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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 121 added, 101 removed, 118 unchanged (65% of the section changed)

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Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (this “Form 10-Q”), including but not limited to:

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (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;

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Envela Overview

The Company operates through via two recommerce business segments represented by its two direct subsidiaries.

The Company operates through two recommerce business segments represented by its two direct subsidiaries.

DGSE focuses on the recommercialization of luxury hard assets, and ECHG focuses on the recommercialization of business IT equipment and consumer electronic devices.

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Echo focuses on end-of-life electronics recycling and sustainability, ITAD USA provides IT equipment disposition, including compliance and data sanitization services, and Teladvance operates as a value-added reseller by providing offerings and services to companies looking either to upgrade capabilities or dispose of equipment.

In addition to its operations through DGSE and ECHG, Envela also leases unused space at its Company headquarters in Irving, Texas to commercial tenants.

DGSE Business Overview

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DGSE also maintains a number of related operations, including precious-metal bullion exchange and refiner partnerships, on-site jewelry and watch repair and restoration at its Dallas flagship location, consignment offerings and partnerships, and design of custom bridal and fashion jewelry.

For additional information regarding DGSE, see “Item 1, Business-Operating Segments-DGSE Segment.” In the Company’s 2020 Annual Report.

For additional information regarding DGSE, see “Item 1.

Business - Operating Segments - DGSE Segment.” in the Company’s 2020 Annual Report.

DGSE Recommerce Activities

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However, gold prices dipped from the peak to close at $1,891 an ounce, as determined by the London PM Fix on December 31, 2020, registering a 24% increase during fiscal year 2020.

Gold prices dipped further during the quarter ended March 31, 2021 to $1,691 an ounce, as determined by the London PM Fix on March 31, 2021, registering an 11% decline during the quarter.

Gold increased slightly to $1,763 an ounce, as determined by the London PM Fix on June 30, 2021, registering a 4% increase during the three months ending June 30, 2021 and a 7% decline for the six months ending June 30, 2021.

Gold prices declined during the nine months ending September 30, 2021 by 8% to $1,743 an ounce as determined by the London PM Fix.

Gold prices decreased 1% for the three months ending September 30, 2021, from $1,763 an ounce on June 30, 2021, as determined by the London PM Fix.

When prices rise for gold or other precious metals, DGSE has observed that individual sellers tend to be more likely to sell their unwanted crafted-precious-metal items and at the same time retail customers tend to buy bullion and other gold products so as not to miss out on potential market gains.

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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 potential purchase of additional properties by DGSE.

ECHG Business Overview

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and global economies, and as disclosed in our 2020 Annual Report on Form 10-K, the pandemic also affected our business in a variety of ways beginning in the second quarter of fiscal 2020 and continuing into fiscal 2021.

The pandemic, together with the recent economic downturn and civil unrest, have affected the recommerce business in unpredictable ways, but Envela experienced fewer customers raising money by selling items, despite higher unemployment.

The pandemic, together with the recent economic downturn and civil unrest, have affected the recommerce business in unpredictable ways, but Envela experienced that there were fewer customers raising money by selling items, despite higher unemployment.

Government stimulus checks, eviction moratoriums and forbearances on mortgages and student loans may have contributed and may still be contributing to this effect.

For more information, see Note 18 to our interim condensed consolidated financial statements.

To date, this drop has been offset by other areas of our business.

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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 June 30, 2021 and 2020:

Three Months Ended June 30,

The following disaggregation of total revenue is listed by sales category and segment for the six months ended June 30, 2021 and 2020:

Six Months Ended June 30,

Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020

Revenue related to DGSE’s continuing operations increased by $8,663,295, or 60%, during the three months ended June 30, 2021, to $23,012,324, as compared to revenue of $14,349,029 during the same period in 2020.

Resale revenue, such as bullion, jewelry, watches and rare coins, increased by $7,471,869, or 56%, during the three months ended June 30, 2021, to $20,893,838 as compared to resale revenue of $13,421,969 during the same period in 2020.

Recycled-material sales increased 129% to $2,118,486 for the three months ended June 30, 2021, as compared to recycled-material sales of $927,060, for the three months ended June 30, 2020.

Revenue increased for resale and recycled items for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to DGSE opening two new retail locations in Lewisville and Grapevine, Texas, during the latter part of fiscal 2020.

The COVID-19 pandemic also shut down DGSE’s retail locations during the three months ended June 30, 2020, except for the governmentally deemed essential portion of the business.

Revenue related to ECHG’s continuing operations for the three months ended June 30, 2021 increased by $4,515,104, or 73%, to $10,711,682, as compared to revenue of $6,196,578 during the same period in 2020.

Resale revenue increased by $4,338,878, or 102%, to $8,595,910, for the three months ended June 30, 2021, as compared to revenue of $4,257,032 during the three months ended June 30, 2020.

Recycled sales increased by $176,226 or 9%, to $2,115,772 for the three months ended June 30, 2021, as compared to recycled sales of $1,939,546 for the three months ended June 30, 2020.

Revenue increased for resale and recycled items for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, due to the COVID-19 pandemic slowing during the three months ended June 30, 2021, as compared to the shutdowns stemming from the pandemic and the dampening effect on ECHG’s customers during the three months ended June 30, 2020.

The following disaggregation of total revenue is listed by sales category and segment for the three months ended September 30, 2021 and 2020:

Three Months Ended September 30,

The following disaggregation of total revenue is listed by sales category and segment for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020

Revenue related to DGSE’s continuing operations decreased by $2,654,795, or 9%, during the three months ended September 30, 2021, to $25,482,379, as compared to revenue of $28,137,174 during the same period in 2020.

Resale revenue, such as bullion, jewelry, watches and rare coins, decreased by $3,694,382, or 14%, during the three months ended September 30, 2021, to $23,407,095 as compared to resale revenue of $27,101,477 during the same period in 2020.

Recycled-material sales increased 100% to $2,075,284 for the three months ended September 30, 2021, as compared to recycled-material sales of $1,035,697, for the three months ended September 30, 2020.

Revenue decreased for resale items for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the lifting of certain governmental orders to refrain from non-essential items that were effective during the three months ended September 30, 2020, thus releasing pent-up purchasing demand.

Revenue increased for recycled items for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to additional refiner capacity and production after the lifting of certain governmental restrictions that were effective during the three months ended September 30, 2020.

Revenue related to ECHG’s continuing operations for the three months ended September 30, 2021 increased by $1,524,680, or 14%, to $12,198,390, as compared to revenue of $10,673,710 during the same period in 2020.

Resale revenue increased by $476,398, or 6%, to $8,288,951, for the three months ended September 30, 2021, as compared to revenue of $7,812,553 during the three months ended September 30, 2020.

Recycled sales increased by $1,048,282 or 37%, to $3,909,439 for the three months ended September 30, 2021, as compared to recycled sales of $2,861,157 for the three months ended September 30, 2020.

Revenue increased for resale and recycled items for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to the COVID-19 pandemic slowing wholesale operations during the three months ended September 30, 2020.

The Company has had no layoffs to-date or terminations due to the pandemic, and we continue to exercise the safety protocols established by the Company at the start of the pandemic.

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Gross Profit.

Gross profit related to DGSE’s operations for the three months ended June 30, 2021, increased by $1,482,231 or 92%, to $3,096,996 as compared to gross profit of $1,614,765 during the same period in 2020.

Resale gross profit increased by $1,233,826, or 85%, to $2,678,640 for the three month ended June 30, 2021, as compared to resale gross profit of $1,444,814 during the three months ended June 30, 2020.

Recycled gross profit increased by $248,405, or 146%, to $418,356 for the three month ended June 30, 2021, as compared to recycled gross profit of $169,951 during the three months ended June 30, 2020.

The increase in resale and recycled gross profit was due primarily to the increased sales in each category plus the increased gross-margin percent of both resale and recycled items for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Gross profit related to ECHG for the three months ended June 30, 2021 increased by $1,174,401, or 41%, to $4,030,894 as compared to gross profit of $2,856,493 during the same period in 2020.

Gross profit for resale revenue for the three months ended June 30, 2021 increased by $997,595, or 49%, to $3,019,685, as compared to gross profit for resale revenue $2,022,090 during the same period in 2020.

Gross profit for recycled sales for the three months ended June 30, 2021 increased $176,806, or 21%, to $1,011,209, as compared to gross profit for recycled sales of $834,403, during the same period in 2020.

The gross profit increase for the resale and recycled items for the three months ended June 30, 2021, compared to the three months ended June 30, 2020 is primarily due to the increased sales in each category as well as the slowing of COVID-19 pandemic.

Gross profit related to DGSE’s operations for the three months ended September 30, 2021, decreased by $373,462 or 11%, to $3,059,498 as compared to gross profit of $3,432,960 during the same period in 2020.

Resale gross profit decreased by $494,439, or 16%, to $2,645,445 for the three month ended September 30, 2021, as compared to resale gross profit of $3,139,884 during the three months ended September 30, 2020.

Recycled gross profit increased by $120,977, or 41%, to $414,053 for the three months ended September 30, 2021, as compared to recycled gross profit of $293,076 during the three months ended September 30, 2020.

The decrease in resale gross profit was due primarily to the decreased sales.

The increase in recycled gross profit for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, was due primarily to increased revenue.

Gross profit related to ECHG for the three months ended September 30, 2021 increased by $1,320,181, or 35%, to $5,050,618 as compared to gross profit of $3,730,437 during the same period in 2020.

Gross profit for resale revenue for the three months ended September 30, 2021 increased by $1,074,246, or 45%, to $3,450,652, as compared to gross profit for resale revenue $2,376,406 during the same period in 2020.

Gross profit for recycled sales for the three months ended September 30, 2021 increased $245,935, or 18%, to $1,599,966, as compared to gross profit for recycled sales of $1,354,031, during the same period in 2020.

The gross profit increase for the resale and recycled items for the three months ended September 30, 2021, compared to the three months ended September 30, 2020 is primarily due to the increased sales in each category.

Selling, General and Administrative Expenses.

For the three months ended June 30, 2021, SG&A expenses for DGSE increased by $344,727, or 22%, to $1,889,895, as compared to SG&A expenses of $1,545,168 during the same period in 2020.

The increase in SG&A expenses was primarily due to increased expenses from two new locations in Lewisville and Grapevine Texas, in addition, DGSE’s retail stores were fully open for the three months ended June 30, 2021 as only governmentally deemed essential portions of DGSE’s operations were open during the three months ended June 30, 2020.

For the three months ended June 30, 2021, SG&A expenses for ECHG increased by $869,828 or 42%, to $2,941,330, as compared to SG&A expenses of $2,071,502 during the same period in 2020.

The increase in SG&A expenses was primarily due to the loss of rent received from sublet tenant of $95,000 that was netted against rent during the three months ended June 30, 2020 and an increase of wages of approximately $700,000 to prepare for increased business from relaxed restrictions from COVID-19.

For the three months ended September 30, 2021, SG&A expenses for DGSE increased by $68,640 or 4%, to $1,772,034, as compared to SG&A expenses of $1,703,394 during the same period in 2020.

The increase in SG&A expenses was primarily due to increased expenses from two new locations in Lewisville and Grapevine Texas that were placed in service during the fourth quarter of the fiscal year ended December 31, 2020.

For the three months ended September 30, 2021, SG&A expenses for ECHG increased by $1,292,160 or 60%, to $3,458,439, as compared to SG&A expenses of $2,166,279 during the same period in 2020.

The increase in SG&A expenses was primarily due to the loss of rent received from the sublet tenant of $95,000 that was netted against rent during the three months ended September 30, 2020 and an increase in wages and employee expenses of approximately $900,000 to prepare for increased business from relaxed restrictions from COVID-19.

Depreciation and Amortization .

For the three months ended June 30, 2021, depreciation and amortization expense for DGSE was $97,435, compared to an expense of $79,240 for the same period in 2020, an increase of $18,195, or 23%.

The increase of $18,195 from the three months ended June 30, 2021 compared to the three months ended June 30, 2020 is primarily due to the new buildings placed in service during the fourth quarter of the fiscal year ended December 31, 2020.

For the three months ended June 30, 2021, depreciation and amortization expense for ECHG was $118,784, compared to an expense of $100,466 for the same period in 2020, an increase of $18,318, or 18%.

The increase of $18,319 from the three months ended June 30, 2021 compared to the three months ended June 30, 2020, is primarily due to depreciation of the Company’s office building in Irving, Texas, split between the two business segments with one-half of the depreciation allocated to ECHG.

For the three months ended September 30, 2021, depreciation and amortization expense for DGSE was $98,787, compared to an expense of $79,190 for the same period in 2020, an increase of $19,597, or 25%.

The increase of $19,597 from the three months ended September 30, 2021 compared to the three months ended September 30, 2020 is primarily due to the new buildings placed in service during the fourth quarter of the fiscal year ended December 31, 2020.

For the three months ended September 30, 2021, depreciation and amortization expense for ECHG was $117,389, compared to an expense of $100,592 for the same period in 2020, an increase of $16,797, or 17%.

The increase of $16,797 from the three months ended September 30, 2021 compared to the three months ended September 30, 2020, is primarily due to depreciation of the Company’s office building in Irving, Texas, split between the two business segments with one-half of the depreciation allocated to ECHG.

The building was placed in service during the fourth quarter of the fiscal year ended December 31, 2020.

Other Income.

For the three months ended June 30, 2021, other income for DGSE was $119,460, an increase of $110,382 or 1,216%, compared to other income of $9,078 during the same period in 2020.

The increase was primarily due to rental income allocated from the corporate headquarters during the three months ended June 30, 2021.

For the three months ended June 30, 2021, other income for ECHG was $163,595, an increase of $120,807 or 282%, compared to other income of $42,788 during the same period in 2020.

The increase was primarily due to rental income allocated from the corporate headquarters.

Interest Expense .

For the three months ended June 30, 2021, interest expense for DGSE was $68,692, an increase of $24,592 or 56%, compared to interest expense of $44,100 during the same period in 2020.

For the three months ended September 30, 2021, interest expense for DGSE was $79,563, an increase of $25,632 or 48%, compared to interest expense of $53,931 during the same period in 2020.

This increase was primarily the result of additional DGSE loans to finance recent real estate acquisitions, as discussed above.

For the three months ended June 30, 2021, interest expense for ECHG was $109,012, an increase of $8,815 or 9%, compared to interest expense of $100,197 during the same period in 2020.

For the three months ended September 30, 2021, interest expense for ECHG was $109,290, an increase of $7,422 or 7%, compared to interest expense of $101,868 during the same period in 2020.

This increase was primarily the result of the loan to finance the corporate office building in Irving, Texas where the interest expensed is split between the two business segments.

Gain on Forgiveness of Federal Loan.

For the three months ended September 30, 2021, other income, gain on forgiveness of Federal Loan for DGSE was $675,210, an increase of $675,210, compared to other income, gain on forgiveness of Federal Loan of $0 during the same period in 2020.

The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the total Federal Loan of $1,668,200, of which DGSE’s portion was $675,210 forgiven for the quarter ended September 30, 2021.

For the three months ended September 30, 2021, other income, gain on forgiveness of Federal Loan for ECHG was $992,990, an increase of $992,990, compared to other income, gain on forgiveness of Federal Loan of $0 during the same period in 2020.

The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the total Federal Loan of $1,668,200, of which ECHG’s portion was $992,990 forgiven for the quarter ended September 30, 2021.

Write-off of Note Receivables and Accrued Interest Receivable.

For the three months ended September 30, 2021, other expense, write-off of notes receivables for ECHG was $949,174, an increase of $949,174 compared to other expense, write-off of notes receivables and accrued interest receivable of $0 during the same period in 2020.

The increase was due to two notes receivables due from CExchange of $900,000 and associated accrued interest receivable of $49,174 written-off during the quarter ended September 30, 2021.

For the three months ended September 30, 2021, other expense for DGSE was $37,823, an increase of $39,031, compared to other income of $1,208 during the same period in 2020.

The increase in expense was primarily due to DGSE’s portion of expense of our corporate building operating expenses not being netted to the corporate building’s income in prior quarters and correcting during the quarter ending September 30, 2021.

For the three months ended September 30, 2021, other expense for ECHG was $22,961, an increase of $48,707, compared to other income of $25,746 during the same period in 2020.

The increase in expense was primarily due to ECHG’s portion of expense of our corporate building operating expenses not being netted to the corporate building’s income in prior quarters and correcting during the quarter ending September 30, 2021.

For the three months ended September 30, 2021, interest expense for ECHG was $109,290, an increase of $7,422 or 7%, compared to interest expense of $101,868 during the same period in 2020.

This increase was primarily the result of the loan to finance the corporate office building in Irving, Texas where the interest expensed is split between the two business segments.

Income Tax Expense.

For the three months ended June 30, 2021, income tax expense was $32,685, an increase of $16,408, compared to income tax expense of $16,277 for the three months ended June 30, 2020.

The effective income tax rate was 1.5% and 2.8% for the three months ended June 30, 2021 and June 30, 2020, respectively.

For the three months ended September 30, 2021, income tax expense was $26,455, an increase of $26,182, compared to income tax expense of $273 for the three months ended September 30, 2020.

The effective income tax rate was 1.0% and 0% for the three months ended September 30, 2021 and September 30, 2020, 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.

We recorded a net income of $2,153,112 for the three months ended June 30, 2021, compared to a net income of $566,174 for the three months ended June 30, 2020, an increase in net income of $1,586,938, which is due primarily to an increase in sales of approximately $13.0 million.

We recorded a net income of $3,106,401 for the three months ended September 30, 2021, compared to a net income of $2,984,824 for the three months ended September 30, 2020, an increase in net income of $121,577, which is due primarily to increased gross profit and an increase in other income, offset with an increase in SG&A expenses.

Earnings Per Share.

For the three months ended June 30, 2021, our net income per basic and diluted shares attributable to holders of our Common Stock was $0.08, compared to $0.02 per basic and diluted shares attributable to holders of our Common Stock for the three months ended June 30, 2020.

This increase is due primarily to an increase in sales between the two periods.

Six Months Ended June 30, 2021 compared to Six Months Ended June 30, 2020

Revenues related to DGSE’s operations increased by $7,214,212, or 21%, during the six months ended June 30, 2021, to $41,926,825, as compared to revenue of $34,712,613 during the same period in 2020.

Resale revenue, such as bullion, jewelry, watches and rare coins, increased $6,250,613, to $38,214,479 for the six months ended June 30, 2021, or 20%, compared to resale revenue of $31,963,866 during the six months ended June 30, 2020.

Recycled revenue increased $963,599 to $3,712,346 for the six months ended June 30, 2021, or approximately 35%, compared to recycled revenue of $2,748,747 during the six months ended June 30, 2020.

Revenues increased for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to the COVID-19 pandemic, which slowed down the increase in our velocity of sales for the six months ended June 30, 2020.

Revenue related to ECHG’s continuing operations for the six months ended June 30, 2021 increased by $5,625,485, or 48%, to $17,287,622, as compared to revenue of $11,662,137 during the same period in 2020.

Resale revenue increased by $5,553,642, or 71%, to $13,336,902, for the six months ended June 30, 2021, as compared to resale revenue of $7,783,260 during the six months ended June 30, 2020.

Recycled sales increased by $71,843, or 2%, to $3,950,720 for the six months ended June 30, 2021, as compared to recycled sales of $3,878,877 for the six months ended June 30, 2020.

Revenue increased for resale and recycled items for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, due to the COVID-19 pandemic slowing during the six months ended June 30, 2021, as compared to the shutdowns stemming from the pandemic and dampening effect on ECHG’s customers during the six months ended June 30, 2020.

For the three months ended September 30, 2021, our net income per basic and diluted shares attributable to holders of our Common Stock was $0.12, compared to $0.11 per basic and diluted shares attributable to holders of our Common Stock for the three months ended September 30, 2020.

Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020

Revenues related to DGSE’s operations increased by $4,559,417, or 7%, during the nine months ended September 30, 2021, to $67,409,204, as compared to revenue of $62,849,787 during the same period in 2020.

Resale revenue, such as bullion, jewelry, watches and rare coins, increased $2,556,231, to $61,621,574 for the nine months ended September 30, 2021, or 4%, compared to resale revenue of $59,065,343 during the nine months ended September 30, 2020.

Recycled revenue increased $2,003,186 to $5,787,630 for the nine months ended September 30, 2021, or approximately 53%, compared to recycled revenue of $3,784,444 during the nine months ended September 30, 2020.

Revenues increased for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the COVID-19 pandemic, which slowed down the increase in our velocity of sales for the nine months ended September 30, 2020.

Revenue related to ECHG’s continuing operations for the nine months ended September 30, 2021 increased by $7,150,165, or 32%, to $29,486,012, as compared to revenue of $22,335,847 during the same period in 2020.

Resale revenue increased by $6,030,040, or 39%, to $21,625,853, for the nine months ended September 30, 2021, as compared to resale revenue of $15,595,813 during the nine months ended September 30, 2020.

Recycled sales increased by $1,120,125, or 17%, to $7,860,159 for the nine months ended September 30, 2021, as compared to recycled sales of $6,740,034 for the nine months ended September 30, 2020.

Revenue increased for resale and recycled items for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to the COVID-19 pandemic slowing during the nine months ended September 30, 2021, as compared to the shutdowns stemming from the pandemic and dampening effect on ECHG’s customers during the nine months ended September 30, 2020.

Gross Profit.

Gross profit related to DGSE’s operations for the six months ended June 30, 2021, increased by $1,925,684 or 48%, to $5,904,631 as compared to gross profit of $3,978,947 during the same period in 2020.

Resale gross profit increased by $1,643,537, or 47%, to $5,135,784 for the six month ended June 30, 2021, as compared to resale gross profit of $3,492,247 during the six months ended June 30, 2020.

Recycled gross profit increased by $282,147, or 58%, to $768,847 for the six months ended June 30, 2021, as compared to recycled gross profit of $486,700 during the six months ended June 30, 2020.

The increase in resale and recycled gross profit was due primarily to the increased sales in each category plus the increased gross-margin percent of both resale and recycled items for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020.

Gross profit related to ECHG for the six months ended June 30, 2021, increased by $1,733,932, or 30%, to $7,527,523 as compared to gross profit of $5,793,591 during the same period in 2020.

Gross profit for resale revenue for the six months ended June 30, 2021 increased by $2,189,603, or 64% to $5,631,869, as compared to gross profit for resale revenue of $3,442,266 during the same period in 2020.

Gross profit for recycled sales for the six months ended June 30, 2021, decreased $455,671, or 19% to $1,895,654, as compared to gross profit for recycle sales of $2,351,325, during the same period in 2020.

The gross profit increase for resale revenue for the six months ended June 30, 2021, compared to the six months ended June 30, 2020 is primarily due to the increased sales.

The gross profit decrease for recycled revenue for the six months ended June 30, 2021, compared to the six months ended June 30, 2020 is primarily due to the reduced gross profit margin from 60.6% for the six months ended June 30, 2020 to 48.0% for the six months ended June 30, 2021.

Gross profit related to DGSE’s operations for the nine months ended September 30, 2021, increased by $1,552,222 or 21%, to $8,964,129 as compared to gross profit of $7,411,907 during the same period in 2020.

Resale gross profit increased by $1,149,098, or 17%, to $7,781,229 for the nine month ended September 30, 2021, as compared to resale gross profit of $6,632,131 during the nine months ended September 30, 2020.

Recycled gross profit increased by $403,124, or 52%, to $1,182,900 for the nine months ended September 30, 2021, as compared to recycled gross profit of $779,776 during the nine months ended September 30, 2020.

The increase in resale and recycled gross profit was due primarily to the increased sales in each category plus the increased overall gross-margin percent for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020.

Gross profit related to ECHG for the nine months ended September 30, 2021, increased by $3,054,113, or 32%, to $12,578,141 as compared to gross profit of $9,524,028 during the same period in 2020.

Gross profit for resale revenue for the nine months ended September 30, 2021 increased by $3,263,849, or 56% to $9,082,521, as compared to gross profit for resale revenue of $5,818,672 during the same period in 2020.

Gross profit for recycled sales for the nine months ended September 30, 2021, decreased $209,736, or 6% to $3,495,620, as compared to gross profit for recycle sales of $3,705,356, during the same period in 2020.

The gross profit increase for resale revenue for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020 is primarily due to the increased sales and increase in gross margin percentage.

The gross profit decrease for recycled revenue for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020 is primarily due to the reduced gross profit margin from 55% for the nine months ended September 30, 2020 to 44.5% for the nine months ended September 30, 2021.

Selling, General and Administrative Expenses.

For the six months ended June 30, 2021, DGSE’s SG&A expenses increased by $254,157, or 7%, to $3,672,332, as compared to SG&A expenses of $3,418,174 during the same period in 2020.

The increase in SG&A expenses was primarily due to the addition of two new retail locations for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020.

For the six months ended June 30, 2021, SG&A expenses for ECHG increased by $1,288,426 or 32%, to $5,312,122, as compared to SG&A expenses of $4,023,696 during the same period in 2020.

The increase in SG&A expenses was primarily due to the loss of rent received from sublet tenant of $190,000 that was netted against rent during the six months ended June 30, 2020, an increase of wages of approximately $600,000 and other administrative expenses to prepare for increased business from the market starting to regain some normalcy from the COVID-19 pandemic.

For the nine months ended September 30, 2021, DGSE’s SG&A expenses increased by $322,798, or 6%, to $5,444,366, as compared to SG&A expenses of $5,121,568 during the same period in 2020.

The increase in SG&A expenses was primarily due to the addition of two new retail locations for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, SG&A expenses for ECHG increased by $2,580,586 or 42%, to $8,770,561, as compared to SG&A expenses of $6,189,975 during the same period in 2020.

The increase in SG&A expenses was primarily due to the loss of rent received from sublet tenant of $285,000 that was netted against rent during the nine months ended September 30, 2020 and increasing the infrastructure of ECHG to support the drive to increase revenue.

Depreciation and Amortization .

For the six months ended June 30, 2021, DGSE’s depreciation and amortization expense was $194,257, compared to an expense of $156,281 for the same period in 2020.

For the nine months ended September 30, 2021, DGSE’s depreciation and amortization expense was $293,044, compared to an expense of $235,471 for the same period in 2020.

The increase is primarily due to adding new buildings placed in service during the fourth quarter of the fiscal year ended December 31, 2020.

For the six months ended June 30, 2021, depreciation and amortization expense for ECHG was $226,874, compared to an expense of $203,154 for the same period in 2020, an increase of $23,721, or 12%.

The increase of $23,720 from the six months ended June 30, 2021 compared to the six months ended June 30, 2020, is primarily due to adding the depreciation of the Company’s office building in Irving, Texas, split between the two business segments with one-half of the depreciation allocated to ECHG.

For the nine months ended September 30, 2021, depreciation and amortization expense for ECHG was $344,263, compared to an expense of $303,746 for the same period in 2020, an increase of $40,517, or 13%.

The increase of $40,517 from the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, is primarily due to adding the depreciation of the Company’s office building in Irving, Texas, split between the two business segments with one-half of the depreciation allocated to ECHG.

The building was placed in service during the fourth quarter of the fiscal year ended December 31, 2020.

Other Income.

For the six months ended June 30, 2021, other income for DGSE was $231,191, an increase of $194,745 or 534%, compared to other income of $36,446 during the same period in 2020.

The increase was primarily due to rental income allocated from the corporate headquarters during the six months ended June 30, 2021.

For the six months ended June 30, 2021, other income for ECHG was $323,805, an increase of $266,695 or 467%, compared to other income of $57,110 during the same period in 2020.

The increase was primarily due to rental income allocated from the corporate headquarters and increased interest income from an increase in notes receivable during the six months ended June 30, 2021.

Interest Expense .

For the six months ended June 30, 2021, the interest expense for DGSE was $137,177, an increase of $48,284, or 54%, compared to interest expense of $88,693 during the same period in 2020.

For the nine months ended September 30, 2021, the interest expense for DGSE was $216,740, an increase of $73,916, or 52%, compared to interest expense of $142,824 during the same period in 2020.

This increase was primarily the result of additional DGSE loans to finance recent real estate acquisitions, as discussed above.

For the six months ended June 30, 2021, interest expense for ECHG was $219,549, an increase of $18,830 or 9%, compared to interest expense of $200,719 during the same period in 2020.

This increase was primarily the result of the additional loan to finance the recent office building acquisition in Irving, Texas where the interest expensed is split between the two business segments.

For the nine months ended September 30, 2021, interest expense for ECHG was $328,839, an increase of $26,252 or 9%, compared to interest expense of $302,587 during the same period in 2020.

This increase was primarily the result of the additional loan to finance the office building acquisition in Irving, Texas where the interest expensed is split between the two business segments.

Gain on Forgiveness of Federal Loan.

For the nine months ended September 30, 2021, other income, gain on forgiveness of Federal Loan for DGSE was $675,210, an increase of $675,210, compared to other income, gain on forgiveness of Federal Loan of $0 during the same period in 2020.

The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the total Federal Loan of $1,668,200, of which DGSE’s portion was $675,210, forgiven during the quarter ended September 30, 2021.

For the nine months ended September 30, 2021, other income, gain on forgiveness of Federal Loan for ECHG was $992,990, an increase of $992,990, compared to other income, gain on forgiveness of Federal Loan of $0 during the same period in 2020.

The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the total Federal Loan of $1,668,200, of which ECHG’s portion was $992,990, forgiven during the quarter ended September 30, 2021.

Write-off of Note Receivables and Accrued Interest Receivable.

For the nine months ended September 30, 2021, other expense, write-off of notes receivables for ECHG was $949,174, an increase of $949,174 compared to other expense, write-off of notes receivables and accrued interest receivable of $0 during the same period in 2020.

The increase was due to two notes receivables due from CExchange of $900,000 and associated accrued interest receivable of $49,174 written-off during the quarter ended September 30, 2021.

For the nine months ended September 30, 2021, other income for DGSE was $193,368, an increase of $155,714, compared to other income of $37,654 during the same period in 2020.

The increase in income was primarily due to DGSE’s portion of income over expenses for our corporate building during the nine months ended September 30, 2021.

For the nine months ended September 30, 2021, other income for ECHG was $300,844, an increase of $217,988, compared to other income of $82,856 during the same period in 2020.

The increase in income was primarily due to DGSE’s portion of income over expenses for our corporate building during the nine months ended September 30, 2021.

Income Tax Expense.

For the six months ended June 30, 2021, income tax expense was $63,455, an increase of $28,601, or 82%, compared to income tax expense of $34,854 for the six months ended June 30, 2020.

The effective income tax rate was 1.5% and 2.0% for the six months ended June 30, 2021 and 2020, respectively.

For the nine months ended September 30, 2021, income tax expense was $89,910, an increase of $54,783, or 156%, compared to income tax expense of $35,127 for the nine months ended September 30, 2020.

The effective income tax rate was 1.0% and 1.0% for the nine months ended September 30, 2021 and 2020, respectively.

Differences between our effective income tax rate and the U.S federal statutory rate are the result of state taxes, non-deductible expenses, changes in reserves for uncertain tax positions and unused net operating loss carryforwards.

We recorded a net income of $4,161,384 for the six months ended June 30, 2021, compared to a net income of $1,740,323 for the six months ended June 30, 2020, an increase in net income of $2,421,061, which is due primarily from an increase in sales of approximately 21% for the six months ended June 30, 2021, as compared to sales from the six months ended June 30, 2020.

We recorded a net income of $7,267,785 for the nine months ended September 30, 2021, compared to a net income of $4,275,147 for the nine months ended September 30, 2020, an increase in net income of $2,992,638, which is due primarily from an increase in sales of approximately 14% for the nine months ended September 30, 2021, as compared to sales from the nine months ended September 30, 2020.

Earnings Per Share.

For the six months ended June 30, 2021, the net income per basic and diluted shares attributable to common stockholders was $.15, compared to $.06 per basic and diluted shares for the six months ended June 30, 2020.

For the nine months ended September 30, 2021, the net income per basic and diluted shares attributable to common stockholders was $0.27, compared to $0.18 per basic and diluted shares for the nine months ended September 30, 2020.

Liquidity and Capital Resources

During the six months ended June 30, 2021, cash flows provided by operations totaled $263,632, and during the six months ended June 30, 2020, cash flows provided by operations totaled $541,486, a decrease of $257,854.

Cash provided by operations for the six months ended June 30, 2021 was driven largely by net income added to non-cash items of depreciation, amortization and bad debt of $4,588,764, an increase in accounts payable and accrued expenses of $1,574,520, an increase in customer deposits and other liabilities of $341,260, offset by the increase of trade receivables of $3,365,999, an increase in inventories of $2,579,991, an increase in prepaid expenses of $169,373 and an increase in other assets of $146,042.

Cash provided by operations for the six months ended June 30, 2020 was driven largely by the reduction of trade receivables of $140,228, a reduction of inventories of $145,381, an increase of customer deposits and other liabilities of $369,511, net income added to non-cash items of depreciation and amortization of $2,099,758, offset by a decrease in accounts payable and accrued expenses of $831,398 and an increase in prepaid expenses of $1,269,517.

During the six months ended June 30, 2021 and 2020, cash flows used in investing activities totaled $1,126,416 and $1,529,046, respectively, a period-over-period decrease of $402,630.

The use of cash in investing activities during the six months ended June 30, 2021 was primarily due to the increase in notes receivable of $654,958, the purchase of additional property and equipment of $484,594, offset by the acquisition of CExchange’s assets and liabilities, net of cash acquired of $13,136.

The use of cash in investing activities during the six months ended June 30, 2020 was primarily due to investing in note receivables of $1,500,000 to CExchange.

During the six months ended June 30, 2021, cash flows used in financing totaled $224,140 and during the six months ended June 30, 2020, cash flows provided by financing totaled $1,529,517, a period-over-period decrease of $1,753,657.

The cash used in financing during the six months ended June 30, 2021 were payments made against the notes payable of $79,353 and notes payable, related party of $144,787.

The cash provided by financing during the six months ended June 30, 2020 were payments made against the notes payable, related party of $138,683, offset by the Federal Loan received of $1,668,200.

During the nine months ended September 30, 2021, cash flows provided by operations totaled $1,026,457, and during the nine months ended September 30, 2020, cash flows provided by operations totaled $3,234,699, a decrease of $2,208,242.

Cash provided by operations for the nine months ended September 30, 2021 was driven largely by net income added to non-cash items of depreciation, amortization, bad debt, gain on forgiveness of notes receivable and forgiveness of Federal Loan of $7,214,598, an increase in customer deposits and other liabilities of $511,610 and an increase in accounts payable and accrued expenses of $100,952, offset by an increase in trade receivables of $2,871,070, an increase in inventories of $2,647,432, an increase in prepaid expenses of $886,591 and the increase in other assets of $417,347.

Cash provided by operations for the nine months ended September 30, 2020 was driven largely by the increase in accounts payable and accrued expenses of $1,006,345 and net income added to non-cash item of depreciation and amortization of $5,264,364, offset by the increase of trade receivables of $1,661,332, an increase in inventories of $1,108,062, an increase in prepaid expenses of $155,518 and the increase in other assets of $94,830.

During the nine months ended September 30, 2021 and 2020, cash flows used in investing activities totaled $3,351,141 and $3,382,591, respectively, a period-over-period decrease of $31,450.

The use of cash in investing activities during the nine months ended September 30, 2021 was due to the increase in notes receivable of $300,000, the purchase of additional property and equipment of $3,064,277, offset by the acquisition of CExchange’s assets and liabilities, net of cash acquired for $13,136.

The use of cash in investing activities during the nine months ended September 30, 2020 was due to investing in notes receivable of $1,500,000 to CExchange and the purchase of additional property and equipment of $1,882,591.

During the nine months ended September 30, 2021, cash flows provided by financing totaled $1,429,828 and during the nine months ended September 30, 2020, cash flows provided by financing totaled $2,906,490, a period-over-period decrease of $1,476,662.

The cash provided by financing during the nine months ended September 30, 2021 were proceeds from notes to purchase property of $1,772,000, offset by payments made against the notes payable of $123,352 and notes payable, related party of $218,820.

The cash provided by financing during the nine months ended September 30, 2020 were proceeds from the Federal Loan received of $1,668,200 and proceeds from notes to purchase property of $1,452,000, offset by payments to notes payable of $5,289 and notes payable, related party of $208,421.

We expect our capital expenditures to total approximately $1,000,000 during the next twelve months.

These expenditures will be driven by the purchase of additional equipment, the purchase of the new DGSE retail Frisco, Texas location, build-out expenses for that property and other potential properties purchased by DGSE for retail locations.

As of June 30, 2021, DGSE had a commitment of a 20% down payment of approximately $450,000 for the purchase of the new retail location in Frisco, Texas.

The Company has no other capital expenditure commitments as of June 30, 2021.

Our primary source of liquidity and capital resources currently consist of cash generated from our operating results and current borrowings, including the Related Party Loans, the Truist Lewisville Loan, the TB&T Grapevine Loan, the TB&T Irving Loan and the Federal Loan.

These expenditures will be driven by the purchase of additional equipment and the purchase of potential properties by DGSE for retail locations and the build-out of those purchased properties.

The Company has no capital expenditure commitments as of September 30, 2021.

For more information, see Note 15 to our interim condensed financial statements, which is incorporated into this item by reference.

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We maintain the TB&T 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 TB&T Facility as of June 30, 2021.

We do not currently anticipate the need of those funds for operations and do not currently have any amounts drawn against the TB&T Facility as of September 30, 2021.

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.

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The COVID-19 pandemic has adversely affected global economic business conditions.

Future sales of products like ours have and may continue to decline due to increased commodities prices, particularly gold.

Future sales of products like ours have and may continue to decline or fluctuate due to increased or fluctuating commodities prices, particularly gold.

Although we are continuing to monitor and assess the effects of the COVID-19 pandemic, the ultimate impact, including the impact on our liquidity and capital resources, is highly uncertain and subject to change.

The duration of any such impact cannot be predicted, and the Company believes additional liquidity may be necessary to support ongoing operations during this period of uncertainty.

For more information, see Note 18 to our interim condensed consolidated financial statements.

The Company leases certain of its facilities under operating leases.

For more information on the minimum rental commitments under non-cancellable operating leases as of June 30, 2021, see Note 13 to our interim condensed consolidated financial statements.

For more information on the minimum rental commitments under non-cancellable operating leases as of September 30, 2021, see Note 13 to our interim condensed consolidated financial statements.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis