| 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:
December 31,
2020 2019
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 amended
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 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:
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 % 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 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. |
