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Item 1. Financial Statements

2022-05-11 compared with 2021-11-04 · 163 added, 241 removed, 334 unchanged (55% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of goods sold

3 unchanged sentences

Operating income

Other income (expense), net

Interest expense

Other income (expense):

Gain on forgiveness of Federal Loan

Write-off of notes receivable and accrued interest receivable

Income before income taxes

6 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

Current assets:

3 unchanged sentences

Prepaid expenses

Other current assets

Total current assets

Notes receivable, less current portion

Property and equipment, net

1 unchanged sentence

Operating lease right-of-use assets

Other long-term assets

Liabilities and stockholders’ equity

1 unchanged sentence

Accounts payable-trade

Notes payable, related party

Line of credit

Notes payable

3 unchanged sentences

Total current liabilities

Notes payable, related party, less current portion

Notes payable, less current portion

18 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30,

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

For the Three Months Ended March 31,

Adjustments to reconcile net income to net cash provided by (used in) operations:

Depreciation, amortization, and other

Bad debt expense

Gain on forgiveness of Federal Loan

( 1,668,200 )

Write-off of note receivables and accrued interest receivable

Changes in operating assets and liabilities:

1 unchanged sentence

( 1,623,485 )

( 1,661,332 )

( 2,647,432 )

( 1,108,062 )

Prepaid expenses

2 unchanged sentences

Customer deposits and other liabilities

Net cash provided by operations

Net cash provided by (used in) operations

Investment in note receivable

( 1,500,000 )

Purchase of property and equipment

( 3,064,277 )

( 1,882,591 )

Acquisition of CExchange assets and liabilities, net of cash acquired

Net cash used in investing

Payments on notes payable, related party

Payments on notes payable

Payments on line of credit

( 1,700,000 )

Net cash used in financing

( 1,906,274 )

Payments on notes payable, related party

Payments on notes payable, retail buildings

Payments on notes payable, office building

Proceeds from notes to purchase property

Proceeds from Paycheck Protection Program Note

Net cash provided by financing

Net change in cash and cash equivalents

3 unchanged sentences

Cash paid during the period for:

Non cash activites:

Acquisition of CExchange assets and liabilities

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

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended September 30, 2020 and 2021

Preferred Stock

Stockholders’

Balances at June 30, 2020

$ ( 27,507,424 )

Balances at September 30, 2020

$ ( 24,522,600 )

Preferred Stock

Balances at June 30, 2021

$ ( 18,702,420 )

Balances at September 30, 2021

$ ( 15,596,019 )

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

ENVELA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months ended September 30, 2020 and 2021

For the Three Months ended March 31, 2021 and 2022

Preferred Stock

Stockholders’

Balances at December 31, 2019

Additional Paid-in

Total Stockholders'

Balances at January 1, 2021

$ ( 22,863,804 )

Balances at September 30, 2020

Balances at March 31, 2021

$ ( 20,855,532 )

Preferred Stock

Stockholders’

Balances at December 31, 2020

Total Stockholders'

Balances at January 1, 2022

$ ( 12,814,929 )

Balances at September 30, 2021

Balances at March 31, 2022

$ ( 10,167,704 )

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 — BASIS OF PRESENTATION

2 unchanged sentences

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”).

The Company suggests that these financial statements be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 16, 2022 (the “2021 Annual Report”).

In the opinion of the management of the Company, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly its results of operations and cash flows for the periods presented.

1 unchanged sentence

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.

The information provided as of March 31, 2022 in these notes to the interim condensed consolidated financial statements is unaudited.

NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS

6 unchanged sentences

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”).

Through ECHG, LLC (“ECHG”), it operates Echo Environmental Holdings, LLC (“Echo”), ITAD USA Holdings, LLC (“ITAD USA”), Teladvance, LLC (“Teladvance”), CEX Holdings, LLC (“CEX”) and Avail Recovery Solutions, LLC (“Avail”).

Envela is a Nevada corporation, headquartered in Irving, Texas.

DGSE primarily buys and resells or recycles luxury hard assets like jewelry, diamonds, gemstones, fine watches, rare coins and related collectibles, precious-metal bullion products, gold, silver and other precious-metals.

DGSE operates six jewelry stores at both the retail and wholesale levels throughout the United States via its facilities in Texas and South Carolina.

DGSE operates seven jewelry stores at both the retail and wholesale levels throughout the United States via its facilities in Texas and South Carolina.

Buying and selling items for their precious-metals content is a major method by which DGSE markets itself.

1 unchanged sentence

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.

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.

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.

Teladvance, CEX and Avail operate as value-added resellers by providing offerings and services to companies looking either to upgrade capabilities or dispose of equipment.

Like DGSE, ECHG also maintains relationships with refiners or recyclers to which it sells valuable materials it extracts from electronics and IT equipment that are not appropriate for resale or reuse.

2 unchanged sentences

Business – Operating Segments” in the Company’s 2021 Annual Report.

The escalating war between Russia and Ukraine presents instability and volatility in global markets.

Although there has been, and will be volatility, management feels the impact has been minimal to our operations to this point.

government has imposed sanctions and export controls against Russia and Russian interests and threatened additional sanctions and controls.

The impact of these sanctions are difficult to measure concerning DGSE and ECHG.

The price and supply of precious metals along with supply-chain issues will undoubtedly cause the Company concern if the war broadens beyond the borders of Ukraine.

The interim condensed consolidated financial statements have been prepared in accordance with U.S.

3 unchanged sentences

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.

The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, prepaid expenses, other current assets, accounts payable, accrued expenses, customer deposits and other liabilities approximate fair value because of the immediate or short-term nature of these financial instruments.

Notes payable and line of credit approximate fair value due to the market interest rate charged.

Earnings Per Share

5 unchanged sentences

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.

As a result of the current market and economic conditions related to the coronavirus pandemic (“COVID-19”) and the war between Ukraine and Russia, in accordance with step 1 of the guidelines set forth in ASC 350-20-35-3A, the Company concluded there were no impairments of goodwill that resulted from triggering events due to COVID-19 and the war between Ukraine and Russia as of March 31, 2022.

The Company will continue to evaluate goodwill for the ECHG segment.

For tax purposes, goodwill is amortized and deductible over fifteen years.

ECHG goodwill was allocated in connection with 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.

ECHG goodwill was allocated in connection with three acquisitions of the assets now held by Echo on May 20, 2019 (the “Echo Transaction”), of the assets now held by Teladvance on June 9, 2021 (the “CExchange Transaction”) and of the assets now held by Avail on October 29, 2021 (the “Avail Transaction”).

There was a preliminary addition to goodwill with the Avail Transaction of $ 3,491,285 .

There has been no other adjustments or impairment charges to goodwill.

As of March 31, 2022 and December 31 2021, goodwill was $ 6,140,465 .

Recent Accounting Pronouncements

6 unchanged sentences

A summary of inventories is as follows:

September 30,

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.

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.

$ 12,282,472 $ 10,422,072

30,071 11,995

12,312,543 10,434,067

2,044,911 3,350,159

264,121 264,210

2,309,032 3,614,369

$ 14,621,575 $ 14,048,436

NOTE 5 — 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.

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.

On October 29, 2021, ECHG entered into the Avail Transaction to purchase all of the assets, liabilities and rights and interests for $ 4,500,000 of Avail Recovery Solutions, an Arizona company.

The purchase was facilitated by an initial payment of $ 2,500,000 at closing, and the remaining $ 2,000,000 to be paid out by 12 quarterly payments starting April 1, 2022, of $ 166,667 each.

See Note 14 to our consolidated financial statements for more information on this loan.

The installment note payable for the Avail Transaction imputed at 3.1 % interest.

As part of the Avail Transaction, goodwill was preliminarily recorded as $ 3,491,284 , which is the purchase price less the approximate fair value of the net assets and liabilities purchased, as shown in the purchase price allocation in the following table.

The Company’s goodwill is related to the ECHG segment.

ECHG has its own separate financial information to perform goodwill impairment testing.

The Company will evaluate goodwill based on cash flows for the ECHG segment.

For tax purposes, goodwill is amortized and deductible over fifteen ( 15 ) years.

For tax purposes, goodwill is amortized and deductible over 15 years.

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:

The preliminary purchase price for the Avail Transaction is allocated as follows:

Account receivables

Prepaid expenses

Fixed assets - net

Right-of-use assets

Account payables

Accrued liabilities

Operating lease liabilities

Total Purchase Price

The following table compares the results of Avail as part of the Company’s financial results for the three months ended March 31, 2022, and the Company’s results of operations as if they were combined for the three months ended March 31, 2021:

Consolidated Statement of Income

Proforma Combined

For the Three Months Ended

March 31, 2022

March 31, 2021

Income from continuing operations

Basic net income per common share

Diluted net income per common share

NOTE 6 — GOODWILL

The changes in goodwill is as follows:

September 30,

The change in goodwill is as follows:

Opening balance

Additions (1)

Impairment adjustment

(1) Addition is in the connection with the CExchange Transaction on June 9, 2021.

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

NOTE 7 — PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

September 30,

Building and improvements

12 unchanged sentences

accumulated depreciation

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 .

NOTE 8 — INTANGIBLE ASSETS

Intangible assets consist of the following:

September 30,

Point of sale system

accumulated amortization

Trademarks (1)

Customer Contracts (1)

Trademarks/Tradenames (2)

Customer Relationships (2)

accumulated amortization

The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2021:

2021 (excluding the nine months ending September 30, 2021)

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

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

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

2022 (excluding the three months ending March 31, 2022)

NOTE 9— ACCRUED EXPENSES

Accrued expenses consist of the following:

September 30,

Accrued interest

Board member fees

Property taxes

1 unchanged sentence

Accrued interest

Unvouchered payables - inventory

Material & shipping costs (COGS)

Other accrued expenses

9 unchanged sentences

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.

The ECHG segment includes Echo, ITAD USA, Teladvance, CEX and Avail.

These five companies are involved in recycling and the reuse of electronic components.

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.

2 unchanged sentences

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,

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

For The Three Months Ended March 31,

Cost of goods sold

2 unchanged sentences

Operating income

Interest expense

Other income/expense:

Gain on forgiveness of Federal Loan

Write-off of notes receivable and accrued interest receivable

Income before income taxes

Income tax expense

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,

Cost of goods sold

Selling, general and administrative expenses

Depreciation and amortization

Operating income

Interest expense

Other income (expense)

Gain on forgiveness of Federal Loan

Write-off of notes receivable and accrued interest receivable

Interest expense

Income before income taxes

7 unchanged sentences

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:

Three Months Ended September 30,

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

Nine Months Ended September 30,

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

Three Months Ended March 31,

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.

25 unchanged sentences

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 .

Our return allowance as of March 31, 2022 and December 31, 2021 remained the same for both periods, at approximately $ 28,000 .

ECHG has several revenue streams and recognize revenue according to ASC 606 at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to the customer.

26 unchanged sentences

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.

DGSE had no allowance for doubtful accounts balance as of March 31, 2022 and December 31, 2021.

Some of ECHG’s customers are on payment terms, and although low risk, occasionally the need arises to record an allowance for receivables that are deemed high risk to collect.

We 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.

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.

We established an allowance for estimated uncollectable receivables related to sales based on historical collections.

Our allowance as of March 31, 2022 and December 31, 2021 was $ 1,582 .

Income Taxes :

11 unchanged sentences

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.

We have not taken a tax position that, if challenged, would have a material effect on the financial statements or the effective tax rate for the three months ended March 31, 2022 and 2021.

NOTE 12 — LEASES

2 unchanged sentences

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 Company has seven operating leases as of March 31, 2022—five in the Dallas/Fort Worth Metroplex, one in Charleston, South Carolina and one in Chandler, Arizona.

The lease for DGSE’s flagship store located at 13022 Preston Road, Dallas, Texas expires on January 31, 2027, with an option to extend the lease for an additional five years, at market rate as determined by the prevailing market rate for comparable space in comparable buildings in the vicinity.

The lease for DGSE’s Grand Prairie, Texas location expires June 30, 2022, and has no current renewal options.

1 unchanged sentence

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.

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:

2021 (excluding the nini months ending September 30, 2021)

The lease for ECHG’s Echo location on W.

Belt Line Road, in Carrollton, Texas, expires January 31, 2026.

The lease for ECHG’s Teladvance location, which also houses ITAD USA, on Realty Road in Carrollton, Texas expires January 31, 2027.

The lease for ECHG’s Avail location in Chandler, Arizona expires May 31, 2025.

All of the Company’s seven leases as of March 31, 2022 are triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance.

Leasing costs for the three months ended March 31, 2022 and 2021 was $ 622,863 and $ 449,486 , respectively, comprised of a combination of minimum lease payments and variable lease costs.

As of March 31, 2022, the weighted average remaining lease term and weighted average discount rate for operating leases was 3.3 years and 4.4 %, respectively.

For the three months ended March 31, 2022 and 2021, the Company’s cash paid for operating lease liabilities was $ 616,097 and $ 501,907 respectively.

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

2022 (excluding the three months ending March 31, 2022)

2026 and thereafter

1 unchanged sentence

Less imputed interest

DGSE Subtotal

2021 (excluding the nine months ending September 30, 2021)

DGSE Sub-Total

2022 (excluding the three months ending March 31, 2022)

2026 and thereafter

1 unchanged sentence

Less imputed interest

ECHG Subtotal

Less current portion

( 1,092,996 )

Long-term operating lease liability

ECHG Sub-Total

Current portion

NOTE 13 — 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:

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

For the Three Months Ended

September 30,

Basic weighted average shares

1 unchanged sentence

Diluted weighted average shares

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,

Basic weighted average shares

Effect of potential dilutive securities

Diluted weighted average shares

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.

For the three months ended March 31, 2022 and 2021, there was a total of 15,000 common stock options, warrants, and Restricted Stock Units (RSUs) unexercised, respectively.

For the three months ended March 31, 2022 and 2021, there were no anti-dilutive shares.

NOTE 14 — LONG-TERM DEBT

1 unchanged sentence

Outstanding Balance

September 30,

Interest Rate

Note payable, related party (1)

Note payable, Farmers Bank (1)

November 15, 2026

Note payable, Truist Bank (2)

4 unchanged sentences

DGSE Sub-Total

Note payable, related party (1)

Note payable, Farmers Bank (1)

November 15, 2026

Line of Credit (5)

November 15, 2024

Avail Transaction note (6)

April 1, 2025

ECHG Sub-Total

Note payable, Texas Bank & Trust (7)

Novemeber 4, 2025

Note payable (5)

Envela Sub-Total

November 4, 2025

Current portion

(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.

Loftus, the Company’s CEO, President and Chairman of the Board.

ECHG, LLC executed a five-year, $ 6,925,979 note for the Echo Transaction, amortized over 20 years at a 6 % annual interest rate.

The interest and principal payment due monthly was $ 49,646 .

DGSE executed a five-year, $ 3,074,021 note to pay off the accounts payable – related party balance to a former Related Party as of May 20, 2019.

That promissory note was also amortized over 20 years at a 6 % annual interest rate.

The interest and principal payment due monthly on the note for DGSE was $ 22,203 .

On November 23, 2021, both notes were refinanced by Farmers State Bank of Oakley Kansas.

(2) On July 9, 2020, DGSE closed the purchase of a new retail building located at 610 E.

Round Grove Road in Lewisville, Texas for $ 1.195 million.

Round Grove Road in Lewisville, Texas for $ 1,195,000 .

The purchase was partly financed through a $ 956,000 , 10 year loan (the “Truist Lewisville Loan”), bearing an annual interest rate of 3.65 %, amortized over 20 years, payable to Truist Bank (f/k/a BB&T Bank).

2 unchanged sentences

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 purchase was partly financed through a $ 496,000 , five-year loan (the “TB&T Grapevine Loan”), bearing an annual interest rate of 3.75 %, amortized over 20 years, payable to Texas Bank and Trust.

The note has monthly interest and principal payments of $ 2,941 .

(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.

(4) On July 30, 2021, 9166 Gaylord Holdings, LLC, a wholly owned subsidiary of DGSE, closed the purchase of a new retail building located at 9166 Gaylord Parkway in Frisco, Texas for $ 2,215,500 .

The purchase was partly financed through a $ 1,772,000 , 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 purchase was partly financed through a $ 1,772,000 , five-year loan (the “TB&T Frisco Loan”), bearing an annual interest rate of 3.75 %, amortized over 20 years, payable to Texas Bank and Trust.

The note has monthly interest and principal payments of $ 10,509 .

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

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

(6) On October 29, 2021, ECHG entered into the Avail Transaction to purchase all of the assets, liabilities and rights and interests of Avail AZ, for $ 4.5 million.

The purchase was facilitated by an initial payment of $2.5 million at closing, and the remaining $2.0 million to be paid out by 12 quarterly payments starting April 1, 2022, of $166,667 each.

The Installment note payable for the Avail Transaction imputed at 3.1%

(7) On November 4, 2020, 1901 Gateway Holdings, LLC, a wholly owned subsidiary of the Company, closed on the purchase of a new office building located at 1901 Gateway Drive, Irving, Texas for $ 3.521 million.

The building was partially financed through a $ 2,960,000 , 5-year loan (the “TB&T Irving Loan”), bearing an interest rate of 3.25 %, amortized over 20 years, payable to Texas Bank and Trust.

The note has monthly interest and principal payments of $ 16,792 .

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

Note payable, Farmers State Bank - DGSE

Year Ending December 31,

2021 (excluding the nine months ended September 30, 2021)