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Envela Corp - Quarter Report: 2023 March (Form 10-Q)

 

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, 2023

 

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

__________________________

ela_10qimg4.jpg

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 3, 2023, 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, 2023 and 2022 (unaudited)

 

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022.

 

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2023 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

38

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

39

 

 

 

 

 

 

Item 1A.

Risk Factors

 

39

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

39

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

39

 

 

 

 

 

 

Item 5.

Other Information

 

39

 

 

 

 

 

 

Item 6.

Exhibits

 

40

 

 

 

 

 

 

SIGNATURES

 

41

 

 

 
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,

 

2023

 

 

2022

 

Revenue:

 

 

 

 

 

 

Sales

 

$48,389,040

 

 

$47,415,098

 

Cost of goods sold

 

 

36,979,138

 

 

 

37,704,064

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

11,409,902

 

 

 

9,711,034

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Selling, General & Administrative Expenses

 

 

7,905,303

 

 

 

6,559,755

 

Depreciation and Amortization

 

 

354,351

 

 

 

291,947

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

8,259,654

 

 

 

6,851,702

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

3,150,248

 

 

 

2,859,332

 

Other income (expense), net

 

 

210,779

 

 

 

(58,576)

Interest expense

 

 

117,064

 

 

 

123,239

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

3,243,963

 

 

 

2,677,517

 

Income tax expense

 

 

717,646

 

 

 

30,292

 

 

 

 

 

 

 

 

 

 

Net income

 

$2,526,317

 

 

$2,647,225

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

Net income

 

$0.09

 

 

$0.10

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

Net income

 

$0.09

 

 

$0.10

 

 

 

 

 

 

 

 

 

 

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

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ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Assets

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$20,352,709

 

 

$17,169,969

 

Trade receivables, net of allowances

 

 

8,291,353

 

 

 

7,949,775

 

Notes receivable, net of allowances

 

 

-

 

 

 

578,250

 

Inventories

 

 

19,105,838

 

 

 

18,755,785

 

Deferred tax asset

 

 

1,140,002

 

 

 

1,488,258

 

Current right-of-use assets from operating leases

 

 

1,700,508

 

 

 

1,683,060

 

Prepaid expenses

 

 

1,279,664

 

 

 

1,231,817

 

Other current assets

 

 

252,387

 

 

 

35,113

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

52,122,461

 

 

 

48,892,027

 

Property and equipment, net

 

 

9,228,454

 

 

 

9,393,802

 

Goodwill

 

 

3,621,453

 

 

 

3,621,453

 

Intangible assets, net

 

 

4,813,270

 

 

 

4,993,545

 

Operating lease right-of-use assets

 

 

3,757,873

 

 

 

4,189,621

 

Other assets

 

 

198,447

 

 

 

186,761

 

 

 

 

 

 

 

 

 

 

Total assets

 

$73,741,958

 

 

$71,277,209

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable-trade

 

$2,746,229

 

 

$3,358,881

 

Notes payable

 

 

1,246,961

 

 

 

1,250,702

 

Current operating lease liabilities

 

 

1,827,285

 

 

 

1,686,997

 

Accrued expenses

 

 

2,077,832

 

 

 

2,286,594

 

Customer deposits and other liabilities

 

 

1,767,088

 

 

 

282,482

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

9,665,395

 

 

 

8,865,656

 

Notes payable, less current portion

 

 

14,419,637

 

 

 

14,726,703

 

Long-term operating lease liabilities, less current portion

 

 

3,814,159

 

 

 

4,368,400

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

27,899,191

 

 

 

27,960,759

 

 

 

 

 

 

 

 

 

 

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

 

Retained earnings

 

 

5,400,521

 

 

 

2,874,204

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

45,842,767

 

 

 

43,316,450

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$73,741,958

 

 

$71,277,209

 

 

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,

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Operations

 

 

 

 

 

 

Net income

 

$2,526,317

 

 

$2,647,225

 

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

354,351

 

 

 

291,947

 

Bad debt expense

 

 

(13,091)

 

 

-

 

Deferred Taxes

 

 

348,256

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(328,487)

 

 

1,809,397

 

Inventories

 

 

(350,053)

 

 

(573,139)

Prepaid expenses

 

 

(47,847)

 

 

(173,436)

Other assets

 

 

(228,959)

 

 

(794,731)

Accounts payable and accrued expenses

 

 

(821,413)

 

 

81,088

 

Operating leases

 

 

346

 

 

 

5,449

 

Customer deposits and other liabilities

 

 

1,484,605

 

 

 

64,969

 

 

 

 

 

 

 

 

 

 

Net cash provided by operations

 

 

2,924,025

 

 

 

3,358,769

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

Payments from notes receivable

 

 

578,250

 

 

 

-

 

Purchase of property and equipment

 

 

(8,728)

 

 

(93,384)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing

 

 

569,522

 

 

 

(93,384)

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

Payments on notes payable

 

 

(310,807)

 

 

(206,274)

Payments on line of credit

 

 

-

 

 

 

(1,700,000)

 

 

 

 

 

 

 

 

 

Net cash used in financing

 

 

(310,807)

 

 

(1,906,274)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

3,182,740

 

 

 

1,359,111

 

Cash and cash equivalents, beginning of period

 

 

17,169,969

 

 

 

10,138,148

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$20,352,709

 

 

$11,497,259

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$116,061

 

 

$129,989

 

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, 2022 and 2023

(Unaudited)

 

 

 

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

 

 

 

 

Common Stock

 

 

Preferred Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2023

 

 

26,924,631

 

 

$269,246

 

 

 

-

 

 

$-

 

 

$40,173,000

 

 

$2,874,204

 

 

$43,316,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,526,317

 

 

 

2,526,317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2023

 

 

26,924,631

 

 

$269,246

 

 

 

-

 

 

$-

 

 

$40,173,000

 

 

$5,400,521

 

 

$45,842,767

 

 

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

 

 
6

Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

These unaudited interim condensed consolidated financial statements of Envela Corproration, a Nevada corporation, and its subsidiaries (together with its subsidiaries, the “Company” or “Envela”), included herein have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X prescribed by the Securities and Exchange Commission (the “SEC”). Pursuant to the SEC’s rules and regulations, they do not include all of the information and notes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments, which are of a normal and recurring nature except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”), necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023 (“fiscal 2023”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“fiscal 2022”) of Envela filed with the SEC on March 16, 2023 (the “2022 Annual Report”).

 

Contemporaneously with filing this Form 10-Q, we updated our two reportable segments by renaming the ECHG segment the “Commercial” segment and the DGSE segment the “Consumer” segment. The segment name changes did not result in any change to the composition of the Company’s operations and therefore did not result in any change to the historical results. Our operations conducted by each of our segments are more specifically described below.

 

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

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. Our consumer segment, formerly known as the DGSE segment, operates DGSE, LLC (“DGSE”), Dallas Gold & Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands. Our commercial segment, formerly known as the ECHG segment, operates ECHG, LLC (“ECHG”), 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.

 

 
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Our consumer segment 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. We operate seven jewelry stores at both the retail and wholesale levels throughout the United States via its facilities in Texas and South Carolina. The Company expects to expand soon to Arizona, see Note 16 – Subsequent Events, to these interim condensed consolidated financial statements. The consumer segment is currently promoting and building their Bullion Express brand into a leading on-line seller of bullion. Buying and selling items for their precious-metals content is a major method by which we are marketed. The consumer segment 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. We also maintain a presence in the retail market through websites, www.dgse.com, www.cgdeinc.com and www.bullionexpress.com.

 

Our commercial segment, 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. We also conduct such recycling and resale at the retail level. We focus 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 the consumer segment, the commercial segment 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. The commercial segment’s customers are companies and organizations that are based domestically and internationally.

 

For additional information on the businesses of both the consumer and commercial segments, see “Item 1. Business – Operating Segments” in the Company’s 2022 Annual Report.

 

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.

 

 
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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 the commercial segment only and not the entire Company. The commercial segment 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 surging inflation and the war between Ukraine and Russia, in accordance with step 1 of the guidelines set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 350-20-35-3A, management concluded there were no impairments of goodwill that resulted from those triggering events for the three months ended March 31, 2023. Management will continue to evaluate goodwill for the commercial segment. For tax purposes, goodwill is amortized and deductible over fifteen years.

 

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”). The preliminary goodwill associated with the Avail Transaction was $3,491,285, which was the initial purchase price less the approximate fair value of the net assets purchased. There have been several adjustments made to goodwill concerning the Avail Transaction during fiscal year 2022. On May 31, 2022, an additional cash payment was made of $216,988 due to certain conditions being met concerning the cash balance upon a certain date. The cash payment increased goodwill for the Avail Transaction to $3,708,273. During fiscal year 2022 management also identified $2,736,000 of intangibles that were not initially included in the fair value of Avail’s net assets. The separation of intangibles reduced the Avail Transaction goodwill to $972,272. There have been no other adjustments or impairment charges to goodwill. As of March 31, 2023 and December 31, 2022, goodwill as reported in the condensed consolidated balance sheets was $3,621,453.

 

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 ASU is effective for the fiscal years beginning after December 15, 2022. We adopted this ASU as of January 1, 2023, which includes interim periods within the reporting period. ASU 2016-13 was adopted by using a modified retrospective transition approach to align our credit loss methodology with the new standard. There were no effects of this standard on our financial position, results of operations or cash flows.

 

There were no other new accounting standards that had a material impact on the Company’s consolidated financial statements during the three-month period ended March 31, 2023, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of March 31, 2023 that the Company expects to have a material impact on its consolidated financial statements.  

 

 
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NOTE 4 — INVENTORIES

 

A summary of inventories is as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Consumer

 

 

 

 

 

 

Resale

 

$18,151,841

 

 

$16,462,749

 

Recycle

 

 

20,313

 

 

 

46,697

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

18,172,154

 

 

 

16,509,446

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

Resale

 

 

623,041

 

 

 

1,858,519

 

Recycle

 

 

310,643

 

 

 

387,820

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

933,684

 

 

 

2,246,339

 

 

 

 

 

 

 

 

 

 

 

 

$19,105,838

 

 

$18,755,785

 

 

NOTE 5 — GOODWILL

 

The change in goodwill is as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

Opening balance

 

$3,621,453

 

 

$6,140,465

 

Reductions (1)

 

 

-

 

 

 

(2,519,012)

 

 

 

 

 

 

 

 

 

Goodwill

 

$3,621,453

 

 

$3,621,453

 

 

(1) The reduction in goodwill of $2,519,012 for fiscal 2022, is a combination of an additional cash payment made on May 31, 2022 of $216,988, increasing goodwill for the Avail Transaction, offset by the effect of identifying $2,736,000 of intangible assets that was not initially included in the fair value of Avail’s net assets, reducing goodwill and increasing intangible assets.

 

 
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NOTE 6 — PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Consumer

 

 

 

 

 

 

Land

 

$1,640,220

 

 

$1,640,219

 

Building and improvements

 

 

2,798,975

 

 

 

2,798,975

 

Leasehold improvements

 

 

1,450,695

 

 

 

1,450,695

 

Machinery and equipment

 

 

1,094,940

 

 

 

1,078,595

 

Furniture and fixtures

 

 

603,943

 

 

 

603,944

 

Vehicles

 

 

22,859

 

 

 

22,859

 

 

 

 

7,611,632

 

 

 

7,595,287

 

Less: accumulated depreciation

 

 

(2,733,466)

 

 

(2,651,832)

 

 

 

 

 

 

 

 

 

Sub-Total

 

 

4,878,166

 

 

 

4,943,455

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

Building and improvements

 

 

151,647

 

 

 

151,647

 

Machinery and equipment

 

 

1,173,019

 

 

 

1,180,636

 

Furniture and fixtures

 

 

145,950

 

 

 

145,950

 

 

 

 

1,470,616

 

 

 

1,478,233

 

Less: accumulated depreciation

 

 

(589,289)

 

 

(515,673)

 

 

 

 

 

 

 

 

 

Sub-Total

 

 

881,327

 

 

 

962,560

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

Land

 

 

1,106,664

 

 

 

1,106,664

 

Building and improvements

 

 

2,502,216

 

 

 

2,502,216

 

Machinery and equipment

 

 

28,627

 

 

 

28,627

 

 

 

 

 

 

 

 

 

 

 

 

 

3,637,507

 

 

 

3,637,507

 

Less: accumulated depreciation

 

 

(168,546)

 

 

(149,720)

 

 

 

 

 

 

 

 

 

Sub-Total

 

 

3,468,961

 

 

 

3,487,787

 

 

 

 

 

 

 

 

 

 

 

 

$9,228,454

 

 

$9,393,802

 

 

 
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NOTE 7 — INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Consumer

 

 

 

 

 

 

Domain names

 

$41,352

 

 

$41,352

 

Point of sale system

 

 

330,000

 

 

 

330,000

 

 

 

 

371,352

 

 

 

371,352

 

Less: accumulated amortization

 

 

(352,002)

 

 

(335,502)

 

 

 

 

 

 

 

 

 

Subtotal

 

 

19,350

 

 

 

35,850

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

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

 

Trademarks/Tradenames (3)

 

 

1,272,000

 

 

 

1,272,000

 

Customer Relationships (3)

 

 

1,464,000

 

 

 

1,464,000

 

 

 

 

6,551,000

 

 

 

6,551,000

 

Less: accumulated amortization

 

 

(1,757,080)

 

 

(1,593,305)

 

 

 

 

 

 

 

 

 

Subtotal

 

 

4,793,920

 

 

 

4,957,695

 

 

 

 

 

 

 

 

 

 

 

 

$4,813,270

 

 

$4,993,545

 

 

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

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

(3) Intangibles relate to the Avail Transaction on October 29, 2021.

  

The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2023:

 

 

 

Consumer

 

 

Commercial

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

2023 (excluding the three months ending March 31, 2023)

 

 

13,850

 

 

 

491,325

 

 

 

505,175

 

2024

 

 

5,500

 

 

 

655,100

 

 

 

660,600

 

2025

 

 

-

 

 

 

655,100

 

 

 

655,100

 

2026

 

 

-

 

 

 

655,100

 

 

 

655,100

 

2027

 

 

-

 

 

 

655,100

 

 

 

655,100

 

Thereafter

 

 

-

 

 

 

1,682,195

 

 

 

1,682,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$19,350

 

 

$4,793,920

 

 

$4,813,270

 

 

 
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    NOTE 8— ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Consumer

 

 

 

 

 

 

Accrued interest

 

$12,277

 

 

$11,624

 

Payroll

 

 

93,548

 

 

 

146,817

 

Property taxes

 

 

66,350

 

 

 

115,222

 

Sales tax

 

 

59,865

 

 

 

153,039

 

Other administrative expenss

 

 

30,425

 

 

 

424

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

262,465

 

 

 

427,126

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

Accrued interest

 

 

8,656

 

 

 

8,228

 

Payroll

 

 

178,334

 

 

 

336,226

 

Unvouchered payables - inventory

 

 

146,533

 

 

 

803,649

 

Material & shipping costs - COGS

 

 

770,205

 

 

 

229,159

 

Other accrued expenses

 

 

11,131

 

 

 

7,392

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

1,114,859

 

 

 

1,384,654

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

Accrued interest

 

 

7,464

 

 

 

7,543

 

Payroll

 

 

12,870

 

 

 

25,179

 

Professional fees

 

 

132,431

 

 

 

199,508

 

Property Tax

 

 

21,900

 

 

 

87,275

 

Other administrative expenses

 

 

1,144

 

 

 

-

 

Federal Income tax

 

 

332,381

 

 

 

-

 

State income tax

 

 

192,318

 

 

 

155,309

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

700,508

 

 

 

474,814

 

 

 

 

 

 

 

 

 

 

 

 

$2,077,832

 

 

$2,286,594

 

 

NOTE 9 — SEGMENT INFORMATION

 

As stated in Note 1 – Basis of Presentation, we updated our two reportable segments by renaming the ECHG segment to the “Commercial” segment and the DGSE segment to the “Consumer” segment. The segment name changes did not result in any change to the composition of the Company’s operations and therefore did not result in any change to the historical results. Our operations conducted by each of our segments are more specifically described below.

 

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

 

The consumer segment includes Dallas Gold & Silver Exchange, which has six retail stores in the Dallas/Fort Worth Metroplex (“DFW”), and Charleston Gold & Diamond Exchange, which has one retail store in Mt. Pleasant, South Carolina. The consumer segment also operates the on-line Bullion Express brand.

 

The commercial 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 the consumer and the commercial financial results of operations for the three months ended March 31, 2023 and 2022:

 

For The Three Months Ended March 31,

2023

2022

Consumer

Commercial

Consolidated

Consumer

Commercial

Consolidated

Revenue:

Sales

$36,704,397$11,684,643$48,389,040$35,782,872$11,632,226$47,415,098

Cost of goods sold

32,719,4294,259,70936,979,13831,559,4106,144,65437,704,064

Gross profit

3,984,9687,424,93411,409,9024,223,4625,487,5729,711,034

Expenses:

Selling, general and administrative expenses

2,396,0255,509,2787,905,3032,137,9494,421,8066,559,755

Depreciation and amortization

98,134256,217354,351106,963184,984291,947
2,494,1595,765,4958,259,6542,244,9124,606,7906,851,702

Operating income

1,490,8091,659,4393,150,2481,978,550880,7822,859,332

Other income/expense:

Other income (expense)

23,534187,245210,779(27,992)(30,584)(58,576)

Interest expense

59,61857,446117,06461,24161,998123,239

Income before income taxes

1,454,7251,789,2383,243,9631,889,317788,2002,677,517

Income tax expense

317,841399,805717,64613,17717,11530,292

Net income

$1,136,884$1,389,433$2,526,317$1,876,140$771,085$2,647,225

 

NOTE 10 — REVENUE RECOGNITION

 

Accounting Standards Codification (“ASC 606”) provides guidance to identify performance obligations for revenue-generating transactions. The initial step is to identify the contract with a customer created with the sales invoice or a repair ticket. Secondly, to identify the performance obligations in the contract as we promise to deliver the purchased item or promised repairs in return for payment or future payment as a receivable. The third step is determining the transaction price of the contract obligation as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied.

 

 
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The following disaggregation of total revenue is listed by sales category and segment for the three months ended March 31, 2023 and 2022:

 

CONSOLIDATED

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

 

Revenues

 

 

Gross Profit

 

 

Margin

 

 

Revenues

 

 

Gross Profit

 

 

Margin

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale

 

$33,719,960

 

 

$3,304,932

 

 

 

9.8%

 

$33,677,133

 

 

$3,742,852

 

 

 

11.1%

Recycled

 

 

2,984,437

 

 

 

680,036

 

 

 

22.8%

 

 

2,105,739

 

 

 

480,610

 

 

 

22.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

36,704,397

 

 

 

3,984,968

 

 

 

10.9%

 

 

35,782,872

 

 

 

4,223,462

 

 

 

11.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale

 

 

8,558,090

 

 

 

5,799,126

 

 

 

67.8%

 

 

9,579,857

 

 

 

4,574,268

 

 

 

47.7%

Recycled

 

 

3,126,553

 

 

 

1,625,808

 

 

 

52.0%

 

 

2,052,369

 

 

 

913,304

 

 

 

44.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

11,684,643

 

 

 

7,424,934

 

 

 

63.5%

 

 

11,632,226

 

 

 

5,487,572

 

 

 

47.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$48,389,040

 

 

$11,409,902

 

 

 

23.6%

 

$47,415,098

 

 

$9,711,034

 

 

 

20.5%

 

For the consumer segment, revenue for monetary transactions (i.e., cash and receivables) with dealers and the retail public are recognized when the merchandise is delivered, and payment has been made either by immediate payment or through a receivable obligation at one of our over-the-counter retail stores. Revenue is recognized 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. Shipping and handling costs are accounted for as fulfillment costs after the customer obtains control of the goods.

 

Crafted-precious-metal items at the end of their useful lives are sold for its precious metal contained. The metal is assayed to determine the precious metal content, a price is agreed upon and payment is made usually within two days. Revenue is recognized from the sale once the performance obligation is satisfied.

 

In limited circumstances, merchandise is exchanged for similar merchandise and/or monetary consideration with both dealers and retail customers, for which revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 845, Nonmonetary Transactions. When merchandise is exchanged for similar merchandise and there is no monetary component to the exchange, there is no revenue recognized. 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 merchandise is exchanged for similar merchandise and there is a monetary component to the exchange, revenue is recognized to the extent of the monetary assets received that 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.

 

 
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The Company offers the option of third-party financing for customers wishing to borrow money for the purchase. The customer applies on-line with the third party and upon going through the credit check will be approved or denied. If accepted, the customer is allowed to purchase according to the limits set by the finance company. Revenue is recognized from the sale upon the promise of the financing company to pay.

 

Our return policy covers retail transactions. In some cases, customers may return a product purchased within 30 days of the receipt of the items for a full refund. Also, in some cases customers may cancel the sale within 30 days of making a commitment to purchase the items. Additionally, a customer may return an item for full refund if they can demonstrate that the item is not authentic, or there was an error in the description of the 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. DGSE has established an allowance for estimated returns based on our review of historical returns experience and reduces our reported revenues and cost of sales accordingly. For the three months ended March 31, 2023 and 2022, our allowance for returns remained the same at approximately $28,000 for both years.

 

A significant amount of revenue stems from sales to two precious metal partners. One partner constitutes 24.5%, and the second partner constitutes 23.7%, of the revenues for the three months ended March 31, 2023. However, the Company believes that the products it sells is marketable to numerous sources at competitive prices.

 

The commercial segment 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 and title transferred. Once the price is established and the terms are agreed to and the product is shipped and title is transferred, the revenue is recognized. The commercial segment has fulfilled its performance obligation with an agreed upon transaction price, payment terms and shipping the product.

 

We recognize 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. The 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 are expected to be entitled is included in the transaction price stated at the current precious metal spot price and weight of the precious metal. An adjustment to revenue is made in the period once the underlying weight and any precious metal spot price movement is resolved, which is usually around six (6) weeks. Any adjustment from the resolution of the underlying uncertainty is netted with the settlement due from the original contract.

 

The commercial segment also provides recycling services according to a Scope of Work (“SOW”). Services are recognized based on the number of units processed by a preset price per unit. Activity reports are produced weekly with the counts and revenue is recognized based on the billing from the weekly reports. Recycling services can be conducted at our facility, or the recycling services can be performed at the client’s facility. The SOW will determine the charges and whether the service will be completed at our facility or at the client’s facility. Payment terms are also dictated in the SOW.

 

 
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Accounts Receivable: We record trade receivables when revenue is recognized. The new accounting standard introduces a new expected credit losses methodology for estimating allowances for credit losses which is based on expected losses rather than incurred losses. We are required to use a forward-looking expected credit loss methodology for accounts receivable. This new methodology is effective for the fiscal years beginning January 1, 2023. We will record an allowance for doubtful accounts, which is primarily determined by an analysis of our trade receivables aging, using the new expected losses methodology. 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 considered and expected to be uncollectable 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. The consumer segment had no allowance for doubtful accounts balance as of March 31, 2023 and December 31, 2022. Some of commercial segment’s customers are on payment terms, and although low risk, occasionally the need may arise to record an allowance for receivables that are deemed high risk using the new expected loss methodology. The commercial segment’s allowance for doubtful accounts, as of March 31, 2023 and December 31, 2022 was $0 and $51,734.

 

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. During fiscal 2022, management determined that it was more likely than not the tax asset would be reduced by future taxable income, therefore, the remaining valuation allowance at December 31, 2022, was released. As of March 31, 2023, we had a tax deferred asset of $1,140,002 with $0 offsetting valuation allowance. As of March 31, 2022, the Company had a deferred tax asset of $3,928,134 with an offsetting valuation allowance of $3,928,134, netting the tax asset to $0.       

 

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.). 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, 2023 and 2022.

 

 
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NOTE 11 — 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 nine operating leases as of March 31, 2023—five in DFW, two in Mt. Pleasant, South Carolina and two in Chandler, Arizona. The leases for the consumer segment are: 1) the flagship store located at 13022 Preston Road, Dallas, Texas expiring on January 31, 2027, with an option to extend the lease for an additional five years, at the prevailing market rate for comparable space in comparable buildings in the vicinity; 2) the Grand Prairie, Texas lease which was renewed starting July 1, 2022, expiring June 30, 2027, with an option to extend the lease for an additional five years; 3) the two leases for the Mt. Pleasant, South Carolina location expiring on April 30, 2025, with no additional renewal options; and 4) the lease for the Euless, Texas location expiring June 30, 2025, with an option to extend the lease for an additional five years. The leases for the commercial segment are: 1) the Echo location on W. Belt Line Road, in Carrollton, Texas, expiring January 31, 2026, with an option to extend the lease an additional five years: 2) the lease for the Teladvance location, which also houses ITAD USA and CEX, on Realty Road in Carrollton, Texas expiring January 31, 2027, with no additional renewal options; and 3) the two leases for the Avail location in Chandler, Arizona expiring on May 31, 2025, with no additional renewal options. All of the Company’s nine leases as of March 31, 2023 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, 2023 and 2022 was $659,616 and $622,863 respectively, comprised of a combination of minimum lease payments and variable lease costs.   

 

As of March 31, 2023, 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, 2023 and 2022, the Company’s cash paid for operating lease liabilities was $656,520 and $616,097 respectively. 

  

 
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Future annual minimum lease payments as of March 31, 2023:

 

 

 

Operating

 

 

 

Leases

 

Consumer

 

 

 

2023 (excluding the three months ending March 31, 2023)

 

 

406,955

 

2024

 

 

552,414

 

2025

 

 

434,274

 

2026

 

 

355,000

 

2027 and thereafter

 

 

50,114

 

 

 

 

 

 

Total minimum lease payments

 

 

1,798,757

 

Less imputed interest

 

 

(149,993)

 

 

 

 

 

Consumer Sub-Total

 

 

1,648,764

 

 

 

 

 

 

Commercial

 

 

 

 

2023 (excluding the three months ending March 31, 2023)

 

 

1,018,905

 

2024

 

 

1,396,129

 

2025

 

 

1,321,297

 

2026

 

 

474,326

 

2027 and thereafter

 

 

33,455

 

 

 

 

 

 

Total minimum lease payments

 

 

4,244,112

 

Less imputed interest

 

 

(251,432)

 

 

 

 

 

Commercial Sub-Total

 

 

3,992,680

 

 

 

 

 

 

Total

 

 

5,641,444

 

 

 

 

 

 

Current portion

 

 

1,827,285

 

 

 

 

 

 

 

 

$3,814,159

 

 

NOTE 12 — BASIC AND DILUTED AVERAGE SHARES

 

A reconciliation of basic and diluted weighted average common shares for the three months ended March 31, 2023 and 2022 is as follows:

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

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

 

 

 
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For the three months ended March 31, 2023 and 2022, 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, 2023 and 2022, there were no anti-dilutive shares.

 

On March 14, 2023, a stock repurchase program was unanimously approved by the Company’s Board of Directors, with gives management authorization to purchase up to one million (1,000,000) shares of the Company’s stock, of a per-share price not to exceed $9, on the open market.

 

NOTE 13 — LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

Outstanding Balance

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

Current

 

 

 

 

 

2023

 

 

2022

 

 

Interest Rate

 

 

Maturity

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Note payable, Farmers Bank (1)

 

$2,642,199

 

 

$2,668,527

 

 

 

3.10%

 

November 15, 2026

 

Note payable, Truist Bank (2)

 

 

865,437

 

 

 

874,418

 

 

 

3.65%

 

July 9, 2030

 

Note payable, Texas Bank & Trust (3)

 

 

451,569

 

 

 

456,187

 

 

 

3.75%

 

September 14, 2025

 

Note payable, Texas Bank & Trust (4)

 

 

1,675,086

 

 

 

1,691,020

 

 

 

3.25%

 

July 30, 2031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Sub-Total

 

 

5,634,291

 

 

 

5,690,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note payable, Farmers Bank (1)

 

 

5,994,831

 

 

 

6,054,565

 

 

 

3.10%

 

November 15, 2026

 

Line of Credit (5)

 

 

-

 

 

 

-

 

 

 

3.10%

 

November 15, 2024

 

Avail Transaction note (6)

 

 

1,333,333

 

 

 

1,500,000

 

 

 

0.00%

 

April 1, 2025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Sub-Total

 

 

7,328,164

 

 

 

7,554,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note payable, Texas Bank & Trust (7)

 

 

2,704,143

 

 

 

2,732,688

 

 

 

3.25%

 

Novemeber 4, 2025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub-Total

 

 

15,666,598

 

 

 

15,977,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion

 

 

1,246,961

 

 

 

1,250,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$14,419,637

 

 

$14,726,703

 

 

 

 

 

 

 

 

 

(1) On November 23, 2021, Farmers State Bank of Oakley, Kansas (“FSB”) refinanced prior related party notes held by the consumer segment and the commercial segment. The commercial segment note was refinanced with a remaining and outstanding balance of $6,309,962, is a five-year promissory note amortized over 20 years at 3.1% annual interest rate. The note has monthly principal and interest payments of $35,292. The consumer segment note was refinanced with a remaining and outstanding balance of $2,781,087, is a five-year promissory note amortized over 20 years at 3.1% annual interest rate. The note has monthly principal and interest payments of $15,555.

 

(2) On July 9, 2020, the consumer segment closed the purchase of a retail building located at 610 E. Round Grove Road in Lewisville, Texas for $1.195 million. The purchase was partly financed through a $956,000, ten-year 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, the consumer segment closed on the purchase of a 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, bearing an annual interest rate of 3.75%, amortized over 20 years, payable to Texas Bank & Trust. The note has monthly interest and principal payments of $2,941.

 

 
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(4) On July 30, 2021, the consumer segment 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 FSB for $3,500,000 at 3.1% annual interest rate. As of March 31, 2023 and December 31, 2022, the outstanding balance of the line of credit was $0.

 

(6) On October 29, 2021, the commercial segment 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 Envela Corporation, closed on the purchase of its new corporate office building located at 1901 Gateway Drive, Irving, Texas for $3.521 million. The building was partially financed through a $2.96 million, five-year loan, bearing an interest rate of 3.25%, amortized over 20 years, payable to Texas Bank & Trust. The note has monthly interest and principal payments of $16,792.

 

Future scheduled principal payments of our notes payable as of March 31, 2023 are as follows:

 

CONSUMER SEGMENT

 

Note payable, Farmers State Bank

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

 

 

 

 

 

2023 (excluding the three months ended March 31, 2023)

 

$79,098

 

2024

 

 

108,743

 

2025

 

 

112,162

 

2026

 

 

2,342,196

 

 

 

 

 

 

Subtotal

 

$2,642,199

 

 

Note payable, Truist Bank

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

 

 

 

 

 

2023 (excluding the three months ended March 31, 2023)

 

$27,006

 

2024

 

 

37,342

 

2025

 

 

38,748

 

2026

 

 

40,206

 

2027

 

 

42,081

 

Thereafter

 

 

680,054

 

 

 

 

 

 

Subtotal

 

$865,437

 

 

 
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Note payable, Texas Bank & Trust

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

 

 

 

 

 

2023 (excluding the three months ended March 31, 2023)

 

$13,885

 

2024

 

 

19,209

 

2025

 

 

418,475

 

 

 

 

 

 

Subtotal

 

$451,569

 

 

 

 

 

 

Note payable, Texas Bank & Trust

 

 

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

 

 

 

 

 

 

2023 (excluding the three months ended March 31, 2023)

 

$47,852

 

2024

 

 

66,225

 

2025

 

 

75,219

 

2026

 

 

78,741

 

2027

 

 

80,717

 

Thereafter

 

 

1,326,332

 

 

 

 

 

 

Subtotal

 

$1,675,086

 

 

COMMERCIAL SEGMENT

 

Note payable, Farmers Bank

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

 

 

 

 

 

2023 (excluding the three months ended March 31, 2023)

 

$179,463

 

2024

 

 

246,725

 

2025

 

 

254,483

 

2026

 

 

5,314,160

 

 

 

 

 

 

Subtotal

 

$5,994,831

 

 

 

 

 

 

Note payable, Avail Transaction

 

 

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

 

 

 

 

 

 

2023 (excluding the three months ended March 31, 2023)

 

$500,000

 

2024

 

 

666,667

 

2025

 

 

166,666

 

 

 

 

 

 

Subtotal

 

$1,333,333

 

 

 
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CORPORATE

 

Note payable, Texas Bank & Trust - Envela

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

 

 

 

 

 

2023 (excluding the three months ended March 31, 2023)

 

$84,881

 

2024

 

 

116,501

 

2025

 

 

2,502,761

 

 

 

 

 

 

Subtotal

 

 

2,704,143

 

 

 

 

 

 

 

 

$15,666,598

 

 

Future scheduled aggregate amount of principal payments and maturities of our notes payable as of March 31, 2023 are as follows:

 

 

 

Scheduled

 

 

 

 

 

 

 

 

 

Principal

 

 

Loan

 

 

 

 

Scheduled Principal Payments and Maturities by Year:

 

Payments

 

 

Maturities

 

 

Total

 

2023 (excluding the three months ended March 31, 2023)

 

 

932,185

 

 

 

-

 

 

 

932,185

 

2024

 

 

1,261,412

 

 

 

-

 

 

 

1,261,412

 

2025

 

 

772,385

 

 

 

2,796,129

 

 

 

3,568,514

 

2026

 

 

464,900

 

 

 

7,310,403

 

 

 

7,775,303

 

2027

 

 

122,798

 

 

 

-

 

 

 

122,798

 

Thereafter

 

 

428,266

 

 

 

1,578,120

 

 

 

2,006,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$3,981,946

 

 

$11,684,652

 

 

$15,666,598

 

 

 
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NOTE 14 — 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, 2023 and 2022.

 

NOTE 15 — 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 (“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 shareholders. Among other factors, the Company’s Board considers the size and duration of the transaction, the nature and interest 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. Envela’s Board reviews all Related Party transactions at least annually to determine if it is in the Board’s best interests and the best interests of the Company’s shareholders 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.

 

 NOTE 16 — SUBSEQUENT EVENTS

 

On April 3, 2023, by means of an auction, the consumer segment placed under contract a stand-alone retail building in Phoenix, Arizona, for $1.2 million as part of their expansion into other markets. The building has approximately 6,000 square feet and we are expecting to close the purchase by Thursday, May 4, 2023.

 

NOTE 17 — CONTINGENCIES

 

Surging inflation and supply chain interruptions continue to adversely affect global economic business conditions. Future sales on products like ours could decline or fluctuate due to increased or fluctuating commodities prices, particularly gold. The Federal Reserve has continued raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise at a slower and more deliberate pace through fiscal 2023. Although we are continuing to monitor and assess the economic effects of inflation levels and supply chain interruptions, the ultimate impact is highly uncertain and subject to change. In addition, the economic effects of the foregoing are subject to, among other things, the effect of government responses on our operations.

 

The global tension caused by the conflict between Russia and Ukraine has upset the stability within the region of the former Soviet era block. This could lead to further volatility in global energy and other 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, which have impacted global supply chains. The impact of these measures, as well as other measures taken, as it concerns our operations is currently unknown.

 

 
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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, 2023 (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 2022 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 customer designations. The consumer segment, formerly known as the DGSE segment, focuses on the recommercialization of luxury hard assets, and the commercial segment formerly known as the ECHG segment, focuses on the recommercialization of business IT equipment and electronic devices.

 

Through the consumer segment, the Company recommercializes luxury hard assets and operates the Dallas Gold and Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands. Through the commercial segment, the Company recommercializes business IT equipment and 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, and 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 the consumer and commercial segments, Envela also leases unused space at its Company headquarters in Irving, Texas to third-party tenants.

 

 
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Consumer Segment Business Overview

 

The consumer segment is headquartered in Dallas, Texas and 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. The Company wholesales and retails these items through its Charleston Gold & Diamond Exchange and Dallas Gold & Silver Exchange operations. Dallas Gold & Silver Exchange and Charleston Gold & Diamond Exchange have specialized in buying and selling jewelry for almost 50 years, making our expert staff among the best in the business.

 

Dallas Gold & Silver Exchange also maintains a number of related operations, on-site jewelry and watch repair and restoration at its Dallas flagship location, and design of custom bridal and fashion jewelry. In addition, it also has a precious-metal bullion-trading operation that buys and sells all forms of gold, silver, platinum and palladium products, including United States and other government-issue coins, private-mint medallions, art bars and trade unit bars.

 

For additional information regarding the consumer segment, see “Item 1. Business - Operating Segments - DGSE Segment.” in the Company’s 2022 Annual Report.

 

Consumer Segment Recommerce Activities

 

We operate a sustainable marketplace for preowned luxury goods. We buy and sell coins, diamonds, jewelry, and related accessories and other merchandise. Our ability to offer quality pre-owned goods at prices significantly lower than original retail prices attracts value-conscious customers. The consumer segment 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 us. 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.

 

Consumer Segment Precious Metals Pricing and Business Impact

 

We are exposed to various market risks. Market risk is the potential loss arising from the adverse changes in market prices and rates. The nature of the consumer operations results in exposure to fluctuations in commodity prices, specifically diamonds, platinum, gold and silver. We do not currently use derivatives to hedge these risks.

 

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. Our retail sales and gross margin could be materially impacted if prices of diamonds, platinum, gold, or silver rise so significantly that our consumers’ behavior changes or if price increases cannot be passed onto our customers.

 

Because the consumer segment buys and resells precious metals, it is impacted by fluctuations and 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. Such fluctuations, particularly with respect to gold, which accounts for a majority of our merchandise costs, can have a significant impact on its earnings and cash availability.

 

 
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We continue to monitor the economic impact on our operations from surging inflation and the conflict in Ukraine. Uncertainties exist that could affect our operations or cash flows in the future, such as continued inflationary environmental changes (including, but not limited to, labor, materials, and advertising costs). The Company’s ability to recruit and retain qualified team members, organized retail crime, or the consumers’ ability to spend on discretionary categories.

 

Consumer Segment Growth and Expansion

 

Our continued strategy will be to expand the number of locations we operate through opening new (“de novo”) locations in both current markets within DFW and South Carolina. The Company expects to soon expand into Arizona, see Note 16 – Subsequent Events, to these interim condensed consolidated financial statements. 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 de novo openings in the United States. The Company expects capital expenditures over the next twelve months including the potential purchase of additional properties.

 

Commercial Segment Business Overview

 

The commercial segment operates Echo, ITAD USA, Teladvance, CEX and Avail, through which it primarily buys and resells or recycles 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 offers its customers the ability to further offer their customers the ability to upgrade their old phones through a trade-in program supported by Teladvance. Like the consumer segment, the commercial segment also maintains relationships with refiners for which it sells extracted valuable materials from electronics and IT equipment deemed unsuitable for retail or wholesale customers.

 

Commercial Segment Recommerce Activities

 

A portion of the commercial 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 and supply limitations.

 

Commercial Segment Metals Pricing and Business Impact

 

The commercial 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. As discussed below, we have seen a recent decrease of recycled items, which we believe is primarily due to the supply chain problems downstream with our customers.

 

 
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Commercial Segment Growth and Expansion

 

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

 

For additional information regarding the commercial segment, see “Item 1. Business—Operating Segments—ECHG Segment.” in the Company’s 2022 Annual Report.

  

Economic Conditions

 

Surging inflation, supply chain disruptions and the war in Ukraine have affected the recommerce business in unpredictable ways. There have been fewer customers raising money by selling items. For more information, see Note 17 to these interim condensed consolidated financial statements.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting (“U.S. GAAP”) principles. The preparation of these financial statements requires our management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material.

 

While our significant accounting policies are more fully described in “Note 1 — Accounting Policies and Nature of Operations” in the Company’s 2022 Annual Report, we believe that the accounting estimates discussed below relate to the more significant areas involving management’s judgments and estimates.

 

Inventories 

 

The consumer Segment inventory is valued at the lower of cost or net realizable value (“NRV”). We acquire a majority of our inventory from individual customers, including pre-owned jewelry, watches, bullion, rare coins and monetary collectibles. We acquire these items based on our own internal estimate of the fair value of the items at the time of purchase. We consider factors such as the current spot market price of precious metals and current market demand for the items being purchased. It supplements these purchases from individual customers with inventory purchased from wholesale vendors. These wholesale purchases can take the form of full asset purchases, or consigned inventory. Consigned inventory is accounted for on our balance sheet with a fully offsetting contra account so that consigned inventory has a net zero balance. The majority of our inventory has some component of its value that is based on the spot market price of precious metals. Because the overall market value for precious metals regularly fluctuates, these fluctuations could have either a positive or negative impact on the value of our inventory and could positively or negatively impact our profitability. We monitor these fluctuations to evaluate any necessary impairment to inventory.

 

 
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The Echo inventory principally includes processed and unprocessed electronic scrap materials. The value of the material is derived from recycling the precious and other scrap metals included in the scrap. The processed and unprocessed materials are carried at the lower of the average cost of the material during the month of purchase or NRV. The in-transit material is carried at lower of cost or NRV using the retail method. Under the retail method the valuation of the inventory at cost and the resulting gross margins are calculated by applying a cost to retail ratio to the retail value of the inventory.

 

For the three months ended March 31, 2023, we have not identified critical accounting estimates that involve a significant level of estimation uncertainty and would have a material impact on our results. Refer to our significant accounting policies are more fully described in Note 3 to these interim condensed consolidated financial statements.

  

Recent Accounting Pronouncements

 

See Note 3- Accounting Policies and Estimates, to these interim condensed consolidated financial statements for recently adopted accounting pronouncements.

 

Use of Non-U.S. GAAP Financial Measures

 

In this management’s discussion and analysis, we use supplemental measures of our performance, which are derived from our interim consolidated financial information, but which are not presented in our interim consolidated financial statements prepared in accordance with U.S. GAAP. We believe that providing these non-U.S. GAAP financial measures adds a meaningful presentation of our operating and financial performance. See the reconciliation of net income to EBITDA (defined below), in Non-U.S. GAAP Financial Measures below.

 

Non-U.S. GAAP Financial Measures

 

EBITDA is a key performance measure that our management uses to assess our operating performance. Because EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure as an overall assessment of our performance, to evaluate the effectiveness of our business strategies and for business planning purposes. EBITDA may not be comparable to similarly titled metrics of other companies. EBITDA means earnings before interest expense, other (income) expense, net, income tax expense, and depreciation and amortization. EBITDA is a non-U.S. GAAP measure and should not be considered as an alternative to the presentation of net income or any other measure of financial performance calculated and presented in accordance with U.S. GAAP.

 

The following table provides a reconciliation of net income to EBITDA:

 

 

 

For the three months Ended March 31,

 

 

 

2023

 

 

2022

 

 

 

Consumer

 

 

Commercial

 

 

Consolidated

 

 

Consumer

 

 

Commercial

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA Reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$1,136,884

 

 

$1,389,433

 

 

$2,526,317

 

 

$1,876,140

 

 

$771,085

 

 

$2,647,225

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

98,134

 

 

 

256,217

 

 

 

354,351

 

 

 

106,963

 

 

 

184,984

 

 

 

291,947

 

Other (income) expense

 

 

(23,534)

 

 

(187,245)

 

 

(210,779)

 

 

27,992

 

 

 

30,584

 

 

 

58,576

 

Interest expense

 

 

59,618

 

 

 

57,446

 

 

 

117,064

 

 

 

61,241

 

 

 

61,998

 

 

 

123,239

 

Income tax expense

 

 

317,841

 

 

 

399,805

 

 

 

717,646

 

 

 

13,177

 

 

 

17,115

 

 

 

30,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$1,588,943

 

 

$1,915,656

 

 

$3,504,599

 

 

$2,085,513

 

 

$1,065,766

 

 

$3,151,279

 

 

 
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Results of Operations

 

The following disaggregation of total revenue is listed by sales category and segment for the three months ended March 31, 2023 and 2022:

 

CONSOLIDATED

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

 

Revenues

 

 

Gross Profit

 

 

Margin

 

 

Revenues

 

 

Gross Profit

 

 

Margin

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale

 

$33,719,960

 

 

$3,304,932

 

 

 

9.8%

 

$33,677,133

 

 

$3,742,852

 

 

 

11.1%

Recycled

 

 

2,984,437

 

 

 

680,036

 

 

 

22.8%

 

 

2,105,739

 

 

 

480,610

 

 

 

22.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

36,704,397

 

 

 

3,984,968

 

 

 

10.9%

 

 

35,782,872

 

 

 

4,223,462

 

 

 

11.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale

 

 

8,558,090

 

 

 

5,799,126

 

 

 

67.8%

 

 

9,579,857

 

 

 

4,574,268

 

 

 

47.7%

Recycled

 

 

3,126,553

 

 

 

1,625,808

 

 

 

52.0%

 

 

2,052,369

 

 

 

913,304

 

 

 

44.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

11,684,643

 

 

 

7,424,934

 

 

 

63.5%

 

 

11,632,226

 

 

 

5,487,572

 

 

 

47.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$48,389,040

 

 

$11,409,902

 

 

 

23.6%

 

$47,415,098

 

 

$9,711,034

 

 

 

20.5%

 

Comparison of three months ended March 31, 2023 and 2022

 

Resale Revenue

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Resale Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$33,719,960

 

 

$33,677,133

 

 

$42,827

 

 

 

0%

Commercial

 

$8,558,090

 

 

$9,579,857

 

 

$(1,021,767)

 

 

-11%

 

 
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Resale revenue related to the consumer segment increased by $42,827, or 0.13% during the three months ended March 31, 2023, to $33,719,960, as compared to $33,677,133 during the same period in 2022. Resale revenue, such as bullion, jewelry, watches, and rare coins, increased slightly during the period.

 

Resale revenue related to the commercial segment decreased by $1,021,767, or 11%, during the three months ended March 31, 2023, to $8,558,090, as compared to $9,579,857 during the same period in 2022. Resale revenue decreased primarily due to supply chain issues the Company experienced during the three months ending March 31, 2023.

 

Recycled Revenue

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Recycled Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$2,984,437

 

 

$2,105,739

 

 

$878,698

 

 

 

42%

Commercial

 

$3,126,553

 

 

$2,052,369

 

 

$1,074,184

 

 

 

52%

 

Recycled revenue related to the consumer segment increased by $878,698, or 42%, during the three months ended March 31, 2023, to $2,984,437, as compared to $2,105,739 during the same period in 2022. Recycled revenue, such as bullion, jewelry, watches, and rare coins, increased primarily during the period ending March 31, 2023 due to increased purchases of non-retail precious metals to be recycled instead of being sold to retail consumers.

 

Recycled revenue related to the commercial segment increased by $1,074,184, or 52%, during the three months ended March 31, 2023, to $3,126,553, as compared to $2,052,369 during the same period in 2022. Recycled revenue increased primarily due to an increase of electronic material to be recycled from material not suitable to resale to commercial customers during the three months ending March 31, 2023.

  

 
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Table of Contents

 

Gross Profit - Resale

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Gross Profit - Resale

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$3,304,932

 

 

$3,742,852

 

 

$(437,920)

 

 

-12%

Commercial

 

$5,799,126

 

 

$4,574,268

 

 

$1,224,858

 

 

 

27%

 

Resale gross profit related to the consumer operations for the three months ended March 31, 2023, decreased by $437,920, or 12%, to $3,304,932, as compared to resale gross profit of $3,752,852 during the same period in 2022. The decrease in resale gross profit was due primarily to the need to purchase retail inventory following the 2022 Christmas season; therefore, in connection with inflationary pressures and rising prices of metals, there was an increase in purchase prices for the three months ended March 31, 2023.  

 

Resale gross profit related to the commercial operations for the three months ended March 31, 2023, increased by $1,224,858, or 27%, to $5,799,126, as compared to resale gross profit of $4,574,268 during the same period in 2022. The increase in resale gross profit was primarily due to increased sales prices on material sold.

 

Gross Profit - Recycled

 

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Gross Profit - Recycled

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$680,036

 

 

$480,610

 

 

$199,426

 

 

 

41%
Commercial

 

$1,625,808

 

 

$913,304

 

 

$712,504

 

 

 

78%

 

Recycled gross profit related to the consumer operations for the three months ended March 31, 2023, increased by $199,426, or 41%, to $680,036, as compared to gross profit of $480,610 during the same period in 2022. The increase in recycled gross profit was due primarily to 42% increase in recycled sales during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. 

 

 
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Table of Contents

 

Recycled gross profit related to the commercial operations for the three months ended March 31, 2023, increased by $712,504, or 78%, to $1,625,808, as compared to gross profit of $913,304 during the same period in 2022. The increase in recycled gross profit was due primarily to 52% increase in recycled sales during the three months ended March 31, 2023 and an increase in margin percentage to 52% for the three months ended March 31, 2023, as compared to 44%, for the three months ended March 31, 2022.

 

 

 

For The Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

 

Consumer

 

 

Commercial

 

 

Consolidated

 

 

Consumer

 

 

Commercial

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$36,704,397

 

 

$11,684,643

 

 

$48,389,040

 

 

$35,782,872

 

 

$11,632,226

 

 

$47,415,098

 

Cost of goods sold

 

 

32,719,429

 

 

 

4,259,709

 

 

 

36,979,138

 

 

 

31,559,410

 

 

 

6,144,654

 

 

 

37,704,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

3,984,968

 

 

 

7,424,934

 

 

 

11,409,902

 

 

 

4,223,462

 

 

 

5,487,572

 

 

 

9,711,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

2,396,025

 

 

 

5,509,278

 

 

 

7,905,303

 

 

 

2,137,949

 

 

 

4,421,806

 

 

 

6,559,755

 

Depreciation and amortization

 

 

98,134

 

 

 

256,217

 

 

 

354,351

 

 

 

106,963

 

 

 

184,984

 

 

 

291,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,494,159

 

 

 

5,765,495

 

 

 

8,259,654

 

 

 

2,244,912

 

 

 

4,606,790

 

 

 

6,851,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

1,490,809

 

 

 

1,659,439

 

 

 

3,150,248

 

 

 

1,978,550

 

 

 

880,782

 

 

 

2,859,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

23,534

 

 

 

187,245

 

 

 

210,779

 

 

 

(27,992)

 

 

(30,584)

 

 

(58,576)

Interest expense

 

 

59,618

 

 

 

57,446

 

 

 

117,064

 

 

 

61,241

 

 

 

61,998

 

 

 

123,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

1,454,725

 

 

 

1,789,238

 

 

 

3,243,963

 

 

 

1,889,317

 

 

 

788,200

 

 

 

2,677,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

317,841

 

 

 

399,805

 

 

 

717,646

 

 

 

13,177

 

 

 

17,115

 

 

 

30,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$1,136,884

 

 

$1,389,433

 

 

$2,526,317

 

 

$1,876,140

 

 

$771,085

 

 

$2,647,225

 

 

Selling, General and Administrative

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Selling, General and Administrative

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$2,396,026

 

 

$2,137,949

 

 

$258,077

 

 

 

12%

Commercial

 

$5,509,278

 

 

$4,421,806

 

 

$1,087,472

 

 

 

25%

 

Selling, General and Administrative Expenses, for the consumer segment, for the three months ended March 31, 2023, increased by $258,077, or 12%, to $2,396,026, as compared to $2,137,949 during the same period in 2022. The increase was primarily due to increased expenses related to expanding our footprint into Arizona. During the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses.

 

Selling, General and Administrative Expenses, for the commercial segment, for the three months ended March 31, 2023, increased by $1,087,472, or 25%, to $5,509,278, as compared to $4,421,806 during the same period in 2022. The increase was primarily due to increased expenses related to expanding the commercial business by increasing the infrastructure. During the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses.

  

Depreciation and Amortization

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$98,134

 

 

$106,963

 

 

$(8,829)

 

 

-8%

Commercial

 

$256,217

 

 

$184,984

 

 

$71,233

 

 

 

39%

 

 
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Table of Contents

 

Depreciation and amortization, for the consumer segment, for the three months ended March 31, 2023, decreased by $8,829, or 8%, to $98,134, as compared to $106,963 during the same period in 2022. The decrease was primarily due to some of the fixed assets being fully depreciated.

 

Depreciation and amortization, for the commercial segment, for the three months ended March 31, 2023, increased by $71,233, or 39%, to $256,217, as compared to $184,984 during the same period in 2022. The increase was primarily due to the amortization of increased intangible assets added from the Avail Transaction during the latter half of fiscal 2022.

 

Other Income (Expense)

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$23,534

 

 

$(27,992)

 

$51,526

 

 

 

184%

Commercial

 

$187,245

 

 

$(30,584)

 

$217,829

 

 

 

712%

 

Other income (expense), for the consumer segment, for the three months ended March 31, 2023, increased by $51,526, or 184%, to $23,534, as compared to a net expense of $(27,992) during the same period in 2022. The increase in other income was primarily due to interest earned from bank accounts for the three months ended March 31, 2023. In addition, during the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses.

 

Other income (expense), for the commercial segment, for the three months ended March 31, 2023, increased by $217,829, or 712%, to $187,245, as compared to a net expense of $(30,584) during the same period in 2022. The increase in other income was primarily due to interest earned from bank accounts, of $61,378 and notes receivable interest received, of $94,115 from notes receivable formerly written off during fiscal year 2021. In addition, during the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses.

 

Interest Expense

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$59,617

 

 

$61,241

 

 

$(1,624)

 

 

-3%

Commercial

 

$57,446

 

 

$61,998

 

 

$(4,552)

 

 

-7%

 

Interest expense, for the consumer segment, for the three months ended March 31, 2023, decreased by $1,624, or 3%, to $59,617, as compared to $61,241 during the same period in 2022. The decrease was primarily due to reduced loan balances during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

 

Interest expense, for the commercial segment, for the three months ended March 31, 2023, decreased by $4,552, or 7%, to $57,446, as compared to $61,998 during the same period in 2022. The decrease was primarily due to reduced loan balances during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

 

 
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Table of Contents

 

Income Tax Expense

 

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 
Income Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 
Consumer

 

$317,841

 

 

$13,177

 

 

$304,664

 

 

2312

% 
Commercial

 

$399,805

 

 

$17,115

 

 

$382,690

 

 

2236

%

 

Income tax expense, for both segments, for the three months ended March 31, 2023, was $717,646, an increase of $687,354, as compared to income tax expense of $30,292 for the three months ended March 31, 2022. Currently, the Company has a deferred tax asset reflecting net operating losses brought over from prior years. Through fiscal 2022, there was an off-setting valuation allowance associated with the deferred tax asset. The valuation allowance was written off as of December 31, 2022. Starting with the three months ended March 31, 2023, the Company will have a federal tax rate of approximately 21%, in addition to other state and local taxes, on net income. The effective income tax rate was 22.1% and 1.1% for the three months ended March 31, 2023 and 2022, 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, as was the Company’s case for the increase for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

 

Net Income

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$1,136,884

 

 

$1,876,140

 

 

$(739,256)

 

 

-39%

Commercial

 

$1,389,433

 

 

$771,085

 

 

$618,348

 

 

 

80%

 

Net income related to the consumer operations for the three months ended March 31, 2023, decreased by $739,256, or 39%, to $1,136,884, as compared to $1,876,140 during the same period in 2022. The decrease in net income was due primarily to the increased tax expense of $304,664, and the decrease in resale gross profit of $437,920 for the three months ended March 31, 2023, compared to the three month ended March 31, 2022. 

 

Net income related to the commercial operations for the three months ended March 31, 2023, increased by $618,348, or 80%, to $1,389,433, as compared to $771,085 during the same period in 2022. The increase in net income was due primarily to an increase in gross profit of $1,937,362, offset by an increase in selling, general and administrative expenses of $787,472 and increased tax expense of $382,690 for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. 

 

 
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Earnings Per Share

 

 

 

 Three Months Ended March 31,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

$0.09

 

 

$0.10

 

 

$(0.01)

 

 

-10%

 

Earnings per share, for the three months ended March 31, 2023, for net income per basic and diluted shares attributable to holders of our Common Stock was $0.09, compared to $0.10 per basic and diluted shares attributable to holders of our Common Stock for the three months ended March 31, 2022.

 

Liquidity and Capital Resources

 

The following table summarizes our cash flows for the periods indicated.

 

 

 

 Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Net cash provided by (used in):

 

 

 

 

 

 

Operating activities

 

$2,924,025

 

 

$3,358,769

 

Investing activities

 

 

569,522

 

 

 

(93,384)

Financing activities

 

 

(310,807)

 

 

(1,906,274)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$3,182,740

 

 

$1,359,111

 

 

During the three months ended March 31, 2023, cash provided by operations totaled $2,924,025, which was primarily driven by net income of $2,526,317, reduction from non-cash charges, net of $689,516, and the increase in customer deposits and other liabilities of $1,484,605. In addition, the foregoing was offset by the decrease in accounts payable and accrued expenses of $821,413, an increase in other assets of $228,959, an increase of trade receivables of $328,487, the increase in inventories of $350,053 and the increase in prepaid expenses of $47,847.

 

During the three months ended March 31, 2023, cash provided by investing totaled $569,522, which primarily consisted of payments received from notes receivable of $578,250, offset by the purchase of property and equipment of $8,728.

 

During the three months ended March 31, 2023, cash used in financing totaled $310,807, which consisted of principal payments made against the notes payable loans of $310,807.

 

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 potential property purchases by the consumer segment for retail locations and the build-out of those purchased properties. The Company has no capital expenditure commitments as of March 31, 2023. For more information, see Note 16 to our interim condensed consolidated financial statements.

 

 
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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 two FSB loans.  For more information, see Note 13 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 (the “FSB Facility”) 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, 2023.

 

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 Company leases certain of its facilities under operating leases. The minimum rental commitments, under non-cancellable operating leases, excluding imputed interest, as of March 31, 2023 are as follows:

 

Operating Leases

 

Total

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer (excluding the three months ending March 31, 2023)

 

$1,798,757

 

 

$406,955

 

 

$552,414

 

 

$434,274

 

 

$355,000

 

 

$50,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (excluding the three months ending March 31, 2023)

 

 

4,244,112

 

 

 

1,018,905

 

 

 

1,396,129

 

 

 

1,321,297

 

 

 

474,326

 

 

 

33,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$6,042,869

 

 

$1,425,860

 

 

$1,948,543

 

 

$1,755,571

 

 

$829,326

 

 

$83,569

 

 

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, 2023. 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, 2023, 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

 

There have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in the Company’s 2022 Annual Report.

 

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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Table of Contents

 

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

 

 

 

 

 

 

 

 

 

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 3, 2023   

By:  

/s/ JOHN R. LOFTUS

 

 

 

John R. Loftus

 

 

 

Chief Executive Officer

(Principal Executive Officer) 

 

 

 

 

Date: May 3, 2023   

 

/s/ BRET A. PEDERSEN

 

 

 

Bret A. Pedersen

 

 

 

Chief Financial Officer

(Principal Accounting Officer) 

 

 

 
41