Envela Corp 10-Q

Item 1. Financial Statements ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended September 30, Nine Months Ended September 30, (Unaudited) 2021 2020 2021 2020 Revenue: Sales $ 37,680,769 $ 38,810,884 $ 96,895,216 $ 85,185,634 Cost of goods sold 29,570,653 31,647,487 75,352,946 68,249,699 Gross margin 8,110,116 7,163,397 21,542,270 16,935,935 Expenses: Selling, general & administrative expenses 5,230,473 3,869,673 14,214,927 11,311,543 Depreciation and amortization 216,176 179,782 637,307 539,217 Total operating expenses 5,446,649 4,049,455 14,852,234 11,850,760 Operating income 2,663,467 3,113,942 6,690,036 5,085,175 Interest expense 188,853 155,799 545,579 445,411 Other income (expense): Gain on forgiveness of Federal Loan 1,668,200 - 1,668,200 - Write-off of notes receivable and accrued interest receivable ( 949,174 ) - ( 949,174 ) - Other, net ( 60,784 ) 26,954 494,212 120,510 Income before income taxes 3,132,856 2,985,097 7,357,695 4,760,274 Income tax expense 26,455 273 89,910 35,127 Net income $ 3,106,401 $ 2,984,824 $ 7,267,785 $ 4,725,147 Basic earnings per share: Net income $ 0.12 $ 0.11 $ 0.27 $ 0.18 Diluted earnings per share: Net income $ 0.12 $ 0.11 $ 0.27 $ 0.18 Weighted average shares outstanding: Basic 26,924,631 26,924,381 26,924,631 26,924,381 Diluted 26,939,631 26,939,631 26,939,631 26,939,631 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2021 2020 Assets (unaudited) Current assets: Cash and cash equivalents $ 8,323,180 $ 9,218,036 Trade receivables, net of allowances 5,678,060 2,846,619 Inventories 12,654,329 10,006,897 Current right-of-use assets from operating leases 1,104,576 1,157,077 Prepaid expenses 1,170,905 281,719 Total current assets 28,931,050 23,510,348 Notes receivable, less current portion - 2,100,000 Property and equipment, net 9,647,470 6,888,601 Goodwill 3,258,586 1,367,109 Intangible assets, net 2,691,273 2,992,473 Operating lease right-of-use assets 4,083,560 3,522,923 Other long-term assets 614,986 197,638 Total assets $ 49,226,925 $ 40,579,092 Liabilities and stockholders’ equity Current liabilities: Accounts payable-Trade $ 1,683,294 $ 1,510,697 Notes payable, related party 320,347 307,032 Notes payable 229,909 1,813,425 Current operating lease liabilities 1,092,996 1,148,309 Accrued expenses 1,248,662 844,324 Customer deposits and other liabilities 940,586 428,976 Total current liabilities 5,515,794 6,052,763 Notes payable, related party, less current portion 8,820,675 9,052,810 Notes payable, less current portion 5,804,622 4,240,658 Long-term operating lease liabilities, less current portion 4,239,607 3,654,419 Total liabilities 24,380,698 23,000,650 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding - - Common stock, $ 0.01 par value; 60,000,000 shares authorized; 26,924,631 shares issued and outstanding 269,246 269,246 Additional paid-in capital 40,173,000 40,173,000 Accumulated deficit ( 15,596,019 ) ( 22,863,804 ) Total stockholders’ equity 24,846,227 17,578,442 Total liabilities and stockholders’ equity $ 49,226,925 $ 40,579,092 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 Nine Months Ended September 30, 2021 2020 (Unaudited) (Unaudited) Operations Net income $ 7,267,785 $ 4,725,147 Adjustments to reconcile net income to net cash provided by operations: Depreciation, amortization, and other 637,307 539,217 Bad debt expense 28,532 - Gain on forgiveness of Federal Loan ( 1,668,200 ) - Write-off of note receivables and accrued interest receivable 949,174 - Changes in operating assets and liabilities: Trade receivables ( 2,871,070 ) ( 1,661,332 ) Inventories ( 2,647,432 ) ( 1,108,062 ) Prepaid expenses ( 886,591 ) ( 155,518 ) Other assets ( 417,347 ) ( 94,830 ) Accounts payable and accrued expenses 100,952 1,006,345 Operating leases 21,737 ( 40,179 ) Customer deposits and other liabilities 511,610 23,911 Net cash provided by operations 1,026,457 3,234,699 Investing Investment in note receivable ( 300,000 ) ( 1,500,000 ) Purchase of property and equipment ( 3,064,277 ) ( 1,882,591 ) Acquisition of CExchange assets and liabilities, net of cash acquired 13,136 - Net cash used in investing ( 3,351,141 ) ( 3,382,591 ) Financing Payments on notes payable, related party ( 218,820 ) ( 208,421 ) Payments on notes payable, retail buildings ( 44,017 ) ( 5,289 ) Payments on notes payable, office building ( 79,335 ) - Proceeds from notes to purchase property 1,772,000 1,452,000 Proceeds from Paycheck Protection Program Note - 1,668,200 Net cash provided by financing 1,429,828 2,906,490 Net change in cash and cash equivalents ( 894,856 ) 2,758,598 Cash and cash equivalents, beginning of period 9,218,036 4,510,660 Cash and cash equivalents, end of period $ 8,323,180 $ 7,269,258 Supplemental Disclosures Cash paid during the period for: Interest $ 541,863 $ 443,415 Income taxes $ 86,000 $ 30,025 Non cash activites: Acquisition of CExchange assets and liabilities $ 1,555,892 $ - 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 September 30, 2020 and 2021 (Unaudited) Additional Total Common Stock Preferred Stock Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Capital Deficit Equity Balances at June 30, 2020 26,924,381 $ 269,244 - $ - $ 40,172,677 $ ( 27,507,424 ) $ 12,934,497 Net Income - - - - - 2,984,824 2,984,824 Balances at September 30, 2020 26,924,381 $ 269,244 - $ - $ 40,172,677 $ ( 24,522,600 ) $ 15,919,321 Additional Total Common Stock Preferred Stock Paid-in Accumulated Stockholders Shares Amount Shares Amount Capital Deficit Equity Balances at June 30, 2021 26,924,631 $ 269,246 - $ - $ 40,173,000 $ ( 18,702,420 ) $ 21,739,826 Net Income - - - - - 3,106,401 3,106,401 Balances at September 30, 2021 26,924,631 $ 269,246 - $ - $ 40,173,000 $ ( 15,596,019 ) $ 24,846,227 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Nine Months ended September 30, 2020 and 2021 (Unaudited) Additional Total Common Stock Preferred Stock Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Capital Deficit Equity Balances at December 31, 2019 26,924,381 $ 269,244 - $ - $ 40,172,677 $ ( 29,247,747 ) $ 11,194,174 Net Income - - - - - 4,725,147 4,725,147 Balances at September 30, 2020 26,924,381 $ 269,244 - $ - $ 40,172,677 $ ( 24,522,600 ) $ 15,919,321 Additional Total Common Stock Preferred Stock Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Capital Deficit Equity Balances at December 31, 2020 26,924,631 $ 269,246 - $ - $ 40,173,000 $ (22,863,804 ) $ 17,578,442 Net Income - - - - - 7,267,785 7,267,785 Balances at September 30, 2021 26,924,631 $ 269,246 - $ - $ 40,173,000 $ ( 15,596,019 ) $ 24,846,227 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 — BASIS OF PRESENTATION The interim condensed consolidated financial statements of Envela Corporation, a Nevada corporation, and its subsidiaries (together with its subsidiaries, the “Company” or “Envela”), included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company suggests that these financial statements be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 23, 2021 (as amended, the “2020 Annual Report”). In the opinion of the management of the Company, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly its results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Certain reclassifications were made to the prior year’s consolidated financial statements to conform to the current year presentation. The information provided as of September 30, 2021 in these notes to the interim condensed consolidated financial statements is unaudited. NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS Envela and its subsidiaries engage in diverse business activities within the recommerce sector. These activities include being one of the nation’s premier authenticated recommerce retailers of luxury hard assets; providing end-of-life asset recycling and resale to businesses, organization and retail consumers; offering data destruction and IT asset management; and providing products, services and solutions to industrial and commercial companies. Envela operates primarily via two operating and reportable segments. Through DGSE, LLC (“DGSE”), it operates Dallas Gold & Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands. Through ECHG, LLC (“ECHG”), it operates Echo Environmental Holdings, LLC (“Echo”), ITAD USA Holdings, LLC (“ITAD USA”) and Teladvance, LLC (“Teladvance”). Envela is a Nevada corporation, headquartered in Irving, Texas. DGSE primarily buys and resells or recycles luxury hard assets like jewelry, diamonds, gemstones, fine watches, rare coins and related collectibles, precious-metal bullion products, gold, silver and other precious-metals. DGSE operates six jewelry stores at both the retail and wholesale levels throughout the United States via its facilities in Texas and South Carolina. Buying and selling items for their precious-metals content is a major method by which DGSE markets itself. DGSE also offers jewelry repair services, custom-made jewelry and consignment items, and maintains relationships with refiners for precious-metal items that are not appropriate for resale. The Company also maintains a presence in the retail market through its websites, www.dgse.com and www.cgdeinc.com. ECHG owns and operates Echo, ITAD USA and Teladvance. ECHG, through its wholly owned holding company CEX Holdings, LLC (“CEX”), purchased substantially all the assets, together with certain liabilities which exceeded the purchased assets by $ 335,585 , of CExchange LLC (“CExchange”) pursuant to an asset purchase agreement (the “CExchange Asset Purchase Agreement”) on June 9, 2021 (the “CExchange Transaction”) in exchange for forgiving $ 1,500,000 in debt plus accrued interest owed to ECHG. Following the CExchange Transaction, the purchased assets and liabilities were then transferred and assigned to Teladvance. CExchange was a leader in electronics-trade-in services for retailers, providing in-store and online solutions for many of the major consumer electronics retailers in the United States. CExchange helped retailers provide in-store trade-in programs designed to allow retail consumers to exchange their old technology for cash in minutes. The Company believes the acquisition of CExchange’s business fits well with ECHG’s existing core business of refurbishing and reusing electronics, particularly cellular telephones. 8 Table of Contents Based on the terms of the purchase, ECHG has concluded the CExchange Transaction represents a business combination pursuant to Financial Accounting Standards Board (“FASB”). Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). ECHG has determined that the assets purchased and the liabilities assumed, through the CExchange Transaction, have an approximate fair value due to the their carrying value. ECHG, through its subsidiaries, primarily buys electronic components from business and other organizations, such as school districts, for end-of-life recycling and resale, or to add life to electronic devices by data destruction and refurbishment for reuse. In addition, following the CExchange Transaction, ECHG also conducts such recycling and resale at the retail level. Echo focuses on end-of-life electronics recycling and sustainability and ITAD USA provides IT equipment disposition, including compliance and data sanitization services. Teladvance operates as a value-added reseller by providing offerings and services to companies looking either to upgrade capabilities or dispose of equipment. Like DGSE, ECHG also maintains relationships with refiners or recyclers to which it sells valuable materials it extracts from electronics and IT equipment that are not appropriate for resale or reuse. ECHG’s customers are companies and organizations that are based domestically and internationally. For additional information on the businesses of both DGSE and ECHG, see “Item 1. Business – Operating Segments” in the Company’s 2020 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, accounts payable, accrued expenses and notes payable approximate fair value because of the immediate or short-term nature of these financial instruments. Notes receivable, notes payable and notes payable, related party approximate fair value due to the market interest rate charged. Earnings Per Share Basic earnings per share of our common stock, par value $0.01 per share (our “Common Stock”), is computed by dividing net earnings available to holders of the Company’s Common Stock by the weighted average number of shares of Common Stock outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts requiring the Company to issue Common Stock were exercised or converted into Common Stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method. Goodwill Goodwill is not amortized but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year, or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to ECHG only and not the entire Company. ECHG has its own, separate financial information to perform goodwill impairment testing at least annually or if events indicate that those assets may be impaired. As a result of the current market and economic conditions related to COVID-19, in accordance with step 1 of the guidelines set forth in ASC 350-20-35-3A, the Company concluded there were no impairments of goodwill that resulted from triggering events due to COVID-19 as of September 30, 2021. The Company will continue to evaluate goodwill for the ECHG segment. For tax purposes, goodwill is amortized and deductible over fifteen years. 9 Table of Contents ECHG goodwill was allocated in connection with the two acquisitions (the “Echo Transaction”) of the assets now held by Echo and ITAD USA (the “Echo Entities”) on May 20, 2019 and the CExchange Transaction on June 9, 2021. There has been a preliminary addition to goodwill with the CExchange Transaction of $ 1,891,477 . There have been no other adjustments or impairment charges to goodwill, other than the CExchange Transaction, since the allocation on May 20, 2019. As of Septemeber 30, 2021 and 2020, goodwill was $ 3,258,586 and $ 1,367,109 , respectively. Recent Accounting Pronouncements In June 2016, the FASB issued a new credit loss accounting standard ASU 2016-13. The new accounting standard introduces the current expected credit losses methodology for estimating allowances for credit losses which will be based on expected losses rather than incurred losses. We will be required to use a forward-looking expected credit loss methodology for accounts receivable, loans and other financial instruments. The standard will be adopted upon the effective date for us beginning January 1, 2023 by using a modified retrospective transition approach to align our credit loss methodology with the new standard. The Company is evaluating the financial statement implications of ASU 2016-13. NOTE 4 — INVENTORIES A summary of inventories is as follows: September 30, December 31, 2021 2020 DGSE Resale $ 10,253,433 $ 8,971,815 Recycle - 191,677 Subtotal 10,253,433 9,163,492 ECHG Resale 2,095,981 557,959 Recycle 304,915 285,446 Subtotal 2,400,896 843,405 $ 12,654,329 $ 10,006,897 NOTE 5 — NOTES RECEIVABLE ECHG entered into an agreement with CExchange on February 15, 2020, to lend $ 1,500,000 bearing interest at eight and one-half percent ( 8.5 %) per annum with interest only payments due quarterly. The loan matures on February 20, 2023. The parties also agreed to warrant and call-option agreements to acquire all of CExchange’s equity interests upon the occurrence of certain events and on certain conditions. On November 7, 2020, ECHG entered into an amended agreement to increase the loan from $1,500,000 to $2,100,000. On April 14, 2021, ECHG entered into a second agreement with CExchange to lend an additional $ 300,000 bearing interest at four percent ( 4 %) per annum with interest only payments due quarterly, to be repaid, principal and accrued interest, upon the occurrence of certain events or upon demand by ECHG. On June 9, 2021, ECHG, through CEX, exercised their rights under the warrant and call-option agreements and purchased substantially all of the assets and certain liabilities of CExchange in exchange for ECHG’s cancellation and forgiveness of $ 1,500,000 of the outstanding principal amount under the loan agreement originally dated February 15, 2020 and accrued and unpaid interest thereunder of $ 55,892 . We subsequently performed impairment evaluations on the two notes after management learned that the two notes may not be recoverable. Using the guidance provided, management has concluded that ECHG should reserve the full amount of the outstanding and unpaid notes receivable of $ 900,000 , and write-off the outstanding and unpaid accrued interest associated with the notes receivable totaling $49,174. The notes receivable of $900,000 and $ 49,174 of accrued interest receivable were written-off to other expense, write-off of notes receivable and accrued interest receivable as of September 30, 2021. 10 Table of Contents ECHG entered into an agreement with Committed Agency, LLC (“Committed Agency”) on February 4, 2021, pursuant to which it agreed (the “CA Facility Agreement”) to provide Committed Agency a line-of-credit not to exceed $ 1,000,000 (the “CA Facility”). Committed Agency intended to, directly or indirectly, sell or dispose of electronic devices previously owned by major electronic carriers. In addition to the CA Facility Agreement, ECHG contracted with Committed Agency beginning February 4, 2021 to exclusively facilitate their sales through the Company’s warehousing and cleaning of electronic devices, wiping of existing data, and inspecting, packaging and shipping of devices to purchasers, in exchange for which ECHG received a per unit service fee (the “CA Service Agreement”). The CA Service Agreement terminated and the CA Facility matured on July 30, 2021. Under the terms of the agreement, the borrower could not borrow any additional funds, under this facility, after May 31, 2021. Committed Agency paid back all principal and accrued interest as of September 30, 2021. Amounts borrowed under the CA Facility bore an interest rate of 6 % per annum. NOTE 6 — ACQUISITION On June 9, 2021, ECHG, entered into the CExchange Asset Purchase Agreement with CExchange, pursuant to which the seller agreed to sell the assets and certain liabilities of CExchange for ECHG’s cancellation and forgiveness of $ 1,500,000 of the outstanding principal amount under the loan agreement between ECHG and CExchange originally dated February 15, 2020 and accrued and unpaid interest thereunder of $ 55,892 . The remaining $900,000 principal owed to ECHG by CExchange is not a part of the purchase price listed below and is expected to be repaid with any accrued and unpaid interest during the third or fourth fiscal quarters of 2021. As mentioned in Note 5 -- Notes Receivable, we subsequently performed impairment evaluations on the remaining $900,000 principal owed after management learned that the $900,000 may not be recoverable. Using the guidance provided, management has concluded that ECHG should reserve the full amount of the outstanding and unpaid notes receivable of $ 900,000 , and write-off the outstanding and unpaid accrued interest associated with the notes receivable totaling $ 49,174 . The notes receivable of $ 900,000 and $49,174 of accrued interest receivable were written-off to other expense, write-off of notes receivable and accrued interest receivable as of September 30, 2021. As part of the CExchange Transaction, goodwill was preliminarily recorded as $ 1,891,477 , which is the purchase price less the approximate fair value of the net assets purchased, as shown in the purchase price allocation in the following table. 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 ECHG segment only and not the whole Company. ECHG has its own separate financial information to perform goodwill impairment testing. The Company will evaluate goodwill based on cash flows for the ECHG segment. For tax purposes, goodwill is amortized and deductible over fifteen ( 15 ) years. 11 Table of Contents The purchase price allocation listed below is considered to be a preliminary allocation and is subject to change. The preliminary purchase price is allocated as follows: Description Amount Assets Cash $ 13,136 Account receivables 93,970 Prepaids 2,594 Fixed assets - net 30,697 Liabilities Account payables ( 474,043 ) Accrued liabilities ( 1,939 ) Net assets ( 335,585 ) Goodwill 1,891,477 Total Purchase Price $ 1,555,892 NOTE 7 — GOODWILL The changes in goodwill is as follows: September 30, December 31, 2021 2020 Opening balance $ 1,367,109 $ 1,367,109 Additions (1) 1,891,477 - Impairment adjustment - - Goodwill $ 3,258,586 $ 1,367,109 (1) Addition is in the connection with the CExchange Transaction on June 9, 2021. 12 Table of Contents NOTE 8 — PROPERTY AND EQUIPMENT Property and equipment consist of the following: September 30, December 31, 2021 2020 DGSE Land $ 1,640,219 $ 720,786 Building and improvements 2,702,292 1,317,906 Leasehold improvements 1,450,694 1,435,742 Machinery and equipment 1,056,315 1,056,315 Furniture and fixtures 526,249 504,430 Vehicles 22,859 22,859 7,398,628 5,058,038 Less: accumulated depreciation ( 2,272,620 ) ( 2,054,294 ) Sub-Total 5,126,008 3,003,744 ECHG Building and improvements 74,162 81,149 Machinery and equipment 869,244 220,417 Furniture and fixtures 101,494 93,827 Vehicles 86,609 - 1,131,509 395,393 Less: accumulated depreciation ( 138,404 ) ( 71,058 ) Sub-Total 993,105 324,335 Envela Land 1,106,664 1,106,664 Building and improvements 2,456,324 2,456,324 Machinery and equipment 23,676 5,407 3,586,664 3,568,395 Less: accumulated depreciation ( 58,307 ) ( 7,873 ) Sub-Total 3,528,357 3,560,522 $ 9,647,470 $ 6,888,601 On July 30, 2021, DGSE closed the purchase of a new retail building located at 9166 Gaylord Parkway in Frisco, Texas for $ 2,215,500 . The purchase was partly financed through a $ 1.772 million, 5 year 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 . 13 Table of Contents NOTE 9 — INTANGIBLE ASSETS Intangible assets consist of the following: September 30, December 31, 2021 2020 DGSE Domain names $ 41,352 $ 41,352 Point of sale system 330,000 330,000 371,352 371,352 Less: accumulated amortization ( 253,002 ) ( 203,502 ) Subtotal 118,350 167,850 ECHG Trademarks 1,483,000 1,483,000 Customer Contracts 1,873,000 1,873,000 3,356,000 3,356,000 Less: accumulated amortization ( 783,077 ) ( 531,377 ) Subtotal 2,572,923 2,824,623 $ 2,691,273 $ 2,992,473 The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2021: DGSE ECHG Total 2021 (excluding the nine months ending September 30, 2021) $ 16,500 $ 83,900 $ 100,400 2022 66,000 335,600 401,600 2023 30,350 335,600 365,950 2024 5,500 335,600 341,100 2025 - 335,600 335,600 Thereafter - 1,146,623 1,146,623 $ 118,350 $ 2,572,923 $ 2,691,273 14 Table of Contents NOTE 10— ACCRUED EXPENSES Accrued expenses consist of the following: September 30, December 31, 2021 2020 DGSE Accrued interest $ 16,963 $ 10,057 Board member fees - 7,500 Payroll 164,129 155,635 Property taxes 175,173 26,435 Sales tax 66,135 180,609 Other administrative expenss 8,537 13,525 Subtotal 430,937 393,761 ECHG Accrued interest 15,644 17,086 Payroll 375,398 119,327 Property tax 20,500 20,500 Other accrued expenses 51,199 10,574 Subtotal 462,741 167,487 Envela Accrued interest 6,138 7,884 Payroll 35,250 10,745 Professional fees 159,712 142,635 Property Tax 65,700 - Other administrative expenses 1,400 8,433 State income tax 86,784 113,379 Subtotal 354,984 283,076 $ 1,248,662 $ 844,324 NOTE 11 — SEGMENT INFORMATION We determine our business segments based upon an internal reporting structure. Our financial performance is based on the following segments: DGSE and ECHG. The DGSE segment includes Dallas Gold & Silver Exchange, which has six retail stores in the Dallas/Fort Worth Metroplex, and Charleston Gold & Diamond Exchange, which has one retail store in Mt. Pleasant, South Carolina. The ECHG segment includes Echo, ITAD USA and Teladvance. These three companies were added during 2019 and are involved in recycling and the reuse of electronic components. 15 Table of Contents We allocate a portion of certain corporate costs and expenses, including information technology as well as rental income and expenses relating to our corporate headquarters, to our business segments. These income and expenses are included in selling, general and administrative (“SG&A”) expenses, depreciation and amortization, other income, interest expense and income tax expense. Our management team evaluates each segment and makes decisions about the allocation of resources according to each segment’s profit. Allocation amounts are generally agreed upon by management and may differ from arms-length allocations. The following separates DGSE and ECHG’s financial results of operations for the three months ended September 30, 2021 and 2020: For The Three Months Ended September 30, 2021 2020 DGSE ECHG Consolidated DGSE ECHG Consolidated Revenue: Sales $ 25,482,379 $ 12,198,390 $ 37,680,769 $ 28,137,174 $ 10,673,710 $ 38,810,884 Cost of goods sold 22,422,881 7,147,772 29,570,653 24,704,214 6,943,273 31,647,487 Gross profit 3,059,498 5,050,618 8,110,116 3,432,960 3,730,437 7,163,397 Expenses: Selling, general and administrative expenses 1,772,034 3,458,439 5,230,473 1,703,394 2,166,279 3,869,673 Depreciation and amortization 98,787 117,389 216,176 79,190 100,592 179,782 1,870,821 3,575,828 5,446,649 1,782,584 2,266,871 4,049,455 Operating income 1,188,677 1,474,790 2,663,467 1,650,376 1,463,566 3,113,942 Interest expense 79,563 109,290 188,853 53,931 101,868 155,799 Other income (expense): Gain on forgiveness of Federal Loan 675,210 992,990 1,668,200 - - - Write-off of notes receivable and accrued interest receivable - ( 949,174 ) ( 949,174 ) - - - Other, net ( 37,823 ) ( 22,961 ) ( 60,784 ) 1,208 25,746 26,954 Income before income taxes 1,746,501 1,386,355 3,132,856 1,597,653 1,387,444 2,985,097 Income tax expense 10,288 16,167 26,455 167 106 273 Net income $ 1,736,213 $ 1,370,188 $ 3,106,401 $ 1,597,486 $ 1,387,338 $ 2,984,824 The following separates DGSE’s and ECHG’s financial results of operations for the nine months ended September 30, 2021 and 2020: For The Nine Months Ended September 30, 2021 2020 DGSE ECHG Consolidated DGSE ECHG Consolidated Revenue: Sales $ 67,409,204 $ 29,486,012 $ 96,895,216 $ 62,849,787 $ 22,335,847 $ 85,185,634 Cost of goods sold 58,445,075 16,907,871 75,352,946 55,437,880 12,811,819 68,249,699 Gross profit 8,964,129 12,578,141 21,542,270 7,411,907 9,524,028 16,935,935 Expenses: Selling, general and administrative expenses 5,444,366 8,770,561 14,214,927 5,121,568 6,189,975 11,311,543 Depreciation and amortization 293,044 344,263 637,307 235,471 303,746 539,217 5,737,410 9,114,824 14,852,234 5,357,039 6,493,721 11,850,760 Operating income 3,226,719 3,463,317 6,690,036 2,054,868 3,030,307 5,085,175 Interest expense 216,740 328,839 545,579 142,824 302,587 445,411 Other income (expense): Gain on forgiveness of Federal Loan 675,210 992,990 1,668,200 - - - Write-off of notes receivable and accrued interest receivable - ( 949,174 ) ( 949,174 ) - - - Other, net 193,368 300,844 494,212 37,654 82,856 120,510 Income before income taxes 3,878,557 3,479,138 7,357,695 1,949,698 2,810,576 4,760,274 Income tax expense 38,178 51,732 89,910 12,714 22,413 35,127 Net income $ 3,840,379 $ 3,427,406 $ 7,267,785 $ 1,936,984 $ 2,788,163 $ 4,725,147 16 Table of Contents NOTE 12 — REVENUE RECOGNITION ASC 606 provides guidance to identify performance obligations for revenue-generating transactions. The initial step is to identify the contract with a customer created with the sales invoice or a repair ticket. Secondly, we identify the performance obligations in the contract, as we promise to deliver the purchased item or promised repairs in return for payment or future payment as a receivable. The third step is determining the transaction price of the contract obligation, as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations, as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied. Beginning in fiscal year 2020, Envela disaggregated its revenue, within the operating segments, based on its resale and recycle presentation basis to more closely align with the Company’s activities. The Company’s historical disaggregation of revenue has been recast to conform to our current presentation. The following disaggregation of total revenue is listed by sales category and segment for the three months ended September 30, 2021 and 2020: CONSOLIDATED Three Months Ended September 30, 2021 2020 Revenues Gross Profit Margin Revenues Gross Profit Margin DGSE Resale $ 23,407,095 $ 2,645,445 11.3 % $ 27,101,477 $ 3,139,884 11.6 % Recycled 2,075,284 414,053 20 .0 % 1,035,697 293,076 28.3 % Subtotal 25,482,379 3,059,498 12 .0 % 28,137,174 3,432,960 12.2 % ECHG Resale 8,288,951 3,450,652 41.6 % 7,812,553 2,376,406 30.4 % Recycled 3,909,439 1,599,966 40.9 % 2,861,157 1,354,031 47.3 % Subtotal 12,198,390 5,050,618 41.4 % 10,673,710 3,730,437 34.9 % $ 37,680,769 $ 8,110,116 21.5 % $ 38,810,884 $ 7,163,397 18.5 % 17 Table of Contents The following disaggregation of total revenue is listed by sales category and segment for the nine months ended September 30, 2021 and 2020: CONSOLIDATED Nine Months Ended September 30, 2021 2020 Revenues Gross Profit Margin Revenues Gross Profit Margin DGSE Resale $ 61,621,574 $ 7,781,229 12.6 % $ 59,065,343 $ 6,632,131 11.2 % Recycled 5,787,630 1,182,900 20.4 % 3,784,444 779,776 20.6 % Subtotal 67,409,204 8,964,129 13.3 % 62,849,787 7,411,907 11.8 % ECHG Resale 21,625,853 9,082,521 42.0 % 15,595,813 5,818,672 37.3 % Recycled 7,860,159 3,495,620 44.5 % 6,740,034 3,705,356 55 .0 % Subtotal 29,486,012 12,578,141 42.7 % 22,335,847 9,524,028 42.6 % $ 96,895,216 $ 21,542,270 22.2 % $ 85,185,634 $ 16,935,935 19.9 % DGSE’s over-the-counter sales with the retail public and wholesale dealers are recognized when merchandise is delivered, and payment has been made either by immediate payment or through a receivable obligation at one of our retail locations. We also recognize revenue upon the shipment of goods when retail and wholesale customers have fulfilled their obligation to pay, or promise to pay through e-commerce or phone sales. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. Crafted-precious-metal items at the end of their useful lives are sold to a refiner. Since the local refiner is located in the Dallas/Fort Worth area, we deliver the metal to the refiner. The metal is melted and assayed, price is determined from the assay and payment is made usually in a day or two. Revenue is recognized from the sale once payment is received. DGSE also offers a structured layaway plan. When a retail customer utilizes the layaway plan, we collect a minimum payment of 25% of the sales price, establish a payment schedule for the remaining balance and hold the merchandise as collateral as security against the customer’s deposit until all amounts due are paid in full. Revenue for layaway sales is recognized when the merchandise is paid in full and delivered to the retail customer. Layaway revenue is also recognized when a customer fails to pay in accordance with the sales contract and the sales item is returned to inventory with the forfeit of deposited funds, typically after 90 days. In limited circumstances, we exchange merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which we recognize revenue in accordance with ASC 845, Nonmonetary Transactions. When we exchange merchandise for similar merchandise and there is no monetary component to the exchange, we do not recognize any revenue. Instead, the basis of the merchandise relinquished becomes the basis of the merchandise received, less any indicated impairment of value of the merchandise relinquished. When we exchange merchandise for similar merchandise and there is a monetary component to the exchange, we recognize revenue to the extent of the monetary assets received and determines the cost of sale based on the ratio of monetary assets received to monetary and non-monetary assets received multiplied by the cost of the assets surrendered. The Company offers the option of third-party financing to customers wishing to borrow money for the purchase. The customer applies on-line with the financing company and upon going through the credit check will be approved or denied. If accepted, the customer is allowed to purchase according to the limits set by the financing company. Once the customer does purchase merchandise, based on their financing agreement, we record and recognize the sale at that point, based on the promise to pay by the finance company up to the customer’s approved limit. 18 Table of Contents We have a return policy (money-back guarantee). The policy covers retail transactions involving jewelry, graded rare coins and currency only. Customers may return jewelry, graded rare coins and currency purchased within 30 days of the receipt of the items for a full refund as long as the items are returned in exactly the same condition as they were delivered. In the case of jewelry, graded rare coins and currency sales on account, customers may cancel the sale within 30 days of making a commitment to purchase the items. The receipt of a deposit and a signed purchase order evidences the commitment. Any customer may return a jewelry item or graded rare coins and currency if they can demonstrate that the item is not authentic, or there was an error in the description of a graded coin or currency piece. Returns are accounted for as a reversal of the original transaction, with the effect of reducing revenues and cost of sales, and returning the merchandise to inventory. We have established an allowance for estimated returns related to sales based on historical returns and reduced our reported revenues and cost of sales accordingly. Our return allowance as of September 30, 2021 and 2020 remained the same for both periods, at approximately $ 28,000 . ECHG has several revenue streams and recognize revenue according to ASC 606 at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to the customer. The revenue streams are as follows. · Outright sales are recorded when product is shipped. Once the price is established and the terms are agreed to and the product is shipped, the revenue is recognized. The Echo Entities have fulfilled their performance obligation with an agreed upon transaction price, payment terms and shipping the product. · Echo recognizes refining revenue when our inventory arrives at the destination port and the performance obligation is satisfied by transferring the control of the promised goods that are identified in the customer contract. Ninety percent (90%) of our refining revenue is generated from one refining partner that has an international refining facility. This refining partner pays us sixty percent (60%) of an Invoice within five working days upon the receipt of the Ocean Bill of Lading issued by the Ocean Carrier. Our initial Invoice is recognized in full when our performance obligation is satisfied, as stated in the first sentence. Under the guidance of ASC 606, an estimate of the variable consideration that we expect to be entitled is included in the transaction price stated at the current precious metal spot price and weight of the precious metal. An adjustment to revenue is made in the period once the underlying weight and any precious metal spot price movement is resolved, which is usually around six (6) weeks. Any adjustment from the resolution of the underlying uncertainty is netted with the remaining forty percent (40%) due from the original contract. · Hard drive sales by the Echo Entities are limited to customers who are required to prepay shipments. Once the commodity price is established and agreed upon by both parties, customers send payment in advance. The Company releases the shipment on the same day when payment receipt is confirmed, and revenue is recognized on day of shipment. If payment is received on the last day of the month and shipment goes out the following day the payment received is deferred revenue and recognized the following month when the shipment is made. · Echo also provides recycling services according to a Scope of Work and services are recognized when promised services are rendered. We have recycling services conducted at the Echo facility and another type of service is conducted at the client’s facility. The Scope of Work will determine the charges and whether it is completed on campus or off campus. Payment terms are also dictated in the Scope of Work. Accounts Receivable : We record trade receivables when revenue is recognized. When appropriate, we will record an allowance for doubtful accounts, which is primarily determined by an analysis of our trade receivables aging. The allowance is determined based on historical experience of collecting past due amounts, based on the degree of their aging. In addition, specific accounts that are doubtful of collection are included in the allowance. These provisions are reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms. DGSE had no allowance for doubtful accounts balance for the quarter ended September 30, 2021 and 2020. Some of ECHG’s customers are on payment terms, and although low risk, occasionally the need arises to record an allowance for receivables that are deemed high risk to collect. We have established an allowance for estimated uncollectable receivables related to sales based on historical collections. Our allowance as of September 30, 2021 and 2020 was $ 0 and $ 0 , respectively. 19 Table of Contents Notes Receivable: We originally recorded ECHG’s notes receivable as current assets as of June 30, 2021 due to the CExchange notes maturity dates. See Note 5 above for additional information. We perform impairment evaluations on the note on December 31 of each year, or whenever business conditions or events indicate that the notes receivable may be impaired. As of December 31, 2020, based on our evaluation, no impairment was required. We subsequently performed impairment evaluations on the two notes totaling $900,000, as of September 30, 2021, after management learned that the two notes may not be recoverable. Using the guidance provided, management has concluded that ECHG should reserve the full amount of the outstanding and unpaid notes receivable of $900,000, and write-off the outstanding and unpaid accrued interest associated with the notes receivable totaling $ 49,174 . The notes receivable of $ 900,000 and $49,174 of accrued interest receivable were written-off to other expense, write-off of notes receivable and accrued interest receivable as of September 30, 2021. Income Taxes : Income taxes are accounted for under the asset and liability method prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized. We account for our position in tax uncertainties in accordance with ASC 740, Income Taxes. The guidance establishes standards for accounting for uncertainty in income taxes. The guidance provides several clarifications related to uncertain tax positions. Most notably, a “more likely-than-not” standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent likelihood of realization. The guidance applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First, we must determine whether any amount of the tax benefit may be recognized. Second, we determine how much of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition.) No additional liabilities have been recognized as a result of the implementation. We have not taken a tax position that, if challenged, would have a material effect on the financial statements or the effective tax rate during fiscal years ended December 31, 2021 and 2020. NOTE 13 — 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 six operating leases as of September 30, 2021—five in the Dallas/Fort Worth Metroplex and one in Charleston, South Carolina. In anticipation of the expiration of the new lease for DGSE’s flagship store at 13022 Preston Road, Dallas, Texas on October 31, 2021, a new lease has been executed and will commence on November 1, 2021. The new lease will expire on January 31, 2027, with an option for DGSE to extend the lease for an additional five years, at market rate as determined by the prevailing market rate for comparable space in comparable buildings in the vicinity. The lease for DGSE’s Grand Prairie, Texas location expires June 30, 2022, and has no current renewal options. The lease for DGSE’s Mt Pleasant, South Carolina location expires April 30, 2025, with no additional renewal options. The lease for DGSE’s Euless, Texas location expires June 30, 2025, with an option for an additional five years. ECHG’s Echo, located on W. Belt Line Road, in Carrollton, Texas, renewed their lease starting January 1, 2021 for 61 months, expiring January 31, 2026. ECHG’s lease for ITAD USA’s location on McKenzie Drive in Carrollton, Texas expired July 31, 2021 and was not renewed. ITAD USA moved its operations to the new CEX location on Realty Road in Carrollton, Texas, the lease for which was assigned to CEX effective June 8, 2021 as part of the CExchange Transaction and under which ITAD USA is permitted to utilize the space. The lease expires December 31, 2021, and this location is under review as to whether to pursue a lease renewal. Pursuant to the assignment of the CExchange lease to CEX, the lease is considered short-term and therefore does not fall under the rules to be reported as a Right of Use asset. As such, it will be reported as an operating lease. All of the Company’s seven leases as of September 30, 2021 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 September 30, 2021 and 2020 were $ 620,829 and $ 421,790 , respectively. Leasing costs for the nine months ended September 30, 2021 and 2020 were $ 1,516,262 and $ 1,071,066 , respectively, comprised of a combination of minimum lease payments and variable lease costs. 20 Table of Contents As of September 30, 2021, the weighted average remaining lease term and weighted average discount rate for operating leases was 3.5 years and 5.5 %, respectively. For the three months ended September 30, 2021 and 2020, the Company’s cash paid for operating lease liabilities was $ 619,584 and $ 428,241 respectively. For the nine months ended September 30, 2021 and 2020, the Company’s cash paid for operating lease liabilities was $ 1,496,524 and $ 1,100,280 , respectively. Future annual minimum lease payments as of September 30, 2021: Operating Leases DGSE 2021 (excluding the nini months ending September 30, 2021) $ 133,407 2022 516,458 2023 499,984 2024 507,414 2025 364,269 2026 and thereafter 333,114 Total minimum lease payments 2,354,646 Less imputed interest ( 223,086 ) DGSE Subtotal 2,131,560 ECHG 2021 (excluding the nine months ending September 30, 2021) 192,649 2022 784,599 2023 806,175 2024 828,345 2025 851,125 2026 and thereafter 72,878 Total minimum lease payments 3,535,771 Less imputed interest ( 334,728 ) ECHG Subtotal 3,201,043 Total 5,332,603 Less current portion ( 1,092,996 ) Long-term operating lease liability $ 4,239,607 21 Table of Contents NOTE 14 — BASIC AND DILUTED AVERAGE SHARES A reconciliation of basic and diluted weighted average common shares for the three months ended September 30, 2021 and 2020 is as follows: For the Three Months Ended September 30, 2021 2020 Basic weighted average shares 26,924,631 26,924,381 Effect of potential dilutive securities 15,000 15,250 Diluted weighted average shares 26,939,631 26,939,631 A reconciliation of basic and diluted weighted average common shares for the nine months ended September 30, 2021 and 2020 is as follows: For the Nine Months Ended September 30, 2021 2020 Basic weighted average shares 26,924,631 26,924,381 Effect of potential dilutive securities 15,000 15,250 Diluted weighted average shares 26,939,631 26,939,631 For the three and nine months ended September 30, 2021 and 2020, there were 15,000 and 15,250 common stock options, warrants, and Restricted Stock Units (RSUs) unexercised, respectively. For the three and nine months ended September 30, 2021 and 2020, there were no anti-dilutive shares. 22 Table of Contents NOTE 15 — LONG-TERM DEBT Long-term debt consists of the following: Outstanding Balance September 30, December 31, Current 2021 2020 Interest Rate Maturity DGSE Note payable, related party (1) $ 2,796,449 $ 2,863,715 6 .00 % May 16, 2024 Note payable, Truist Bank (2) 917,595 942,652 3.65 % July 9, 2030 Note payable, Texas Bank & Trust (3) 478,668 491,852 3.75 % September 14, 2025 Note payable, Texas Bank & Trust (6) 1,766,225 - 3.75 % July 31, 2026 DGSE Sub-Total 5,958,937 4,298,219 ECHG Note payable, related party (1) 6,344,572 6,496,127 6 .00 % May 16, 2024 Envela Note payable, Texas Bank & Trust (4) 2,872,044 2,951,379 3.25 % Novemeber 4, 2025 Note payable (5) - 1,668,200 Envela Sub-Total 2,872,044 4,619,579 Sub-Total 15,175,553 15,413,925 Current portion 550,256 2,120,457 $ 14,625,297 $ 13,293,468 (1) On May 20, 2019, in connection with the Echo Transaction, the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board of Directors of the Company (the “Board”), pursuant to which Mr. Loftus made two loans (the “Related Party Loans”) to the Company. ECHG executed a 5 -year, $ 6,925,979 note for the Echo Transaction, amortized over 20 years at a 6 % annual interest rate. DGSE executed a 5 -year, $ 3,074,021 note to pay off the accounts payable – related party balance to a related person to the Company, as that term is defined in the instructions to item 404(a) of Regulation S-K, promulgated under the Securities Act (each such person, a “Related Party”). Such person was no longer a Related Party as of May 20, 2019. That promissory note is also amortized over 20 years at a 6 % annual interest rate. On January 1, 2020, revisions were made on the original documents for both DGSE and ECHG notes. Originally, the DGSE note stated that the monthly interest and principal payment due was $ 41,866 and the ECHG note stated that the monthly interest and principal payment due was $ 94,327 . The revised interest and principal payment due monthly on the note for DGSE is $ 22,203 . The revised interest and principal payment due monthly on the note for ECHG is $ 49,646 . The allocation between short-term and long-term notes payable, related party was revised accordingly starting with the three months ended March 31, 2020. (2) On July 9, 2020, DGSE closed the purchase of a new retail building located at 610 E. Round Grove Road in Lewisville, Texas for $ 1.195 million. The purchase was partly financed through a $ 956,000 , 10 year loan (the “Truist Lewisville Loan”), bearing an annual interest rate of 3.6 5%, amortized over 20 years, payable to Truist Bank (f/k/a BB&T Bank). The note has monthly interest and principal payments of $ 5,645 . (3) On September 14, 2020, 1106 NWH Holdings, LLC, a wholly owned subsidiary of DGSE, closed on the purchase of a new retail building located at 1106 W. Northwest Highway in Grapevine, Texas for $ 620,000 . The purchase was partly financed through a $ 496,000 , 5 year loan (the “TB&T Grapevine Loan”), bearing an annual interest rate of 3.75 %, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $ 2,941 . (4) On November 4, 2020, 1901 Gateway Holdings, LLC, a wholly owned subsidiary of the Company, closed on the purchase of a new office building located at 1901 Gateway Drive, Irving, Texas for $ 3.521 million. The building was partially financed through a $ 2.96 million, 5 year loan (the “TB&T Irving Loan”), bearing an interest rate of 3.25 %, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $ 16,792 . 23 Table of Contents (5) The Company applied for and received, on April 20, 2020, approximately $ 1.67 million, 1 % interest, federally backed loan intended to pay employees and cover certain rent and utility-related costs during the COVID-19 pandemic (the “Federal Loan”), with Truist Bank (f/k/a BB&T Bank) as lender. The Federal Loan was forgivable to the extent that certain criteria are met. We applied to the Small Business Administration for the forgiveness of the Federal Loan during the fourth quarter ended December 31, 2020. The Federal Loan was forgiven effective April 1, 2021 but notification was not sent to the Company until the third quarter of 2021. (6) On July 30, 2021, 9166 Gaylord Holdings, LLC, a wholly owned subsidiary of DGSE, closed the purchase of a new retail building located at 9166 Gaylord Parkway in Frisco, Texas for $ 2,215,500 . The purchase was partly financed through a $ 1,772,000 , 5 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 . Future scheduled principal payments of our notes payable and notes payable, related party, as of September 30, 2021 are as follows: Note payable, related party - DGSE Year Ending December 31, Amount 2021 (excluding the nine months ended September 30, 2021) $ 24,359 2022 100,702 2023 106,913 2024 2,564,475 Subtotal $ 2,796,449 Note payable, Truist Bank - DGSE Year Ending December 31, Amount 2021 (excluding the nine months ended September 30, 2021) $ 8,495 2022 34,682 2023 35,988 2024 37,342 2025 38,748 Thereafter 762,340 Subtotal $ 917,595 Note payable, Texas Bank & Trust - DGSE Year Ending December 31, Amount 2021 (excluding the nine months ended September 30, 2021) $ 4,362 2022 17,812 2023 18,492 2024 19,197 2025 418,805 Subtotal $ 478,668 24 Table of Contents Note payable, Texas Bank & Trust - DGSE Year Ending December 31, Amount 2021 (excluding the nine months ended September 30, 2021) $ 17,263 2022 70,314 2023 72,634 2024 75,030 2025 77,505 Thereafter 1,453,479 Subtotal $ 1,766,225 Note payable, related party - ECHG Year Ending December 31, Amount 2021 (excluding the nine months ended September 30, 2021) $ 54,300 2022 224,460 2023 238,305 2024 5,827,507 Subtotal $ 6,344,572 Note payable, Texas Bank & Trust - Envela Year Ending December 31, Amount 2021 (excluding the nine months ended September 30, 2021) $ 26,666 2022 108,896 2023 112,558 2024 116,344 2025 2,507,580 Subtotal $ 2,872,044 $ 15,175,553 25 Table of Contents NOTE 16 — 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 nine months ended September 30, 2021 and 2020. NOTE 17 — RELATED PARTY TRANSACTIONS The Company has a corporate policy governing the identification, review, consideration and approval or ratification of transactions with related persons, as that term is defined in the Instructions to Item 404(a) of Regulation S-K, promulgated under the Securities Act (each such person a Related Party”). Under this policy, all Related Party transactions are identified and approved prior to consummation of the transaction to ensure they are consistent with the Company’s best interests and the best interests of its stockholders. Among other factors, the Company’s Board considers the size and duration of the transaction, the nature and interest of the of the Related Party in the transaction, whether the transaction may involve a conflict of interest, and if the transaction is on terms that are at least as favorable to the Company as would be available in a comparable transaction with an unaffiliated third party. The Company’s Board reviews all Related Party transactions at least annually to determine if it is in the best interest of the Company and the Company’s stockholders to continue, modify, or terminate any of the Related Party transactions. Envela’s Related Person Transaction Policy is available for review in its entirety under the “Investors” menu of the Company’s corporate relations website at www.envela.com. On May 20, 2019, the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board. ECHG executed a 5 -year, $ 6,925,979 note in connection with the Echo Transaction, amortized over 20 years at a 6 % annual interest rate. DGSE executed a 5 -year, $ 3,074,021 note to pay off the accounts payable – related party balance to a former Related Party as of May 20, 2019. That promissory note is also amortized over 20 years at a 6 % annual interest rate. Both notes are being serviced by operational cash flow. On January 1, 2020, revisions were made on the original documents for both DGSE and ECHG notes. Originally, the DGSE note stated the monthly interest and principal payment due was $ 41,866 and the ECHG note stated the monthly interest and principal payment due was $ 94,327 . The revised interest and principal payment due monthly on the note for DGSE is $ 22,203 . The revised interest and principal payment due monthly on the note for ECHG is $ 49,646 . For the three months ended September 30, 2021 and 2020, the Company paid Mr. Loftus $ 157,366 and $ 158,748 respectively, in interest on the Company’s outstanding notes payable, related party. For the nine months ended September 30, 2021 and 2020, the Company paid Mr. Loftus $ 442,719 and $ 442,550 , respectively, in interest on the Company’s outstanding notes payable, related party. NOTE 18 — SUBSEQUENT EVENTS On November 1, 2021, ECHG purchased the assets and liabilities of Avail Recovery Solutions, LLC, an Arizona limited liability company pursuant to an Asset Purchase Agreement dated November 1, 2021 for $ 4.5 million. The purchase closed with an initial payment of $2.5 million and $2.0 million to be paid by twelve (12) payments of $166,666.67 starting after 90 days after November 1, 2021 . The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global economic business conditions. Future sales on products like ours could decline or fluctuate due to increased or fluctuating commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic, the ultimate impact is highly uncertain and subject to change. The duration of any such impact cannot be predicted, nor can the timing of the development, distribution and acceptance of effective vaccines, booster shots or other treatments for potential COVID-19 divergent strains, including the Delta variant. In addition, the effects of the COVID-19 pandemic are subject to, among other things, the effect of government responses to the pandemic on our operations, including vaccine mandates, impacts of the pandemic on global and domestic economic conditions, including with respect to commercial activity, our customers and business partners, as well as consumer preferences and demand. 26 Table of Contents