NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 —
ACCOUNTING POLICIES AND NATURE OF OPERATIONS
A summary of the
significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows. References
to fiscal years below are denoted with the word
“Fiscal” and the associated year.
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 business segments. Through DGSE,
we operate Dallas Gold & Silver Exchange, Charleston Gold &
Diamond Exchange, and Bullion Express brands. Through ECHG we
operate Echo Environmental, ITAD USA and 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. The Company also maintains
a presence in the retail market through our web-sites, www.dgse.com and
www.cgdeinc.com.
ECHG buys
electronic components from businesses and other organizations, such
as school districts, for end-of-life recycling or to add life to
electronic devices by data destruction and refurbishment for reuse.
For end-of–life recycling, we sell to downstream recycling
companies who further process our material for end users. The
electronic devices saved for reuse are cleaned of prior data,
refurbished and sold to businesses or organizations wanting to
extend the remaining life and value of recycled electronics. Our
customers are companies and organizations that are based
domestically and internationally.
For additional
business operations for both DGSE and ECHG, see “Item 1.
Business—Operating Segments” in this annual report on
Form 10-K.
The 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 the business as two operating and reportable segments
under a variety of banners. DGSE includes Charleston Gold &
Diamond Exchange and Dallas Gold & Silver Exchange. ECHG
includes Echo, ITAD USA and Teladvance.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on
previously reported results of operations.
Cash and Cash
Equivalents
The Company
considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents. The carrying
amounts reported in the consolidated balance sheets approximate
fair value.
Inventories
DGSE’s
inventory is valued at the lower of cost or NRV. The Company
acquires a majority of its inventory from individual customers,
including pre-owned jewelry, watches, bullion, rare coins and
collectibles. The Company acquires these items based on its own
internal estimate of the fair market value of the items at the time
of purchase. The Company considers factors such as the current spot
market price of precious metals and current market demand for the
items being purchased. The Company supplements these purchases from
individual customers with inventory purchased from wholesale
vendors. These wholesale purchases of new merchandise can take the
form of full asset purchases, or consigned inventory. Consigned
inventory is accounted for on the Company’s consolidated
balance sheet with a fully offsetting contra account so that
consigned inventory has a net zero balance. The majority of the
Company’s inventory has some component of its value that is
based on the spot market price of precious metals. Because the
overall market value for precious metals regularly fluctuates,
these fluctuations could have either a positive or negative impact
on the value of the Company’s inventory and could positively
or negatively impact the profitability of the Company. The Company
regularly monitors these fluctuations to evaluate any necessary
impairment to its inventory.
ECHG’s
inventory principally includes processed and unprocessed electronic
scrap materials. The value of the material is derived from
recycling the precious and other scrap metals included in the
scrap. The processed and unprocessed materials are carried at the
lower of the average cost of the material during the month of
purchase or NRV. The in-transit material is carried at lower of
cost or market using the retail method. Under the retail method the
valuation of the inventory at cost and the resulting gross margins
are calculated by applying a cost to retail ratio to the retail
value of the inventory.
The inventory
listed in Note 3, and for the time period until May 17, 2022, is
pledged as collateral against our $3,500,000 short-term line of
credit with Texas Bank and Trust.
Property and
Equipment
Property and
equipment are stated at cost. Depreciation on property and
equipment is provided for using the straight-line method over the
anticipated economic useful lives of the related property.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If circumstances require a long-lived
asset or asset group be tested for possible impairment, we first
compare undiscounted cash flows expected to be generated by the
asset or asset group to its carrying value. If the carrying value
of the long-lived asset or asset group is not recoverable on an
undiscounted cash flow basis, an impairment is recognized to the
extent the carrying value exceeds its fair value. Fair value is
determined through various valuation techniques including
discounted cash flow models, quoted market values, and third-party
independent appraisals, as considered necessary. There
were no impairments recorded during Fiscal 2020 and
Fiscal 2019.
Expenditures for
maintenance and repairs are charged against income as incurred;
betterments that increase the value or materially extend the life
of the related assets are capitalized. When assets are sold or
retired, the cost and accumulated depreciation are removed from the
accounts and any gain or loss is recorded to current operating
income.
Impairment of Long-Lived
Assets, Amortized Intangible Assets and
Goodwill
The Company
performs impairment evaluations of its long-lived assets, including
property, equipment, and intangible assets with finite lives
whenever business conditions or events indicate that those assets
may be impaired. When the estimated future undiscounted cash flows
to be generated by the assets are less than the carrying value of
the long-lived assets, the assets are written down to fair market
value and a charge is recorded to current operations. Based on the
Company’s evaluations no impairment was required as of
December 31, 2020 or 2019.
We evaluate goodwill for
impairment annually in the fourth quarter, or when there is reason
to believe that the value has been diminished or impaired.
Evaluations for possible impairment are based upon a comparison of
the estimated fair value of the reporting segment to which the
goodwill has been assigned, versus the sum of the carrying value of
the assets and liabilities of that segment including the assigned
goodwill value. Goodwill is tested at the segment level and is the
only intangible asset with an indefinite life on the balance
sheet.
Financial
Instruments
The carrying
amounts reported in the consolidated balance sheets for cash
equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying
amounts reported for the note receivable and notes payable
approximate fair value because the underlying instruments have an
interest rate that reflects current market rates. None of these
instruments are held for trading purposes.
Advertising
Costs
DGSE’s
advertising costs are expensed as incurred and amounted to $240,770
and $392,588 for Fiscal 2020 and Fiscal 2019,
respectively.
ECHG’s
advertising costs are expensed as incurred and amounted to $16,311
and $4,809 For Fiscal 2020 and for the period beginning May 20,
2019 through December 31, 2019, respectively.
Accounts
Receivable
Given the
generally low level of accounts receivable for DGSE, the Company
uses a simplified approach to calculate a general bad debt reserve.
An allowance is calculated for each aging “bucket,”
based on the risk profile of that bucket. For example, based on our
historical experience, we have chosen to not place any reserve on
amounts that are less than 60 days past due. From there the reserve
amount escalates: 10% reserve on amounts over 60 but less than 90
days past due, 25% on amounts over 90 but less than 120 past due,
and 75% on amounts over 120 days past due. The account receivables
past 120 days past due are reviewed quarterly and if they are
deemed uncollectable will be written off against the
reserve.
For Fiscal 2020
and 2019, besides the normal timing to clear credit cards and
financing collections, DGSE’s accounts receivable balance
consisted of wholesale dealers that are current, therefore no
reserve was established at December 31, 2020 and 2019. Once a
reserve is established, and an amount is considered to be
uncollectable it is to be written off against the reserve. We will
revisit the reserve periodically, but no less than annually, with
the same analytical approach in order to determine if the reserve
needs to be increased or decreased, based on the risk profile of
open accounts receivable at that point.
ECHG has a more
sizable accounts receivable balance of $2,528,215 at December 31,
2020 and $2,383,061 as of December 31, 2019. We use a different
approach for allowance for doubtful accounts because customers are
generally larger and payable terms are farther out. Once we
determine that a balance is uncollectable we reserve that balance
but still pursue payment. On the rare occasion we determine a
balance is uncollectable we will write off the balance against the
reserve. As of December 31, 2020 and 2019, we consider the full
accounts receivable balance to be fully collectable and feel that a
reserve of $0 to be appropriate.
As of December 31,
2020 and 2019, there was no allowance for doubtful
accounts.
A summary of the
Allowance for Doubtful Accounts is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
$-
|
$-
|
|
Bad debt expense
(+)
|
37,798
|
-
|
|
Receivables written off
(-)
|
(37,798)
|
-
|
|
Ending
Balance
|
$-
|
$-
|
Note
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
agreement, whereby, increasing 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.
Short-Term
Financing
Envela established
a short-term line of credit with Texas Bank and Trust to cover
emergency cash needs for $1,000,000 on May 17, 2019. The line of
credit was renewed for an additional two years and increased to
$3,500,000 on May 17 2020 and expires May 16, 2022. It has a
varying interest rate, per annum, based on the Prime Rate. On
December 31, 2020, the interest rate was 5% and the balance due on
this short-term line of credit was $0.
Income
Taxes
Income taxes are
accounted for under the asset and liability method prescribed by
Financial Accounting Standards Board (the “FASB”)
Accounting Standards Codification (“ASC”) 740, Income
Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation
allowance is recorded to reduce the carrying amounts of deferred
tax assets unless it is more likely than not such assets will be
realized.
The Company
accounts for its position in tax uncertainties in accordance with
ASC 740. The guidance establishes standards for accounting for
uncertainty in income taxes. The guidance provides several
clarifications related to uncertain tax positions. Most notably, a
“more likely-than-not” standard for initial recognition
of tax positions, a presumption of audit detection and a
measurement of recognized tax benefits based on the largest amount
that has a greater than 50 percent likelihood of realization. ASC
740 applies a two-step process to determine the amount of tax
benefit to be recognized in the financial statements. First, the
Company must determine whether any amount of the tax benefit may be
recognized. Second, the Company determines how much of the tax
benefit should be recognized (this would only apply to tax
positions that qualify for recognition). The Company has not taken
a tax position that, if challenged, would have a material effect on
the financial statements or the effective tax rate during the years
ended December 31, 2020 and 2019.
The Company
currently believes that its significant filing positions are highly
certain and that all of its other significant income tax filing
positions and deductions would be sustained upon audit or the final
resolution would not have a material effect on the consolidated
financial statements. Therefore, the Company has not established
any significant reserves for uncertain tax positions. The Company
recognizes accrued interest and penalties resulting from audits by
tax authorities in the provision for income taxes in the
consolidated statements of operations. During Fiscal 2020 and
Fiscal 2019, the Company did not incur any federal income tax
interest or penalties.
Revenue
Recognition
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers
(Topic 606), which superseded revenue recognition requirements in
Topic 605, Revenue Recognition. The ASU is based on the principle
that revenue is recognized to depict the transfer of goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The ASU also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and
cash flows arising from customer contracts, including significant
judgements and changes in judgements and assets recognized from
cost incurred to obtain or fulfill a contract.
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, to identify the performance obligations in the contract
as we promise to deliver the purchased item or promised repairs in
return for payment or future payment as a receivable. The third
step is determining the transaction price of the contract
obligation as in the full ticket price, negotiated price or a
repair price. The next step is to allocate the transaction price to
the performance obligations as we designate a separate price for
each item. The final step in the guidance is to recognize revenue
as each performance obligation is satisfied.
The following
disaggregation of total revenue is listed by sales category and
segment for the years ended December 31, 2020 and
2019:
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DGSE
|
|
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|
|
|
|
|
Resale
|
$79,790,419
|
9,215,494
|
11.5%
|
$60,088,405
|
$7,760,365
|
12.9%
|
|
Recycled
|
5,870,972
|
1,154,376
|
19.7%
|
7,431,749
|
1,157,459
|
15.6%
|
|
|
|
|
|
|
|
|
|
Subtotal
|
85,661,391
|
10,369,870
|
12.1%
|
67,520,154
|
8,917,824
|
13.2%
|
|
|
|
|
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|
ECHG
|
|
|
|
|
|
|
|
Resale
|
19,395,834
|
9,504,607
|
49.0%
|
8,722,281
|
4,692,114
|
53.8%
|
|
Recycled
|
8,864,790
|
3,194,486
|
36.0%
|
5,782,062
|
2,645,904
|
45.8%
|
|
|
|
|
|
|
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Subtotal
|
28,260,624
|
12,699,093
|
44.9%
|
14,504,343
|
7,338,018
|
50.6%
|
|
|
|
|
|
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|
|
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$113,922,015
|
$23,068,963
|
20.2%
|
$82,024,497
|
$16,255,842
|
19.8%
|
For
DGSE, revenue for monetary transactions (i.e., cash and
receivables) with dealers and the retail public are recognized when
the merchandise is delivered, and payment has been made either by
immediate payment or through a receivable obligation at one of our
over-the-counter retail stores. 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 Dallas refiner, who was a related
party until May 20, 2019. Since this refiner is located in the
Dallas area, we deliver the metal to the refiner. The metal is
assayed, price is determined from the assay and payment is made
usually within two days. Revenue is recognized from the sale once
payment is received.
We also offer 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 for customers wishing to borrow
money for the purchase. The customer applies on-line with the third
party 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. We recognize the
revenue of the sale upon the promise of the financing company to
pay.
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 Fiscal
2020 sales, which is based on our review of historical returns
experience, and reduces our reported revenues and cost of sales
accordingly. As of December 31, 2020 and 2019, our allowance for
returns remained the same at approximately $28,000 for both
years.
ECHG has several
revenue streams and recognize revenue according to ASC 606 at an
amount that reflects the consideration to which the entities expect
to be entitled in exchange for transferring goods or services to
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. ECHG has fulfilled its performance obligation with an
agreed upon transaction price, payment terms and shipping the
product.
●
ECHG 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 with 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 ECHG 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.
●
ECHG also provides
recycling services according to a Scope of Work. Services are
recognized based on the number of units processed by a preset price
per unit. Activity reports are produced weekly with the counts and
revenue is recognized based on the billing from the weekly reports.
Recycling services can be conducted at our ECHG facility or we can
design and perform the recycling service at the client’s
facility. The Scope of Work will determine the charges and whether
the service will be completed at ECHG or at the client’s
facility. Payment terms are also dictated in the Scope of
Work.
Shipping and Handling
Costs
Shipping and
handling costs amounted to $1,025,215 and $803,015, for 2020 and
2019, respectively. We have determined that shipping and handling
costs should be included in cost of goods sold since inventory is
what is shipped to and from store locations or to and from
vendors.
Taxes Collected from
Customers
The
Company’s policy is to present taxes collected from customers
and remitted to governmental authorities on a net basis. The
Company records the amounts collected as a current liability and
relieves such liability upon remittance to the taxing authority
without impacting revenues or expenses.
Earnings Per
Share
Basic earnings per
share of our Common Stock is computed by dividing net earnings
available to holders of our Common Stock by the weighted average
number of common shares outstanding for the reporting period.
Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock. For the calculation
of diluted earnings per share, the basic weighted average number of
shares is increased by the dilutive effect of stock options and
warrants outstanding determined using the treasury stock
method.
Stock-Based
Compensation
The Company
accounts for stock-based compensation by measuring the cost of the
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 Fiscal 2020 and Fiscal 2019 amounted to
$325 and $0 respectively.
The following
table represents our total compensation cost related to non-vested
awards not yet recognized at year end December 31, 2020 and
December 31, 2019:
|
Date of
grant
|
Employee
|
Price of stock at grant
date
|
Number of shares granted
unvested December 31, 2020
|
Unrecognized expense at
December 31, 2020
|
Number of shares granted
unvested December 31, 2019
|
Unrecognized expense at
December 31, 2019
|
|
|
|
|
|
|
|
|
|
January 23,
2014
|
Robert
Burnside
|
$2.18
|
0
|
-
|
250
|
$545.00
|
|
|
|
|
|
|
|
|
Total cost
unrecognized
|
|
|
|
-
|
|
$545.00
|
No stock awards
remained unexercised as of December 31, 2020 and only 250
unexercised stock awards remained unexercised as of December 31,
2019.
Use of
Estimates
The preparation of
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, and expenses.
Examples of estimates and assumptions include: for revenue
recognition, determining the nature and timing of satisfaction of
performance obligations, and determining the standalone selling
price of performance obligations, variable consideration, and other
obligations such as product returns and refunds; loss
contingencies; the fair value of and/or potential impairment of
goodwill and intangible assets for our reporting units; useful
lives of our tangible and intangible assets; allowances for
doubtful accounts; valuation allowance; the market value of, and
demand for, our inventory and the potential outcome of uncertain
tax positions that have been recognized on our consolidated
financial statements or tax returns. Actual results and outcomes
may differ from management’s estimates and
assumptions.
New 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.
The adoption did not have an impact on the Company’s
consolidated financial statements.
On January 1, 2019, we adopted Accounting
Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02)
using the modified retrospective transition approach by applying
the new standard to all leases existing at the date of initial
application. Results and disclosure requirements for reporting
periods beginning after January 1, 2019, are presented under Topic
842, while prior period amounts have not been adjusted and continue
to be reported in accordance with our historical accounting under
Topic 840. Upon adoption, we recognized right-of-use
assets of approximately $2.0 million,
with corresponding lease liabilities of approximately $2.0 million
on the consolidated balance sheets. The right-of-use
assets include adjustments for
deferred rent liabilities. The adoption did not impact our
beginning retained earnings, or our prior year consolidated
statements of income and statements of cash
flows.
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 2 —
CONCENTRATION OF CREDIT RISK
The Company
maintains cash balances in financial institutions in excess of
federally insured limits.
A significant
amount of DGSE’s revenue and expenses stem from sales to and
purchases from one Dallas refining partner, which relationship
constitutes Envela’s single largest source of revenues and
expenses. In addition, a significant amount of
ECHG’s refining revenue comes from one refining partner with
an international refining facility. Any adverse break in either
relationship could reduce the flow of refining materials and
revenue. While the pandemic continues to be a global threat, any
potential 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. The effects of the coronavirus pandemic on our
business, the ultimate impact remains uncertain and subject to
change. The duration of any such impact cannot be
predicted.
NOTE 3 —
INVENTORIES
Inventories
consist of the following:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Resale
|
$8,971,815
|
$8,213,551
|
|
Recycle
|
191,677
|
401,468
|
|
|
|
|
|
Subtotal
|
9,163,492
|
8,615,019
|
|
|
|
|
|
ECHG
|
|
|
|
Resale
|
557,959
|
351,958
|
|
Recycle
|
285,446
|
542,477
|
|
|
|
|
|
Subtotal
|
843,405
|
894,435
|
|
|
|
|
|
|
$10,006,897
|
$9,509,454
|
NOTE
4 — 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
conditions. On November 7, 2020, the Company entered into an
amended agreement, whereby, increasing the loan from $1,500,000 to
$2,100,000. 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
5 — PROPERTY AND EQUIPMENT
Property and
equipment consist of the following:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Land
|
$720,786
|
$55,000
|
|
Buildings and
improvements
|
1,317,906
|
-
|
|
Leasehold
improvements
|
1,435,742
|
1,561,649
|
|
Machinery and
equipment
|
1,056,315
|
1,039,013
|
|
Furniture and
fixtures
|
504,430
|
453,699
|
|
Vehicles
|
22,859
|
-
|
|
|
5,058,038
|
3,109,361
|
|
Less: accumulated
depreciation
|
(2,054,294)
|
(1,904,948)
|
|
|
|
|
|
Sub-Total
|
3,003,744
|
1,204,413
|
|
|
|
|
|
ECHG
|
|
|
|
Leasehold
improvements
|
81,149
|
81,149
|
|
Machinery and
equipment
|
220,417
|
27,497
|
|
Furniture and
fixtures
|
93,827
|
93,827
|
|
|
395,393
|
202,473
|
|
Less: accumulated
depreciation
|
(71,058)
|
(55,847)
|
|
|
|
|
|
Sub-Total
|
324,335
|
146,626
|
|
|
|
|
|
Envela
|
|
|
|
Land
|
1,106,664
|
-
|
|
Buildings and
improvements
|
2,456,324
|
-
|
|
Machinery and
equipment
|
5,407
|
-
|
|
|
3,568,395
|
-
|
|
Less: accumulated
depreciation
|
(7,873)
|
-
|
|
|
|
|
|
Sub-Total
|
3,560,522
|
-
|
|
|
|
|
|
|
$6,888,601
|
$1,351,039
|
Depreciation
expense was $327,026 and $264,021 for Fiscal 2020 and Fiscal 2019,
respectively.
NOTE 6 —
ACQUISITION
On May 20, 2019,
ECHG, a wholly owned subsidiary of the Company, entered into an
asset purchase agreement with each of Echo Environmental, LLC and
its wholly owned subsidiary ITAD USA, LLC (collectively, the
“Echo Legacy Entities”), pursuant to which the Echo
Legacy Entities agreed to sell all of their assets and rights and
interests thereto (the “Acquired Assets”) for
$6,925,979 (the “Echo Transaction”). The Echo Legacy
Entities were wholly owned subsidiaries of a former Related Party.
John R. Loftus is the Company’s CEO, President and Chairman
and owned approximately one-third of the equity interests of the
former Related Party prior to the Echo Transaction. The Company
also paid a closing fee of $85,756 that was not part of the
purchase price allocation. The fee is included in selling, general
and administrative expenses.
On the same day,
Mr. Loftus became the largest beneficial owner of the
Company’s stock by purchasing all of the Company’s
stock beneficially owned by the former Related Party. As part of
the transaction of acquiring the stock from the former Related
Party, Mr. Loftus no longer owns an equity interest in that entity.
As an interested party, Mr. Loftus was familiar with the operations
of the Echo Legacy Entities.
In connection with
the Echo Transaction, on May 20, 2019, ECHG executed and delivered
to Mr. Loftus, a promissory note to which ECHG borrowed from Mr.
Loftus $6,925,979, the proceeds of which were used to purchase the
Acquired Assets.
As part of the
Echo Transaction, goodwill was realized of $1,367,109, which is the
purchase price less the fair value of the net assets purchased, as
shown in the purchase price allocation in the following table.
Goodwill is not amortized but evaluated for impairment on an annual
basis during the fourth quarter of our fiscal year or earlier if
events or circumstances indicate the carrying value may be
impaired. The Company’s goodwill is related to ECHG only and
not the whole Company. The Company has evaluated goodwill based on
cash flows for the ECHG segment. For federal income tax purposes,
goodwill is amortized and deductible over fifteen
years.
The purchase price
was allocated to the fair value of assets and liabilities acquired
as of May 20, 2019:
|
Description
|
|
|
|
|
|
Assets
|
|
|
Cash
|
$1,049,462
|
|
Account
receivables
|
1,025,615
|
|
Inventories
|
1,209,203
|
|
Prepaids
|
88,367
|
|
Fixed
assets
|
191,208
|
|
Right-of-use
assets
|
2,350,781
|
|
Intangible
Assets
|
3,356,000
|
|
Other
assets
|
88,998
|
|
|
|
|
Liabilities
|
|
|
Account
payables
|
(723,043)
|
|
Accrued
liabilities
|
(721,483)
|
|
Operating lease
liabilities
|
(2,350,781)
|
|
Other long-term
liabilities
|
(5,457)
|
|
|
|
|
Net
assets
|
5,558,870
|
|
|
|
|
Goodwill
|
1,367,109
|
|
|
|
|
Total
Purchase Price
|
$6,925,979
|
The following pro forma presents
the Company's results of the Echo Entities and the Company's
results of operations for the twelve months ended December 31, 2019
as if they were combined the entire twelve
months:
|
|
|
|
|
For the Twelve Months Ended
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$87,921,642
|
|
|
|
|
Income
(loss) from continuing operations
|
$1,931,558
|
|
|
|
|
Net
income
|
$1,931,558
|
|
|
|
|
Basic
net income per common share
|
$0.07
|
|
|
|
|
Diluted
net income per common share
|
$0.07
|
NOTE 7 —
GOODWILL
The changes in the carrying
amount of goodwill for the years ended December 31, 2020 and 2019,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Opening
balance
|
$1,367,109
|
$-
|
|
Additions
|
-
|
1,367,109
|
|
Acquisition
adjustment
|
-
|
-
|
|
Impairment
adjustment
|
-
|
-
|
|
|
|
|
|
Goodwill
|
$1,367,109
|
$1,367,109
|
Our 2019 acquisition of the assets of the Echo
Legacy Entities resulted in the addition to our goodwill balance in
2019. The Company’s goodwill is related to the ECHG
segment only and not the whole Company. We evaluate goodwill for impairment annually in
the fourth quarter, or when there is reason to believe that the
value has been diminished or impaired. Based on the
Company’s evaluations, no impairment was required as of
December 31, 2020 and 2019.
NOTE
8 — INTANGIBLE ASSETS
Intangible assets
consist of:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Domain
names
|
$41,352
|
$41,352
|
|
Point of sale
system
|
330,000
|
330,000
|
|
|
371,352
|
371,352
|
|
Less: accumulated
amortization
|
(203,502)
|
(137,502)
|
|
|
|
|
|
Subtotal
|
167,850
|
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
|
(531,377)
|
(195,777)
|
|
|
|
|
|
Subtotal
|
2,824,623
|
3,160,223
|
|
|
|
|
|
Total
|
$2,992,473
|
$3,394,073
|
Amortization
expense was $401,600 and $256,277 for Fiscal 2020 and Fiscal 2019,
respectively.
The estimated
aggregate amortization expense for each of the five succeeding
fiscal years follows:
|
|
|
|
|
|
|
|
|
|
|
2021
|
$66,000
|
$335,600
|
$401,600
|
|
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
|
|
|
|
|
|
|
|
$167,850
|
$2,824,623
|
$2,992,473
|
NOTE 9 –
ACCRUED EXPENSES
Accrued expenses
consist of the following:
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
Accrued
Interest
|
$10,057
|
$7,374
|
|
Professional
fees
|
-
|
125,200
|
|
Board member
fees
|
7,500
|
7,500
|
|
Insurance
|
-
|
30,508
|
|
Payroll
|
155,635
|
157,148
|
|
Property
tax
|
26,435
|
-
|
|
Sales
tax
|
180,609
|
115,451
|
|
Other
administrative expenses
|
13,525
|
-
|
|
State income
tax
|
-
|
33,907
|
|
|
|
|
|
Subtotal
|
393,761
|
477,088
|
|
|
|
|
|
ECHG
|
|
|
|
Accrued
Interest
|
17,086
|
16,724
|
|
Professional
fees
|
-
|
77,900
|
|
Payroll
|
119,327
|
79,342
|
|
Property
tax
|
20,500
|
-
|
|
Sales
tax
|
-
|
7,852
|
|
Credit
card
|
-
|
22,279
|
|
Other accrued
expenses
|
10,574
|
-
|
|
State income
tax
|
-
|
27,963
|
|
Material &
shipping costs (COGS)
|
-
|
207,361
|
|
|
|
|
|
Subtotal
|
167,487
|
439,421
|
|
|
|
|
|
Envela
|
|
|
|
Accrued
Interest
|
7,884
|
-
|
|
Payroll
|
10,745
|
-
|
|
Professional
fees (1)
|
142,635
|
-
|
|
Other
administrative expenses
|
8,433
|
-
|
|
State income
tax (1)
|
113,379
|
-
|
|
|
|
|
|
Subtotal
|
283,076
|
-
|
|
|
|
|
|
|
$844,324
|
$916,509
|
(1) State income
tax and professional fee accruals have been recorded at the segment
level in prior periods. Proceeding forward, we will allocate those
expenses at the segment level but accrue the consolidated balances
at the corporate level.
NOTE 10 —
LONG-TERM DEBT
Long-term debt
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DGSE
|
|
|
|
|
|
Note payable, related party
(1)
|
$2,863,715
|
$2,949,545
|
6.00%
|
|
|
Note payable, Truist Bank
(2)
|
942,652
|
-
|
3.65%
|
July 9, 2030
|
|
Note payable, Texas Bank
& Trust (3)
|
491,852
|
-
|
3.75%
|
September 14,
2025
|
|
|
|
|
|
|
|
DGSE
Sub-Total
|
4,298,219
|
2,949,545
|
|
|
|
|
|
|
|
|
|
ECHG
|
|
|
|
|
|
Note payable, related party
(1)
|
6,496,127
|
6,689,507
|
6.00%
|
May 16, 2024
|
|
|
|
|
|
|
|
Envela
|
|
|
|
|
|
Note payable, Texas Bank
& Trust (4)
|
2,951,379
|
-
|
3.25%
|
November 4, 2025
|
|
Note payable
(5)
|
1,668,200
|
-
|
|
|
|
|
|
|
|
|
|
Envela
Sub-Total
|
4,619,579
|
-
|
|
|
|
|
|
|
|
|
|
Sub-Total
|
15,413,925
|
9,639,052
|
|
|
|
|
|
|
|
|
|
Current
portion
|
2,120,457
|
1,084,072
|
|
|
|
|
|
|
|
|
|
|
$13,293,468
|
$8,554,980
|
|
|
(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. 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 a former 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,
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) On November 4,
2020, 1901 Gateway Holdings, LLC, a wholly owned subsidiary of
Envela Corporation, 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, 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 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 note payables and note payables, related party, as
of December 31, 2020 are as follows:
|
Note
payable, related party - DGSE
|
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
|
2021
|
$95,129
|
|
2022
|
100,996
|
|
2023
|
107,225
|
|
2024
|
2,560,365
|
|
|
|
|
Subtotal
|
$2,863,715
|
|
Note
payable, Truist Bank - DGSE
|
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
|
2021
|
$33,904
|
|
2022
|
35,163
|
|
2023
|
36,468
|
|
2024
|
37,821
|
|
2025
|
39,216
|
|
Thereafter
|
760,080
|
|
|
|
|
Subtotal
|
$942,652
|
|
Note
payable, Texas Bank & Trust - DGSE
|
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
|
2021
|
$17,399
|
|
2022
|
18,053
|
|
2023
|
18,732
|
|
2024
|
19,437
|
|
2025
|
418,231
|
|
|
|
|
Subtotal
|
$491,852
|
|
Note
payable, related party - ECHG
|
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
|
2021
|
$211,903
|
|
2022
|
224,973
|
|
2023
|
238,849
|
|
2024
|
5,820,402
|
|
|
|
|
Subtotal
|
$6,496,127
|
|
Note
payable, Texas Bank & Trust - Envela
|
|
|
|
|
|
Year Ending December
31,
|
|
|
|
|
|
2021
|
$93,922
|
|
2022
|
97,455
|
|
2023
|
101,122
|
|
2024
|
104,926
|
|
2025
|
2,553,954
|
|
|
|
|
Subtotal
|
$2,951,379
|
|
Note payable - Envela Corporation
|
|
|
Year Ending December
31,
|
|
|
|
|
|
2021
|
$1,668,200
|
|
|
|
|
Subtotal
|
$1,668,200
|
|
|
|
|
|
$15,413,925
|
NOTE 11 —
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 Charleston,
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 waste.
We allocate our
corporate costs and expenses, including 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 the operating performance of each segment
and makes decisions about the allocation of resources according to
each segment profit. The allocations are generally amounts agreed
upon by management, which may differ from an arms-length
amount.
The following
table segments the financial results of DGSE and ECHG for Fiscal
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
Sales
|
$85,661,391
|
$28,260,624
|
$113,922,015
|
|
Cost of goods
sold
|
75,291,521
|
15,561,531
|
90,853,052
|
|
|
|
|
|
|
Gross
profit
|
10,369,870
|
12,699,093
|
23,068,963
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Selling, general and
administrative expenses
|
6,933,259
|
8,620,015
|
15,553,274
|
|
Depreciation and
amortization
|
321,833
|
406,793
|
728,626
|
|
|
|
|
|
|
|
7,255,092
|
9,026,808
|
16,281,900
|
|
|
|
|
|
|
Operating
income
|
3,114,778
|
3,672,285
|
6,787,063
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
Other
income
|
(113,974)
|
(193,023)
|
(306,997)
|
|
Interest
expense
|
209,295
|
411,204
|
620,499
|
|
|
|
|
|
|
Income before income
taxes
|
3,019,457
|
3,454,104
|
6,473,561
|
|
|
|
|
|
|
Income tax
expense
|
40,283
|
49,335
|
89,618
|
|
|
|
|
|
|
Income
from continuing operations
|
$2,979,174
|
$3,404,769
|
$6,383,943
|
|
|
|
|
|
NOTE
12 — BASIC AND DILUTED AVERAGE
SHARES
A reconciliation
of basic and diluted average common shares is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
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 years
ended December 31, 2020 and 2019, there were 15,000 and 15,250
Common Stock options, warrants, and Restricted Stock Units (RSUs)
unexercised respectively. For the years ended December 31, 2020 and
2019, there were no anti-dilutive shares.
NOTE
13 — COMMON STOCK
In January 2014,
the Company’s Board granted 112,000 RSUs to its officers and
certain key employees. As of December 31, 2020, no RSUs remain
unexercised and dilutive.
NOTE
14 — STOCK OPTIONS AND RESTRICTED STOCK
UNITS
On June 21, 2004,
our shareholders approved the adoption of the 2004 Employee Stock
Option Plan (the “2004 Employee Stock Option Plan”)
that provided for incentive stock
options and nonqualified stock options to be granted to key
employee and certain directors. Each option vested on either
January 1, 2004 or immediately upon issuance thereafter. The
exercise price of each option issued pursuant to the 2004 Plan is
equal to the market value of our Common Stock on the date of grant,
as determined by the closing bid price for our Common Stock on the
Exchange on the date of grant or, if no trading occurred on the
date of grant, on the last day prior to the date of grant on which
our securities were listed and traded on the Exchange. Of the
options issued under the 2004 Employee Stock Option Plan, 15,000
remain outstanding. Options issued pursuant to the 2004 Employee
Stock Option Plan have no expiration date. The Company previously
determined there will be no additional grants under the 2004
Employee Stock Option Plan.
On December 7,
2016, our shareholders approved the adoption of the 2016 Equity
Incentive Plan (the “2016 Plan”), which reserved
1,100,000 shares for issuance pursuant to awards issued thereunder.
As of December 31, 2020, no awards had been made under the 2016
Plan.
The following
table summarizes the activity in common shares subject to options
and warrants:
|
|
|
|
|
|
|
|
|
|
Weighted average exercise
price
|
|
Weighted average exercise
price
|
|
|
|
|
|
|
|
Outstanding at beginning or
year
|
15,000
|
$2.17
|
15,000
|
$2.17
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding at end of
year
|
15,000
|
$2.17
|
15,000
|
$2.17
|
|
|
|
|
|
|
|
Options exercisable at end
of year
|
15,000
|
$2.17
|
15,000
|
$2.17
|
|
|
|
|
|
|
The 15,000 options
exercisable at the end of the year are potential dilutive
shares.
Information about
stock options outstanding at December 31, 2020 is summarized as
follows:
|
|
Options Outstanding and
Exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual life
(Years)
|
|
Weighted average exercise
price
|
Aggregate intrinsic
value
|
|
$2.13
|
10,000
|
NA
|
(1)
|
$2.13
|
$32,450
|
|
$2.25
|
5,000
|
NA
|
(1)
|
$2.25
|
$15,600
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
$48,050
|
(1)
Options currently
issued pursuant to the Company’s 2004 Employee Stock Option
Plans have no expiration date.
The aggregate
intrinsic values in the above table were based on the closing price
of our Common Stock of $5.37 as of December 31,
2020.
A summary of the
status of our non-vested RSU grants issued under our 2006 Plan is
presented below:
|
|
|
|
|
|
|
|
|
|
Weighted average exercise
price
|
|
Weighted average exercise
price
|
|
|
|
|
|
|
|
Nonvested at beginning or
year
|
250
|
$1.30
|
250
|
$1.30
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
250
|
1.30
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding at end of
year
|
-
|
$-
|
250
|
$1.30
|
As a result of the
expiration of the 2006 Plan, as of December 31, 2019, no further
shares could be issued under the 2006 Plan. As of January 1, 2020,
the remaining 250 RSU grants have vested and were exercised during
Fiscal 2020. A total of 1,100,000 shares remain available for
future grants pursuant to the 2016 Plan.
During Fiscal 2020
we recognized $325 of stock-based compensation expense compared to
$0 in Fiscal 2019.
NOTE 15 —
INCOME TAXES
The income tax
provision reconciled to the tax computed at the statutory from
continuing operations Federal rate follows:
|
|
|
|
|
|
|
|
|
Tax Expense at
Statutory Rate
|
$1,364,191
|
$626,468
|
|
Valuation
Allowance
|
(1,371,195)
|
(631,775)
|
|
Non-Deductible
Expenses and Other
|
7,004
|
5,307
|
|
State Taxes, Net of
Federal Benefit
|
89,618
|
95,116
|
|
Income tax
expense
|
$89,618
|
$95,116
|
|
|
|
|
|
Current
|
$89,618
|
$95,116
|
|
Total
|
$89,618
|
$95,116
|
Deferred
income taxes are comprised of the following at December 31, 2020
and 2019:
|
|
|
|
|
Deferred
tax assets (liabilities):
|
|
|
|
Inventories
|
$22,620
|
$21,495
|
|
Stock
options and other
|
6,836
|
57,019
|
|
Contingencies
and accruals
|
28,580
|
32,154
|
|
Property
and equipment
|
(256,065)
|
(180,300)
|
|
Net
operating loss carryforward
|
6,527,548
|
7,763,103
|
|
Goodwill
and intangibles
|
27,085
|
34,328
|
|
Total
deferred tax assets, net
|
6,356,604
|
7,727,799
|
|
|
|
|
|
Valuation
allowance
|
$(6,356,604)
|
$(7,727,799)
|
|
Net
Deferred tax asset
|
-
|
-
|
As of December 31,
2020, the Company had $2,729,636 of net operating loss
carry-forwards, related to the Superior Galleries acquisition which
may be available to reduce taxable income in future years, subject
to the applicable Internal Revenue Code Section 382 limitations. As
of December 31, 2020, the Company had approximately $28,353,926 of
net operating loss carry-forwards related to Superior
Galleries’ post acquisition operating losses and other
operating losses incurred by the Company’s other operations.
These carry-forwards will expire, starting in 2026 if not
utilized.
The
Company is uncertain of our ability to accurately project income
into the future due to the economic conditions caused by the
pandemic, therefore, the Company is waiving any adjustment to the
current valuation allowance.
As of December 31,
2020, the Company determined based on consideration of all
available evidence, including but not limited to historical,
current and future anticipated financial results as well as
applicable IRS limitations and expiration dates related to the
Company’s net operating losses, a full valuation allowance
should be recorded for its net deferred tax
assets.
NOTE
16 — LEASES
On February 25,
2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). We adopted
ASC 842 on January 1, 2019, by applying its provisions
prospectively. The financial results reported in periods prior to
January 1, 2019 are unchanged. Upon adoption, we recognized all of
our leases on the balance sheet as right-of-use assets and lease
liabilities. For income statement purposes, the FASB retained a
dual model, requiring leases to be classified as either operating
of finance. Classification is based on certain criteria and we have
determined that all of our retail building leases fall into the
operating lease category. Our leases are included in our
consolidated balance sheet as right-of-use assets along with the
current operating lease liabilities and long-term operating lease
liabilities.
When the 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 the consolidated balance sheet. The
operating lease liabilities were determined based on the present
value of the remaining minimum rental payments and the operating
lease right-of-use asset was determined based on the value of the
lease liabilities, adjusted for deferred rent balances of $61,500,
which were previously included in other
liabilities.
Due to the
acquisition, referred in Note 6, 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 the consolidated balance sheet. The
operating lease liabilities were determined based on the present
value of the remaining minimum rental payments and the operating
lease right-of-use asset was determined based on the value of the
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 rate of interest 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 the lease agreement, 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. We have two leases expiring
during Fiscal year 2021. Our Southlake, Texas location expired July
31, 2020 with no current options. We evaluated the lease in the
present location and decided to vacate the property as of July 31,
2020. Our lease on the main flagship store located at 13022 Preston
Road, Dallas, Texas will be expiring October 31, 2021, with no
current lease options. The Grand Prairie, Texas lease expires June
30, 2022, and has no current lease options. The Charleston,
South Carolina lease
expires April 30, 2025, and has no current lease options. The
Euless, Texas lease expires June 30, 2025 with an option for an
additional five (5) year term. On September 9, 2020, we entered
into a new lease agreement with the landlord of the Echo Belt Line
building starting January 1, 2021, expiring January 31, 2026, with
one option period of an additional 60 months. A portion of the Echo
Belt Line building was sublet and the rent received was applied
against the rental expense for the building. The new Echo Belt Line
lease, starting January 1, 2021, will not contain a subletter. The
McKenzie ITAD lease expires July 31, 2021 with no current lease
options. All six leases are triple net leases that we pay our
proportionate amount of common area maintenance, property taxes and
property insurance. Leasing costs for Fiscal 2020 and Fiscal 2019
was $1,452,689 and $1,151,619, respectively. These lease costs
consist of a combination of minimum lease payments and variable
lease costs.
As of December 31,
2019, the weighted average remaining lease term and weighted
average discount rate for operating leases was 2.81 years and 5.5%,
respectively. The Company’s future operating lease
obligations that have not yet commenced are immaterial. The cash
paid for operating lease liabilities for Fiscal 2020 and Fiscal
2019 was $1,314,285 and $1,809,514,
respectively.
Future annual
minimum lease payments as of December 31, 2020:
|
|
|
|
|
|
|
DGSE
|
|
|
2021
|
$479,161
|
|
2022
|
235,674
|
|
2023
|
212,855
|
|
2024
|
213,885
|
|
2025
and thereafter
|
64,087
|
|
|
|
|
Total
minimum lease payments
|
1,205,662
|
|
Less
imputed interest
|
(110,429)
|
|
|
|
|
DGSE
Sub-Total
|
1,095,233
|
|
|
|
|
ECHG
|
|
|
2021
|
869,209
|
|
2022
|
786,396
|
|
2023
|
808,022
|
|
2034
|
830,244
|
|
2025
and thereafter
|
853,076
|
|
|
|
|
Total
minimum lease payments
|
4,146,947
|
|
Less
imputed interest
|
(439,452)
|
|
|
|
|
Envela
Sub-Total
|
3,707,495
|
|
|
|
|
Total
|
4,802,728
|
|
|
|
|
Current
portion
|
1,148,309
|
|
|
|
|
|
$3,654,419
|
NOTE 17 —
RELATED-PARTY TRANSACTIONS
The Company has a
corporate policy governing the identification, review,
consideration and approval or ratification of transactions with
related persons, as that term is defined in the Instructions to
Item 404(a) of Regulation S-K, promulgated under the Securities Act
(“Related Party”). Under this policy, all Related Party
transactions are identified and approved prior to 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. Envela’s Board reviews all Related
Party transactions at least annually to determine if it is in the
Board’s best interests and the best interests of 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.
Through a series
of transactions beginning in 2010, Elemetal, NTR and Truscott
(“Related Entities”) became the largest shareholders of
our Common Stock. NTR transferred all of its Common Stock to Eduro
Holdings, LLC (“Eduro”) on August 29, 2018. A certain
Related Entity has been the Company’s primary refiner and
bullion trading partner. From January 1, 2019 through May 20, 2019
a certain Related Entity accounted for 4% of sales and 6% of
purchases. Fiscal 2018, these transactions represented 11% of the
Company’s sales and 2% of the Company’s purchases. On
May 20, 2019, through a series of transactions, the Related Entity
sold their shares of the Company to John R. Loftus, The
Company’s CEO, President and Chairman of the Board. As of May
20, 2019, they were no longer a Related Entity. On December 9,
2016, the Company and a certain Related Entity closed the
transactions contemplated by the Debt Exchange Agreement whereby
the Company issued a certain Related Entity 8,536,585 shares of its
common stock and a warrant to purchase an additional 1,000,000
shares to be exercised within two years after December 9, 2016, in
exchange for the cancellation and forgiveness of $3,500,000 of
trade payables owed to a certain Related Entity as a result of
bullion-related transactions. The warrant to purchase an additional
1,000,000 shares expired in December 2018 and was not exercised. As
of December 31, 2020, the Company was obligated to pay $0 to the
certain Related Entity as a trade payable and had a $0 receivable
from the certain Related Entity. As of December 31, 2019, the
Company was obligated to pay $0 to the certain Related Entity as a
trade payable and had a $0 receivable from the certain Related
Entity. For the year ended December 31, 2020 and 2019, the Company
paid the Related Entities $0 and $61,869, respectively, in interest
on the Company’s outstanding payable.
Through a series
of transactions reported on Schedule 13D on May 24, 2019, Truscott
sold their 12,814,727 shares, 47.7% of DGSE Companies Common Stock
to John R. Loftus. Mr. Loftus assumed all rights under the existing
registration rights agreements. On the same day, Mr. Loftus
contributed his 12,814,727 Common Stock shares to N10TR, LLC
(“N10TR”) which is wholly owned by Mr. Loftus. Mr.
Loftus, by virtue of his relationship with Eduro and N10TR may be
deemed to indirectly beneficially own the Common Shares that Eduro
and N10TR directly beneficially own. On the same day the Company
entered into two (2) loan agreements with John R. Loftus, the
Company’s CEO, President and Chairman of the Board. The first
note of $6,925,979, pursuant to the Echo Entities purchase
agreement, is a 5-year promissory note amortized over 20 years at
6% annual interest rate. As of December 31, 2020 and 2019, ECHG was
obligated to pay $6,496,127 and $6,689,507, respectively, to Mr.
Loftus as a note payable, related party. The second note of
$3,074,021 paid off the accounts payable – related party
balance to Elemetal as of May 20, 2019. The promissory note is a
5-year note amortized over 20 years at 6% annual interest rate. As
of December 31, 2020 and 2019, DGSE was obligated to pay $2,863,715
and $2,949,545, respectively, to Mr. Loftus as a note payable,
related party. Both notes are being serviced by operational cash
flow. For the year ended December 31, 2020 and 2019, the Company
paid Mr. Loftus $580,957 and $325,749, respectively, in interest on
the Company’s outstanding note payables, related
party.
NOTE
18 — DEFINED CONTRIBUTION PLAN
The Company
sponsors a defined contribution 401(k) plan that is subject to the
provisions of the Employee Retirement Income Security Act of 1974.
The plan covers substantially all employees who have completed one
month of service. Participants can contribute up to 15% of their
annual salary subject to Internal Revenue Service limitations. The
Company matched 10% of the employee’s contribution up to 6%
of the employee’s salary for the Fiscal 2020 and Fiscal 2019
plans.
NOTE
19 — SUBSEQUENT EVENTS
The outbreak of
COVID-19, coronavirus pandemic has already adversely affected
global economic business conditions. Future sales on products like
ours could decline due to increased commodities prices,
particularly gold. Although we are continuing to monitor and assess
the effects of the coronavirus pandemic, the ultimate impact is
highly uncertain and subject to change. The duration of any such
impact cannot be predicted, nor can the timing of the development
and distribution of an effective vaccine or treatments for
COVID-19.
