Unless the context indicates otherwise, references to "we," "us," "our," "the Company" and "Envela" refer to the consolidated business operations of Envela Corporation, the parent, and all of its direct and indirect subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (this "Form 10-Q"), including but not limited to: (i) the section of this Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations;" (ii) information concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items; and, (iii) our strategies, plans and objectives, together with other statements that are not historical facts, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may," "will," "would," "expect," "intend," "could," "estimate," "should," "anticipate" or "believe." We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements other than statements of historical information provided herein are forward-looking statements based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ from current expectations are described under the section of this Form 10-Q entitled "Risk Factors" and elsewhere in this Form 10-Q as well as under the section entitled "Risk Factors" in our Fiscal 2019 10-K. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to-release publicly the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital expenditures, store growth plans, or to reflect the occurrence of unanticipated events.


                             Results of Operations

General

The COVID-19 pandemic's effects, including limited Company operations and dramatic changes in consumer behavior, led to a marked decline in sales during the second half of March and significantly affected the Company's first-quarter results.

Although retail investors' demand for precious-metal coins appears to have contributed to higher gold prices, jewelry consumption and recycled-gold supply plunged during the first quarter as consumers were confined to their homes for some of the quarter in an effort to stem the spread of coronavirus, according to the World Gold Council ("WGC"). Over the longer term, the WGC believes that recycled-gold volumes could likely rise once restrictions are lifted, with consumers looking for liquid assets-such as gold-to help alleviate economic hardship caused by the lockdown.





                                       20

The following disaggregation of total revenue is listed by sales category and segment:




             Three Months Ended March 31,
CONSOLIDATED

             2020                              2019


             Revenues      Gross Profit Margin Revenues      Gross Profit Margin



DGSE
Resale        $18,541,897   $2,047,433   11.0%  $14,801,379   $2,033,435   13.7%
Recycled      1,821,687     316,749      17.4%  1,218,151     185,047      15.2%

Subtotal 20,363,584 2,364,182 11.6% 16,019,530 2,218,482 13.8%

ECHG


Resale        3,526,228     1,420,176    40.3%  -             -            -
Recycled      1,939,331     1,516,922    78.2%  -             -            -

  Subtotal    5,465,559     2,937,098    53.7%  -             -            -

              $25,829,143   $5,301,280   20.5%  $16,019,530   $2,218,482   13.8%




Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Revenues. Revenues related to DGSE's continuing operations increased by $4,344,054 or 27%, during the three months ended March 31, 2020, to $20,363,584, as compared to $16,019,530 during the same period in 2019. Resale revenue, such as bullion, jewelry, watches and rare coins, increased $3,740,518, or 25%, during the three months ended March 31, 2020, to $18,541,897, as compared to the $14,801,379 for the prior three months ended March 31, 2019. Recycled-material sales increased 50% to $1,821,687 for the three months ended March 31, 2020, as compared to $1,218,151, for the three months ended March 31, 2019. Revenues increased for resale items for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to higher gold prices. The increase in recycled-materials revenue is primarily due to the increase in gold prices. Revenue related to ECHG for the three months ended March 31, 2020 was $5,465,559. Recycled-material sales accounted for 58% of the total sales at $3,173,761, and resale revenue accounted for 42% of the total sales at $2,291,798.

Gross Profit. Gross Profit related to DGSE's operations for the three months ended March 31, 2020, increased by $145,700 to $2,364,182 as compared to $2,218,482 during the same period in 2019. The increase in total gross profit was due primarily to the increase in sales velocity for the resale items and the recycled materials. Even though there were additional revenues for the resale items, there were also lower gross-margin percentages due to the change in market conditions.

Gross Profits related to ECHG support a larger profit margin compared to the DGSE segment. ECHG's profit margin of $2,937,098 on $5,465,559 sales comprises 53.7% overall.

Selling, General and Administrative Expenses. For the three months ended March 31, 2020, Selling, General and Administrative ("SG&A") expenses for DGSE increased $131,666, or 7.6%, to $1,873,006, as compared to $1,741,340 during the same period in 2019. The increase in SG&A was primarily due to increased corporate expenses loaded to both the DGSE and ECHG segments.

The SG&A expenses for ECHG totaled $1,952,194, which primarily consists of payroll, payroll taxes and employee benefits of $1,104,418; rent and variable rent costs, net of sublet income, of $136,232; warehouse and office supplies of $35,803; insurance costs of $23,068; travel expenses of $23,772; professional fees of $44,650; and other administrative expenses totaling $226,430.


                                       21

Depreciation and Amortization. For the three months ended March 31, 2020, depreciation and amortization expense for DGSE was $77,041, compared to $74,324 for the same period in 2019, an increase of $2,717, or 3.6%. The increase of $2,717 from the three months ending March 31, 2020 compared to the three months ending March 31, 2019 is primarily due to a vehicle purchase during the quarter.

The Depreciation and Amortization expense for ECHG consisted of depreciation of $18,788 and amortization of $83,900 for the three months ending March 31, 2020. Amortization for the three months ended March 31, 2020 is the amortization of intangibles from the Purchase Price Allocation.

Interest Expense. For the three months ended March 31, 2020, interest expense for DGSE was $44,793, an increase of $10,236, or 29%, compared to $34,549 during the same period in 2019. The increase is primarily due to an increased interest rate on the note payable - trade, related party, that paid off the accounts payable, related party, outstanding balance of $2,928,210 as of March 31, 2020.

The interest expense for ECHG was $100,522 for the three months ending March 31, 2020, which was related to the note payable, related party, with an outstanding balance of $6,641,438 as of March 31, 2020.

Income Tax Expense. For the three months ending March 31, 2020, our income tax expense was $18,577, an increase of $8,341, or 81%, compared to $10,236 for the three months ending March 31, 2019. The effective income tax rate was 1.6% and 2.9% for the three months ending March 31, 2020 and 2019, respectively. Differences between our effective income tax rate and the U.S federal statutory rate are the result of state taxes, non-deductible expenses, changes in reserves for uncertain tax positions and unused NOL carryforwards.

Net Income. We recorded a net income of $1,174,149 for the three months ended March 31, 2020, compared to a net income of $354,635 for the three months ended March 31, 2019, an increase in net income of $819,514, which is due primarily from the addition of ECHG adding $785,724 of net income for the three months ended March 31, 2020.

Earnings Per Share. For the three months ending March 31, 2020, our net income per basic and diluted shares attributable to common stockholders was $.04, compared to $.01 per basic and diluted shares for the three months ending March 31, 2019, an increase of $.03 per share. The increase is primarily due to the addition of ECHG's net income for the three months ending March 31, 2020.

Liquidity and Capital Resources

During the three months ended March 31, 2020, cash flows provided from operating activities totaled $1,031,715, and during the three months ended March 31, 2019 cash flows used in operating activities totaled $960,206, an increase of $1,991,921. Cash provided from operating activities for the three months ended March 31, 2020, was driven largely by the reduction of trade receivables of $525,519, a reduction of inventories of $111,931 and net income added to non-cash items of depreciation and amortization of $1,353,878, offset by a decrease in accounts payable and accrued expenses of $647,804, an increase in prepaid expenses of $163,312 and a reduction of customer deposits and other liabilities of $118,710. Cash used in operating activities for the three months ended March 31, 2019, was driven largely by the reduction of accounts payable and accrued expenses of $564,868, the increase of inventories of $550,567, the increase in trade receivables of $105,606 and the increase in prepaid expenses of $185,536, offset by net income, without non-cash items of depreciation, amortization, bad debt expense of $458,959.

During the three months ended March 31, 2020 and 2019, cash flows used in investing activities totaled $1,529,046 and $14,175, respectively, an increase of $1,514,871. 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 to CExchange. The use of cash in investing activities during the three months ended March 31, 2019 was the result of purchasing of equipment.

During the three months ended March 31, 2020 and 2019, cash flows used in financing activities totaled $69,404 and $0, respectively, an increase of $69,404. The use of cash in financing activities during the three months ended March 31, 2020 was payments made against the notes payable, related party.


                                       22

The COVID-19 pandemic has adversely affected global economic business conditions. Future sales of 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, 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 is necessary to support ongoing operations during this period of uncertainty. We have applied and received approval for the Federal Loan to provide approximately $1.67 million in additional liquidity. On May 17, 2019, the Company secured a one-year, $1,000,000 revolving line of credit loan from Texas Bank and Trust Co. The loan agreement includes a 30-day clean-up provision. Although Texas Bank and Trust Co. has communicated approval of a two-year extension and increased credit limit for this credit line, the Company is awaiting definitive documents reflecting these terms. If not renewed, the existing credit line will expire on May 17, 2020. From time to time we adjust our inventory levels to meet seasonal demand or working-capital requirements. Management believes we have sufficient capital resources (including the Federal Loan) to meet working-capital requirements. If additional working capital is required, we will seek additional loans from individuals or other commercial banks. The availability of such loans on acceptable terms is uncertain.

We expect our capital expenditures to total approximately $50,000 during the next twelve months. These expenditures will be largely driven by miscellaneous equipment needed to recycle electronic waste.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

© Edgar Online, source Glimpses