the Nine Months Ended
 
 
 
September 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Basic weighted average shares
  26,924,381 
  26,924,381 
Effect of potential dilutive securities
  15,250 
  - 
Diluted weighted average shares
  26,939,631 
  26,924,381 
 
    
    
 
 
For the three and nine months ended September 30, 2020 and 2019, there were 15,250 and 15,250 common stock options, warrants, and Restricted Stock Units (RSUs) unexercised, respectively.
 
NOTE 14 — LONG-TERM DEBT
 
 
  Outstanding Balance      
 
 
 
 
 
 
September 30,
 
 
December 31,
 
 
Current
 
 
 
 
2020
 
 
2019
 
 
Interest Rate
 
Maturity
DGSE
 
 
 
 
 
 
 
 
 
 
Note payable, related party (1)
 $2,885,476 
 $2,949,545 
  6.00% 
 May 16, 2024
Note payable, Truist Bank (2)
  950,711 
  - 
  3.65% 
 July 9, 2030
Note payable, Texas Bank & Trust (3)
  496,000 
  - 
  3.75% 
 September 14, 2025
 
    
    
    
 
 
  4,332,187 
  2,949,545 
    
 
ECHG
    
    
    
 
Note payable, related party (1)
  6,545,155 
  6,689,507 
  6.00% 
 May 16, 2024
 
    
    
    
 
Envela
    
    
    
 
Note payable (4)
  1,668,200 
  - 
    
 
 
    
    
    
 
Sub-Total
  12,545,542 
  9,639,052 
    
 
 
    
    
    
 
Current portion
  2,021,521 
  1,084,072 
    
 
 
    
    
    
 
 
 $10,524,021 
 $8,554,980 
    
 
 
(1) On May 20, 2019, in connection with the acquisition of the Echo Entities (the “Echo Transaction”) the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board of Directors of the Company (the “Board”). ECHG, LLC executed a 5-year, $6,925,979 note for the Echo Transaction, amortized over 20 years at a 6% annual interest rate. DGSE, LLC executed a 5-year, $3,074,021 note to pay off the accounts payable – related party balance to Elemetal, LLC (“Elemetal”) as of May 20, 2019. That promissory note is also amortized over 20 years at a 6% annual interest rate. On January 1, 2020, revisions were made on the original documents for both DGSE and ECHG notes. Originally, the DGSE note stated that the monthly interest and principal payment due was $41,866 and the ECHG note stated that the monthly interest and principal payment due was $94,327. The revised interest and principal payment due monthly on the note for DGSE is $22,203. The revised interest and principal payment due monthly on the note for ECHG is $49,646. The allocation between short-term and long-term notes payable, related party was revised accordingly starting with the three months ending March 31, 2020.
 
 
20
 
  
(2) On July 9, 2020, DGSE closed the purchase of a new retail building located at 610 E. Round Grove Road in Lewisville, Texas for $1.195 million. The purchase was partly financed through a $956,000, 10 year loan, bearing an annual interest rate of 3.65%, amortized over 20 years, payable to Truist Bank (f/k/a BB&T Bank). The note has monthly interest and principal payments of $5,645.
 
(3) On September 14, 2020, 1106 NWH Holdings, LLC, a wholly owned subsidiary of DGSE, closed on the purchase of a new retail building located at 1106 W. Northwest Highway in Grapevine, Texas for $620,000. The purchase was partly financed through a $496,000, 5 year loan, bearing an annual interest rate of 3.75%, amortized over 20 years, payable to Texas Bank & Trust. The note has monthly interest and principal payments of $2,941.
 
(4) The Company applied for and received, on April 20, 2020, approximately $1.67 million, 1% interest, federally backed loan intended to pay employees and cover certain rent and utility-related costs during the COVID-19 pandemic (the “Federal Loan”), with Truist Bank (f/k/a BB&T Bank) as lender. The Federal Loan is forgivable to the extent that certain criteria are met. We will apply for the forgiveness of the Federal Loan during the fourth quarter ending December 31, 2020; therefore, we are classifying the loan as short-term.
 
Future scheduled principal payments of our notes payable and notes payable, related party, as of September 30, 2020 are as follows:
 
Note payable, related party - DGSE
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the nine months ended September 30, 2020)
 $23,021 
2021
  95,129 
2022
  100,996 
2023
  107,225 
2024
  2,559,105 
 
    
   Subtotal
  2,885,476 
 
Note payable, Truist Bank - DGSE
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the nine months ended September 30, 2020)
  8,285 
2021
  33,904 
2022
  35,163 
2023
  36,468 
2024
  37,821 
Thereafter
  799,070 
 
    
   Subtotal
  950,711 
 
 
21
 
 
Note payable, Texas Bank & Trust - DGSE
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the nine months ended September 30, 2020)
  4,250 
2021
  17,399 
2022
  18,053 
2023
  18,732 
2024
  19,437 
Thereafter
  418,129 
 
    
   Subtotal
  496,000 
 
Note payable, related party - ECHG
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the nine months ended September 30, 2020)
  51,284 
2021
  211,903 
2022
  224,973 
2023
  238,849 
2024
  5,818,146 
 
    
   Subtotal
  6,545,155 
 
    
 
Note payable - Envela Corporation
 
 
 
 
 
 
 
Year Ending December 31,
 
 Amount
 
 
 
 
 
2020 (excluding the nine months ended September 30, 2020)
  1,668,200 
 
    
   Subtotal
  1,668,200 
 
    
 
 $12,545,542 
 
NOTE 15 — STOCK-BASED COMPENSATION
 
The Company accounts for share-based compensation by measuring the cost of employee services received in exchange for an award of equity instruments, including grants of stock options, based on the fair value of the award at the date of grant. In addition, to the extent that the Company receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in the consolidated statement of cash flows.
 
Stock-based compensation expense for the three months and nine months ended September 30, 2020 and 2019 was $0 and $0, respectively.
 
22
 
 

NOTE 16 — RELATED PARTY TRANSACTIONS
 
The Company has a corporate policy governing the identification, review, consideration and approval or ratification of transactions with related persons (each such person, a “Related Party”), as that term is defined in the Instructions to Item 404(a) of Regulation S-K, promulgated under the Securities Act of 1933, as amended (the “Securities Act”). Under this policy, all Related Party transactions are identified and approved prior to their consummation to ensure they are consistent with the Company’s and the stockholders’ best interests. Among other factors, the Company’s Board considers the size and duration of the transaction, the nature and interest of the of the Related Party in the transaction, whether the transaction may involve a conflict of interest, and if the transaction is on terms that are at least as favorable to the Company as would be available in a comparable transaction with an unaffiliated third party. Envela’s Board reviews all Related Party transactions at least annually to determine if it is in the best interest of the Company and the Company’s stockholders to continue, modify, or terminate any Related Party transactions. Envela’s Related Person Transaction Policy is available for review in its entirety under the “Investors” menu of the Company’s corporate relations website at www.envela.com.
 
Through a series of transactions beginning in 2010, Elemetal, NTR Metals, LLC (“NTR”) and Truscott Capital, LLC (“Truscott” and together with Elemetal and NTR, the “Related Entities”), became the largest shareholders of our common stock. On August 29, 2018, NTR transferred all of its common stock in the Company to Eduro Holdings, LLC (“Eduro”), which is controlled by John R. Loftus, the Company’s CEO, President and Chairman of the Board. A certain Related Entity (the “Related Trading Partner”) has been the Company’s primary refiner and bullion trading partner. For the nine months ended September 30, 2019, the Related Trading Partner accounted for 3% of sales and 1% of purchases. For the nine months ended September 30, 2020, the Related Trading Partner was no longer a Related Party. On May 20, 2019, through a series of transactions, the Related Entities sold their shares of the Company to Mr. Loftus. As of May 20, 2019, the Related Entities were no longer Related Parties. As of September 30, 2020, the Company was obligated to pay $0 to the Related Trading Party as a trade payable, and had a $0 receivable from the Related Trading Partner. As of September 30, 2019, the Company was obligated to pay $0 to the Related Trading Partner as a trade payable and had a $0 receivable from the Related Trading Partner. For the nine months ended September 30, 2020 and 2019, the Company paid the Related Entities $0 and $46,068, respectively, in interest on the Company’s outstanding payable.
 
Through a series of transactions, as reported on its Schedule 13D filed with the SEC on May 24, 2019, Truscott sold its 12,814,727 shares of the Company’s common stock, which then represented 47.7% of the Company’s common stock outstanding, to John R. Loftus, the Company’s CEO, President and Chairman of the Board. In connection therewith, Mr. Loftus assumed all rights under the existing registration rights agreements. On the same day, Mr. Loftus contributed his 12,814,727 shares of the Company’s common stock to N10TR, LLC (“N10TR”), which is controlled by Mr. Loftus. Mr. Loftus, by virtue of his relationship with Eduro and N10TR may be deemed to indirectly beneficially own the shares of the Company’s common stock that Eduro and N10TR directly beneficially own. Also on the same day, the Company entered into two loan agreements with Mr. Loftus. ECHG, LLC executed a 5-year, $6,925,979 note in connection with the Echo Transaction, amortized over 20 years at a 6% annual interest rate. DGSE, LLC executed a 5-year, $3,074,021 note to pay off the accounts payable – related party balance to Elemetal, as of May 20, 2019. That promissory note is also amortized over 20 years at a 6% annual interest rate. Both notes are being serviced by operational cash flow. For the nine months ended September 30, 2020 and 2019, the Company paid Mr. Loftus $442,550 and $194,081, respectively, in interest on the Company’s outstanding note payables, related party.
 
 
23
 
 
 NOTE 17 — SUBSEQUENT EVENTS
 
On September 14, 2020, the Company signed an initial agreement for the purchase of an office building to relocate its corporate headquarters, in Irving, Texas, for $3.521 million. The building has approximately 73,000 rentable square feet, and is approximately 70% leased. We closed the purchase of the building on November 4, 2020. The purchase was partly financed through a $2.96 million, 5 year loan, bearing an annual interest rate of 3.25%, amortized over 20 years, payable to Texas Bank & Trust. The Company will continue to sublet the building to offset the note payments.
 
The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global economic business conditions. Future sales on products like ours could decline due to increased commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic, the ultimate impact is highly uncertain and subject to change. We saw an adverse impact on the Company’s sales for the quarter ended June 30, 2020, and the pandemic may have a negative impact on our operations into year 2021. The duration of any such impact cannot be predicted, and the Company believes additional liquidity may be necessary to support ongoing operations during this period of uncertainty. The Company entered into a Federal Loan effective April 20, 2020 with Truist Bank (f/k/a BB&T Bank) as the lender in an aggregate principal amount of approximately $1.67 million pursuant to the Paycheck Protection Program under the Coronavirus Aid Relief, and Economic Security (CARES) Act. Subject to the terms of the note, the Federal Loan bears interest at a fixed rate of 1% per annum, with interest deferred up to 7 months payable monthly thereafter, has an initial term of two years and is unsecured and guaranteed by the Small Business Administration. The loan is intended to pay employees and cover certain rent and utility-related costs during the COVID-19 pandemic. The Federal Loan is forgivable to the extent that certain criteria are met. We will apply for the forgiveness of the Federal Loan during the fourth quarter ending December 31, 2020. There is no assurance that the Company will be granted forgiveness of the Federal Loan.
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Unless the context indicates otherwise, references to “we,” “us,” “our,” “the Company” and “Envela” refer to the consolidated business operations of Envela Corporation, and all of its direct and indirect subsidiaries.
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (this “Form 10-Q”), including but not limited to: (i) the section of this Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” (ii) information concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items; and, (iii) our strategies, plans and objectives, together with other statements that are not historical facts, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate” or “believe.” We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements other than statements of historical information provided herein are forward-looking statements based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ from current expectations are described under the section of this Form 10-Q entitled “Risk Factors” and elsewhere in this Form 10-Q as well as under the section entitled “Risk Factors” in our Fiscal 2019 10-K. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital expenditures, or store growth plans, or to reflect the occurrence of unanticipated events.
 
24
 
 
Results of Operations
 
General
 
The COVID-19 pandemic’s effects, including limited Company operations due to a portion of our retail stores being unable to sell certain products, mandated by governing authorities, and dramatic changes in consumer behavior, led to a decline in DGSE sales during the second quarter of fiscal year 2020. As the activity has grown rapidly, from increased business, at both DSGE's retail locations and ECHG's warehouses during the quarter ended September 30, 2020, we continue to exercise the safety protocols established by the Company at the start of the pandemic. The Company continues to operate at full strength and will take measures to keep our employees safe where possible. The Company established safety protocols by wearing masks and social distancing where possible. The Company had no layoffs or terminations due to the pandemic, although there had been reduced revenue from governmental shut-in orders for the second quarter ended June 30, 2020. As the activity has grown rapidly, from increased business, at both DGSE's retail locations and ECHG's warehouses during the quarter ended September 30, 2020, we continue to exercise the safety protocols established by the Company at the start of the pandemic. The Company continues to operate at full strength and will take measures to keep our employees safe where possible. Although retail investors’ demand for precious-metal coins appeared to have contributed to higher gold pricesjewelry consumption and recycled-gold supply plunged during the second quarter as consumers were confined to their homes for most of the quarter in an effort to stem the spread of COVID-19, according to the World Gold Council (the “WGC”). Over the longer term, the WGC noted it believed that recycled-gold volumes could likely rise once restrictions are lifted, with consumers looking for liquid assetssuch as goldto help alleviate economic hardship caused by the lockdown. Consumer demand for our products rose following the lifting of governmental orders to refrain from selling non-essential items in our retail stores due to the COVID-19 pandemic and a related spiking of gold prices.
 
The following disaggregation of total revenue is listed by sales category and segment for the three months ended September 30, 2020 and September 30, 2019:
 
CONSOLIDATED
Three Months Ended September 30,
 
 
2020
 
 
2019
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $27,101,477 
 $3,139,884 
  11.6%
 $14,105,015 
 $1,659,597 
  11.8%
Recycled
  1,035,697 
  293,076 
  28.3%
  2,547,912 
  359,255 
  14.1%
 
    
    
    
    
    
    
     Subtotal
  28,137,174 
  3,432,960 
  12.2%
  16,652,927 
  2,018,852 
  12.1%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  7,812,553 
  2,376,406 
  30.4%
  5,133,181 
  2,408,416 
  46.9%
Recycled
  2,861,157 
  1,354,031 
  47.3%
  1,075,093 
  759,186 
  70.6%
 
    
    
    
    
    
    
    Subtotal
  10,673,710 
  3,730,437 
  34.9%
  6,208,274 
  3,167,602 
  51.0%
 
    
    
    
    
    
    
 
 $38,810,884 
 $7,163,397 
  18.5%
 $22,861,201 
 $5,186,454 
  22.7%
 
 
 
 
25
 
 
The following disaggregation of total revenue is listed by sales category and segment for the nine months ended September 30, 2020 and September 30, 2019:
 
CONSOLIDATED
Nine Months Ended September 30,
 
 
2020
 
 
2019
 
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
 
Revenues
 
 
Gross Profit
 
 
Margin
 
DGSE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale
 $59,065,343 
 $6,632,131 
  11.2%
 $45,737,002 
 $5,705,946 
  12.5%
Recycled
  3,784,444 
  779,776 
  20.6%
  5,514,091 
  801,216 
  14.5%
 
    
    
    
    
    
    
     Subtotal
  62,849,787 
  7,411,907 
  11.8%
  51,251,093 
  6,507,162 
  12.7%
 
    
    
    
    
    
    
ECHG
    
    
    
    
    
    
Resale
  15,595,813 
  5,818,672 
  37.3%
  5,116,345 
  2,335,781 
  45.7%
Recycled
  6,740,034 
  3,705,356 
  55.0%
  3,450,730 
  1,927,308 
  55.9%
 
    
    
    
    
    
    
    Subtotal
  22,335,847 
  9,524,028 
  42.6%
  8,567,075 
  4,263,089 
  49.8%
 
    
    
    
    
    
    
 
 $85,185,634 
 $16,935,935 
  19.9%
 $59,818,168 
 $10,770,251 
  18.0%
 
Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019
 
Revenue. Revenue related to DGSE’s continuing operations increased by $11,484,247, or 69%, during the three months ended September 30, 2020, to $28,137,174, as compared to $16,652,927 during the same period in 2019. Resale revenue, such as bullion, jewelry, watches and rare coins, increased by $12,996,462, or 92%, during the three months ended September 30, 2020, to $27,101,477 as compared to $14,105,015 during the same period in 2019. Recycled-material sales decreased 59% to $1,035,697 for the three months ended September 30, 2020, as compared to $2,547,912 for the three months ended September 30, 2019. Revenue increased for resale items for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to the apparent increase in consumer demand following the lifting of governmental orders to refrain from selling non-essential items in our retail stores due to the COVID-19 pandemic and the related spiking of gold prices due to the pandemic. The decrease in recycled-materials revenue is primarily due to the spike in resale revenue stemming from the COVID-19 pandemic, as we purchased inventory for the quarter ended September 30, 2020, more inventory was kept for our retail stores as compared to the three months ended September 30, 2019, and recycled less.
 
Revenue related to ECHG’s continuing operations for the three months ended September 30, 2020 increased by $4,465,436, or 72%, to $10,673,710, as compared to $6,208,274 during the same period in 2019. Resale revenue increased by $2,679,372, or 52%, to $7,182,553 as compared to $5,133,181 during the three months ended September 30, 2019. Recycled sales increased by $1,786,064 or 166%, to $2,861,157 as compared to $1,075,093 for the three months ended September 30, 2019. Teladvance was acquired on August 2, 2019; therefore, the revenue for the three months ended September 30, 2019 may not be fully comparable to the three months ended September 30, 2020.
 
The Company has no layoffs to-date or terminations due to the pandemic, although revenue declined from governmental shut-in orders for the second quarter ended June 30, 2020.
 
26
 
 
Gross Profit. Gross profit related to DGSE’s operations for the three months ended September 30, 2020, increased by $1,414,108, or 70%, to $3,432,960 as compared to $2,018,852 during the same period in 2019. The increase in total gross profit was due primarily to the increase in sales velocity of resale items due to the apparent increase in consumer demand following lifting of the governmental restrictions from the COVID-19 pandemic and the aforementioned related spike in gold prices. Although there was increased revenue for the resale items, there was also a slightly lower gross-margin percentages due to DGSE’s desire to increase the sales velocity after the lifting of governmental orders due to the COVID-19 pandemic.
 
Gross profit related to ECHG for the three months ended September 30, 2020 was $3,730,437 as compared to $3,167,602 during the same period in 2019. Gross profit for resale revenue for the three months ended September 30, 2020 was $2,376,406, or 64% of ECHG’s gross profit, compared to recycled gross profit during the same period of $1,354,031, or 36%. Teladvance was acquired on August 2, 2019; therefore, the gross profit for the three months ended September 30, 2019 may not be fully comparable to the three months ended September 30, 2020.
 
Selling, General and Administrative Expenses. For the three months ended September 30, 2020, Selling, General and Administrative (“SG&A”) expenses for DGSE decreased by $164,750, or 9%, to $1,703,394, as compared to $1,868,144 during the same period in 2019. The decrease in SG&A was primarily due to corporate overhead expenses being shared between both the DGSE and ECHG segments.
 
The SG&A expenses for ECHG totaled $2,166,279 for the three months ended September 30, 2020. Teladvance was acquired on August 2, 2019, therefore, the SG&A expense for the three months ended September 30, 2019 may not be fully comparable to the three months ended September 30, 2020.
 
Depreciation and Amortization. For the three months ended September 30, 2020, depreciation and amortization expense for DGSE was $79,190, compared to $44,368 for the same period in 2019, an increase of $34,822, or 78%. The increase of $34,822 from the three months ending September 30, 2020 compared to the three months ending September 30, 2019 is primarily due to a vehicle purchase during the first quarter of 2020 and amortization expenses from additional point of sale “POS” costs during the year to be amortized.
 
The Depreciation and Amortization expense for ECHG consisted of depreciation of $16,692 and amortization of $83,900 for the three months ending September 30, 2020. Amortization for the three months ended September 30, 2020, is from the Echo Entities’ Purchase Price Allocation of intangibles amortized over 10 years. Teladvance was acquired on August 2, 2019; therefore, the depreciation and amortization expense for the three months ended September 30, 2019 may not be fully comparable to the three months ended September 30, 2020.
 
Interest Expense. For the three months ended September 30, 2020, interest expense for DGSE was $53,931, an increase of $7,167 or 15%, compared to $46,764 during the same period in 2019. This increase was primarily the result of additional loans to DGSE to finance recent real estate acquisitions for retail operations, as discussed above.
 
The interest expense for ECHG was $101,868 for the three months ended September 30, 2020, as compared to $101,956 for the same period in 2019, a slight decrease due to a paid down principal balance on the note payable, related party. The interest paid and accrued interest for the three months ended September 30, 2020 is from the note payable, related party, the proceeds of which were used for the purchase of the Echo Entities.
 
Income Tax Expense. For the three months ending September 30, 2020, income tax expense was $273 a decrease of $41,437, compared to $41,710 for the three months ending September 30, 2019. The effective income tax rate was 0% and 3.9% for the three months ending September 30, 2020 and 2019, respectively. Differences between our effective income tax rate and the U.S. federal statutory rate are the result of state taxes, non-deductible expenses and changes in the valuation allowance in relation to the deferred tax asset for NOL carryforwards.
 
Net Income. We recorded a net income of $2,984,824 for the three months ended September 30, 2020, compared to a net income of $1,035,475 for the three months ended September 30, 2019, an increase in net income of $1,949,349, which is due primarily to an almost 70% increase in revenue between the periods.
 
 
27
 
 
Earnings Per Share. For the three months ending September 30, 2020, our net income per basic and diluted shares attributable to common stockholders was $0.11, compared to $0.04 per basic and diluted shares for the three months ending September 30, 2019. This increase is again due primarily to an almost 70% increase in revenue between the periods.
 
Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019
 
Revenues. Revenue related to DGSE’s operations increased by $11,598,693, or 23%, during the nine months ended September 30, 2020, to $62,849,787, as compared to $51,251,094 during the same period in 2019. Resale revenue, such as bullion, jewelry, watches and rare coins, increased $13,328,341, or 29%, compared to the nine months ended September 30, 2019. Recycled revenue decreased by approximately 31%, compared to the prior year nine months. Revenue increased for the nine months ending September 30, 2020, compared to the nine months ending September 30, 2019, primarily due an apparent increase in consumer demand following the lifting of governmental orders to refrain from selling non-essential items in our retail stores because of the COVID-19 pandemic and the spiking of gold prices due to the pandemic.
 
Revenue related to ECHG for the nine months ended September 30, 2020 was $22,335,847, consisting of $15,595,813 of resale revenue, or 70% of ECHG sales, compared to $6,740,034 of recycled sales, or 30%. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019; therefore, the revenue for the nine months ended September 30, 2019 is not comparable to the nine months ended September 30, 2020.
 
Gross Profit. Gross profit for the nine months ended September 30, 2020, related to DGSE, increased by $904,745, or 14%, to $7,411,907, as compared to $6,507,162 during the same period in 2019. The increase in gross profit was primarily due to increased sales. As a percentage of revenue, gross margin decreased to 11.8% for the nine months ended September 30, 2020, compared to 12.7% for the same period in 2019.
 
Gross profit related to ECHG for the nine months ended September 30, 2020, was $9,524,028, consisting of gross profit for resale revenue of $5,818,672, or 61% of ECHG’s gross profit, and recycled gross profit accounting for $3,705,356, or 39%. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019; therefore, the gross profit for the nine months ended September 30, 2019 is not comparable to the nine months ended September 30, 2020.
 
Selling, General and Administrative Expenses. For the nine months ended September 30, 2020, DGSE’s SG&A expenses decreased by $362,514, or 7%, to $5,121,568, as compared to $5,484,082 during the same period in 2019. The decrease in SG&A was primarily due to corporate overhead expenses being shared between both the DGSE and ECHG segments.
 
The SG&A expenses for ECHG totaled $6,189,975 for the nine months ended September 30, 2020. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019; therefore, the SG&A expense for the nine months ended September 30, 2019 is not comparable to the nine months ended September 30, 2020.
 
Depreciation and Amortization. For the nine months ended September 30, 2020, DGSE’s depreciation and amortization expense was $235,471, compared to $193,141 for the same period in 2019. The increase is primarily due to additional POS costs that are being amortized and a vehicle purchased during the first quarter of 2020.
 
The Depreciation and Amortization expense for ECHG consisted of depreciation of $52,046 and amortization of $251,700 for the nine months ended September 30, 2020. Amortization for the nine months ended September 30, 2020 is due to the Echo Entities’ Purchase Price Allocation of intangibles being amortized over 10 years. The Echo Entities were acquired on May 20, 2019, and Teladvance was acquired on August 2, 2019; therefore, the depreciation and amortization expense for the nine months ended September 30, 2019 is not comparable to the nine months ended September 30, 2020.
 
Interest Expense. For the nine months ended September 30, 2020, the interest expense for DGSE was $142,824, an increase of $35,854, or 34%, compared to $106,970 during the same period in 2019. The increase is primarily due to an increased interest rate on the note payable, related party, that paid off the accounts payable, related party, outstanding balance on May 20, 2019.
 
 
28
 
 
The interest expense for ECHG was $302,587 for the nine months ended September 30, 2020, which is the interest paid and accrued for the nine months ended September 30, 2020 for the note payable, related party, the proceeds of which were used for the purchase of the Echo Entities. The Echo Entities were acquired on May 20, 2019; therefore, the interest expense for the nine months ended September 30, 2019 is not comparable to the nine months ended September 30, 2020.
  
Income Tax Expense. For the nine months ended September 30, 2020, income tax expense was $35,127, a decrease of $30,238, or 46%, compared to $65,365 for the nine months ended September 30, 2019. The effective income tax rate was 1.0% and 3.2% for the nine months ended September 30, 2020 and 2019, respectively. Differences between our effective income tax rate and the U.S. federal statutory rate are the result of state taxes, non-deductible expenses and changes in the valuation allowance in relation to the deferred tax asset for NOL carryforwards.
 
Net Income. The Company recorded a net income of $4,725,147 for the nine months ended September 30, 2020, compared to a net income of $1,979,637 for the nine months ended September 30, 2019, an increase in net income of $2,745,510, which is due primarily from the additional net income attributable to ECHG and increased sales in both the DGSE and ECHG segments, for the nine months ended September 2020, compared to the nine months ended September 30, 2019.
 
Earnings Per Share. For the nine months ended September 30, 2020, our net income per basic and diluted shares attributable to common stockholders was $0.18, compared to $0.08 per basic and diluted shares for the nine months ended September 30, 2019.
 
Liquidity and Capital Resources
 
During the nine months ended September 30, 2020, cash flows provided by operations totaled $3,234,699, and during the nine months ended September 30, 2019 cash flows used in operations totaled $2,732,488, an increase of $5,967,187. Cash provided by operations for the nine months ended September 30, 2020 was driven largely by the increase of accounts payable and accrued expenses of $1,006,345 and net income added to non-cash items of depreciation and amortization of $5,264,364, offset by an increase in trade receivables of $1,661,332 and an increase in inventories of $1,108,062. Cash used in operations for the nine months ended September 30, 2019 was driven largely by the reduction of accounts payable and accrued expenses of $1,006,345, the reduction of accounts payable, related party of $3,074,021, the increase of trade receivables of $920,929, the increase in inventories of $256,103 and the increase in prepaid expenses of $212,866, offset by net income added non-cash items of depreciation, amortization, bad debt expense of $2,207,195.
 
During the nine months ended September 30, 2020 and 2019, cash flows used in investing activities totaled $3,382,591 and $6,024,506, respectively, a period-over-period decrease of $2,641,915. The use of cash in investing activities during the nine months ended September 30, 2020 was primarily due to investing in a note receivable of $1,500,000 to CExchange and purchasing two new retail locations for DGSE totaling $1,815,000, of which $363,000 was cash payments applied against the purchases of the retail locations and the remainder of the balance purchased was financed through notes payable. The use of cash in investing activities during the nine months ended September 30, 2019 was primarily due to purchasing the Echo Entities for $5,876,517, net of cash.
 
During the nine months ended September 30, 2020 and 2019, cash flows provided by financing totaled $2,906,490 and $9,858,432, respectively, a period-over-period decrease of $6,951,942. The cash provided by financing during the nine months ended September 30, 2020 were payments made against the notes payable, related party of $208,421, offset by the Federal Loan received of $1,668,200 and two loans from Texas Bank and Trust for $496,000 and Truist Bank (f/k/a BB&T Bank) for $956,000. The cash provided by financing during the nine months ended September 30, 2019 represented payments made against the notes payable, related party of $292,568, offset by financing to pay off the accounts payable, related party of $3,074,021 and financing for the acquisition of the Echo Entities of $6,925,979.
 
 
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The COVID-19 pandemic has adversely affected global economic business conditions. Future sales of products like ours have and may continue to decline due to increased commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic, the ultimate impact, including the impact on our liquidity and capital resources, is highly uncertain and subject to change. The duration of any such impact cannot be predicted, and the Company believes additional liquidity may be necessary to support ongoing operations during this period of uncertainty. The Company entered into a Payment Protection Term Note effective April 20, 2020 with Truist Bank (f/k/a BB&T Bank) as the lender in an aggregate principal amount of approximately $1.67 million pursuant to the Paycheck Protection Program under the Coronavirus Aid Relief, and Economic Security (CARES) Act, the Federal Loan. On May 18, 2020, the Company renewed and increased its Texas Bank & Trust Co. line of credit (the “Truist Credit Facility”) from $1,000,000 to $3,500,000, and from a one-year term to a two-year term, of which $0 is currently drawn. The loan agreement for the Truist Credit Facility includes a 30-day clean-up provision. From time to time we adjust our inventory levels to meet seasonal demand or working-capital requirements. Management believes we have sufficient capital resources (including the Federal Loan) to meet working-capital requirements. If additional working capital is required, we will seek additional loans from individuals or other commercial banks. The availability of such loans on acceptable terms is uncertain.
 
We expect our capital expenditures to total approximately $150,000 during the next twelve months. These expenditures will be driven by build-out expenses for properties purchased by DGSE for retail locations, and the purchase of the office building discussed below.
 
On September 14, 2020, the Company signed an initial agreement for the purchase of an office building to relocate its corporate headquarters, in Irving, Texas, for $3.521 million. The building has approximately 73,000 rentable square feet, and is approximately 70% leased. We closed the purchase of the building on November 4, 2020. The purchase was partly financed through a $2.96 million, 5 year loan, bearing an annual interest rate of 3.25%, amortized over 20 years, payable to Texas Bank & Trust. The Company will continue to sublet the building to offset the note payments. 
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Because we are a “smaller reporting company,” we are not required to disclose the information required by this item.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) and Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and our principal financial officer, conducted an evaluation, as of the end of the period covered by the Quarterly Report on Form 10-Q, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management has concluded that as of September 30, 2020, the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in that the reports that we file or submit under the Exchange Act and are effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
 
 
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Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
 
PART II - OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
There are various claims, lawsuits and pending actions against the Company arising in the normal course of the Company's business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flow. Management is also not aware of any legal proceedings contemplated by government agencies of which the outcome is reasonable likely to have a material adverse effect on the Company's financial condition, results of operations or cash flow.
 
 
ITEM 1A.  RISK FACTORS
 
Because we are a “smaller reporting company”, we are not required to disclose the information required by this item. Although we are not required to address this item, we feel it is prudent to do so.  
 
On March 11, 2020, the World Health Organization announced that infections of the coronavirus COVID-19 had become pandemic, and on March 13, the U.S. President announced a National Emergency relating to the disease. There has been widespread infection throughout the United States and abroad. National, state and local authorities have recommended social distancing and imposed quarantine and isolation measures on large portions of the population, including mandatory business and partial-business closures. These measures, while intended to protect human life, are having serious adverse impacts on domestic and foreign economies. The effectiveness of economic-stabilization efforts, including government payments to affected citizens and industries, is uncertain. Some economists are predicting the United States will soon enter a recession.
 
The sweeping nature of the COVID-19 pandemic makes it extremely difficult to predict how our business and operations will be affected in the long term, though the likely overall economic impact of the pandemic is viewed as highly negative to the general economy. While it remains a developing situation, any continuing quarantines, interruptions in travel and business disruptions with respect to us, our customers or our supply chain could adversely affect our sales, costs and liquidity position, possibly to a significant degree. We may also become subject to partial store closures, as before. Although we are continuing to monitor and assess the effects of the coronavirus pandemic on our business, the ultimate impact is highly uncertain and subject to change. The duration of any such impact cannot be predicted.
 
The coronavirus pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable reductions in demand for certain of our products and services.
 
DGSE’s business, similar to the jewelry industry overall, is affected by fluctuations in precious-metals prices. Such fluctuations, particularly with respect to gold, which accounts for the majority of DGSE’s merchandise costs, could adversely impact its earnings and cash availability. Additionally, DGSE depends on purchasing products and materials from secondary markets. At any given time, we may be unable to obtain an adequate supply of products and materials at prices or other terms acceptable to us.
 
ECHG’s recycling business is affected by precious and other non-ferrous metals’ prices, which fluctuate based upon global supply-and-demand dynamics, among other things, with the greatest impact relating to gold. Additionally, ECHG depends on purchasing products and materials from secondary markets. At any given time, we may be unable to obtain an adequate supply of products and materials at prices and other terms acceptable to us. Compliance with future environmental laws and regulations, or current environmental laws and regulations reinterpreted in the future, could result in costs that have a material adverse effect on our business, results of operations and financial condition.
 
Except as set forth above, there have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report, filed with the SEC on March 26, 2020.
 
 
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
Not applicable
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
Not applicable
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable
 
ITEM 5. OTHER INFORMATION
 
As noted above, On July 9, 2020 and September 14, 2020, DGSE closed the purchases of new retail buildings located in Lewisville, Texas and Grapevine, Texas, respectively. The agreements for the purchases of these retail buildings were signed on May 22, 2020 and June 24, 2020. The purchase of the Lewisville location was for consideration of $1.195 million and the purchase of the Grapevine location was for consideration of $620,000. Each was financed in substantial part by long-term loans, as discussed above. The purchase agreements of these retail locations are attached to this quarterly report on Form 10-Q as Exhibit 10.1 and 10.2, respectively, and are incorporated by reference into this item 5.
 
On September 14, 2020, the Company signed an initial agreement for the purchase of an office building to relocate its corporate headquarters, in Irving, Texas, for $3.521 million. The building has approximately 73,000 rentable square feet, and is approximately 70% leased. We closed the purchase of the building on November 4, 2020. The purchase was partly financed through a $2.96 million, 5 year loan, bearing an annual interest rate of 3.25%, amortized over 20 years, payable to Texas Bank & Trust. The Company will continue to sublet the building to offset the note payments  The purchase agreement of this office building is attached to this quarterly report on Form 10-Q as Exhibit 10.3 and is incorporated by reference into this Item 5.
 
As previously disclosed, On January 1, 2020, revisions were made on the notes payable, related party. Originally, the DGSE note stated that the monthly interest and principal payment due was $41,866 and the ECHG note stated that the monthly interest and principal payment due was $94,327. The revised interest and principal payment due monthly on the note for DGSE is $22,203. The revised interest and principal payment due monthly on the note for ECHG is $49,646. The revised notes payable, related party are attached to this quarterly report on Form 10-Q as Exhibit 10.4 and 10.5, respectively, and are incorporated by reference into this Item 5.
 

 
 
 
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ITEM 6. EXHIBITS
 
Exhibit
Number
 
Description
 
Filed
Herein
 
Incorporated by
Reference
 
Form
 
Date Filed with SEC
 
Exhibit Number
 
 
Purchase agreement, dated May 22, 2020, for the Lewisville, Texas property purchased by DGSE, LLC
 
 
X
 
 
X
 
 
10-Q
 
 
November 5, 2020
 
 
10.1
 
 
 
Purchase agreement, dated June 24, 2020, for the Grapevine, Texas property purchased by 1106 NWH Holdings, LLC, wholly owned by DGSE, LLC
 
 
X
 
 
X
 
 
10-Q
 
 
November 5, 2020
 
 
10.2
 
 
 
Purchase agreement, dated September 14, 2020, for the Irving, Texas office building purchased by Envela Corporation
 
 
X
 
 
X
 
 
10-Q
 
 
November 5, 2020
 
 
10.3
 
 
 
Revised note payable, related party, dated January 1, 2020, between DGSE, LLC and John R. Loftus.
 
 
X
 
 
X
 
 
10-Q
 
 
November 5, 2020
 
 
10.4
 
 
 
Revised note payable, related party, dated January 1, 2020, between ECHG, LLC and John R. Loftus
 
 
X
 
 
X
 
 
10-Q
 
 
November 5, 2020
 
 
10.5
 
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
 
 
 
 
X








 
 
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen
 
 
X
 
 
 
 
 
 
 
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
 
 
X
 
 
 
 
 
 
 
 
 
 
 
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen
 
 
X
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
X
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
X
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
 
X
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
 
X
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
 
X
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
 
X
 
 
 
 
 
 
 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ENVELA CORPORATION
(Registrant)
  
 
Date: November 5, 2020   
By:  
/s/ JOHN R. LOFTUS
 
 
 
John R. Loftus
 
 
 
Chief Executive Officer
(Principal Executive Officer) 
 
 
 
 
Date: November 5, 2020   
 
/s/ BRET A. PEDERSEN
 
 
 
Bret A. Pedersen
 
 
 
Chief Financial Officer
(Principal Accounting Officer) 
 
 
 
 
34