ENVELA CORPORATION CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
Please see the section of this Form 10-K entitled "Note About Forward-Looking Statements" on page 2.
The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global economic business conditions. Future sales on products like ours could decline, and the ultimate impact is uncertain and subject to change. We took steps during Fiscal 2020 to have as many employees work from home as possible. We also followed governmental directives to wear masks and adopt the social distance guidelines where possible. The duration of this pandemic and the impact, either direct or indirect cannot be predicted. The Company believed additional liquidity was necessary to support ongoing operations during this period of uncertainty. We applied for and received approximately$1.67 million , 1% interest, federally backed loan to pay employees and cover certain rent and utility-related costs during the COVID-19 pandemic (the "Federal Loan"). The loan is forgivable to the extent that certain criteria are met. We have applied for forgiveness and that forgiveness application is currently under review by the SBA.
Changes in Financial Presentation During Fiscal Year 2020
During the first quarter of fiscal year 2020, we revised the way we review and report our financial information to align more closely with the Company's strategy to engage in diverse recommerce activities through two principle business segments-DGSE and ECHG.Envela continues to report its revenue and operating expenses based on its DGSE and ECHG operating segments, and beginning in fiscal year 2020, disaggregated its revenue, within the operating segments, based on its resale and recycle presentation basis. The Company's historical disaggregation of revenue has been recast to conform to our current presentation. For more information, see "Item 1. Business-Operating Segments" above.
DGSE Precious Metals Pricing and Business Impact
Because DGSE buys and resells precious metals, it is impacted by changes in precious metals pricing which rises and falls based upon global supply and demand dynamics, with the greatest impact on us relating to gold as it represents a significant portion of the precious metals in which we trade. Gold prices stabilized during fiscal year 2019 starting at$1,238 an ounce, as determined by the London AM Fix onJanuary 1, 2019 , climbing to$1,523 an ounce, as determined by the London PM Fix onDecember 31, 2019 , representing an increase of 19% during fiscal year 2019. Gold prices surged during the beginnings of the COVID-19 pandemic, starting at$1,523 an ounce, as determined by the London AM Fix onJanuary 1, 2020 , and rose strongly during the first half of 2020 peaking at$2,060 an ounce during August. However, gold prices dipped from the peak to close at$1,891 an ounce, as determined by the London PM Fix onDecember 31, 2020 , registering a 24% increase during fiscal year 2020. TheWorld Gold Council ("WGC"), noted that gold demand improved greatly during 2019 due to uncertainty in the global financial markets and rising geopolitical unrest. As noted, gold prices observably surged during the beginnings of the COVID-19 pandemic and price tempered toward the end of the year. According toStuart Burns of theIndustry News , physical demand could pick up during 2021 due toChina's forecasted double-digit growth and world recovery from the pandemic. The WGC has projected the price of gold to remain over$1,800 an ounce this year. The pandemic, economic downturn, and civil unrest, seem to have been affecting the recommerce business in unpredictable ways - there are fewer customers raising money by selling items. This is the opposite of what one might expect when a record number of people are unemployed. Government stimulus checks, eviction moratoriums and forbearances on mortgages and student loans may be contributing to this effect. To date, this drop has been offset by other areas of our business. This diversity, combined with DGSE's continued focus on disciplined operations, makes us optimistic for DGSE's continued future success. 21 PART II Item 7
When prices rise for gold or other precious metals, DGSE has observed that individual sellers tend to be more likely to sell their unwanted crafted-precious-metal items and at the same time retail customers tend to buy bullion and other gold products so as not to miss out on potential market gains. Tracking the rise in gold prices, DGSE's crafted-precious-metal purchases increased 45% in fiscal year 2019. In fiscal year 2020, however, DGSE experienced a dip in crafted-precious-metal purchases by 21%. The Company attributes this dip to the impact of the COVID-19 and various shutdown orders, which impacted foot traffic and its retail locations. While the precious metals industry has improved, our focus will be to continue to grow our jewelry, diamond and fine watch business, as well as maintain our business of purchasing crafted-precious-metal items, a diversified strategy which we believe will continue to grow and be a profit engine in the future.
For additional information regarding DGSE, see "Item 1. Business-Operating Segments-DGSE Segment."
ECHG Business Drivers and Impacts
ECHG owns and operates Echo,ITAD USA and Teladvance, through which it primarily buys and resells or recycles consumer electronic components and IT equipment. Echo focuses on end-of-life electronics recycling and also offers disposal transportation and product tracking,ITAD USA provides IT equipment disposition including compliance and data sanitization services, and Teladvance operates as a value-added reseller by providing offerings and services to companies looking to either upgrade capabilities or dispose of equipment. Like DGSE, ECHG also maintains relationships with refiners or recyclers to which it sells extracted valuable materials from electronics and IT equipment that are not appropriate for resale or reuse.
For additional information regarding DGSE, see "Item 1. Business-Operating Segments-ECHG Segment."
Critical Accounting Policies and Estimates
Our significant accounting policies are disclosed in Note 1 of our consolidated
financial statements. The following discussion addresses our most critical
accounting policies, which are those that are both important to the portrayal of
our financial condition and results of operations and that require significant
judgment or use of complex estimates. References to fiscal years below are
denoted with the word "Fiscal" and the associated year.
Inventories: DGSE inventory is valued at the lower of cost or net realizable
value ("NRV"). We acquire a majority of our inventory from individual customers,
including pre-owned jewelry, watches, bullion, rare coins and monetary
collectibles. We acquire these items based on our own internal estimate of the
fair market value of the items at the time of purchase. We consider factors such
as the current spot market price of precious metals and current market demand
for the items being purchased. We supplement these purchases from individual
customers with inventory purchased from wholesale vendors. These wholesale
purchases can take the form of full asset purchases, or consigned inventory.
Consigned inventory is accounted for on our balance sheet with a fully
offsetting contra account so that consigned inventory has a net zero balance.
The majority of our 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 our inventory and could positively
or negatively impact our profitability. We monitor these fluctuations to
evaluate any necessary impairment to inventory.
The Echo 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.
Impairment of Long-Lived and Amortized Intangible Assets: We perform impairment
evaluations of our long-lived assets, including property, plant and 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 our evaluations, no
impairment was required as of December 31, 2020 or 2019.
22
PART II
Item 7
Revenue Recognition: InMay 2014 , theFinancial 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 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 of ASC 606 is to recognize revenue as each performance obligation is satisfied. Our over-the-counter sales with the retail public and wholesale dealers are recognized when merchandise is delivered, and payment has been made either by immediate payment or through a receivable obligation at one of our retail locations. We also recognize revenue upon the shipment of goods when retail and wholesale customers have fulfilled their obligation to pay, or promise to pay, through e-commerce or phone sales. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. Crafted-precious-metal items at the end of their useful lives are sold to a refiner. Since the local refiner is located in theDallas/Fort Worth area we deliver the metal to the refiner. The metal is melted and assayed, price is determined from the assay and payment is made usually in a day or two. Revenue is recognized from the sale once payment is received. DGSE also offers a structured layaway plan. When a retail customer utilizes the layaway plan, we collect a minimum payment of 25% of the sales price, establish a payment schedule for the remaining balance and hold the merchandise as collateral as security against the customer's deposit until all amounts due are paid in full. Revenue for layaway sales is recognized when the merchandise is paid in full and delivered to the retail customer. Layaway revenue is also recognized when a customer fails to pay in accordance with the sales contract and the sales item is returned to inventory with the forfeit of deposited funds, typically after 90 days. In limited circumstances, we exchange merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which we recognize revenue in accordance with Accounting Standards Codification ("ASC") 845, Nonmonetary Transactions. When we exchange merchandise for similar merchandise and there is no monetary component to the exchange, we do not recognize any revenue. Instead, the basis of the merchandise relinquished becomes the basis of the merchandise received, less any indicated impairment of value of the merchandise relinquished. When we exchange merchandise for similar merchandise and there is a monetary component to the exchange, we recognize revenue to the extent of the monetary assets received and determines the cost of sale based on the ratio of monetary assets received to monetary and non-monetary assets received multiplied by the cost of the assets surrendered. The Company offers the option of third-party financing to customers wishing to borrow money for the purchase. The customer applies on-line with the financing company and upon going through the credit check will be approved or denied. If accepted, the customer is allowed to purchase according to the limits set by the financing company. Once the customer does purchase merchandise, based on their financing agreement, we record and recognize the sale at that point, based on the promise to pay by the finance company up to the customer's approved limit. We have a return policy (money-back guarantee). The policy covers retail transactions involving jewelry, graded rare coins and currency only. Customers may return jewelry, graded rare coins and currency purchased within 30 days of the receipt of the items for a full refund as long as the items are returned in exactly the same condition as they were delivered. In the case of jewelry, graded rare coins and currency sales on account, customers may cancel the sale within 30 days of making a commitment to purchase the items. The receipt of a deposit and a signed purchase order evidences the commitment. Any customer may return a jewelry item or graded rare coins and currency if they can demonstrate that the item is not authentic, or there was an error in the description of a graded coin or currency piece. Returns are accounted for as a reversal of the original transaction, with the effect of reducing revenues, and cost of sales, and returning the merchandise to inventory. We have established an allowance for estimated returns related to year endedDecember 31, 2020 ("Fiscal 2020") and year endedDecember 31, 2019 ("Fiscal 2019") sales, which is based on our review of historical returns experience and reduces our reported revenues and cost of sales accordingly. As ofDecember 31, 2020 and 2019, our allowance for returns remained the same at approximately$28,000 for both years. 23 PART II Item 7 The Echo Entities have several revenue streams and recognize revenue according to ASC 606 at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to the customer. The revenue streams are as follows. ? Outright sales are recorded when product is shipped. Once the price is established and the terms are agreed to and the product is shipped, the revenue is recognized. The Echo Entities have fulfilled their performance obligation with an agreed upon transaction price, payment terms and shipping the product. ? Echo recognizes refining revenue when our inventory arrives at the destination port and the performance obligation is satisfied by transferring the control of the promised goods that are identified in the customer contract. Ninety percent (90%) of our refining revenue is generated from one refining partner that has an international refining facility. This refining partner pays us sixty percent (60%) of an Invoice within five working days upon the receipt of the Ocean Bill of Lading issued by the Ocean Carrier. Our initial Invoice is recognized in full when our performance obligation is satisfied, as stated in the first sentence. Under the guidance of ASC 606, an estimate of the variable consideration that we expect to be entitled is included in the transaction price stated at the current precious metal spot price and weight of the precious metal. An adjustment to revenue is made in the period once the underlying weight and any precious metal spot price movement is resolved, which is usually around six (6) weeks. Any adjustment from the resolution of the underlying uncertainty is netted with the remaining forty percent (40%) due from the original contract. ? Hard drive sales by the Echo Entities are limited to customers who are required to prepay shipments. Once the commodity price is established and agreed upon by both parties, customers send payment in advance. The Company releases the shipment on the same day when payment receipt is confirmed, and revenue is recognized on day of shipment. If payment is received on the last day of the month and shipment goes out the following day the payment received is deferred revenue and recognized the following month when the shipment is made. ? The Echo Entities also provide recycling services according to a Scope of Work and services are recognized when promised services are rendered. We have recycling services conducted at the Echo facility and another type of service is conducted at the client's facility. The Scope of Work will determine the charges and whether it is completed on campus or off campus. Payment terms are also dictated in the Scope of Work. Accounts Receivable: We record trade receivables when revenue is recognized. When appropriate, we will record an allowance for doubtful accounts, which is primarily determined by an analysis of our trade receivables aging. The allowance is determined based on historical experience of collecting past due amounts, based on the degree of their aging. In addition, specific accounts that are doubtful of collection are included in the allowance. These provisions are reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms. DGSE had no allowance for doubtful accounts balance for the years endingDecember 31, 2020 and 2019. The Echo Entities also had no allowance for doubtful accounts balance for the years endingDecember 31, 2020 and 2019. Note Receivable: We record ECHG's note receivable as a non-current asset due to the note being quarterly interest only payments, with a maturity date ofFebruary 20, 2023 . Interest is accrued quarterly and payments are applied against the accruals. From time to time, the balance is increased through amendments to the note. We perform impairment evaluations on the note onDecember 31 of each year, or whenever business conditions or events indicate that the note receivable may be impaired. The note receivable, in addition, has a warrant and call option agreements to the lender which represents the right of the lender to purchase an equity interest for a certain amount within a certain time. There is no guarantee that the warrant will be exercised. As ofDecember 31, 2020 , based on our evaluation, no impairment was required. 24 PART II Item 7
Income Taxes: Income taxes are accounted for under the asset and liability method prescribed by 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. We account for our position in tax uncertainties in accordance with ASC 740, Income Taxes. 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. The guidance applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First, we must determine whether any amount of the tax benefit may be recognized. Second, we determine how much of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition.) No additional liabilities have been recognized as a result of the implementation. We have not taken a tax position that, if challenged, would have a material effect on the financial statements or the effective tax rate during Fiscal 2020 and Fiscal 2019, respectively.
Results of Operations
Year Ended
Revenue. Revenue related to DGSE's continuing operations increased by$18,141,237 , or 27%, during fiscal 2020, to$85,661,391 , as compared to$67,520,154 during Fiscal 2019. Resale revenue, such as bullion, jewelry, watches and rare coins, increased by$19,702,014 in Fiscal 2020, or 33%, to$79,790,419 as compared to$60,088,405 during Fiscal 2019. Recycled-material sales decreased 21% to$5,870,972 for Fiscal 2020, as compared to$7,431,749 for Fiscal 2019. Revenue increased for resale items for Fiscal 2020, compared to Fiscal 2019 primarily due to the apparent increase in consumer demand following the lifting of governmental orders to refrain from selling non-essential items in our retail stores due to the COVID-19 pandemic and the related spiking of gold prices due to the pandemic. The decrease in recycled-materials revenue is primarily due to the spike in resale revenue stemming from the COVID-19 pandemic, as we purchased inventory for Fiscal 2020, more inventory was kept for our retail stores as compared to Fiscal 2019, and recycled less.
Revenue related to ECHG for Fiscal 2020 was
Gross Margin: Gross margin related to DGSE, increased in Fiscal 2020 by$1,452,046 to$10,369,870 , as compared to$8,917,824 during Fiscal 2019. The increase in gross profit was primarily related to a 33% increase in resale revenue although the resale margin decreased from 12.9% in Fiscal 2019 to 11.5% in Fiscal 2020. The gross profit for recycled material sales for Fiscal 2020 compared to Fiscal 2019 stayed relatively the same although sales decreased by 21%. The sales declined but the profit margin increased from 15.6% in Fiscal 2019 to 19.7% in Fiscal 2020. The ECHG profit margin for Fiscal 2020 was$12,699,093 . Resale profit margin was 49% or$9,504,607 , an overall percentage of 75% of ECHG's total profit margin. Recycling's gross margin of 36.0% accounted for$3,194,486 , or 25% of the total. The assets of the Echo Legacy Entities were acquired onMay 20, 2019 and the Echo Entities were formed in connection therewith, and Teladvance was acquired onAugust 2, 2019 ; therefore, Fiscal 2019 is not comparable to Fiscal 2020.
The following table represents our historical operating revenue and gross profit results by category:
For the Years Ended
December 31, 2020 December 31, 2019
Revenues Gross Profit Margin Revenues Gross Profit Margin
DGSE
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%
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%
Subtotal 28,260,624 12,699,093 44.9% 14,504,343 7,338,018 50.6%
$113,922,015 $23,068,963 20.2% $82,024,497 $16,255,842 19.8%
25
PART II
Item 7
Selling, General and Administrative: Selling, general and administrative
expenses for DGSE decreased
Selling, general and administrative expenses for ECHG totaled$8,620,015 for Fiscal 2020. The expenses consist primarily of payroll, payroll taxes and employee benefits of$5,192,492 , rent and variable rent costs, net of sublet income, of$813,220 , warehouse and office supplies of$202,728 , insurance costs of$97,490 , travel expenses of$29,623 , professional fees of$91,327 , Utilities of$228,620 and overhead administrative expenses of$979,767 . The assets of the Echo Legacy Entities were acquired onMay 20, 2019 and the Echo Entities were formed in connection therewith, and Teladvance was acquired onAugust 2, 2019 ; therefore, Fiscal 2019 is not comparable to Fiscal 2020. Depreciation and Amortization:Depreciation and amortization for DGSE increased by$53,160 or 20% in Fiscal 2020 to$321,833 as compared to$268,673 in Fiscal 2019. The increase is primarily due to the added depreciation from two buildings purchased, and associated build-out costs, that were put into service during the fourth quarter of Fiscal 2020. The Depreciation and Amortization expense for ECHG totaled$406,793 for Fiscal 2020. The balance is made up of the amortization of intangibles acquired from the Echo Transaction onMay 20, 2019 of$335,600 and depreciation expense of$71,193 . The assets of the Echo Legacy Entities were acquired onMay 20, 2019 and the Echo Entities were formed in connection therewith, and Teladvance was acquired onAugust 2, 2019 ; therefore, Fiscal 2019 is not comparable to Fiscal 2020. Other Income: Other income for DGSE increased by$58,590 in Fiscal 2020, to$113,974 compared to$55,384 in Fiscal 2019. Fiscal 2020, other income of$113,974 , was primarily the combination of writing off old vendor checks of approximately$45,000 and half of the rent income allocated from tenants at the new Company headquarters' of$67,632 . Fiscal 2019, other income of$55,384 was primarily the write up of a small plot of land owned by the Company for many years. Other income for ECHG totaled$193,023 in Fiscal 2020. The other income amount of$193,024 is primarily a combination of interest income from note receivable of$114,297 and half of the rent income allocated from tenants at the new Company headquarters' of$67,632 . The assets of the Echo Legacy Entities were acquired onMay 20, 2019 and the Echo Entities were formed in connection therewith, and Teladvance was acquired onAugust 2, 2019 ; therefore, Fiscal 2019 is not comparable to Fiscal 2020. Interest Expense: Interest expense for DGSE increased by$47,054 or 29% in Fiscal 2020, to$209,295 compared to$162,241 in Fiscal 2019. The increase is due from the promissory note issued byJohn R. Loftus to pay off an accounts payable - related party balance onMay 20, 2019 , that has a slightly higher interest rate than the accounts payable - related party had as an imputed rate and the two notes payable associated with the new stand-alone buildings purchased during the second half of 2020. The interest expense for ECHG was$411,204 in Fiscal 2020. The interest is primarily related to the note payable, related party, with an outstanding balance of$6,496,128 as ofDecember 31, 2020 . The assets of the Echo Legacy Entities were acquired onMay 20, 2019 and the Echo Entities were formed in connection therewith, and Teladvance was acquired onAugust 2, 2019 ; therefore, Fiscal 2019 is not comparable to Fiscal 2020. Income Tax Expense: Income tax expense for DGSE decreased$5,498 or 6% in Fiscal 2020, to$89,618 compared to$95,116 in Fiscal 2019. See Note 15 for Federal Income Taxes. Net Income: We recorded a net income of$6,383,943 in Fiscal 2020, compared to a net income of$2,780,713 in Fiscal 2019, an increase in net income of$3,603,230 is due primarily to an increase of revenue of approximately$32.0 million and the purchase of the assets of the Echo Legacy Entities onMay 20, 2019 . 26 PART II Item 7 Earnings Per Share: Our net income per basic and diluted shares attributable to holders of our Common Stock was$0.24 , for Fiscal 2020, compared to$0.10 per basic and diluted shares for Fiscal 2019, an increase of$0.14 per share. The increase is due primarily from the revenue increase of approximately$32.0 million from Fiscal 2019 to Fiscal 2020 and the purchase of the assets of the Echo Legacy Entities onMay 20, 2019 . Liquidity and Capital Resources: During Fiscal 2020, cash flows provided by operating activities totaled$6,897,091 compared to cash flows used in operating activities totaling$542,828 in Fiscal 2019, an increased cash flows provided by operating activities of$7,439,919 . Cash provided by operating activities for the year endedDecember 31, 2020 , was primarily driven by the increase in trade accounts receivable of$151,124 , an increase in customer deposits and other liabilities of$263,572 and net income, with depreciation, amortization and stock based compensation to employees of$7,112,894 . Offset by the increase of inventories of$497,444 , the increase of prepaid expenses of$108,884 and the reduction of accounts payable and accrued accounts payable of$29,332 . Cash used in operating activities for the year endedDecember 31, 2019 , was primarily driven by the increase in trade accounts receivable of$1,877,783 , the reduction of accounts payable and accrued accounts payable of$492,952 , the reduction of the accounts payable - related party of$3,074,021 . Offset by the reduction of inventories of$1,464,843 , the increase in operating leases of 124,713 and net income, with depreciation and amortization of$3,301,011 . During Fiscal 2020 and Fiscal 2019, cash used in investing activities totaled$7,964,588 and$6,039,505 , respectively, an increase of$1,925,083 . The cash used in investing for 2020, was a combination of investing in a note receivable of$2,100,000 toCExchange, LLC ("CExchange"), purchasing two new retail locations for DGSE totaling$1,815,000 and associated build out costs, of which$363,000 was cash payments applied against the purchases of the retail locations and the remainder of the balance from the purchases was financed through notes payable, and the purchase of our corporate headquarters totaling$3,521,021 , of which$561,021 was cash payments applied against the office building and the remainder of the balance from the purchase was financed through notes payable. The cash used in investing for 2019, was the combination of property and equipment purchases of$102,989 , the continual upgrading our point-of-sale system in the amount of$60,000 and acquisition of the assets of the Echo Legacy Entities, net of cash acquired, in the amount of$5,876,516 . During Fiscal 2020, cash provided by financing activities totaled$5,774,873 , and Fiscal 2019, cash provided by financing activities totaled$9,639,052 , a decrease in cash provided by financing activities of$3,864,179 . The cash provided by financing activities during Fiscal 2020 is funds provided by loans made byTexas Bank & Trust for the corporate office building inIrving, Texas and the retail building inGrapevine, Texas , both totaling$3,456,000 , a loan made byTruist Bank (f/k/aBB&T Bank ) for the retail building located inLewisville, Texas for$956,000 and the proceeds from the Federal Loan of$1,668,200 . Offset by principal payments made against the two promissory notes fromMr. Loftus in the amount of$279,210 and principal payments made against the notes payable loans issued for the buildings purchased mentioned in this paragraph of approximately$26,000 . The cash provided by financing activities during Fiscal 2019 is funds provided to purchase the assets of the Echo Legacy Entities through a promissory note fromJohn R. Loftus datedMay 20, 2019 for$6,925,979 . Additionally, funds provided to pay off an accounts payable - related party balance of$3,074,021 , evidenced by a promissory note datedMay 20, 2019 byJohn R. Loftus and the drawing on a short-term line of credit fromTexas Bank and Trust of$150,000 . Offset by principal payments made against the two promissory notes FromMr. Loftus in the amount of$360,948 and the pay down of the short-term line of credit fromTexas Bank and Trust for$150,000 . OnMay 17, 2019 , the Company secured a twelve month Line of Credit fromTexas Bank and Trust for$1,000,000 . The Line of Credit was renewed for an additional 24 months and increased to$3,500,000 onMay 17, 2020 . The Line of Credit is to fund any cash shortfalls that we may have from time-to-time during the next 24 months. We don't anticipate the need of those funds for operations. Also, from time-to-time, we have adjusted our inventory levels to meet seasonal demand or in order to meet working capital requirements. Management believes we have enough capital resources to meet working capital requirements. If additional working capital is required, additional loans can be obtained from individuals or from other commercial banks. If necessary, inventory levels may be adjusted in order to meet unforeseen working-capital requirements. We expect our capital expenditures to total approximately$100,000 during the next twelve months. These expenditures will be largely driven by the purchase of equipment and the build-out of corporate space in our office building for tenants, As ofDecember 31, 2020 , there were no commitments outstanding for capital expenditures. In the event of significant growth in retail and wholesale jewelry sales and recycling demand, whether purchases or services, our demand for additional working capital will increase due to a related need to stock additional jewelry inventory, increases in wholesale accounts receivable and the purchasing of recycled material. Historically we have funded these activities through operations.
We have historically renewed, extended or replaced short-term debt as it matures, and management believes that we will be able to continue to do so in the near future.
27
PART II
Item 7, 7A
On May 20, 2019 , we 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 Legacy Entities asset purchase agreement, is a
5-year promissory note amortized over 20 years at 6% annual interest rate. The
second note of $3,074,021 paid off the accounts payable - related party balance
to a former Related Party on May 20, 2019 . The promissory note is a 5-year note
amortized over 20 years at 6% annual interest rate. Both notes are being
serviced by operational cash flow.
The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global
economic business conditions. Future sales on products like ours could decline,
and the ultimate impact is uncertain and subject to change. The duration of this
pandemic and the impact, either direct or indirect cannot be predicted. The
Company believed additional liquidity was necessary to support ongoing
operations during this period of uncertainty. We applied for and received
approximately $1.67 million , 1% interest, Federal Loan to pay employees and
cover certain rent and utility-related costs during the COVID-19 pandemic. The
loan is forgivable to the extent that certain criteria are met. We have applied
for forgiveness and that forgiveness application is currently under review by
the SBA.
The Company leases certain of its facilities under operating leases. The minimum
rental commitments under non-cancellable operating leases as of December 31,
2020 are as follows:
Total 2021 2022 2023 2024 Thereafter
Operating Leases
DGSE $1,205,662 $479,161 $235,674 $212,855 $213,885 $64,087
Echo Entities 4,217,873 869,209 786,396 808,022 830,244 924,002
Total $5,423,535 $1,348,370 $1,022,070 Off-Balance Sheet Arrangements.
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the consolidated financial
statements and related information that are presented in this report. The
consolidated financial statements, which include amounts based on management's
estimates and judgments, have been prepared in conformity with accounting
principles generally accepted in
The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities and careful selection and training of qualified personnel. The Company engagedWhitley Penn LLP , an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements in accordance with the standards of the Public Accounting Oversight Board (United States ). Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of theSEC that permit the company to provide only management's report in this annual report. The Board, through its Audit Committee, consisting solely of independent directors of the Company, meets periodically with management and our independent registered public accounting firm to ensure that the Company is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting.Whitley Penn LLP and our management team each have full and free access to the Audit Committee.
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