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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

OR

☐ | 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.

TABLE OF CONTENTS

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 |

2
Table of Contents

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.

3
Table of Contents

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.

4
Table of Contents

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.

5
Table of Contents

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 |  | $ | 0.10 |  |  | $ | 0.09 |

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NOTE 6 — GOODWILL

The change in goodwill is as follows:

|  | March 31, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
Opening balance |  | $ | 6,140,465 |  |  | $ | 1,367,109 |
Additions (1) |  |  | - |  |  |  | 4,773,356 |
Goodwill |  | $ | 6,140,465 |  |  | $ | 6,140,465 |

(1) Addition is in connection with the CExchange Transaction on June 9, 2021 of $1,282,072 and the preliminary purchase price allocation of the Avail Transaction of $3,491,284.

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NOTE 7 — PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

|  | March 31, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
DGSE |  |  |  |  |  |
Land |  | $ | 1,640,220 |  |  | $ | 1,640,220 |
Building and improvements |  |  | 2,781,903 |  |  |  | 2,764,529 |
Leasehold improvements |  |  | 1,450,695 |  |  |  | 1,450,695 |
Machinery and equipment |  |  | 1,056,315 |  |  |  | 1,056,315 |
Furniture and fixtures |  |  | 554,881 |  |  |  | 526,250 |
Vehicles |  |  | 22,859 |  |  |  | 22,859 |
|  |  | 7,506,873 |  |  |  | 7,460,868 |
Less: accumulated depreciation |  |  | (2,422,573 | ) |  |  | (2,343,923 | )
Sub-Total |  |  | 5,084,300 |  |  |  | 5,116,945 |
ECHG |  |  |  |  |  |  |  |
Building and improvements |  |  | 135,491 |  |  |  | 135,491 |
Machinery and equipment |  |  | 1,145,832 |  |  |  | 1,109,306 |
Furniture and fixtures |  |  | 145,950 |  |  |  | 145,950 |
|  |  | 1,427,273 |  |  |  | 1,390,747 |
Less: accumulated depreciation |  |  | (289,945 | ) |  |  | (212,147 | )
Sub-Total |  |  | 1,137,328 |  |  |  | 1,178,600 |
Envela |  |  |  |  |  |  |  |
Land |  |  | 1,106,664 |  |  |  | 1,106,664 |
Building and improvements |  |  | 2,456,324 |  |  |  | 2,456,324 |
Machinery and equipment |  |  | 34,528 |  |  |  | 23,676 |
|  |  | 3,597,516 |  |  |  | 3,586,664 |
Less: accumulated depreciation |  |  | (99,645 | ) |  |  | (76,021 | )
Sub-Total |  |  | 3,497,871 |  |  |  | 3,510,643 |
|  | $ | 9,719,499 |  |  | $ | 9,806,188 |

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NOTE 8 — INTANGIBLE ASSETS

Intangible assets consist of the following:

|  | March 31, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
DGSE |  |  |  |  |  |
Domain names |  | $ | 41,352 |  |  | $ | 41,352 |
Point of sale system |  |  | 330,000 |  |  |  | 330,000 |
|  |  | 371,352 |  |  |  | 371,352 |
Less: accumulated amortization |  |  | (286,002 | ) |  |  | (269,502 | )
Subtotal |  |  | 85,350 |  |  |  | 101,850 |
ECHG |  |  |  |  |  |  |  |
Trademarks (1) |  |  | 1,483,000 |  |  |  | 1,483,000 |
Customer Contracts (1) |  |  | 1,873,000 |  |  |  | 1,873,000 |
Trademarks/Tradenames (2) |  |  | 114,000 |  |  |  | 114,000 |
Customer Relationships (2) |  |  | 345,000 |  |  |  | 345,000 |
|  |  | 3,815,000 |  |  |  | 3,815,000 |
Less: accumulated amortization |  |  | (987,980 | ) |  |  | (892,605 | )
Subtotal |  |  | 2,827,020 |  |  |  | 2,922,395 |
|  | $ | 2,912,370 |  |  | $ | 3,024,245 |

(1) Intangibles relate to the Echo Transaction on May 20, 2019.

(2) Intangibles relate to the CExchange Transaction on June 9, 2021.

The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2022:

|  | DGSE |  |  | ECHG |  |  | Total |
2022 (excluding the three months ending March 31, 2022) |  |  | 49,500 |  |  |  | 286,125 |  |  |  | 335,625 |
2023 |  |  | 30,350 |  |  |  | 381,500 |  |  |  | 411,850 |
2024 |  |  | 5,500 |  |  |  | 381,500 |  |  |  | 387,000 |
2025 |  |  | - |  |  |  | 381,500 |  |  |  | 381,500 |
2026 |  |  | - |  |  |  | 381,500 |  |  |  | 381,500 |
Thereafter |  |  | - |  |  |  | 1,014,895 |  |  |  | 1,014,895 |
|  | $ | 85,350 |  |  | $ | 2,827,020 |  |  | $ | 2,912,370 |

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NOTE 9— ACCRUED EXPENSES

Accrued expenses consist of the following:

|  | March 31, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
DGSE |  |  |  |  |  |
Accrued interest |  | $ | 12,793 |  |  | $ | 12,627 |
Payroll |  |  | 157,349 |  |  |  | 131,325 |
Property taxes |  |  | 61,014 |  |  |  | 88,046 |
Sales tax |  |  | 70,006 |  |  |  | 150,070 |
Other administrative expenss |  |  | 3,449 |  |  |  | - |
Subtotal |  |  | 304,611 |  |  |  | 382,068 |
ECHG |  |  |  |  |  |  |  |
Accrued interest |  |  | 8,464 |  |  |  | 14,547 |
Payroll |  |  | 192,625 |  |  |  | 334,431 |
Unvouchered payables - inventory |  |  | 480,866 |  |  |  | 461,481 |
Material & shipping costs (COGS) |  |  | 118,445 |  |  |  | 78,647 |
Other accrued expenses |  |  | - |  |  |  | 51,506 |
Subtotal |  |  | 800,400 |  |  |  | 940,612 |
Envela |  |  |  |  |  |  |  |
Accrued interest |  |  | 7,522 |  |  |  | 8,355 |
Payroll |  |  | 11,128 |  |  |  | 25,175 |
Professional fees |  |  | 203,743 |  |  |  | 220,101 |
Property Tax |  |  | 21,300 |  |  |  | 84,920 |
Other administrative expenses |  |  | 12,500 |  |  |  | 18,453 |
State income tax |  |  | 139,974 |  |  |  | 109,682 |
Subtotal |  |  | 396,167 |  |  |  | 466,686 |
|  | $ | 1,501,178 |  |  | $ | 1,789,366 |

NOTE 10 — SEGMENT INFORMATION

We determine our business segments based upon an internal reporting structure. Our financial performance is based on the following segments: DGSE and ECHG.

The DGSE segment includes Dallas Gold & Silver Exchange, which has six retail stores in the Dallas/Fort Worth Metroplex, and Charleston Gold & Diamond Exchange, which has one retail store in Mt. Pleasant, South Carolina.

The ECHG segment includes Echo, ITAD USA, Teladvance, CEX and Avail. These five companies are involved in recycling and the reuse of electronic components.

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We allocate a portion of certain corporate costs and expenses, including information technology as well as rental income and expenses relating to our corporate headquarters, to our business segments. These income and expenses are included in selling, general and administrative (“SG&A”) expenses, depreciation and amortization, other income, interest expense and income tax expense. Our management team evaluates each segment and makes decisions about the allocation of resources according to each segment’s profit. Allocation amounts are generally agreed upon by management and may differ from arms-length allocations.

The following separates DGSE and ECHG’s financial results of operations for the three months ended March 31, 2022 and 2021:

|  | For The Three Months Ended March 31, |
|  | 2022 |  |  | 2021 |
|  | DGSE |  |  | ECHG |  |  | Consolidated |  |  | DGSE |  |  | ECHG |  |  | Consolidated |
Revenue: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sales |  | $ | 35,782,872 |  |  | $ | 11,632,226 |  |  | $ | 47,415,098 |  |  | $ | 18,914,501 |  |  | $ | 6,575,940 |  |  | $ | 25,490,441 |
Cost of goods sold |  |  | 31,559,410 |  |  |  | 6,144,654 |  |  |  | 37,704,064 |  |  |  | 16,106,866 |  |  |  | 3,079,311 |  |  |  | 19,186,177 |
Gross profit |  |  | 4,223,462 |  |  |  | 5,487,572 |  |  |  | 9,711,034 |  |  |  | 2,807,635 |  |  |  | 3,496,629 |  |  |  | 6,304,264 |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling, general and administrative expenses |  |  | 2,137,949 |  |  |  | 4,421,806 |  |  |  | 6,559,755 |  |  |  | 1,782,437 |  |  |  | 2,370,792 |  |  |  | 4,153,229 |
Depreciation and amortization |  |  | 106,963 |  |  |  | 184,984 |  |  |  | 291,947 |  |  |  | 96,822 |  |  |  | 108,090 |  |  |  | 204,912 |
|  |  | 2,244,912 |  |  |  | 4,606,790 |  |  |  | 6,851,702 |  |  |  | 1,879,259 |  |  |  | 2,478,882 |  |  |  | 4,358,141 |
Operating income |  |  | 1,978,550 |  |  |  | 880,782 |  |  |  | 2,859,332 |  |  |  | 928,376 |  |  |  | 1,017,747 |  |  |  | 1,946,123 |
Other income/expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other income (expense) |  |  | (27,992 | ) |  |  | (30,584 | ) |  |  | (58,576 | ) |  |  | 111,731 |  |  |  | 160,210 |  |  |  | 271,941 |
Interest expense |  |  | 61,241 |  |  |  | 61,998 |  |  |  | 123,239 |  |  |  | 68,485 |  |  |  | 110,537 |  |  |  | 179,022 |
Income before income taxes |  |  | 1,889,317 |  |  |  | 788,200 |  |  |  | 2,677,517 |  |  |  | 971,622 |  |  |  | 1,067,420 |  |  |  | 2,039,042 |
Income tax expense |  |  | 13,177 |  |  |  | 17,115 |  |  |  | 30,292 |  |  |  | 13,705 |  |  |  | 17,065 |  |  |  | 30,770 |
Net income |  | $ | 1,876,140 |  |  | $ | 771,085 |  |  | $ | 2,647,225 |  |  | $ | 957,917 |  |  | $ | 1,050,355 |  |  | $ | 2,008,272 |

NOTE 11 — REVENUE RECOGNITION

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, we 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.

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The following disaggregation of total revenue is listed by sales category and segment for the three months ended March 31, 2022 and 2021:

CONSOLIDATED |  | Three Months Ended March 31, |
|  | 2022 |  |  | 2021 |
|  | Revenues |  |  | Gross Profit |  |  | Margin |  |  | Revenues |  |  | Gross Profit |  |  | Margin |
DGSE |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Resale |  | $ | 33,677,133 |  |  | $ | 3,742,852 |  |  |  | 11.1 | % |  | $ | 17,320,641 |  |  | $ | 2,457,144 |  |  |  | 14.2 | %
Recycled |  |  | 2,105,739 |  |  |  | 480,610 |  |  |  | 22.8 | % |  |  | 1,593,860 |  |  |  | 350,491 |  |  |  | 22.0 | %
Subtotal |  |  | 35,782,872 |  |  |  | 4,223,462 |  |  |  | 11.8 | % |  |  | 18,914,501 |  |  |  | 2,807,635 |  |  |  | 14.8 | %
ECHG |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Resale |  |  | 9,579,857 |  |  |  | 4,574,268 |  |  |  | 47.7 | % |  |  | 4,740,992 |  |  |  | 2,612,184 |  |  |  | 55.1 | %
Recycled |  |  | 2,052,369 |  |  |  | 913,304 |  |  |  | 44.5 | % |  |  | 1,834,948 |  |  |  | 884,445 |  |  |  | 48.2 | %
Subtotal |  |  | 11,632,226 |  |  |  | 5,487,572 |  |  |  | 47.2 | % |  |  | 6,575,940 |  |  |  | 3,496,629 |  |  |  | 53.2 | %
|  | $ | 47,415,098 |  |  | $ | 9,711,034 |  |  |  | 20.5 | % |  | $ | 25,490,441 |  |  | $ | 6,304,264 |  |  |  | 24.7 | %

DGSE’s 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 the Dallas/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 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.

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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 sales based on historical returns and reduced our reported revenues and cost of sales accordingly. Our return allowance as of March 31, 2022 and December 31, 2021 remained the same for both periods, at approximately $28,000.

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. 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 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.
| · | Echo also provides 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 as of March 31, 2022 and December 31, 2021. Some of ECHG’s customers are on payment terms, and although low risk, occasionally the need arises to record an allowance for receivables that are deemed high risk to collect. We established an allowance for estimated uncollectable receivables related to sales based on historical collections. Our allowance as of March 31, 2022 and December 31, 2021 was $1,582.

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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 for the three months ended March 31, 2022 and 2021.

NOTE 12 — LEASES

In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the interest rate that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. If we cannot readily determine the discount rate implicit in lease agreements, we utilize our incremental borrowing rate.

The Company has seven operating leases as of March 31, 2022—five in the Dallas/Fort Worth Metroplex, one in Charleston, South Carolina and one in Chandler, Arizona. The lease for DGSE’s flagship store located at 13022 Preston Road, Dallas, Texas expires on January 31, 2027, with an option to extend the lease for an additional five years, at market rate as determined by the prevailing market rate for comparable space in comparable buildings in the vicinity. The lease for DGSE’s Grand Prairie, Texas location expires June 30, 2022, and has no current renewal options. The lease for DGSE’s Mt Pleasant, South Carolina location expires April 30, 2025, with no additional renewal options. The lease for DGSE’s Euless, Texas location expires June 30, 2025, with an option for an additional five years. The lease for ECHG’s Echo location on W. Belt Line Road, in Carrollton, Texas, expires January 31, 2026. The lease for ECHG’s Teladvance location, which also houses ITAD USA, on Realty Road in Carrollton, Texas expires January 31, 2027. The lease for ECHG’s Avail location in Chandler, Arizona expires May 31, 2025. All of the Company’s seven leases as of March 31, 2022 are triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance. Leasing costs for the three months ended March 31, 2022 and 2021 was $622,863 and $449,486, respectively, comprised of a combination of minimum lease payments and variable lease costs.

As of March 31, 2022, the weighted average remaining lease term and weighted average discount rate for operating leases was 3.3 years and 4.4%, respectively. For the three months ended March 31, 2022 and 2021, the Company’s cash paid for operating lease liabilities was $616,097 and $501,907 respectively.

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Future annual minimum lease payments as of March 31, 2022:

|  | Operating |
|  | Leases |
DGSE |  |  |
2022 (excluding the three months ending March 31, 2022) |  | $ | 381,790 |
2023 |  |  | 499,984 |
2024 |  |  | 507,414 |
2025 |  |  | 364,269 |
2026 and thereafter |  |  | 333,114 |
Total minimum lease payments |  |  | 2,086,571 |
Less imputed interest |  |  | (178,906 | )
DGSE Sub-Total |  |  | 1,907,665 |
ECHG |  |  |  |
2022 (excluding the three months ending March 31, 2022) |  |  | 991,870 |
2023 |  |  | 1,357,381 |
2024 |  |  | 1,396,129 |
2025 |  |  | 1,321,297 |
2026 and thereafter |  |  | 507,780 |
Total minimum lease payments |  |  | 5,574,457 |
Less imputed interest |  |  | (430,822 | )
ECHG Sub-Total |  |  | 5,143,635 |
Total |  |  | 7,051,300 |
Current portion |  |  | 1,584,169 |
|  | $ | 5,467,131 |

NOTE 13 — BASIC AND DILUTED AVERAGE SHARES

A reconciliation of basic and diluted weighted average common shares for the three months ended March 31, 2022 and 2021 is as follows:

|  | For the Three Months Ended |
|  | March 31, |
|  | 2022 |  |  | 2021 |
Basic weighted average shares |  |  | 26,924,631 |  |  |  | 26,924,631 |
Effect of potential dilutive securities |  |  | 15,000 |  |  |  | 15,000 |
Diluted weighted average shares |  |  | 26,939,631 |  |  |  | 26,939,631 |

For the three months ended March 31, 2022 and 2021, there was a total of 15,000 common stock options, warrants, and Restricted Stock Units (RSUs) unexercised, respectively. For the three months ended March 31, 2022 and 2021, there were no anti-dilutive shares.

NOTE 14 — LONG-TERM DEBT

Long-term debt consists of the following:

|  | Outstanding Balance |  |  |  |  |  |  |
|  | March 31, |  |  | December 31, |  |  | Current |  |  |  |
|  | 2022 |  |  | 2021 |  |  | Interest Rate |  |  | Maturity |
DGSE |  |  |  |  |  |  |  |  |  |  |  |
Note payable, Farmers Bank (1) |  | $ | 2,745,186 |  |  | $ | 2,770,729 |  |  |  | 3.10 | % |  | November 15, 2026 |
Note payable, Truist Bank (2) |  |  | 900,436 |  |  |  | 909,073 |  |  |  | 3.65 | % |  | July 9, 2030 |
Note payable, Texas Bank & Trust (3) |  |  | 469,556 |  |  |  | 474,009 |  |  |  | 3.75 | % |  | September 14, 2025 |
Note payable, Texas Bank & Trust (4) |  |  | 1,737,081 |  |  |  | 1,752,446 |  |  |  | 3.25 | % |  | July 30, 2031 |
DGSE Sub-Total |  |  | 5,852,259 |  |  |  | 5,906,257 |  |  |  |  |  |  |  |
ECHG |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note payable, Farmers Bank (1) |  |  | 6,228,505 |  |  |  | 6,286,459 |  |  |  | 3.10 | % |  | November 15, 2026 |
Line of Credit (5) |  |  | - |  |  |  | 1,700,000 |  |  |  | 3.10 | % |  | November 15, 2024 |
Avail Transaction note (6) |  |  | 1,933,333 |  |  |  | 2,000,000 |  |  |  | 0.00 | % |  | April 1, 2025 |
ECHG Sub-Total |  |  | 8,161,838 |  |  |  | 9,986,459 |  |  |  |  |  |  |  |
Envela |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note payable, Texas Bank & Trust (7) |  |  | 2,815,759 |  |  |  | 2,843,415 |  |  |  | 3.25 | % |  | November 4, 2025 |
Sub-Total |  |  | 16,829,856 |  |  |  | 18,736,131 |  |  |  |  |  |  |  |
Current portion |  |  | 1,003,592 |  |  |  | 2,120,457 |  |  |  |  |  |  |  |
|  | $ | 15,826,264 |  |  | $ | 16,615,674 |  |  |  |  |  |  |  |

(1) On May 20, 2019, in connection with the Echo Transaction, the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board. ECHG, LLC executed a five-year, $6,925,979 note for the Echo Transaction, amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly was $49,646. DGSE executed a five-year, $3,074,021 note to pay off the accounts payable – related party balance to a former Related Party as of May 20, 2019. That promissory note was also amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly on the note for DGSE was $22,203. On November 23, 2021, both notes were refinanced by Farmers State Bank of Oakley Kansas.

(2) On July 9, 2020, DGSE closed the purchase of a new retail building located at 610 E. Round Grove Road in Lewisville, Texas for $1,195,000. The purchase was partly financed through a $956,000, 10 year loan (the “Truist Lewisville Loan”), bearing an annual interest rate of 3.65%, amortized over 20 years, payable to Truist Bank (f/k/a BB&T Bank). The note has monthly interest and principal payments of $5,645.

(3) On September 14, 2020, 1106 NWH Holdings, LLC, a wholly owned subsidiary of DGSE, closed on the purchase of a new retail building located at 1106 W. Northwest Highway in Grapevine, Texas for $620,000. The purchase was partly financed through a $496,000, five-year loan (the “TB&T Grapevine Loan”), bearing an annual interest rate of 3.75%, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $2,941.

(4) On July 30, 2021, 9166 Gaylord Holdings, LLC, a wholly owned subsidiary of DGSE, closed the purchase of a new retail building located at 9166 Gaylord Parkway in Frisco, Texas for $2,215,500. The purchase was partly financed through a $1,772,000, five-year loan (the “TB&T Frisco Loan”), bearing an annual interest rate of 3.75%, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $10,509.

(5) On November 23, 2021, the Company secured a 36-month line of credit from Farmers State Bank of Oakley Kansas (“FSB Facility”) for $3,500,000 at a 3.1% annual interest rate.

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(6) On October 29, 2021, ECHG entered into the Avail Transaction to purchase all of the assets, liabilities and rights and interests of Avail AZ, for $4.5 million. The purchase was facilitated by an initial payment of $2.5 million at closing, and the remaining $2.0 million to be paid out by 12 quarterly payments starting April 1, 2022, of $166,667 each. The Installment note payable for the Avail Transaction imputed at 3.1%

(7) On November 4, 2020, 1901 Gateway Holdings, LLC, a wholly owned subsidiary of the Company, closed on the purchase of a new office building located at 1901 Gateway Drive, Irving, Texas for $3.521 million. The building was partially financed through a $2,960,000, 5-year loan (the “TB&T Irving Loan”), bearing an interest rate of 3.25%, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $16,792.

Future scheduled principal payments of our notes payable as of March 31, 2022 are as follows:

Note payable, Farmers State Bank - DGSE |  |  |
Year Ending December 31, |  | Amount |
2022 (excluding the three months ended March 31, 2022) |  | $ | 76,667 |
2023 |  |  | 105,428 |
2024 |  |  | 108,743 |
2025 |  |  | 112,163 |
2026 |  |  | 2,342,185 |
Subtotal |  | $ | 2,745,186 |

Note payable, Truist Bank - DGSE |  |  |  |
Year Ending December 31, |  | Amount |
2022 (excluding the three months ended March 31, 2022) |  | $ | 26,018 |
2023 |  |  | 35,988 |
2024 |  |  | 37,342 |
2025 |  |  | 38,748 |
2026 |  |  | 40,206 |
Thereafter |  |  | 722,134 |
Subtotal |  | $ | 900,436 |

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Note payable, Texas Bank & Trust - DGSE |  |  |  |
Year Ending December 31, |  | Amount |
2022 (excluding the three months ended March 31, 2022) |  | $ | 13,370 |
2023 |  |  | 18,503 |
2024 |  |  | 19,209 |
2025 |  |  | 418,474 |
Subtotal |  | $ | 469,556 |

Note payable, Texas Bank & Trust - DGSE |  |  |  |
Year Ending December 31, |  | Amount |
2022 (excluding the three months ended March 31, 2022) |  | $ | 52,616 |
2023 |  |  | 72,442 |
2024 |  |  | 74,832 |
2025 |  |  | 77,300 |
2026 |  |  | 79,600 |
Thereafter |  |  | 1,380,291 |
Subtotal |  | $ | 1,737,081 |

Note payable, Farmers Bank - ECHG |  |  |  |
Year Ending December 31, |  | Amount |
2022 (excluding the three months ended March 31, 2022) |  | $ | 173,949 |
2023 |  |  | 239,204 |
2024 |  |  | 246,725 |
2025 |  |  | 254,484 |
2026 |  |  | 5,314,143 |
Subtotal |  | $ | 6,228,505 |

Note payable - Avail Transaction |  |  |  |
Year Ending December 31, |  | Amount |
2022 (excluding the three months ended March 31, 2022) |  | $ | 433,333 |
2023 |  |  | 666,667 |
2024 |  |  | 666,667 |
2025 |  |  | 166,666 |
Subtotal |  | $ | 1,933,333 |

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Note payable, Texas Bank & Trust - Envela |  |  |  |
Year Ending December 31, |  | Amount |
2022 (excluding the three months ended March 31, 2022) |  | $ | 82,078 |
2023 |  |  | 112,653 |
2024 |  |  | 116,441 |
2025 |  |  | 2,504,587 |
Subtotal |  | $ | 2,815,759 |
|  | $ | 16,829,856 |

Future scheduled aggregate amount of principal payments and maturities of our notes payable as of March 31, 2022 are as follows:

|  | Scheduled |  |  |  |  |  |  |
|  | Principal |  |  | Loan |  |  |  |
Scheduled Principal Payments and Maturities by Year: |  | Payments |  |  | Maturities |  |  | Total |
2022 (excluding the three months ended March 31, 2022) |  | $ | 858,031 |  |  | $ | - |  |  | $ | 858,031 |
2023 |  |  | 1,250,885 |  |  |  | - |  |  |  | 1,250,885 |
2024 |  |  | 1,269,959 |  |  |  | - |  |  |  | 1,269,959 |
2025 |  |  | 595,940 |  |  |  | 2,976,482 |  |  |  | 3,572,422 |
2026 |  |  | 434,243 |  |  |  | 7,341,891 |  |  |  | 7,776,134 |
2027 and Thereafter |  |  | 555,443 |  |  |  | 1,546,982 |  |  |  | 2,102,425 |
Total |  | $ | 4,964,501 |  |  | $ | 11,865,355 |  |  | $ | 16,829,856 |

NOTE 15 — STOCK-BASED COMPENSATION

The Company accounts for share-based compensation by measuring the cost of 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.

There was no stock-based compensation expense for the three months ended March 31, 2022 and 2021.

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NOTE 16 — RELATED PARTY TRANSACTIONS

The Company has a corporate policy governing the identification, review, consideration and approval or ratification of transactions with related persons, as that term is defined in the Instructions to Item 404(a) of Regulation S-K, promulgated under the Securities Act (each such person a Related Party”). Under this policy, all Related Party transactions are identified and approved prior to consummation of the transaction to ensure they are consistent with the Company’s best interests and the best interests of its stockholders. Among other factors, the Company’s Board considers the size and duration of the transaction, the nature and interest of the of the Related Party in the transaction, whether the transaction may involve a conflict of interest, and if the transaction is on terms that are at least as favorable to the Company as would be available in a comparable transaction with an unaffiliated third party. The Company’s Board reviews all Related Party transactions at least annually to determine if it is in the best interest of the Company and the Company’s stockholders to continue, modify, or terminate any of the Related Party transactions. Envela’s Related Person Transaction Policy is available for review in its entirety under the “Investors” menu of the Company’s corporate relations website at www.envela.com.

On May 20, 2019, in connection with the Echo Transaction, the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board. ECHG, LLC executed a five-year, $6,925,979 note for the Echo Transaction, amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly was $49,646. DGSE executed a five-year, $3,074,021 note to pay off the accounts payable – related party balance to a former Related Party as of May 20, 2019. That promissory note was also amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly on the note for DGSE was $22,203. Both notes were being serviced by operational cash flow. On November 23, 2021, both notes were refinanced by Farmers State Bank of Oakley Kansas. For the three months ended March 31, 2022 and 2021, the Company paid Mr. Loftus $0 and $143,189, respectively, in interest on the Company’s notes payable, related party.

NOTE 17 — SUBSEQUENT EVENTS

The COVID-19 pandemic has adversely affected global economic business conditions. Future sales on products like ours could decline or fluctuate due to increased or fluctuating commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic, the ultimate impact is highly uncertain and subject to change. The duration of any such impact cannot be predicted, nor can the timing of the development, distribution and acceptance of effective vaccines, booster shots or other treatments for potential COVID-19 divergent strains, including the Delta variant. In addition, the effects of the COVID-19 pandemic are subject to, among other things, the effect of government responses to the pandemic on our operations, including vaccine mandates, impacts of the pandemic on global and domestic economic conditions, including with respect to commercial activity, our customers and business partners, as well as consumer preferences and demand.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context indicates otherwise for one of our specific operating segments, references to “we,” “us,” “our,” the ”Company” and “Envela” refer to the consolidated business operations of Envela Corporation, and all of its direct and indirect subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (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 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 entitled “Risk Factors” in the Company’s 2021 Annual Report and any material updates are described under the section of this Form 10-Q entitled “Risk Factors” and elsewhere in this Form 10-Q. 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, or store growth plans, or to reflect the occurrence of unanticipated events.

Envela Overview

The Company operates through two recommerce business segments represented by its two direct subsidiaries, DGSE and ECHG. DGSE focuses on the recommercialization of luxury hard assets, and ECHG focuses on the recommercialization of business IT equipment and consumer electronic devices.

Through DGSE, the Company recommercializes luxury hard assets and operates the Dallas Gold and Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands. Through ECHG, the Company recommercializes business IT equipment and consumer electronic devices and operates Echo, ITAD USA, Teladvance, CEX and Avail. Echo focuses on end-of-life electronics recycling and sustainability, 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. In addition to its operations through DGSE and ECHG, Envela also leases unused space at its Company headquarters in Irving, Texas to commercial tenants.

DGSE Business Overview

DGSE is headquartered in Dallas, Texas. DGSE focuses on sustainable, authenticated recommerce of luxury hard assets, including diamonds. Its retail strategy is anchored in being an information resource for clients, bringing transparency to purchase and sale transactions, and offering value and liquidity to those seeking to buy, sell or trade jewelry, fine watches, diamonds, rare coins and currency as well as other valuables. DGSE wholesales and retails these items through its Charleston Gold & Diamond Exchange and Dallas Gold & Silver Exchange operations. DGSE has specialized in buying and selling jewelry for over 40 years, making our expert staff among the best in the business. DGSE also maintains a number of related operations, including precious-metal bullion exchange and refiner partnerships, on-site jewelry and watch repair and restoration at its Dallas flagship location, consignment offerings and partnerships, and design of custom bridal and fashion jewelry.

For additional information regarding DGSE, see “Item 1. Business - Operating Segments - DGSE Segment.” in the Company’s 2021 Annual Report.

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DGSE Recommerce Activities

Our ability to offer quality pre-owned goods at prices significantly lower than original retail prices attracts value-conscious customers. The gross profit on sales of inventory depends primarily on our assessment of the purchase value at the time the property is purchased and our ability to sell that merchandise in a timely manner. As a significant portion of our inventory and sales involve gold and jewelry, our results can be influenced by the market price of gold and diamonds.

DGSE Precious Metals Pricing and Business Impact

DGSE’s business, similar to the jewelry industry overall, is effected by fluctuations in precious-metals pricing. Such fluctuations, particularly with respect to gold which accounts for a majority of DGSE’s merchandise costs, can have significant impact on its earnings and cash availability.

Because DGSE buys and resells precious metals, it is impacted by changes in precious metal 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 metal in which we trade. Gold prices surged during the beginnings of the COVID-19 pandemic, rising steeply during Fiscal 2020 but receding somewhat toward the end of Fiscal 2020. Gold prices started January 1, 2021 at $1,891 an ounce, as determined by the London AM Fix and dipped to a low of $1,683 an ounce on March 30, 2021. Gold then began to rebound throughout the remainder of the year closing at $1,820 on December 31, 2021, as determined by the London AM Fix. During fiscal year 2021, gold prices receded 4% from December 31, 2020. Gold rose 7% to $1,942 during the first three months of Fiscal 2022.

The COVID-19 pandemic continues to affect the recommerce business in unpredictable ways. Although there are variants of COVID-19 affecting the health of the United States, employment figures improved throughout 2021. The unemployment rate improved from over six percent (6%) in January of 2021 to four percent (4%), as of January 2022.

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. When prices decline for gold or other precious metals, DGSE has observed that individual buyers tend to buy due to the decrease in gold prices. While the precious-metals industry has slowed, our focus will be 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.

In addition, DGSE depends on purchasing products and materials from secondary markets. We are reliant on our ability to obtain an adequate supply of products and material at prices or other terms acceptable to it.

DGSE Growth and Expansion

Our strategy is to expand the number of locations we operate through opening new (“de novo”) locations in both current markets of Dallas/Fort Worth, Texas and Charleston, South Carolina and potential new markets. Our ability to add new stores is dependent on several variables, such as projected achievement of internal investment hurdles, the availability of acceptable sites, the regulatory environment, local zoning ordinances, access to capital and the availability of qualified personnel. We see opportunity for further expansion through new openings in the United States. The Company expects capital expenditures over the next twelve months including potential purchase of additional properties by DGSE.

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ECHG Business Overview

ECHG owns and operates Echo, ITAD USA, Teladvance, CEX and Avail, 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, CEX and Avail operates as value-added resellers by providing offerings and services to companies looking to either upgrade capabilities or dispose of equipment. In addition, as a result of the CExchange Transaction, Teladvance now offers retail customers a trade-in program to offer their customers the ability to upgrade their old phones through a trade-in program. 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.

ECHG Recommerce Activities

A portion of ECHG’s business depends on obtaining products and material from secondary markets and is reliant on its ability to obtain an adequate supply of products and material at prices and other items acceptable to it. Although we believe that the long-term prospects for the industry remain bright, but because we do not have unlimited backlogs, our business can be promptly affected by short-term market fluctuations.

ECHG Metals Pricing and Business Impact

ECHG’s recycling business is affected by precious and other non-ferrous metal prices, which fluctuate based upon global supply-and-demand dynamics, among other things, with the greatest impact relating to gold. Recent fluctuations in gold prices are discussed above.

ECHG Growth and Expansion

ECHG’s strategy is to expand both organically and through acquisitions. As an organization, ECHG strives to deliver value through organic growth, high customer loyalty and retention as well as strategic acquisitions. ECHG is committed to continuous innovation. Many of ECHG’s clients have made commitments to going carbon neutral over the next few years and ECHG sees the potential to further expand key relationships as it partners with them in more ways to help them achieve their goal. With an emphasis on increasing recurring revenues and expanding our margins, ECHG believes its organic strategy will ultimately drive strong financial performance, including cash flow to support our acquisition strategy. ECHG’s business strategy has always included pursuing synergistic acquisitions, and ECHG’s plans to continue to expand its business by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance its growth.

For additional information regarding ECHG, see “Item 1. Business—Operating Segments—ECHG Segment.” in the Company’s 2021 Annual Report.

COVID-19

The COVID-19 pandemic has adversely affected global economic business conditions. Future sales on products like ours could decline or fluctuate due to increased or fluctuating commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic, the ultimate impact is highly uncertain and subject to change. The duration of any such impact cannot be predicted, nor can the timing of the development, distribution and acceptance of effective vaccines, booster shots or other treatments for potential COVID-19 divergent strains, including the Delta and Omnicron variants. In addition, the effects of the COVID-19 pandemic are subject to, among other things, the effect of government responses to the pandemic on our operations, including vaccine mandates, impacts of the pandemic on global and domestic economic conditions, including with respect to commercial activity, our customers and business partners, as well as consumer preferences and demand.

Critical Accounting Policies and Estimates

For a discussion of critical accounting policies, see Note 3 to the interim condensed consolidated financial statements included herein.

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Results of Operations

General

The following disaggregation of total revenue is listed by sales category and segment for the three months ended March 31, 2022 and 2021:

CONSOLIDATED |  | Three Months Ended March 31, |
|  | 2022 |  |  | 2021 |
|  | Revenues |  |  | Gross Profit |  |  | Margin |  |  | Revenues |  |  | Gross Profit |  |  | Margin |
DGSE |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Resale |  | $ | 33,677,133 |  |  | $ | 3,742,852 |  |  |  | 11.1 | % |  | $ | 17,320,641 |  |  | $ | 2,457,144 |  |  |  | 14.2 | %
Recycled |  |  | 2,105,739 |  |  |  | 480,610 |  |  |  | 22.8 | % |  |  | 1,593,860 |  |  |  | 350,491 |  |  |  | 22.0 | %
Subtotal |  |  | 35,782,872 |  |  |  | 4,223,462 |  |  |  | 11.8 | % |  |  | 18,914,501 |  |  |  | 2,807,635 |  |  |  | 14.8 | %
ECHG |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Resale |  |  | 9,579,857 |  |  |  | 4,574,268 |  |  |  | 47.7 | % |  |  | 4,740,992 |  |  |  | 2,612,184 |  |  |  | 55.1 | %
Recycled |  |  | 2,052,369 |  |  |  | 913,304 |  |  |  | 44.5 | % |  |  | 1,834,948 |  |  |  | 884,445 |  |  |  | 48.2 | %
Subtotal |  |  | 11,632,226 |  |  |  | 5,487,572 |  |  |  | 47.2 | % |  |  | 6,575,940 |  |  |  | 3,496,629 |  |  |  | 53.2 | %
|  | $ | 47,415,098 |  |  | $ | 9,711,034 |  |  |  | 20.5 | % |  | $ | 25,490,441 |  |  | $ | 6,304,264 |  |  |  | 24.7 | %

Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021

Revenue. Revenue related to DGSE’s continuing operations increased by $16,868,371, or 89%, during the three months ended March 31, 2022, to $35,782,872, as compared to revenue of $18,914,501 during the same period in 2021. Resale revenue, such as bullion, jewelry, watches and rare coins, increased by $16,356,492, or 94%, during the three months ended March 31, 2022, to $33,677,133 as compared to resale revenue of $17,320,641 during the same period in 2021. Recycled-material sales increased 32% to $2,105,739 for the three months ended March 31, 2022, as compared to recycled-material sales of $1,593,860, for the three months ended March 31, 2021. Revenue increased for resale and recycled items for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to the effectiveness of DGSE’s on-line advertising and marketing campaign that saw DGSE increase its advertising budget by 56% during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

Revenue related to ECHG’s continuing operations for the three months ended March 31, 2022 increased by $5,056,286, or 77%, to $11,632,226, as compared to revenue of $6,575,940 during the same period in 2021. Resale revenue increased by $4,838,865, or 102%, to $9,579,857, for the three months ended March 31, 2022, as compared to revenue of $4,740,992 during the three months ended March 31, 2021. Recycled sales increased by $217,421 or 12%, to $2,052,369 for the three months ended March 31, 2022, as compared to recycled sales of $1,834,948 for the three months ended March 31, 2021. Revenue increased for resale and recycled items for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, primarily due to the addition of Avail and CEX for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

The Company has had no layoffs to-date or terminations due to the COVID-19 pandemic, and we continue to exercise the safety protocols established by the Company at the start of the pandemic. The Company continues to operate at full strength and will take measures to keep our employees safe where possible.

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Gross Profit. Gross profit related to DGSE’s operations for the three months ended March 31, 2022, increased by $1,415,827 or 50%, to $4,223,462, as compared to gross profit of $2,807,635 during the same period in 2021. Resale gross profit increased by $1,285,708, or 52%, to $3,742,852 for the three month ended March 31, 2022, as compared to resale gross profit of $2,457,144 during the three months ended March 31, 2021. Recycled gross profit increased by $130,119, or 37%, to $480,610 for the three months ended March 31, 2022, as compared to recycled gross profit of $350,491 during the three months ended March 31, 2021. The increase in resale and recycled gross profit was due primarily to the increase in sales for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

Gross profit related to ECHG for the three months ended March 31, 2022 increased by $1,990,943, or 57%, to $5,487,572 as compared to gross profit of $3,496,629 during the same period in 2021. Gross profit for resale revenue for the three months ended March 31, 2022 increased by $1,962,084, or 75%, to $4,574,268, as compared to gross profit for resale revenue of $2,612,184 during the same period in 2021. Gross profit for recycled sales for the three months ended March 31, 2022 increased $28,859, or 3%, to $913,304, as compared to gross profit for recycled sales of $884,445, during the same period in 2021. The gross profit increase for the resale and recycled items for the three months ended March 31, 2022, compared to the three months ended March 31, 2021 is primarily due to the increased sales in each category.

Selling, General and Administrative Expenses. For the three months ended March 31, 2022, SG&A expenses for DGSE increased by $355,512, or 20%, to $2,137,949, as compared to SG&A expenses of $1,782,437 during the same period in 2021. The increase in SG&A expenses was primarily due to increased payroll and related expenses from personnel needed for the increase in business, and for the addition of a new DGSE retail location that opened for business during the quarter ended March 31, 2022, as compared to the three months ended March 31, 2021.

For the three months ended March 31, 2022, SG&A expenses for ECHG increased by $2,051,014 or 87%, to $4,421,806, as compared to SG&A expenses of $2,370,792 during the same period in 2021. The increase in SG&A expenses was primarily due to the addition of CEX and Avail businesses during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Depreciation and Amortization. For the three months ended March 31, 2022, depreciation and amortization expense for DGSE was $106,963, compared to an expense of $96,822 for the same period in 2021, an increase of $10,141, or 10%. The increase of $10,141 from the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, is primarily due to the new retail building purchased during 2021 but not placed into service until January 2022.

For the three months ended March 31, 2022, depreciation and amortization expense for ECHG was $184,984, compared to an expense of $108,090 for the same period in 2021, an increase of $76,894, or 71%. The increase of $76,894 from the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, is primarily due to the added depreciable assets and intangibles from the purchase of assets from the CExchange and Avail Transactions during Fiscal 2021.

Interest Expense. For the three months ended March 31, 2022, interest expense for DGSE was $61,241, a decrease of $7,244 or 11%, compared to interest expense of $68,485 during the same period in 2021. The decrease was primarily the netting effect of additional interest from a new loan to purchase a retail building netted against the reduction of interest expense from refinancing the related party loan by Farmers State Bank of Oakley Kansas, reducing the annual interest rate from 6% to 3.1%.

For the three months ended March 31, 2022, interest expense for ECHG was $61,998, a decrease of $48,539 or 44%, as compared to the interest expense of $110,537, during the same period in 2021. The decrease was primarily due to refinancing the related party loan by Farmers State Bank of Oakley Kansas, reducing the annual interest rate from 6% to 3.1%.

Other. For the three months ended March 31, 2022, net other expense for DGSE was $27,992, an increase of $139,723, compared to net other income of $111,731 during the same period in 2021. The increase in net other expense as compared to net other income was primarily due to DGSE’s portion of operating expenses above rental income for the Company’s corporate building. The corporate building’s rental income and expenses were equally shared between the two segments. The Company’s corporate building’s largest tenant vacated the property during the fourth quarter of Fiscal 2021.

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For the three months ended March 31, 2022, net other expense for ECHG was $30,584, an increase of $190,794, as compared to net other income of $160,210, during the same period in 2021. The increase in net other expense as compared to net other income was primarily due to ECHG’s portion of operating expenses above rental income for the Company’s corporate building. The corporate building’s rental income and expenses were equally shared between the two segments. The Company’s corporate building’s largest tenant vacated the property during the fourth quarter of Fiscal 2021.

Income Tax Expense. For the three months ended March 31, 2022, income tax expense was $30,292, a decrease of $478, as compared to income tax expense of $30,770 for the three months ended March 31, 2021. The effective income tax rate was 1.1% and 1.5% for the three months ended March 31, 2022 and 2021, respectively. Differences between our effective income tax rate and the U.S. federal statutory rate are the result of state taxes, non-deductible expenses and changes in the valuation allowance in relation to the deferred tax asset for net operating loss carryforwards.

Net Income. We recorded a net income of $2,647,225 for the three months ended March 31, 2022, as compared to a net income of $2,008,272 for the three months ended March 31, 2021, an increase in net income of $638,953. The increase is due primarily to increased revenue and gross profit for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

Earnings Per Share. For the three months ended March 31, 2022, our net income per basic and diluted shares attributable to holders of our Common Stock was $0.10, compared to $0.07 per basic and diluted shares attributable to holders of our Common Stock for the three months ended March 31, 2021.

Liquidity and Capital Resources

During the three months ended March 31, 2022, cash flows provided by operations totaled $3,358,769, and during the three months ended March 31, 2021, cash flows used in operations totaled $384,912, an increase of $3,743,681. Cash provided by operations for the three months ended March 31, 2022 was driven largely by net income added to non-cash items of depreciation and amortization totaling $2,939,173, a decrease in trade receivables of $1,809,396, an increase in accounts payable and accrued expenses of $81,088, an increase in customer deposits and other liabilities of $64,969, offset by an increase in inventories of $573,139, an increase in prepaid expenses of $173,436 and an increase in other assets of $794,731. Cash used in operations for the three months ended March 31, 2021 was driven largely by net income added to non-cash items of depreciation and amortization and bad debt totaling $2,219,433, an increase in customer deposits and other liabilities of $260,615, offset by the increase of trade receivables of $344,103, an increase in inventories of $1,623,485, an increase in prepaid expenses of $576,578, an increase in other assets of $100,000 and a decrease in accounts payable and accrued expenses of $240,410.

During the three months ended March 31, 2022 and 2021, cash used in investing activities totaled $93,384 and $324,035, respectively, a period-over-period decrease of $230,651. The use of cash in investing activities during the three months ended March 31, 2022 was primarily due to the purchase of additional property and equipment of $93,384. The use of cash in investing activities during the three months ended March 31, 2021 was primarily due to investing in notes receivable of $123,472 to CExchange and the purchase of additional property and equipment of $200,563.

During the three months ended March 31, 2022 and 2021, cash used in financing totaled $1,906,274 and $112,092, respectively, a period over period increase of $1,794,182. The cash used in financing during the three months ended March 31, 2022 were payments made against the notes payable of $206,274 and payments made against the line of credit of $1,700,000. The cash used in financing during the three months ended March 31, 2021 were payments made against the notes payable of $40,239 and notes payable, related party of $71,853.

We expect our capital expenditures to total approximately $1,000,000 during the next 12 months. These expenditures will be driven by the purchase of additional equipment and the purchase of potential properties by DGSE for retail locations and the build-out of those purchased properties. The Company has no capital expenditure commitments as of March 31, 2022.

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Our primary source of liquidity and capital resources currently consist of cash generated from our operating results and current borrowings, including the Truist Lewisville Loan, the TB&T Grapevine Loan, the TB&T Irving Loan, the TB&T Frisco Loan and the two Farmers State Bank of Oakley Kansas loans. For more information, see Note 14 to our interim condensed financial statements, which is incorporated into this item by reference. In addition, on November 23, 2021, the Company secured a thirty six month line of credit from Farmers State Bank of Oakley Kansas for up to $3,500,000. The FSB Facility has an annual interest rate of 3.1%. We maintain the FSB Facility to help fund cash shortfalls that we may have from time to time. We do not currently anticipate the need of those funds for operations and do not currently have any amounts drawn against the FSB Facility as of Mach 31, 2022.

From time to time, we have adjusted and may further adjust our inventory levels to meet seasonal demand or in order to meet working capital requirements. Management believes we have sufficient capital resources to meet working capital requirements. 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. If additional working capital is required, we will seek additional loans from individuals or other commercial banks. If necessary, inventory levels may be adjusted in order to meet unforeseen working-capital requirements.

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.

The COVID-19 pandemic and the war between Ukraine and Russia has adversely affected global economic business conditions. Future sales of products like ours have and may continue to decline or fluctuate due to increased or fluctuating commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic and the war between Ukraine and Russia, 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 may be necessary to support ongoing operations during this period of uncertainty. For more information, see Note 17 to our interim condensed consolidated financial statements.

The Company leases certain of its facilities under operating leases. For more information on the minimum rental commitments under non-cancellable operating leases as of March 31, 2022, see Note 12 to our interim condensed consolidated financial statements.

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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Because we are a “smaller reporting company,” we are not required to disclose the information required by this item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2022. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of March 31, 2022, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance of the foregoing.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance of achieving their objectives, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are various claims, lawsuits and pending actions against the Company arising in the normal course of the Company's business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flow. Management is also not aware of any legal proceedings contemplated by government agencies of which the outcome is reasonable likely to have a material adverse effect on the Company's financial condition, results of operations or cash flow.

ITEM 1A. RISK FACTORS

The risk factor set forth below includes additional information relating to the Russian invasion of Ukraine and should be read together with the risk factors disclosed under Part I, Item 1A “Risk Factors” in the Company’s 2021 Form 10-K.

Escalating global tensions, including the conflict between Russia and Ukraine, could negatively impact us.

Escalating global tensions, including the ongoing conflict between Russia and Ukraine, could lead to disruption, instability and volatility in global markets and industries that could negatively impact our operations. 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 measures, as well as other changes in diplomatic relations and trade policy, including between the United States and Russia (or the United States and other countries that may support Russia or take similar actions) is currently unknown and they could adversely affect our business.

For additional information on the COVID-19 pandemic, see Note 17 to our interim condensed consolidated financial statements.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

Exhibit Number |  | Description |  | Filed Herein |  | Incorporated by Reference |  | Form |  | Date Filed with SEC |  | Exhibit Number
31.1 |  | Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John R. Loftus |  | X |  |  |  |  |  |  |  |
31.2 |  | Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen |  | X |  |  |  |  |  |  |  |
32.1 |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John R. Loftus |  | X |  |  |  |  |  |  |  |
32.2 |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Bret A. Pedersen |  | X |  |  |  |  |  |  |  |
101.INS |  | XBRL Instance Document |  | X |  |  |  |  |  |  |  |
101.SCH |  | XBRL Taxonomy Extension Schema Document |  | X |  |  |  |  |  |  |  |
101.CAL |  | XBRL Taxonomy Calculation Linkbase Document |  | X |  |  |  |  |  |  |  |
101.DEF |  | XBRL Taxonomy Definition Linkbase Document |  | X |  |  |  |  |  |  |  |
101.LAB |  | XBRL Taxonomy Label Linkbase Document |  | X |  |  |  |  |  |  |  |
101.PRE |  | XBRL Taxonomy Presentation Linkbase Document |  | X |  |  |  |  |  |  |  |
104* |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101) |  | X |  |  |  |  |  |  |  |

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| ENVELA CORPORATION (Registrant) |
Date: May 11, 2022 | By: | /s/ JOHN R. LOFTUS |
|  | John R. Loftus |
|  | Chief Executive Officer (Principal Executive Officer) |
Date: May 11, 2022 |  | /s/ BRET A. PEDERSEN |
|  | Bret A. Pedersen |
|  | Chief Financial Officer (Principal Accounting Officer) |

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