ela_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended March 31, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Transition Period From _______________ to _______________

Commission File Number 001-11048

ENVELA CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

1901 GATEWAY DRIVE, STE 100, IRVING, TX 75038

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(972) 587-4049

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

www.envela.com

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol		Name of exchange on which registered
COMMON STOCK, par value $0.01 per share		ELA		NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated Filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 11, 2022, the registrant had 26,924,631 shares of common stock outstanding.

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PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements		3

	Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited)		3

	Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021		4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)		5

	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2022 (unaudited)		6

	Notes to Condensed Consolidated Financial Statements (unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31

Item 4.	Controls and Procedures		31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		32

Item 1A.	Risk Factors		32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32

Item 3.	Defaults Upon Senior Securities		32

Item 4.	Mine Safety Disclosures		32

Item 5.	Other Information		32

Item 6.	Exhibits		33

SIGNATURES			34

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	(Unaudited)			(Unaudited)
Three Months Ended March 31,	2022			2021
Revenue:
Sales	$	47,415,098		$	25,490,441
Cost of goods sold		37,704,064			19,186,177

Gross margin		9,711,034			6,304,264

Expenses:
Selling, General & Administrative Expenses		6,559,755			4,153,229
Depreciation and Amortization		291,947			204,912

Total operating expenses		6,851,702			4,358,141

Operating income		2,859,332			1,946,123
Other income (expense), net		(58,576	)		271,941
Interest expense		123,239			179,022

Income before income taxes		2,677,517			2,039,042
Income tax expense		30,292			30,770

Net income	$	2,647,225		$	2,008,272

Basic earnings per share:
Net income	$	0.10		$	0.07

Diluted earnings per share:
Net income	$	0.10		$	0.07

Weighted average shares outstanding:
Basic		26,924,631			26,924,631
Diluted		26,939,631			26,939,631

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

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ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2022			2021
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	11,497,259		$	10,138,148
Trade receivables, net of allowances		5,357,137			7,166,533
Inventories		14,621,575			14,048,436
Current right-of-use assets from operating leases		1,609,077			1,604,736
Prepaid expenses		612,475			439,038
Other current assets		1,765,355			969,624

Total current assets		35,462,878			34,366,515
Property and equipment, net		9,719,499			9,806,188
Goodwill		6,140,465			6,140,465
Intangible assets, net		2,912,370			3,024,245
Operating lease right-of-use assets		5,286,770			5,692,141
Other assets		236,761			237,761

Total assets	$	59,758,743		$	59,267,315

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable-trade	$	2,857,674		$	2,488,396
Line of credit		-			1,700,000
Notes payable		1,003,592			1,065,794
Current operating lease liabilities		1,584,169			1,573,824
Accrued expenses		1,501,178			1,789,366
Customer deposits and other liabilities		1,244,193			1,179,224

Total current liabilities		8,190,806			9,796,604
Notes payable, less current portion		15,826,264			15,970,337
Long-term operating lease liabilities, less current portion		5,467,131			5,873,057

Total liabilities		29,484,201			31,639,998

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		(10,167,704	)		(12,814,929	)

Total stockholders’ equity		30,274,542			27,627,317

Total liabilities and stockholders’ equity	$	59,758,743		$	59,267,315

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

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ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31,	2022			2021
	(Unaudited)			(Unaudited)
Operations
Net income	$	2,647,225		$	2,008,272
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation, amortization, and other		291,947			204,912
Bad debt expense		-			6,249
Changes in operating assets and liabilities:
Trade receivables		1,809,397			(344,103	)
Inventories		(573,139	)		(1,623,485	)
Prepaid expenses		(173,436	)		(576,578	)
Other assets		(794,731	)		(100,000	)
Accounts payable and accrued expenses		81,088			(240,410	)
Operating leases		5,449			19,616
Customer deposits and other liabilities		64,969			260,615

Net cash provided by (used in) operations		3,358,769			(384,912	)

Investing
Investment in note receivable		-			(123,472	)
Purchase of property and equipment		(93,384	)		(200,563	)

Net cash used in investing		(93,384	)		(324,035	)

Financing
Payments on notes payable, related party		-			(71,853	)
Payments on notes payable		(206,274	)		(40,239	)
Payments on line of credit		(1,700,000	)		-

Net cash used in financing		(1,906,274	)		(112,092	)

Net change in cash and cash equivalents		1,359,111			(821,039	)
Cash and cash equivalents, beginning of period		10,138,148			9,218,036

Cash and cash equivalents, end of period	$	11,497,259		$	8,396,997

Supplemental Disclosures
Cash paid during the period for:
Interest	$	129,989		$	179,082
Income taxes	$	-		$	-

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

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ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended March 31, 2021 and 2022

(Unaudited)

	Common Stock				Preferred Stock				Additional Paid-in		Accumulated			Total Stockholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity

Balances at January 1, 2021		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

	Common Stock				Preferred Stock				Additional Paid-in		Accumulated			Total Stockholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity

Balances at January 1, 2022		26,924,631	$	269,246		-	$	-	$	40,173,000	$	(12,814,929	)	$	27,627,317

Net Income		-		-		-		-		-		2,647,225			2,647,225

Balances at March 31, 2022
		26,924,631	$	269,246		-	$	-	$	40,173,000	$	(10,167,704	)	$	30,274,542

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

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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, 2021 filed with the SEC on March 16, 2022 (the “2021 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, 2022 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 and resale to businesses, organization and retail consumers; 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”), Teladvance, LLC (“Teladvance”), CEX Holdings, LLC (“CEX”) and Avail Recovery Solutions, LLC (“Avail”). 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 seven 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, through its subsidiaries, primarily buys electronic components from business and other organizations, such as school districts, for end-of-life recycling and resale, or to add life to electronic devices by data destruction and refurbishment for reuse. ECHG also conducts such recycling and resale at the retail level. Echo focuses on end-of-life electronics recycling and sustainability and ITAD USA provides IT equipment disposition, including compliance and data sanitization services. Teladvance, CEX and Avail operate as value-added resellers 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.

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For additional information on the businesses of both DGSE and ECHG, see “Item 1. Business – Operating Segments” in the Company’s 2021 Annual Report.

The escalating war between Russia and Ukraine presents instability and volatility in global markets. Although there has been, and will be volatility, management feels the impact has been minimal to our operations to this point. The U.S. government has imposed sanctions and export controls against Russia and Russian interests and threatened additional sanctions and controls. The impact of these sanctions are difficult to measure concerning DGSE and ECHG. The price and supply of precious metals along with supply-chain issues will undoubtedly cause the Company concern if the war broadens beyond the borders of Ukraine.

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, prepaid expenses, other current assets, accounts payable, accrued expenses, customer deposits and other liabilities approximate fair value because of the immediate or short-term nature of these financial instruments. Notes payable and line of credit 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 the coronavirus pandemic (“COVID-19”) and the war between Ukraine and Russia, in accordance with step 1 of the guidelines set forth in ASC 350-20-35-3A, the Company concluded there were no impairments of goodwill that resulted from triggering events due to COVID-19 and the war between Ukraine and Russia as of March 31, 2022. 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 three acquisitions of the assets now held by Echo on May 20, 2019 (the “Echo Transaction”), of the assets now held by Teladvance on June 9, 2021 (the “CExchange Transaction”) and of the assets now held by Avail on October 29, 2021 (the “Avail Transaction”). There was a preliminary addition to goodwill with the Avail Transaction of $3,491,285. There has been no other adjustments or impairment charges to goodwill. As of March 31, 2022 and December 31 2021, goodwill was $6,140,465.

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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 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 methodology for accounts receivable, loans and other financial instruments. The standard will be adopted upon the effective date for us beginning January 1, 2023 by using a modified retrospective transition approach to align our credit loss methodology with the new standard. The Company is evaluating the financial statement implications of ASU 2016-13.

NOTE 4 — INVENTORIES

A summary of inventories is as follows:

	March 31,		December 31,
	2022		2021
DGSE
Resale	$	12,282,472	$	10,422,072
Recycle		30,071		11,995

Subtotal		12,312,543		10,434,067

ECHG
Resale		2,044,911		3,350,159
Recycle		264,121		264,210

Subtotal		2,309,032		3,614,369

	$	14,621,575	$	14,048,436

NOTE 5 — ACQUISITION

On October 29, 2021, ECHG entered into the Avail Transaction to purchase all of the assets, liabilities and rights and interests for $4,500,000 of Avail Recovery Solutions, an Arizona company. The purchase was facilitated by an initial payment of $2,500,000 at closing, and the remaining $2,000,000 to be paid out by 12 quarterly payments starting April 1, 2022, of $166,667 each. See Note 14 to our consolidated financial statements for more information on this loan. The installment note payable for the Avail Transaction imputed at 3.1% interest.

As part of the Avail Transaction, goodwill was preliminarily recorded as $3,491,284, which is the purchase price less the approximate fair value of the net assets and liabilities purchased, as shown in the purchase price allocation in the following table. The Company’s goodwill is related to the ECHG segment. ECHG has its own separate financial information to perform goodwill impairment testing. The Company will evaluate goodwill based on cash flows for the ECHG segment. For tax purposes, goodwill is amortized and deductible over 15 years.

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The purchase price allocation listed below is considered to be a preliminary allocation and is subject to change.

The preliminary purchase price for the Avail Transaction is allocated as follows:

Description	Amount

Assets
Cash	$	988,870
Account receivables		395,144
Inventories		486,736
Prepaid expenses		93,727
Fixed assets - net		247,038
Right-of-use assets		609,511
Other assets		13,268

Liabilities
Account payables		(562,778	)
Accrued liabilities		(653,289	)
Operating lease liabilities		(609,511	)

Net assets		1,008,716

Goodwill		3,491,284

Total Purchase Price	$	4,500,000

The following table compares the results of Avail as part of the Company’s financial results for the three months ended March 31, 2022, and the Company’s results of operations as if they were combined for the three months ended March 31, 2021:

	Consolidated Statement of Income		Proforma Combined
	For the Three Months Ended		For the Three Months Ended
	March 31, 2022		March 31, 2021
	(unaudited)		(unaudited)

Revenue	$	47,415,098	$	27,110,216

Income from continuing operations	$	2,647,225	$	2,354,895

Net income	$	2,647,225	$	2,354,895

Basic net income per common share	$	0.10	$	0.09

Diluted net income per common share

SEC Form 10-Q filed by Envela Corporation