Item 1. Financial Statements
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Revenue:
|
|
|
|
Sales
|
$25,490,441
|
$25,829,143
|
|
Cost
of goods sold
|
19,186,177
|
20,527,863
|
|
|
|
|
|
Gross
margin
|
6,304,264
|
5,301,280
|
|
|
|
|
|
Expenses:
|
|
|
|
Selling,
General & Administrative Expenses
|
4,153,229
|
3,825,200
|
|
Depreciation
and Amortization
|
204,912
|
179,729
|
|
|
|
|
|
Total
operating expenses
|
4,358,141
|
4,004,929
|
|
|
|
|
|
Operating
income
|
1,946,123
|
1,296,351
|
|
Other
income, net
|
271,941
|
41,690
|
|
|
179,022
|
145,315
|
|
|
|
|
|
Income
before income taxes
|
2,039,042
|
1,192,726
|
|
Income
tax expense
|
30,770
|
18,577
|
|
|
|
|
|
Net
income
|
$2,008,272
|
$1,174,149
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
Net
income
|
$0.07
|
$0.04
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
Net
income
|
$0.07
|
$0.04
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
Basic
|
26,924,631
|
26,924,381
|
|
Diluted
|
26,939,631
|
26,939,631
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$8,396,997
|
$9,218,036
|
|
Trade
receivables, net of allowances
|
3,184,473
|
2,846,619
|
|
Notes
receivable
|
123,472
|
-
|
|
Inventories
|
11,630,383
|
10,006,897
|
|
Current
right-of-use assets from operating leases
|
1,057,511
|
1,157,077
|
|
Prepaid
expenses
|
858,299
|
281,719
|
|
|
|
|
|
Total
current assets
|
25,251,135
|
23,510,348
|
|
Notes
receivable, less current portion
|
2,100,000
|
2,100,000
|
|
Property
and equipment, net
|
6,984,653
|
6,888,601
|
|
Goodwill
|
1,367,109
|
1,367,109
|
|
Intangible
assets, net
|
2,892,073
|
2,992,473
|
|
Operating
lease right-of-use assets
|
3,344,732
|
3,522,923
|
|
Other
long-term assets
|
297,638
|
197,638
|
|
|
|
|
|
Total
assets
|
$42,237,340
|
$40,579,092
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable-Trade
|
$1,192,454
|
$1,510,697
|
|
Notes
payable, related party
|
311,067
|
307,032
|
|
Notes
payable
|
1,825,487
|
1,813,425
|
|
Current
operating lease liabilities
|
1,054,599
|
1,148,309
|
|
Accrued
expenses
|
922,159
|
844,324
|
|
Customer
deposits and other liabilities
|
689,592
|
428,976
|
|
|
|
|
|
Total
current liabilities
|
5,995,358
|
6,052,763
|
|
Notes
payable, related party, less current portion
|
8,976,922
|
9,052,810
|
|
Notes
payable, less current portion
|
4,188,357
|
4,240,658
|
|
Long-term
operating lease liabilities, less current portion
|
3,489,989
|
3,654,419
|
|
|
|
|
|
Total
liabilities
|
22,650,626
|
23,000,650
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred
stock, $0.01 par value; 5,000,000 shares authorized;
|
|
|
|
no
shares issued and outstanding
|
-
|
-
|
|
Common
stock, $0.01 par value; 60,000,000 shares authorized;
|
|
|
|
26,924,631
shares issued and outstanding
|
269,246
|
269,246
|
|
Additional
paid-in capital
|
40,173,000
|
40,173,000
|
|
Accumulated
deficit
|
(20,855,532)
|
(22,863,804)
|
|
|
|
|
|
Total
stockholders’ equity
|
19,586,714
|
17,578,442
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$42,237,340
|
$40,579,092
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
Operations
|
|
|
|
Net
income
|
$2,008,272
|
$1,174,149
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operations:
|
|
|
|
Depreciation,
amortization, and other
|
204,912
|
179,729
|
|
Bad
debt expense
|
6,249
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Trade
receivables
|
(344,103)
|
525,519
|
|
Inventories
|
(1,623,485)
|
111,931
|
|
Prepaid
expenses
|
(576,578)
|
(163,312)
|
|
Other
assets
|
(100,000)
|
5,120
|
|
Accounts
payable and accrued expenses
|
(240,410)
|
(647,804)
|
|
Operating
leases
|
19,616
|
(34,907)
|
|
Customer
deposits and other liabilities
|
260,615
|
(118,710)
|
|
Net
cash provided by (used in) operations
|
(384,912)
|
1,031,715
|
|
|
|
|
|
Investing
|
|
|
|
Investment
in note receivable
|
(123,472)
|
(1,500,000)
|
|
Purchase
of property and equipment
|
(200,563)
|
(29,046)
|
|
|
|
|
|
Net
cash used in investing
|
(324,035)
|
(1,529,046)
|
|
|
|
|
|
Financing
|
|
|
|
Payments
on notes payable, related party
|
(71,853)
|
(69,404)
|
|
Payments
on notes payable
|
(40,239)
|
-
|
|
|
|
|
|
Net
cash used in financing
|
(112,092)
|
(69,404)
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
(821,039)
|
(566,735)
|
|
Cash
and cash equivalents, beginning of period
|
9,218,036
|
4,510,660
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
$8,396,997
|
$3,943,925
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
Cash
paid during the period for:
|
|
|
|
Interest
|
$179,082
|
$121,718
|
|
Income
taxes
|
$-
|
$-
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY
For the Three Months ended March 31, 2020 and 2021
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
Total Stockholders' Equity
|
|
Balances at December 31,
2019
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(29,247,747)
|
$11,194,174
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
1,174,149
|
1,174,149
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31,
2020
|
|
|
|
|
|
|
|
|
|
26,924,381
|
$269,244
|
-
|
$-
|
$40,172,677
|
$(28,073,598)
|
$12,368,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
Total Stockholders' Equity
|
|
Balances at December 31,
2020
|
26,924,631
|
$269,246
|
-
|
$-
|
$40,173,000
|
$(22,863,804)
|
$17,578,442
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
2,008,272
|
2,008,272
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31,
2021
|
|
|
|
|
|
|
|
|
|
26,924,631
|
$269,246
|
-
|
$-
|
$40,173,000
|
$(20,855,532)
|
$19,586,714
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The
interim condensed consolidated financial statements of Envela
Corporation, a Nevada corporation, and its subsidiaries (together
with its subsidiaries, the “Company” or
“Envela”), included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”), including under the
Securities Act of 1933, as amended (the “Securities
Act”) and the Securities and Exchange Act of 1934, as amended
(the “Exchange Act”). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) have been
condensed or omitted pursuant to the SEC’s rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. The
Company suggests that these financial statements be read in
conjunction with the financial statements and notes included in the
Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2020 filed with the SEC on March 23, 2021(as
amended, the “2020 Annual Report”). In the opinion of
the management of the Company, the accompanying unaudited interim
financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary to present fairly its
results of operations and cash flows for the periods presented. The
results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. Certain
reclassifications were made to the prior year's consolidated
financial statements to conform to the current year presentation.
The information provided as of March 31, 2021 in these notes to the
interim condensed consolidated financial statements is
unaudited.
NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF
OPERATIONS
Envela
and its subsidiaries engage in diverse business activities within
the recommerce sector. These activities include being one of the
nation's premier authenticated recommerce retailers of luxury hard
assets; providing end-of-life asset recycling; offering data
destruction and IT asset management; and providing products,
services and solutions to industrial and commercial companies.
Envela operates primarily via two operating and reportable
segments. Through DGSE, LLC (“DGSE”), it operates
Dallas Gold & Silver Exchange, Charleston Gold & Diamond
Exchange, and Bullion Express brands. Through ECHG, LLC
(“ECHG”), it operates Echo Environmental Holdings, LLC
(“Echo”), ITAD USA Holdings, LLC (“ITAD
USA”) and Teladvance, LLC (“Teladvance”). Envela
is a Nevada corporation, headquartered in Irving,
Texas.
DGSE
primarily buys and resells or recycles luxury hard assets like
jewelry, diamonds, gemstones, fine watches, rare coins and related
collectibles, precious-metal bullion products, gold, silver and
other precious-metals. DGSE operates six jewelry stores at both the
retail and wholesale levels throughout the United States via its
facilities in Texas and South Carolina. Buying and selling items
for their precious-metals content is a major method by which DGSE
markets itself. DGSE also offers jewelry repair services,
custom-made jewelry and consignment items, and maintains
relationships with refiners for precious-metal items that are not
appropriate for resale. The Company also maintains a presence in
the retail market through its websites, www.dgse.com
and www.cgdeinc.com.
ECHG
owns and operates Echo, ITAD USA and Teladvance, through which it
primarily buys the electronic components from business and other
organizations, such as school districts, for end-of-life recycling
and resale, or to add life to economic devices by data destruction
and refurbishment for reuse. Echo focuses on end-of-life
electronics recycling and sustainability, ITAD USA provides IT
equipment disposition, including compliance and data sanitization
services, and Teladvance operates as a value-added reseller by
providing offerings and services to companies looking either to
upgrade capabilities or dispose of equipment. Like DGSE, ECHG also
maintains relationships with refiners or recyclers to which it
sells valuable materials it extracts from electronics and IT
equipment that are not appropriate for resale or reuse.
ECHG’s customers are companies and organizations that are
based domestically and internationally.
For
additional information on the businesses of both DGSE and ECHG, see
“Item 1. Business – Operating Segments” in the
Company’s 2020 Annual Report.
The
interim condensed consolidated financial statements have been
prepared in accordance with U.S. GAAP and include the accounts of
the Company and its subsidiaries. All material intercompany
transactions and balances have been eliminated.
NOTE 3 — ACCOUNTING POLICIES AND
ESTIMATES
Financial
Instruments
The carrying amounts reported in the
condensed consolidated balance sheets for cash equivalents,
trade receivables,
accounts payable, accrued expenses and notes payable approximate
fair value because of the
immediate or short-term nature of these financial instruments.
Notes receivable, notes payable and notes payable, related party
approximate fair value due to the market interest rate
charged.
Earnings Per Share
Basic earnings per share of our common stock, par value $0.01 per
share (our “Common Stock”), is computed by dividing net
earnings available to holders of the Company’s Common Stock
by the weighted average number of shares of Common Stock
outstanding for the reporting period. Diluted earnings per share
reflect the potential dilution that could occur if securities or
other contracts requiring the Company to issue Common Stock were
exercised or converted into Common Stock. For the calculation of
diluted earnings per share, the basic weighted average number of
shares is increased by the dilutive effect of stock options and
warrants outstanding determined using the treasury stock
method.
Goodwill
Goodwill
is not amortized but evaluated for impairment on an annual basis
during the fourth quarter of our fiscal year, or earlier if events
or circumstances indicate the carrying value may be impaired. The
Company’s goodwill is related to ECHG only and not the entire
Company. ECHG has its own, separate financial information to
perform goodwill impairment testing at least annually or if events
indicate that those assets may be impaired. As a result of the current market and economic
conditions related to COVID-19, in accordance with step 1 of the
guidelines set forth in Accounting Standards Codification
(“ASC”) 350-20-35-3A, the Company concluded there were
no impairments of goodwill that resulted from triggering events due
to COVID-19 as of March 31, 2021. The Company will continue
to evaluate goodwill for the ECHG segment. For tax purposes,
goodwill is amortized and deductible over fifteen
years.
ECHG goodwill was allocated in connection with the acquisition (the
“Echo Transaction”) of the assets now held by Echo and
ITAD USA (the “Echo Entities”) on May 20, 2019. There
has been no additions, acquisition adjustments or impairment
charges to goodwill since the allocation on May 20, 2019. As of
March 31, 2021 and 2020, goodwill was $1,367,109.
Recent Accounting Pronouncements
In June 2016, the FASB issued a new credit loss accounting standard
ASU 2016-13. The new accounting standard introduces the current
expected credit losses methodology (CECL) for estimating allowances
for credit losses which will be based on expected losses rather
than incurred losses. We will be required to use a forward-looking
expected credit loss model for accounts receivable, loans and other
financial instruments. The standard will be adopted upon the
effective date for us beginning January 1, 2023 by using a modified
retrospective transition approach to align our credit loss
methodology with the new standard. The Company is evaluating the
financial statement implications of ASU 2016-13.
NOTE 4 — INVENTORIES
A
summary of inventories is as follows:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Resale
|
$9,184,314
|
$8,971,815
|
|
Recycle
|
87,907
|
191,677
|
|
|
|
|
|
Subtotal
|
9,272,221
|
9,163,492
|
|
|
|
|
|
ECHG
|
|
|
|
Resale
|
1,962,929
|
557,959
|
|
Recycle
|
395,233
|
285,446
|
|
|
|
|
|
Subtotal
|
2,358,162
|
843,405
|
|
|
|
|
|
|
$11,630,383
|
$10,006,897
|
NOTE 5 — NOTES
RECEIVABLE
ECHG,
LLC, entered into an agreement with CExchange, LLC on February 15,
2020, to lend $1,500,000 bearing interest at eight and one-half
percent (8.5%) with interest only payments due quarterly. The loan
matures on February 20, 2023. The parties also agreed to warrant
and call-option agreements to acquire all of CExchange’s
equity interests. On November 7, 2020, the Company entered into an
amended agreement, to increase the loan from $1,500,000 to
$2,100,000. CExchange is the leader in retail trade-in services,
providing in-store and online solutions for most of the major
consumer electronics retailers in the United States. CExchange
helps retailers provide in-store trade-in programs designed to
allow customers to exchange their old technology for cash in
minutes. This fits well with ECHG’s core business of
refurbishing and reusing cell telephones. There is no assurance
that the Company will exercise its warrant or call
option.
ECHG
entered into an agreement with Committed Agency, LLC
(“Committed Agency”) on February 4, 2021, pursuant to
which it agreed (the “CA Facility Agreement”) to
provide Committed Agency a line-of-credit not to exceed $1,000,000
(the “CA Facility”). Committed Agency intends to,
directly or indirectly, sell or dispose of electronic devices
previously owned by major electronic carriers. In addition to the
CA Facility Agreement, ECHG has contracted with Committed Agency
beginning February 4, 2021 to exclusively facilitate their sales
through the Company’s warehousing and cleaning of electronic
devices, wiping of existing data, and inspecting, packaging and
shipping of devises to purchasers, in exchange ECHG will receive a
per unit service fee (the “CA Service Agreement”). The
CA Service Agreement will terminate no later than July 30, 2021.
Under the terms of the agreement, the borrower cannot borrow any
additional funds, under this facility, after May 31, 2021.
Committed Agency is required to pay back any principal and accrued
interest no later than 60 days after withdrawing funds. Amount
borrowed under the CA Facility bears an interest rate of 6% per
annum. Principal and accrued interest are due and payable no later
than 60 days after such advance and the CA Facility has a current
maturity of July 30, 2021. As of March 31, 2021, Committed Agency
has drawn $123,472 on the CA Facility.
NOTE 6 — PROPERTY AND EQUIPMENT
Property and equipment consist of the
following:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Land
|
$720,786
|
$720,786
|
|
Building
and improvements
|
1,331,887
|
1,317,906
|
|
Leasehold
improvements
|
1,450,695
|
1,435,742
|
|
Machinery
and equipment
|
1,056,315
|
1,056,315
|
|
Furniture
and fixtures
|
511,247
|
504,430
|
|
Vehicles
|
22,859
|
22,859
|
|
|
5,093,789
|
5,058,038
|
|
Less:
accumulated depreciation
|
(2,126,518)
|
(2,054,294)
|
|
|
|
|
|
Sub-Total
|
2,967,271
|
3,003,744
|
|
|
|
|
|
ECHG
|
|
|
|
Building
and improvements
|
81,149
|
81,149
|
|
Machinery
and equipment
|
375,686
|
220,417
|
|
Furniture
and fixtures
|
93,827
|
93,827
|
|
|
550,662
|
395,393
|
|
Less:
accumulated depreciation
|
(87,150)
|
(71,058)
|
|
|
|
|
|
Sub-Total
|
463,512
|
324,335
|
|
|
|
|
|
Envela
|
|
|
|
Land
|
1,106,664
|
1,106,664
|
|
Building
and improvements
|
2,456,324
|
2,456,324
|
|
Machinery
and equipment
|
14,951
|
5,407
|
|
|
|
|
|
|
3,577,939
|
3,568,395
|
|
Less:
accumulated depreciation
|
(24,069)
|
(7,873)
|
|
|
|
|
|
Sub-Total
|
3,553,870
|
3,560,522
|
|
|
|
|
|
|
$6,984,653
|
$6,888,601
|
|
|
|
|
NOTE 7 — INTANGIBLE ASSETS
Intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Domain
names
|
$41,352
|
$41,352
|
|
Point
of sale system
|
330,000
|
330,000
|
|
|
371,352
|
371,352
|
|
Less:
accumulated amortization
|
(220,002)
|
(203,502)
|
|
|
|
|
|
Subtotal
|
151,350
|
167,850
|
|
|
|
|
|
ECHG
|
|
|
|
Trademarks
|
1,483,000
|
1,483,000
|
|
Customer
Contracts
|
1,873,000
|
1,873,000
|
|
|
3,356,000
|
3,356,000
|
|
Less:
accumulated amortization
|
(615,277)
|
(531,377)
|
|
|
|
|
|
Subtotal
|
2,740,723
|
2,824,623
|
|
|
|
|
|
|
$2,892,073
|
$2,992,473
|
The following table outlines the estimated
future amortization expense related to intangible assets held as of
March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
2021 (excluding the three
months ending March 31, 2021)
|
$49,500
|
$251,700
|
$301,200
|
|
2022
|
66,000
|
335,600
|
401,600
|
|
2023
|
30,350
|
335,600
|
365,950
|
|
2024
|
5,500
|
335,600
|
341,100
|
|
2025
|
-
|
335,600
|
335,600
|
|
Thereafter
|
-
|
1,146,623
|
1,146,623
|
|
|
|
|
|
|
|
$151,350
|
$2,740,723
|
$2,892,073
|
NOTE 8 — ACCRUED
EXPENSES
Accrued
expenses consist of the following:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Accrued
interest
|
$9,250
|
$10,057
|
|
Board
member fees
|
-
|
7,500
|
|
Payroll
|
126,596
|
155,635
|
|
Property
taxes
|
66,831
|
26,435
|
|
Sales
tax
|
53,427
|
180,609
|
|
Other
administrative expenss
|
9,488
|
13,525
|
|
|
|
|
|
Subtotal
|
265,592
|
393,761
|
|
|
|
|
|
ECHG
|
|
|
|
Accrued
interest
|
16,955
|
17,086
|
|
Payroll
|
224,666
|
119,327
|
|
Property
tax
|
20,500
|
20,500
|
|
Other
accrued expenses
|
38,472
|
10,574
|
|
|
|
|
|
Subtotal
|
300,593
|
167,487
|
|
|
|
|
|
Envela
|
|
|
|
Accrued
interest
|
7,811
|
7,884
|
|
Payroll
|
52,802
|
10,745
|
|
Professional
fees
|
144,889
|
142,635
|
|
Property
Tax
|
24,900
|
-
|
|
Other
administrative expenses
|
11,423
|
8,433
|
|
State
income tax
|
114,149
|
113,379
|
|
|
|
|
|
Subtotal
|
355,974
|
283,076
|
|
|
|
|
|
|
$922,159
|
$844,324
|
NOTE 9 — SEGMENT INFORMATION
We determine our business segments based upon an internal reporting
structure. Our financial performance is based on the following
segments: DGSE and ECHG.
The DGSE segment includes Dallas Gold & Silver Exchange, which
has five retail stores in the Dallas/Fort Worth Metroplex, and
Charleston Gold & Diamond Exchange, which has one retail store
in Mt. Pleasant, South Carolina.
The ECHG segment includes Echo, ITAD USA and Teladvance. These
three companies were added during 2019 and are involved in
recycling and the reuse of electronic components.
We allocate a portion of certain corporate costs and expenses,
including information technology as well as rental income and
expenses relating to our new corporate headquarters, to our
business segments. These income and expenses are included in
selling, general and administrative expenses, depreciation and
amortization, other income, interest expense and income tax
expense. Our management team evaluates each segment and makes
decisions about the allocation of resources according to each
segment’s profit. Allocation amounts are generally agreed
upon by management and may differ from arms-length allocations.
The following separates DGSE and ECHG’s financial results of
operations for the three months ending March 31, 2021 and
2020:
|
|
For The
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Sales
|
$18,914,501
|
$6,575,940
|
$25,490,441
|
$20,363,584
|
$5,465,559
|
$25,829,143
|
|
Cost
of goods sold
|
16,106,866
|
3,079,311
|
19,186,177
|
17,999,402
|
2,528,461
|
20,527,863
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
2,807,635
|
3,496,629
|
6,304,264
|
2,364,182
|
2,937,098
|
5,301,280
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
1,782,437
|
2,370,792
|
4,153,229
|
1,873,006
|
1,952,194
|
3,825,200
|
|
Depreciation
and amortization
|
96,822
|
108,090
|
204,912
|
77,041
|
102,688
|
179,729
|
|
|
|
|
|
|
|
|
|
|
1,879,259
|
2,478,882
|
4,358,141
|
1,950,047
|
2,054,882
|
4,004,929
|
|
|
|
|
|
|
|
|
|
Operating
income
|
928,376
|
1,017,747
|
1,946,123
|
414,135
|
882,216
|
1,296,351
|
|
|
|
|
|
|
|
|
|
Other
income/expense:
|
|
|
|
|
|
|
|
Other
income
|
111,731
|
160,210
|
271,941
|
27,368
|
14,322
|
41,690
|
|
Interest
expense
|
68,485
|
110,537
|
179,022
|
44,793
|
100,522
|
145,315
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
971,622
|
1,067,420
|
2,039,042
|
396,710
|
796,016
|
1,192,726
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
13,705
|
17,065
|
30,770
|
8,285
|
10,292
|
18,577
|
|
|
|
|
|
|
|
|
|
Net
income
|
$957,917
|
$1,050,355
|
$2,008,272
|
$388,425
|
$785,724
|
$1,174,149
|
NOTE 10 — REVENUE RECOGNITION
ASC 606
provides guidance to identify performance obligations for
revenue-generating transactions. The initial step is to identify
the contract with a customer created with the sales invoice or a
repair ticket. Secondly, we identify the performance obligations in
the contract, as we promise to deliver the purchased item or
promised repairs in return for payment or future payment as a
receivable. The third step is determining the transaction price of
the contract obligation, as in the full ticket price, negotiated
price or a repair price. The next step is to allocate the
transaction price to the performance obligations, as we designate a
separate price for each item. The final step in the guidance is to
recognize revenue as each performance obligation is
satisfied.
Beginning in fiscal year 2020, Envela disaggregated its revenue,
within the operating segments, based on its resale and recycle
presentation basis to more closely align with the Company’s
activities. The Company’s historical disaggregation of
revenue has been recast to conform to our current
presentation.
The
following disaggregation of total revenue is listed by sales
category and segment for the three months ended March 31, 2021 and
2020:
|
CONSOLIDATED
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Margin
|
|
|
Margin
|
|
DGSE
|
|
|
|
|
|
|
|
Resale
|
$17,320,641
|
$2,457,144
|
14.2%
|
$18,541,897
|
$2,047,433
|
11.0%
|
|
Recycled
|
1,593,860
|
350,491
|
22.0%
|
1,821,687
|
316,749
|
17.4%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
18,914,501
|
2,807,635
|
14.8%
|
20,363,584
|
2,364,182
|
11.6%
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
|
|
Resale
|
4,740,992
|
2,612,184
|
55.1%
|
3,526,228
|
1,420,176
|
40.3%
|
|
Recycled
|
1,834,948
|
884,445
|
48.2%
|
1,939,331
|
1,516,922
|
78.2%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
6,575,940
|
3,496,629
|
53.2%
|
5,465,559
|
2,937,098
|
53.7%
|
|
|
|
|
|
|
|
|
|
|
$25,490,441
|
$6,304,264
|
24.7%
|
$25,829,143
|
$5,301,280
|
20.5%
|
DGSE’s
over-the-counter sales with the retail public and wholesale dealers
are recognized when merchandise is delivered, and payment has been
made either by immediate payment or through a receivable obligation
at one of our retail locations. We also recognize revenue upon the
shipment of goods when retail and wholesale customers have
fulfilled their obligation to pay, or promise to pay through
e-commerce or phone sales. We have elected to account for shipping
and handling costs as fulfillment costs after the customer obtains
control of the goods. Crafted-precious-metal items at the end of
their useful lives are sold to a refiner. Since the local refiner
is located in the Dallas/Fort Worth area, we deliver the metal to
the refiner. The metal is melted and assayed, price is determined
from the assay and payment is made usually in a day or two. Revenue
is recognized from the sale once the payment is
received.
DGSE
also offers a structured layaway plan. When a retail customer
utilizes the layaway plan, we collect a minimum payment of 25% of
the sales price, establish a payment schedule for the remaining
balance and hold the merchandise as collateral as security against
the customer’s deposit until all amounts due are paid in
full. Revenue for layaway sales is recognized when the merchandise
is paid in full and delivered to the retail customer. Layaway
revenue is also recognized when a customer fails to pay in
accordance with the sales contract and the sales item is returned
to inventory with the forfeit of deposited funds, typically after
90 days.
In
limited circumstances, we exchange merchandise for similar
merchandise and/or monetary consideration with both dealers and
retail customers, for which we recognize revenue in accordance with
Accounting Standards Codification (“ASC”) 845,
Nonmonetary Transactions. When we exchange merchandise for similar
merchandise and there is no monetary component to the exchange, we
do not recognize any revenue. Instead, the basis of the merchandise
relinquished becomes the basis of the merchandise received, less
any indicated impairment of value of the merchandise relinquished.
When we exchange merchandise for similar merchandise and there is a
monetary component to the exchange, we recognize revenue to the
extent of the monetary assets received and determines the cost of
sale based on the ratio of monetary assets received to monetary and
non-monetary assets received multiplied by the cost of the assets
surrendered.
The
Company offers the option of third-party financing to customers
wishing to borrow money for the purchase. The customer applies
on-line with the financing company and upon going through the
credit check will be approved or denied. If accepted, the customer
is allowed to purchase according to the limits set by the financing
company. Once the customer does purchase merchandise, based on
their financing agreement, we record and recognize the sale at that
point, based on the promise to pay by the finance company up to the
customer’s approved limit.
We have
a return policy (money-back guarantee). The policy covers retail
transactions involving jewelry, graded rare coins and currency
only. Customers may return jewelry, graded rare coins and currency
purchased within 30 days of the receipt of the items for a full
refund as long as the items are returned in exactly the same
condition as they were delivered. In the case of jewelry, graded
rare coins and currency sales on account, customers may cancel the
sale within 30 days of making a commitment to purchase the items.
The receipt of a deposit and a signed purchase order evidences the
commitment. Any customer may return a jewelry item or graded rare
coins and currency if they can demonstrate that the item is not
authentic, or there was an error in the description of a graded
coin or currency piece. Returns are accounted for as a reversal of
the original transaction, with the effect of reducing revenues and
cost of sales, and returning the merchandise to inventory. We have
established an allowance for estimated returns related to sales
based on historical returns and reduced our reported revenues and
cost of sales accordingly. Our return allowance as of March 31,
2021 and March 31, 2020 remained the same for both periods, at
approximately $28,000.
The
Echo Entities have several revenue streams and recognize revenue
according to ASC 606 at an amount that reflects the consideration
to which the entities expect to be entitled in exchange for
transferring goods or services to the customer. The revenue streams
are as follows.
●
Outright sales are
recorded when product is shipped. Once the price is established and
the terms are agreed to and the product is shipped, the revenue is
recognized. The Echo Entities have fulfilled their performance
obligation with an agreed upon transaction price, payment terms and
shipping the product.
●
Echo recognizes
refining revenue when our inventory arrives at the destination port
and the performance obligation is satisfied by transferring the
control of the promised goods that are identified in the customer
contract. Ninety percent (90%) of our refining revenue is generated
from one refining partner that has an international refining
facility. This refining partner pays us sixty percent (60%) of
an Invoice within five working days upon the receipt of the Ocean
Bill of Lading issued by the Ocean Carrier. Our initial
Invoice is recognized in full when our performance obligation is
satisfied, as stated in the first sentence. Under the guidance of
ASC 606, an estimate of the variable consideration that we expect
to be entitled is included in the transaction price stated at the
current precious metal spot price and weight of the precious metal.
An adjustment to revenue is made in the period once the underlying
weight and any precious metal spot price movement is resolved,
which is usually around six (6) weeks. Any adjustment from the
resolution of the underlying uncertainty is netted with the
remaining forty percent (40%) due from the original
contract.
●
Hard drive sales by
the Echo Entities are limited to customers who are required to
prepay shipments. Once the commodity price is established and
agreed upon by both parties, customers send payment in advance. The
Company releases the shipment on the same day when payment receipt
is confirmed, and revenue is recognized on day of shipment. If
payment is received on the last day of the month and shipment goes
out the following day the payment received is deferred revenue and
recognized the following month when the shipment is
made.
●
The Echo Entities
also provide recycling services according to a Scope of Work and
services are recognized when promised services are rendered. We
have recycling services conducted at the Echo facility and another
type of service is conducted at the client’s facility. The
Scope of Work will determine the charges and whether it is
completed on campus or off campus. Payment terms are also dictated
in the Scope of Work.
Some of
ECHG’s customers are on payment terms, and although low risk,
occasionally the need arises to record an allowance for receivables
that are deemed high risk to collect. We have established an
allowance for estimated uncollectable receivables related to sales
based on historical collections. Our allowance as of March 31, 2021
and 2020 was $6,249 and $0, respectively.
NOTE
11 — LEASES
In
determining our right-of-use assets and lease liabilities, we apply
a discount rate to the minimum lease payments within each lease
agreement. ASC 842 requires us to use the interest rate that a
lessee would have to pay to borrow on a collateralized basis over a
similar term an amount equal to the lease payments in a similar
economic environment. If we cannot readily determine the discount
rate implicit in lease agreements, we utilize our incremental
borrowing rate.
The
Company has six operating leases—five in the Dallas/Fort
Worth Metroplex and one in Charleston, South Carolina. The lease
for DGSE’s flagship-store at 13022 Preston Road, Dallas,
Texas will expire October 31, 2021, with no current renewal
options. This location is under review as to whether to pursue a
lease renewal. The lease for DGSE’s Grand Prairie, Texas
location expires June 30, 2022, and has no current renewal options.
The lease for DGSE’s Mt Pleasant, South Carolina location
expires April 30, 2025, with no additional renewal options. The
lease for DGSE’s Euless, Texas location expires June 30,
2025, with an option for an additional five years. ECHG’s
Echo Environmental, located on W. Belt Line Road, in Carrollton,
Texas, renewed their lease starting January 1, 2021 for 61 months,
expiring January 31, 2026. Echo Environmental sublet a portion of
the building through December 31, 2020. The subletting company has
subsequently vacated the premises and plans are being made to
transfer ITAD USA’s operations to share the building with
Echo Environmental. ECHG’s lease for ITAD USA’s
location on McKenzie Drive in Carrollton, Texas expires July 31,
2021 and the lease will not be pursued for renewal. All of the
Company’s six leases are triple net, for which it pays its
proportionate share of common area maintenance, property taxes and
property insurance. Leasing costs for the three months ended March
31, 2021 and 2020 was $449,486 and $306,537, respectively,
comprised of a combination of minimum lease payments and variable
lease costs.
As of
March 31, 2021, the weighted average remaining lease term and
weighted average discount rate for operating leases was 2.4 years
and 5.5%, respectively. For the three months ending March 31, 2021
and 2020, the Company’s cash paid for operating lease
liabilities was $501,907 and $335,227 respectively.
Future
annual minimum lease payments as of March 31, 2021:
|
|
|
|
DGSE
|
|
|
2021
(excluding the three months ending March 31, 2021)
|
$348,556
|
|
2022
|
235,674
|
|
2023
|
212,854
|
|
2024
|
213,884
|
|
2025
|
64,087
|
|
2026
and thereafter
|
-
|
|
|
|
|
Total
minimum lease payments
|
1,075,055
|
|
Less
imputed interest
|
(94,456)
|
|
|
|
|
DGSE
Subtotal
|
980,599
|
|
ECHG
|
|
|
2021
(excluding the three months ending March 31, 2021)
|
632,048
|
|
2022
|
784,599
|
|
2023
|
806,175
|
|
2024
|
828,345
|
|
2025
|
851,125
|
|
2026
and thereafter
|
72,878
|
|
|
|
|
Total
minimum lease payments
|
3,975,170
|
|
Less
imputed interest
|
(411,181)
|
|
|
|
|
ECHG
Subtotal
|
3,563,989
|
|
|
|
|
Total
|
4,544,588
|
|
|
|
|
Less
current portion
|
(1,054,599)
|
|
|
|
|
Long-term
operating lease liability
|
$3,489,989
|
NOTE 12 — BASIC AND DILUTED AVERAGE SHARES
A
reconciliation of basic and diluted weighted average common shares
for the three months ended March 31, 2021 and 2020 is as
follows:
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares
|
26,924,631
|
26,924,381
|
|
Effect
of potential dilutive securities
|
15,000
|
15,250
|
|
Diluted
weighted average shares
|
26,939,631
|
26,939,631
|
For the
three months ended March 31, 2021 and 2020, there were 15,000 and
15,250 common stock options, warrants, and Restricted Stock Units
(RSUs) unexercised, respectively. For the three months ended March
31, 2021 and 2020, there were no anti-dilutive shares.
NOTE 13 — LONG-TERM DEBT
Long-term
debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
DGSE
|
|
|
|
|
|
Note
payable, related party (1)
|
$2,841,626
|
$2,863,715
|
6.00%
|
May
16, 2024
|
|
Note
payable, Truist Bank (2)
|
934,165
|
942,652
|
3.65%
|
July
9, 2030
|
|
Note
payable, Texas Bank & Trust (3)
|
487,414
|
491,852
|
3.75%
|
September
14, 2025
|
|
|
|
|
|
|
|
DGSE
Sub-Total
|
4,263,205
|
4,298,219
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
Note
payable, related party (1)
|
6,446,363
|
6,496,127
|
6.00%
|
May
16, 2024
|
|
|
|
|
|
|
|
Envela
|
|
|
|
|
|
Note
payable, Texas Bank & Trust (4)
|
2,924,065
|
2,951,379
|
3.25%
|
Novemeber
4, 2025
|
|
Note
payable (5)
|
1,668,200
|
1,668,200
|
1.00%
|
April
20, 2025
|
|
|
|
|
|
|
|
Envela
Sub-Total
|
4,592,265
|
4,619,579
|
|
|
|
|
|
|
|
|
|
Sub-Total
|
15,301,833
|
15,413,925
|
|
|
|
|
|
|
|
|
|
Current
portion
|
2,136,554
|
2,120,457
|
|
|
|
|
|
|
|
|
|
|
$13,165,279
|
$13,293,468
|
|
|
(1) On
May 20, 2019, in connection with 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”), pursuant to
which Mr. Loftus made two loans (the “Related Party
Loans”) to the Company. ECHG executed a 5-year, $6,925,979
note for the Echo Transaction, amortized over 20 years at a 6%
annual interest rate. DGSE executed a 5-year, $3,074,021 note to
pay off the accounts payable – related party balance to a
related person to the Company, as that term is defined in the
instructions to item 404(a) of Regulation S-K, promulgated under
the Securities Act (each such person, a “Related
Party”). Such person was no longer a Related Party 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.
(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 (the “Truist Lewisville 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 (the “ TB&T Grapevine 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) On
November 4, 2020, 1901 Gateway Holdings, LLC, a wholly owned
subsidiary of the Company, closed on the purchase of a new office
building located at 1901 Gateway Drive, Irving, Texas for $3.521
million. The building was partially financed through a $2.96
million, 5 year loan (the “TB&T Irving Loan”),
bearing an interest rate of 3.25%, amortized over 20 years, payable
to Texas Bank & Trust. The note has monthly interest and
principal payments of $16,792.
(5) 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 have
applied to the Small Business Administration for the forgiveness of
the Federal Loan during the fourth quarter ending December 31,
2020. We are waiting for the final approval from the Small Business
Administration. We are classifying the loan as
short-term.
Future
scheduled principal payments of our notes payable and notes
payable, related party, as of March 31, 2021 are as
follows:
|
Note payable, related party - DGSE
|
|
|
|
|
|
Year
Ending December 31,
|
|
|
|
|
|
2021
(excluding the three months ended March 31, 2021)
|
$71,163
|
|
2022
|
100,803
|
|
2023
|
107,020
|
|
2024
|
2,562,640
|
|
|
|
|
Subtotal
|
$2,841,626
|
|
Note payable, Truist Bank - DGSE
|
|
|
|
|
|
Year
Ending December 31,
|
|
|
|
|
|
2021
(excluding the three months ended March 31, 2021)
|
$25,066
|
|
2022
|
34,682
|
|
2023
|
35,988
|
|
2024
|
37,342
|
|
2025
|
38,748
|
|
Thereafter
|
762,339
|
|
|
|
|
Subtotal
|
$934,165
|
Note payable, Texas Bank & Trust - DGSE
|
|
|
|
|
|
Year
Ending December 31,
|
|
|
|
|
|
2021
(excluding the three months ended March 31, 2021)
|
$12,859
|
|
2022
|
17,803
|
|
2023
|
18,482
|
|
2024
|
19,187
|
|
2025
|
419,083
|
|
|
|
|
Subtotal
|
$487,414
|
|
Note payable, related party - ECHG
|
|
|
|
|
|
Year
Ending December 31,
|
|
|
|
|
|
2021
(excluding the three months ended March 31, 2021)
|
$158,544
|
|
2022
|
224,612
|
|
2023
|
238,465
|
|
2024
|
5,824,742
|
|
|
|
|
Subtotal
|
$6,446,363
|
|
Note payable, Texas Bank & Trust - Envela
|
|
|
|
|
|
Year
Ending December 31,
|
|
|
|
|
|
2021
(excluding the three months ended March 31, 2021)
|
$79,357
|
|
2022
|
108,919
|
|
2023
|
112,582
|
|
2024
|
116,368
|
|
2025
|
2,506,839
|
|
|
|
|
Subtotal
|
$2,924,065
|
|
Note payable - Envela Corporation
|
|
|
|
|
|
Year
Ending December 31,
|
|
|
|
|
|
2021
|
$1,668,200
|
|
|
|
|
Subtotal
|
$1,668,200
|
|
|
|
|
|
$15,301,833
|
NOTE 14 — 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.
There was no stock-based compensation expense for the three months
ended March 31, 2021 and March 31, 2020.
NOTE 15 — RELATED PARTY TRANSACTIONS
The
Company has a corporate policy governing the identification,
review, consideration and approval or ratification of transactions
with related persons, as that term is defined in the Instructions
to Item 404(a) of Regulation S-K, promulgated under the Securities
Act (each such person a Related Party”). Under this policy,
all Related Party transactions are identified and approved prior to
consummation of the transaction to ensure they are consistent with
the Company’s best interests and the best interests of its
stockholders. 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. The Company’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 of the 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.
On May
20, 2019, the Company entered into two loan agreements with John R.
Loftus, the Company’s CEO, President and Chairman of the
Board. ECHG 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 executed a 5-year, $3,074,021 note to pay off
the accounts payable – related party balance to a former
Related Party as of May 20, 2019. That promissory note is also
amortized over 20 years at a 6% annual interest rate. Both notes
are being serviced by operational cash flow. For the three months
ended March 31, 2021 and 2020, the Company paid Mr. Loftus $143,189
and $145,315, respectively, in interest on the Company’s
outstanding notes payable, related party.
NOTE
16 — SUBSEQUENT EVENTS
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. The duration of any such impact
cannot be predicted, nor can the timing of the development and
distribution of an effective vaccine or treatments for COVID-19 or
potentially divergent strains.
ECHG,
LLC, entered into a second agreement with CExchange, LLC on April
14, 2020, to lend $300,000 bearing interest at four percent (4.0%)
per annum. Principal and unpaid accrued interest are due and
payable on the earliest of (i) the date the borrower receives
Employee Retention Credit or other pandemic related relief funds,
or (ii) demand by holder.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Unless the context indicates otherwise for one of our specific
operating segments, 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 March 31, 2021
(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 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 entitled
“Risk Factors” in the Company’s 2020 Annual
Report and any material updates are described under the section of
this Form 10-Q entitled “Risk Factors” and elsewhere in
this Form 10-Q. 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.
DGSE Precious Metals Pricing and Business Impact
DGSE’s
business, similar to the jewelry industry overall, is affected by
fluctuations in precious-metals pricing. Such fluctuations,
particularly with respect to gold which accounts for a majority of
DGSE’s merchandise costs, can have significant impact on its
earnings and cash availability. Precious metals pricing rises and
falls based upon global supply and demand dynamics. Gold prices
surged during the beginnings of the COVID-19 pandemic, starting at
$1,523 an ounce, as determined by the London AM Fix on January 1,
2020, and rose strongly during the first half of 2020 peaking at
$2,060 an ounce during August. However, gold prices dipped from the
peak to close at $1,891 an ounce, as determined by the London PM
Fix on December 31, 2020, registering a 24% increase during fiscal
year 2020. Gold prices dipped further during the quarter ended
March 31, 2021 to $1,691 an ounce, as determined by the London PM
Fix on March 31, 2021, registering an 11% decline during the
quarter.
From an
article by Carla Mozee, dated February 17, 2021, on
Businessinsider.com, “gold prices have been weighed down by
weaker physical demand for the precious metal and a “lack of
interest” from investors, according to Bank of America, which
also said prices could still push above $2,000 an ounce this
year.
When
prices rise for gold or other precious metals, DGSE has observed
that individual sellers tend to be more likely to sell their
unwanted crafted-precious-metal items and at the same time retail
customers tend to buy bullion and other gold products so as not to
miss out on potential market gains. When prices decline for gold or
other precious metals, DGSE has observed that individual buyers
tend to buy due to the decrease in gold prices. The Company
attributes the dip in quarter over quarter DGSE sales to decreasing
or unstable gold prices. While the precious-metals industry has
slowed, our focus will be to grow our jewelry, diamond and fine
watch business, as well as maintain our business of purchasing
crafted-precious-metal items, a diversified strategy which we
believe will continue to grow and be a profit engine in the
future.
In
addition, DGSE depends on purchasing products and materials from
secondary markets. We are reliant on our ability to obtain an
adequate supply of products and material at prices or other terms
acceptable to it.
The
pandemic, economic downturn, and civil unrest, seem to have been
affecting the recommerce business in unpredictable ways; there are
fewer customers raising money by selling items. This is the
opposite of what one might expect when a record number of people
are unemployed. Government stimulus checks, eviction moratoriums
and forbearances on mortgages and student loans may by contributing
to this effect. To date, this drop has been offset by other areas
of our business. This diversity, combined with DGSE’s
continued focus on disciplined operations, makes us optimistic for
DGSE’s future success.
For
additional information regarding DGSE, see “Item 1.
Business—Operating Segments—DGSE Segment” in the
Company’s 2020 Annual Report.
ECHG Business Drivers and Impacts
ECHG
owns and operates Echo, ITAD USA and Teladvance, through which it
primarily buys and resells or recycles consumer electronic
components and IT equipment. Echo focuses on end-of-life
electronics recycling and also offers disposal transportation and
product tracking, ITAD USA provides IT equipment disposition
including compliance and data sanitization services, and Teladvance
operates as a value-added reseller by providing offerings and
services to companies looking to either upgrade capabilities or
dispose of equipment. Like DGSE, ECHG also maintains relationships
with refiners or recyclers to which it sells extracted valuable
materials from electronics and IT equipment that are not
appropriate for resale or reuse.
Like
DGSE, ECHG’s recycling business is affected by precious and
other non-ferrous metal prices, which fluctuate based upon global
supply-and-demand dynamics, among other things, with the greatest
impact relating to gold. Recent fluctuations in gold prices are
discussed above.
Also
like DGSE, ECHG depends on purchasing products and material from
secondary markets and is reliant on its ability to obtain an
adequate supply of products and material at prices and other items
acceptable to it. As the country is heading back to offices,
schools and government buildings from the loosening of restrictions
of the COVID-19 pandemic, we are seeing an increase in recycled
electronic materials being released for recycling or
disposal.
For
additional information regarding DGSE, see “Item 1.
Business—Operating Segments—ECHG Segment.” In the
Company’s 2020 Annual Report.
The
COVID-19 pandemic has adversely affected global economic business
conditions. We took steps during 2020 to have as many employees
work from home as possible. We also followed governmental
directives to wear masks and adopt the social distance guidelines
where possible. The duration of this pandemic and the impact,
either direct or indirect cannot be predicted. The Company believed
additional liquidity was necessary to support ongoing operations
during this period of uncertainty. We applied for and received
approximately $1.67 million, 1% interest, federally backed loan to
pay employees and cover certain rent and utility-related costs
during the COVID-19 pandemic (the “Federal Loan”). The
loan is forgivable to the extent that certain criteria are met. We
have applied for forgiveness and that forgiveness application is
currently under review by the Small Business Administration as of
March 31, 2021.
Critical Accounting Policies and Estimates
For a
discussion of critical accounting policies, see Note 3 to the
interim condensed consolidated financial statements included
herein.
Results of Operations
General
The
following disaggregation of total revenue is listed by sales
category and segment for the three months ended March 31, 2021 and
2020:
|
CONSOLIDATED
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
|
|
|
|
Resale
|
$17,320,641
|
$2,457,144
|
14.2%
|
$18,541,897
|
$2,047,433
|
11.0%
|
|
Recycled
|
1,593,860
|
350,491
|
22.0%
|
1,821,687
|
316,749
|
17.4%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
18,914,501
|
2,807,635
|
14.8%
|
20,363,584
|
2,364,182
|
11.6%
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
|
|
Resale
|
4,740,992
|
2,612,184
|
55.1%
|
3,526,228
|
1,420,176
|
40.3%
|
|
Recycled
|
1,834,948
|
884,445
|
48.2%
|
1,939,331
|
1,516,922
|
78.2%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
6,575,940
|
3,496,629
|
53.2%
|
5,465,559
|
2,937,098
|
53.7%
|
|
|
|
|
|
|
|
|
|
|
$25,490,441
|
$6,304,264
|
24.7%
|
$25,829,143
|
$5,301,280
|
20.5%
|
Three Months Ended March 31, 2021 compared to Three Months Ended
March 31, 2020
Revenue. Revenue related to DGSE’s continuing
operations decreased by $1,449,083, or 7%, during the three months
ended March 31, 2021, to $18,914,501, as compared to
$20,363,584 during the same period in 2020. Resale revenue, such as
bullion, jewelry, watches and rare coins, decreased by $1,221,256,
or 7%, during the three months ended March 31, 2021, to $17,320,641
as compared to $18,541,897 during the same period in 2020.
Recycled-material sales decreased 13% to $1,593,860 for the three
months ended March 31, 2021, as compared to $1,821,687 for the
three months ended March 31, 2020. Revenue decreased for resale
items for the three months ended March 31, 2021, compared to the
three months ended March 31, 2020, is primarily due to our effort
to increase margins. The decrease in recycled-materials revenue is
primarily due to less inventory of recycled scrap to sell due to
more scrap being turned into resale inventory.
Revenue
related to ECHG’s continuing operations for the three months
ended March 31, 2021 increased by $1,110,381, or 20%, to
$6,575,940, as compared to $5,465,559 during the same period in
2020. Resale revenue increased by $1,214,764, or 34%, to
$4,740,992, for the three months ended March 31, 2021, as compared
to $3,526,228 during the three months ended March 31, 2020.
Recycled sales decreased by $104,383 or 5%, to $1,834,948 for the
three months ended March 31, 2021, as compared to $1,939,331 for
the three months ended March 31, 2020. Revenue increased for resale
items for the three months ended March 31, 2021, compared to the
three months ended March 31, 2020, is primarily due to the
increased line of products for the ECHG companies. The decrease in
recycled-materials revenue is primarily due to the continuing lag
of electronic waste being released as the country is working its
way through the pandemic.
The Company has no layoffs to-date or terminations due to the
pandemic, 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.
Gross Profit. Gross profit related to DGSE’s
operations for the three months ended March 31, 2021, increased by
$443,453, or 19%, to $2,807,635 as compared to $2,364,182 during
the same period in 2020. Resale gross profit increased by $409,711,
or 20%, to $2,457,144 for the three month ended March 31, 2021, as
compared to $2,047,433 during the three months ended March 31,
2020. Recycled gross profit increased by $33,742, or 11%, to
$350,491 for the three month ended March 31, 2021, as compared to
$316,749 during the three months ended March 31, 2020. The increase
in resale gross profit was due primarily to the increased
gross-margin percent of resale items for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020.
Although there was a decrease in revenue for the resale items,
there was a higher gross-margin percentages due to DGSE’s
on-going effort to raise gross profit.
Gross
profit related to ECHG for the three months ended March 31, 2021,
increased by $559,531, or 19%, to $3,496,629 as compared to
$2,937,098 during the same period in 2020. Gross profit for resale
revenue for the three months ended March 31, 2021 increased by
$1,192,008, or 84% to $2,612,184, as compared to $1,420,176 during
the same period in 2020. Gross profit for recycled sales for the
three months ended March 31, 2021, decreased $632,477, or 42% to
$884,445, as compared to $1,516,922, during the same period in
2020. The gross profit increase for the resale revenue for the
three months ended March 31, 2021, compared to the three months
ended March 31, 2020 is primarily due to the increased sales of 34%
and increased gross-margin percentages. The gross profit decrease
for the recycled revenue for the three months ended March 31, 2021,
as compared to the three months ended March 31, 2020, is primarily
due to the gross profit margin percentage decrease from 78.2% for
the three months ended March 31, 2020, as compared to the gross
profit margin percentage of 48.2% for the three months ended March
31, 2021.
Selling, General and Administrative Expenses. For the three
months ended March 31, 2021, SG&A expenses for DGSE decreased
by $90,569, or 5%, to $1,782,437, as compared to $1,873,006 during
the same period in 2020. The decrease in SG&A was primarily due
to an ongoing effort to reduce expenses across DGSE and
corporately.
For the
three months ended March 31, 2021, SG&A expenses for ECHG
increased by $418,598 or 21%, to $2,370,792, as compared to
$1,952,194 during the same period in 2020. The increase in SG&A
was primarily due to the loss of rent received from sublet tenant
of $95,000 that was netted against rent during the three months
ended March 31, 2020, an increase of wages of approximately
$100,000 for ECHG and corporately and general expenses of
approximately $200,000 to prepare the Company for increased
business.
Depreciation and Amortization. For the three months ended
March 31, 2021, depreciation and amortization expense for DGSE was
$96,822, compared to $77,041 for the same period in 2020, an
increase of $19,781, or 26%. The increase of $19,781 from the three
months ending March 31, 2021 compared to the three months ending
March 31, 2020 is primarily due to adding the new buildings placed
in service during the fourth quarter of the fiscal year ended
December 31, 2020.
For the
three months ended March 31, 2021, depreciation and amortization
expense for ECHG was $108,090, compared to $102,688 for the same
period in 2020, an increase of $5,402, or 5%. The increase of
$5,402 from the three months ending March 31, 2021 compared to the
three months ending March 31, 2020, is primarily due to adding the
one-half of the depreciation of the Company’s new office
building, split between the two business segments. The building was
placed in service during the fourth quarter of the fiscal year
ended December 31, 2020.
Other Income. For the three months ended March 31, 2021,
other income for DGSE was $111,731, an increase of $84,363 or 308%,
compared to $27,368 during the same period in 2020. The increase
was primarily due to rental income of approximately $110,000
allocated from the corporate headquarters during the quarter ended
March 31, 2021.
For the
three months ended March 31, 2021, other income for ECHG was
$160,210, an increase of $145,888 or 1,019%, compared to $14,322
during the same period in 2020. The increase was primarily due to
rental income of approximately $110,000 allocated from the
corporate headquarters and $44,603 of interest income from the
CExchange note receivable.
Interest Expense. For the three months ended March 31, 2021,
interest expense for DGSE was $68,485, an increase of $23,692 or
53%, compared to $44,793 during the same period in 2020. This
increase was primarily the result of additional DGSE loans to
finance recent real estate acquisitions, as discussed
above.
For the
three months ended March 31, 2021, interest expense for ECHG was
$110,537, an increase of $10,015 or 10%, compared to $100,522
during the same period in 2020. This increase was primarily the
result of an additional loan to finance the recent office building
acquisition where the interest expensed is split between the two
business segments.
Income Tax Expense. For the three months ended March 31,
2021, income tax expense was $30,770, an increase of $12,193,
compared to $18,577 for the three months ended March 31, 2020. The
effective income tax rate was 1.5% and 1.6% for the three months
ended March 31, 2021 and 2020, 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 net operating loss carryforwards.
Net Income. We recorded a
net income of $2,008,272 for the three months ended March 31, 2021,
compared to a net income of $1,174,149 for the three months ended
March 31, 2020, an increase in net income of $834,123, which is due
primarily to an increase in gross profit of approximately $1.0
million.
Earnings Per Share. For the
three months ended March 31, 2021, our net income per basic and
diluted shares attributable to holders of our Common Stock was
$0.07, compared to $0.04 per basic and diluted shares for the three
months ended March 31, 2020. This increase is again due primarily
to an increase in the gross profit margin between the
periods.
Liquidity and Capital Resources
During
the three months ended March 31, 2021, cash used in operations
totaled 384,912, and during the three months ended March 31, 2020
cash provided by operations totaled $1,031,715, a decrease of
$1,416,627. Cash used in operations for the three months ended
March 31, 2021 was driven largely by the increase in
inventories of $1,623,485, an increase of prepaid expenses of
$576,578, an increase in trade receivables of $344,103, a reduction
of accounts payable and accrued expenses of $240,410 and the
increase in other assets of $100,000, offset by an increase in
customer deposits and other liabilities of $260,615 and net income
added to non-cash items of depreciation, amortization and bad debt
expense of $2,219,433. Cash provided by operations for the three
months ended March 31, 2020 was driven largely by a decrease in
trade receivables of $525,519, the decrease in inventories of
$111,931 and by the increase of net income added to non-cash items
of depreciation and amortization of $1,353,878, offset by the
reduction of accounts payable and accrued expenses of $647,804, an
increase of prepaid expenses of $163,312 and a decrease in customer
deposits and other liabilities of $118,710.
During
the three months ended March 31, 2021 and 2020, cash used in
investing activities totaled $324,035 and $1,529,046, respectively,
a period-over-period decrease of $1,105,011. The use of cash in
investing activities during the three months ended March 31, 2021
was primarily due to investing in notes receivable of $123,472, and
purchasing property and equipment totaling $200,563. The use of
cash in investing activities during the three months ended March
31, 2020 was primarily due to investing in a note receivable of
$1,500,000 and the purchase of property and equipment totaling
$29,046.
During
the three months ended March 31, 2021 and 2020, cash used in
financing totaled $112,092 and $69,404, respectively, a
period-over-period increase of $42,688. Cash used in financing
during the three months ended March 31, 2021 were payments made
against the notes payable, related party of $71,853 and payments
made against notes payable of $40,239. Cash used in financing
during the three months ended March 31, 2020 represented payments
made against the notes payable, related party of
$69,404.
We
expect our capital expenditures to total approximately $250,000
during the next twelve months. These expenditures will be driven by
the purchase of equipment and build-out expenses for properties
purchased by DGSE for retail locations, and the office building
purchased by the Company for its corporate headquarters. As of
March 31, 2021, there were no commitments for capital
expenditures.
Our
primary source of liquidity and capital resources currently consist
of cash generated from our operating results and current
borrowings, including the Related Party Loans, the Truist
Lewisville Loan, the TB&T Grapevine Loan, the TB&T Irving
Loan and the Federal Loan. For more information, see Note 14 to our
interim condensed financial statements, which is incorporated into
this item by reference. In addition, on May 17, 2019, the Company
secured a twelve month line of credit from Texas Bank and Trust for
up to $1,000,000 (the “TB&T Facility”). The
TB&T Facility was renewed for an additional 24 months, for a
maturity date of May 16, 2022, and the limit of the TB&T
Facility was increased to $3,500,000 on May 17, 2020. We maintain
the TB&T Facility to help fund cash shortfalls that we may have
from time to time. We do not currently anticipate the need of those
funds for operations.
From
time to time, we have adjusted our inventory levels to meet
seasonal demand or in order to meet working capital requirements.
Management believes we have enough capital resources to meet
working capital requirements. In the event of significant growth in
retail and wholesale jewelry sales and recycling demand, whether
purchases or services, our demand for additional working capital
will increase due to a related need to stock additional jewelry
inventory, increases in wholesale accounts receivable and the
purchasing of recycled material. Historically we have funded these
activities through operations. If additional working capital is
required, we will seek additional loans from individuals or from
other commercial banks. If necessary, inventory levels may be
adjusted in order to meet unforeseen working-capital
requirements.
We have
historically renewed, extended or replaced short-term debt as it
matures, and management believes that we will be able to continue
to do so in the near future.
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 leases certain of its facilities under operating leases.
For more information on the minimum rental commitments under
non-cancellable operating leases as of March 31, 2021, see Note 12
to our interim condensed consolidated financial
statements.
Off-Balance Sheet Arrangements
We do
not have any 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 our stockholders.
