Envela Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context indicates otherwise for one of our specific operating segments, references to “we,” “us,” “our,” the “Company” and “Envela” refer to the consolidated business operations of Envela Corporation, and all of its direct and indirect subsidiaries. Forward-Looking Statements This Quarterly Report on Form 10-Q for the quarter ended June 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; and (iii) our strategies, plans and objectives, together with other statements that are not historical facts, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate” or “believe.” We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements other than statements of historical information provided herein are forward-looking based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ from current expectations are described under the section entitled “Risk Factors” in the Company’s 2020 Annual Report and any material updates are described under the section of this Form 10-Q entitled “Risk Factors” and elsewhere in this Form 10-Q. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital expenditures, or store growth plans, or to reflect the occurrence of unanticipated events. Envela Overview The Company operates through via 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. Through DGSE, the Company recommercializes luxury hard assets and operates the Dallas Gold and Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands (collectively, “DGSE”). Through ECHG, the Company recommercializes business IT equipment and consumer electronic devices and operates Echo, ITAD USA and Teladvance. 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. 27 Table of Contents DGSE Business Overview DGSE is headquartered in Dallas, Texas. DGSE focuses on sustainable, authenticated recommerce of luxury hard assets, including diamonds. Its retail strategy is anchored in being an information resource for clients, bringing transparency to purchase and sale transactions, and offering value and liquidity to those seeking to buy, sell or trade jewelry, fine watches, diamonds, rare coins and currency as well as other valuables. DGSE wholesales and retails these items through its Charleston Gold & Diamond Exchange and Dallas Gold & Silver Exchange operations. DGSE has specialized in buying and selling jewelry for over 40 years, making our expert staff among the best in the business. DGSE also maintains a number of related operations, including precious-metal bullion exchange and refiner partnerships, on-site jewelry and watch repair and restoration at its Dallas flagship location, consignment offerings and partnerships, and design of custom bridal and fashion jewelry. For additional information regarding DGSE, see “Item 1, Business-Operating Segments-DGSE Segment.” In the Company’s 2020 Annual Report. DGSE Recommerce Activities Our ability to offer quality pre-owned goods at prices significantly lower than original retail prices attracts value-conscious customers. The gross profit on sales of inventory depends primarily on our assessment of the purchase value at the time the property is purchased and our ability to sell that merchandise in a timely manner. As a significant portion of our inventory and sales involve gold and jewelry, our results can be influenced by the market price of gold and diamonds. DGSE Precious Metals Pricing and Business Impact DGSE’s business, similar to the jewelry industry overall, is effected by fluctuations in precious-metals pricing. Such fluctuations, particularly with respect to gold which accounts for a majority of DGSE’s merchandise costs, can have significant impact on its earnings and cash availability. Precious metals pricing rises and falls based upon global supply and demand dynamics. Gold prices surged during the beginnings of the COVID-19 pandemic, starting at $1,523 an ounce, as determined by the London AM Fix on January 1, 2020, and rose strongly during the first half of 2020 peaking at $2,060 an ounce during August. 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. When prices rise for gold or other precious metals, DGSE has observed that individual sellers tend to be more likely to sell their unwanted crafted-precious-metal items and at the same time retail customers tend to buy bullion and other gold products so as not to miss out on potential market gains. When prices decline for gold or other precious metals, DGSE has observed that individual buyers tend to buy due to the decrease in gold prices. While the precious-metals industry has slowed, our focus will be to grow our jewelry, diamond and fine watch business, as well as maintain our business of purchasing crafted-precious-metal items, a diversified strategy which we believe will continue to grow and be a profit engine in the future. In addition, DGSE depends on purchasing products and materials from secondary markets. We are reliant on our ability to obtain an adequate supply of products and material at prices or other terms acceptable to it. DGSE Growth and Expansion Our strategy is to expand the number of locations we operate through opening new (“de novo”) locations in both current markets of Dallas/Fort Worth, Texas and Charleston, South Carolina and potential new markets. Our ability to add new stores is dependent on several variables, such as projected achievement of internal investment hurdles, the availability of acceptable sites, the regulatory environment, local zoning ordinances, access to capital and the availability of qualified personnel. We see opportunity for further expansion through de novo openings in the United States. ECHG Business Overview ECHG owns and operates Echo, ITAD USA and Teladvance, through which it primarily buys and resells or recycles consumer electronic components and IT equipment. Echo focuses on end-of-life electronics recycling and also offers disposal transportation and product tracking, ITAD USA provides IT equipment disposition including compliance and data sanitization services and Teladvance operates as a value-added reseller by providing offerings and services to companies looking to either upgrade capabilities or dispose of equipment. In addition, as a result of the CExchange Transaction, Teladvance now offers retail customers a trade-in program to offer their customers the ability to upgrade their old phones through a trade-in program. Like DGSE, ECHG also maintains relationships with refiners or recyclers to which it sells extracted valuable materials from electronics and IT equipment that are not appropriate for resale or reuse. ECHG Recommerce Activities A portion of ECHG’s business depends on obtaining products and material from secondary markets and is reliant on its ability to obtain an adequate supply of products and material at prices and other items acceptable to it. Although we believe that the long-term prospects for the industry remain bright, but because we do not have unlimited backlogs, our business can be promptly affected by short-term market fluctuations. ECHG Metals Pricing and Business Impact ECHG’s recycling business is affected by precious and other non-ferrous metal prices, which fluctuate based upon global supply-and-demand dynamics, among other things, with the greatest impact relating to gold. Recent fluctuations in gold prices are discussed above 28 Table of Contents ECHG Growth and Expansion ECHG’s strategy is to expand both organically and through acquisitions. As an organization, ECHG strives to deliver value through organic growth, high customer loyalty and retention as well as strategic acquisitions. ECHG is committed to continuous innovation. Many of ECHG’s clients have made commitments to going carbon neutral over the next few years and ECHG sees the potential to further expand key relationships as it partners with them in more ways to help them achieve their goal. With an emphasis on increasing recurring revenues and expanding our margins, ECHG believes its organic strategy will ultimately drive strong financial performance, including cash flow to support our acquisition strategy. ECHG’s business strategy has always included pursuing synergistic acquisitions, and ECHG’s plans to continue to expand its business by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance its growth. For additional information regarding ECHG, see “Item 1. Business—Operating Segments—ECHG Segment.” in the Company’s 2020 Annual Report. COVID-19 The COVID-19 pandemic continues to affect the U.S. 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. Government stimulus checks, eviction moratoriums and forbearances on mortgages and student loans may have contributed and may still be contributing to this effect. To date, this drop has been offset by other areas of our business. This diversity, combined with ECHG and DGSE’s continued focus on disciplined operations, makes us optimistic for our future success. The full extent and duration of the COVID-19 impact on the global economy generally, and on our business specifically, is currently unknown. A prolonged pandemic and recovery may have an adverse effect on our results of operations, financial position and liquidity in future periods. Critical Accounting Policies and Estimates For a discussion of critical accounting policies, see Note 3 to the interim condensed consolidated financial statements included herein. Results of Operations General The following disaggregation of total revenue is listed by sales category and segment for the three months ended June 30, 2021 and 2020: CONSOLIDATED Three Months Ended June 30, 2021 2020 Revenues Gross Profit Margin Revenues Gross Profit Margin DGSE Resale $ 20,893,838 $ 2,678,640 12.8 % $ 13,421,969 $ 1,444,814 10.8 % Recycled 2,118,486 418,356 19.7 % 927,060 169,951 18.3 % Subtotal 23,012,324 3,096,996 13.5 % 14,349,029 1,614,765 11.3 % ECHG Resale 8,595,910 3,019,685 35.1 % 4,257,032 2,022,090 47.5 % Recycled 2,115,772 1,011,209 47.8 % 1,939,546 834,403 43.0 % Subtotal 10,711,682 4,030,894 37.6 % 6,196,578 2,856,493 46.1 % $ 33,724,006 $ 7,127,890 21.1 % $ 20,545,607 $ 4,471,258 21.8 % 29 Table of Contents The following disaggregation of total revenue is listed by sales category and segment for the six months ended June 30, 2021 and 2020: CONSOLIDATED Six Months Ended June 30, 2021 2020 Revenues Gross Profit Margin Revenues Gross Profit Margin DGSE Resale $ 38,214,479 $ 5,135,784 13.4 % $ 31,963,866 $ 3,492,247 10.9 % Recycled 3,712,346 768,847 20.7 % 2,748,747 486,700 17.7 % Subtotal 41,926,825 5,904,631 14.1 % 34,712,613 3,978,947 11.5 % ECHG Resale 13,336,902 5,631,869 42.2 % 7,783,260 3,442,266 44.2 % Recycled 3,950,720 1,895,654 48.0 % 3,878,877 2,351,325 60.6 % Subtotal 17,287,622 7,527,523 43.5 % 11,662,137 5,793,591 49.7 % $ 59,214,447 $ 13,432,154 22.7 % $ 46,374,750 $ 9,772,538 21.1 % Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020 Revenue. 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 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. The Company continues to operate at full strength and will take measures to keep our employees safe where possible. 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. 30 Table of Contents 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. 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. 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. 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. 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. 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. 31 Table of Contents 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. Differences between our effective income tax rate and the U.S. federal statutory rate are the result of state taxes, non-deductible expenses and changes in the valuation allowance in relation to the deferred tax asset for net operating loss carryforwards. Net Income . We recorded a net income of $2,153,112 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. 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. 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. 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. 32 Table of Contents 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. 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. 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. 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. 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. 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. 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. Net Income . 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. 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. 33 Table of Contents 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. 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. For more information, see Note 15 to our interim condensed financial statements, which is incorporated into this item by reference. In addition, on May 17, 2019, the Company secured a twelve month line of credit from Texas Bank and Trust for up to $1,000,000 (the “TB&T Facility”). The TB&T Facility was renewed for an additional 24 months, for a maturity date of May 16, 2022, and the limit of the TB&T Facility was increased to $3,500,000 on May 17, 2020. 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. From time to time, we have adjusted and may further adjust our inventory levels to meet seasonal demand or in order to meet working capital requirements. Management believes we have sufficient capital resources to meet working capital requirements. In the event of significant growth in retail and wholesale jewelry sales and recycling demand, whether purchases or services, our demand for additional working capital will increase due to a related need to stock additional jewelry inventory, increases in wholesale accounts receivable and the purchasing of recycled material. Historically we have funded these activities through operations. If additional working capital is required, we will seek additional loans from individuals or other commercial banks. If necessary, inventory levels may be adjusted in order to meet unforeseen working-capital requirements. We have historically renewed, extended or replaced short-term debt as it matures, and management believes that we will be able to continue to do so in the near future. The COVID-19 pandemic 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. 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. 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. 34 Table of Contents Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Because we are a “smaller reporting company,” we are not required to disclose the information required by this item.