Envela Corp 10-Q

Item 1. Financial Statements ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Unaudited) Three Months Ended March 31, 2022 2021 Revenue: Sales $ 47,415,098 $ 25,490,441 Cost of goods sold 37,704,064 19,186,177 Gross margin 9,711,034 6,304,264 Expenses: Selling, General & Administrative Expenses 6,559,755 4,153,229 Depreciation and Amortization 291,947 204,912 Total operating expenses 6,851,702 4,358,141 Operating income 2,859,332 1,946,123 Other income (expense), net ( 58,576 ) 271,941 Interest expense 123,239 179,022 Income before income taxes 2,677,517 2,039,042 Income tax expense 30,292 30,770 Net income $ 2,647,225 $ 2,008,272 Basic earnings per share: Net income $ 0.10 $ 0.07 Diluted earnings per share: Net income $ 0.10 $ 0.07 Weighted average shares outstanding: Basic 26,924,631 26,924,631 Diluted 26,939,631 26,939,631 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 2022 2021 Assets (unaudited) Current assets: Cash and cash equivalents $ 11,497,259 $ 10,138,148 Trade receivables, net of allowances 5,357,137 7,166,533 Inventories 14,621,575 14,048,436 Current right-of-use assets from operating leases 1,609,077 1,604,736 Prepaid expenses 612,475 439,038 Other current assets 1,765,355 969,624 Total current assets 35,462,878 34,366,515 Property and equipment, net 9,719,499 9,806,188 Goodwill 6,140,465 6,140,465 Intangible assets, net 2,912,370 3,024,245 Operating lease right-of-use assets 5,286,770 5,692,141 Other assets 236,761 237,761 Total assets $ 59,758,743 $ 59,267,315 Liabilities and stockholders’ equity Current liabilities: Accounts payable-trade $ 2,857,674 $ 2,488,396 Line of credit - 1,700,000 Notes payable 1,003,592 1,065,794 Current operating lease liabilities 1,584,169 1,573,824 Accrued expenses 1,501,178 1,789,366 Customer deposits and other liabilities 1,244,193 1,179,224 Total current liabilities 8,190,806 9,796,604 Notes payable, less current portion 15,826,264 15,970,337 Long-term operating lease liabilities, less current portion 5,467,131 5,873,057 Total liabilities 29,484,201 31,639,998 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 ( 10,167,704 ) ( 12,814,929 ) Total stockholders’ equity 30,274,542 27,627,317 Total liabilities and stockholders’ equity $ 59,758,743 $ 59,267,315 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2022 2021 (Unaudited) (Unaudited) Operations Net income $ 2,647,225 $ 2,008,272 Adjustments to reconcile net income to net cash provided by (used in) operations: Depreciation, amortization, and other 291,947 204,912 Bad debt expense - 6,249 Changes in operating assets and liabilities: Trade receivables 1,809,397 ( 344,103 ) Inventories ( 573,139 ) ( 1,623,485 ) Prepaid expenses ( 173,436 ) ( 576,578 ) Other assets ( 794,731 ) ( 100,000 ) Accounts payable and accrued expenses 81,088 ( 240,410 ) Operating leases 5,449 19,616 Customer deposits and other liabilities 64,969 260,615 Net cash provided by (used in) operations 3,358,769 ( 384,912 ) Investing Investment in note receivable - ( 123,472 ) Purchase of property and equipment ( 93,384 ) ( 200,563 ) Net cash used in investing ( 93,384 ) ( 324,035 ) Financing Payments on notes payable, related party - ( 71,853 ) Payments on notes payable ( 206,274 ) ( 40,239 ) Payments on line of credit ( 1,700,000 ) - Net cash used in financing ( 1,906,274 ) ( 112,092 ) Net change in cash and cash equivalents 1,359,111 ( 821,039 ) Cash and cash equivalents, beginning of period 10,138,148 9,218,036 Cash and cash equivalents, end of period $ 11,497,259 $ 8,396,997 Supplemental Disclosures Cash paid during the period for: Interest $ 129,989 $ 179,082 Income taxes $ - $ - The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Three Months ended March 31, 2021 and 2022 (Unaudited) Common Stock Preferred Stock Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Capital Deficit Equity Balances at January 1, 2021 26,924,631 $ 269,246 - $ - $ 40,173,000 $ ( 22,863,804 ) $ 17,578,442 Net Income - - - - - 2,008,272 2,008,272 Balances at March 31, 2021 26,924,631 $ 269,246 - $ - $ 40,173,000 $ ( 20,855,532 ) $ 19,586,714 Common Stock Preferred Stock Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Capital Deficit Equity Balances at January 1, 2022 26,924,631 $ 269,246 - $ - $ 40,173,000 $ ( 12,814,929 ) $ 27,627,317 Net Income - - - - - 2,647,225 2,647,225 Balances at March 31, 2022 26,924,631 $ 269,246 - $ - $ 40,173,000 $ ( 10,167,704 ) $ 30,274,542 . The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 — BASIS OF PRESENTATION 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, 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. 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 March 31, 2022 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”), 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 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. 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, 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. 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, 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. ECHG’s customers are companies and organizations that are based domestically and internationally. 7 Table of Contents For additional information on the businesses of both DGSE and ECHG, see “Item 1. 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. The U.S. 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. GAAP and include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated. NOTE 3 — ACCOUNTING POLICIES AND ESTIMATES Financial Instruments The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, prepaid expenses, other current assets, accounts payable, accrued expenses, customer deposits and other liabilities approximate fair value because of the immediate or short-term nature of these financial instruments. Notes payable and line of credit approximate fair value due to the market interest rate charged. Earnings Per Share Basic earnings per share of our common stock, par value $ 0.01 per share (our “Common Stock”), is computed by dividing net earnings available to holders of the Company’s Common Stock by the weighted average number of shares of Common Stock outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts requiring the Company to issue Common Stock were exercised or converted into Common Stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method. 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 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 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 . 8 Table of Contents 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: March 31, December 31, 2022 2021 DGSE Resale $ 12,282,472 $ 10,422,072 Recycle 30,071 11,995 Subtotal 12,312,543 10,434,067 ECHG Resale 2,044,911 3,350,159 Recycle 264,121 264,210 Subtotal 2,309,032 3,614,369 $ 14,621,575 $ 14,048,436 NOTE 5 — ACQUISITION 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 15 years. 9 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 for the Avail Transaction is allocated as follows: Description Amount Assets Cash $ 988,870 Account receivables 395,144 Inventories 486,736 Prepaid expenses 93,727 Fixed assets - net 247,038 Right-of-use assets 609,511 Other assets 13,268 Liabilities Account payables ( 562,778 ) Accrued liabilities ( 653,289 ) Operating lease liabilities ( 609,511 ) Net assets 1,008,716 Goodwill 3,491,284 Total Purchase Price $ 4,500,000 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 For the Three Months Ended March 31, 2022 March 31, 2021 (unaudited) (unaudited) Revenue $ 47,415,098 $ 27,110,216 Income from continuing operations $ 2,647,225 $ 2,354,895 Net income $ 2,647,225 $ 2,354,895 Basic net income per common share $ 0.10 $ 0.09 Diluted net income per common share $ 0.10 $ 0.09 10 Table of Contents NOTE 6 — GOODWILL The change in goodwill is as follows: March 31, December 31, 2022 2021 Opening balance $ 6,140,465 $ 1,367,109 Additions (1) - 4,773,356 Goodwill $ 6,140,465 $ 6,140,465 (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 . 11 Table of Contents NOTE 7 — PROPERTY AND EQUIPMENT Property and equipment consist of the following: March 31, December 31, 2022 2021 DGSE Land $ 1,640,220 $ 1,640,220 Building and improvements 2,781,903 2,764,529 Leasehold improvements 1,450,695 1,450,695 Machinery and equipment 1,056,315 1,056,315 Furniture and fixtures 554,881 526,250 Vehicles 22,859 22,859 7,506,873 7,460,868 Less: accumulated depreciation ( 2,422,573 ) ( 2,343,923 ) Sub-Total 5,084,300 5,116,945 ECHG Building and improvements 135,491 135,491 Machinery and equipment 1,145,832 1,109,306 Furniture and fixtures 145,950 145,950 1,427,273 1,390,747 Less: accumulated depreciation ( 289,945 ) ( 212,147 ) Sub-Total 1,137,328 1,178,600 Envela Land 1,106,664 1,106,664 Building and improvements 2,456,324 2,456,324 Machinery and equipment 34,528 23,676 3,597,516 3,586,664 Less: accumulated depreciation ( 99,645 ) ( 76,021 ) Sub-Total 3,497,871 3,510,643 $ 9,719,499 $ 9,806,188 12 Table of Contents NOTE 8 — INTANGIBLE ASSETS Intangible assets consist of the following: March 31, December 31, 2022 2021 DGSE Domain names $ 41,352 $ 41,352 Point of sale system 330,000 330,000 371,352 371,352 Less: accumulated amortization ( 286,002 ) ( 269,502 ) Subtotal 85,350 101,850 ECHG Trademarks (1) 1,483,000 1,483,000 Customer Contracts (1) 1,873,000 1,873,000 Trademarks/Tradenames (2) 114,000 114,000 Customer Relationships (2) 345,000 345,000 3,815,000 3,815,000 Less: accumulated amortization ( 987,980 ) ( 892,605 ) Subtotal 2,827,020 2,922,395 $ 2,912,370 $ 3,024,245 (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: DGSE ECHG Total 2022 (excluding the three months ending March 31, 2022) 49,500 286,125 335,625 2023 30,350 381,500 411,850 2024 5,500 381,500 387,000 2025 - 381,500 381,500 2026 - 381,500 381,500 Thereafter - 1,014,895 1,014,895 $ 85,350 $ 2,827,020 $ 2,912,370 13 Table of Contents NOTE 9— ACCRUED EXPENSES Accrued expenses consist of the following: March 31, December 31, 2022 2021 DGSE Accrued interest $ 12,793 $ 12,627 Payroll 157,349 131,325 Property taxes 61,014 88,046 Sales tax 70,006 150,070 Other administrative expenss 3,449 - Subtotal 304,611 382,068 ECHG Accrued interest 8,464 14,547 Payroll 192,625 334,431 Unvouchered payables - inventory 480,866 461,481 Material & shipping costs (COGS) 118,445 78,647 Other accrued expenses - 51,506 Subtotal 800,400 940,612 Envela Accrued interest 7,522 8,355 Payroll 11,128 25,175 Professional fees 203,743 220,101 Property Tax 21,300 84,920 Other administrative expenses 12,500 18,453 State income tax 139,974 109,682 Subtotal 396,167 466,686 $ 1,501,178 $ 1,789,366 NOTE 10 — 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, Teladvance, CEX and Avail. These five companies are involved in recycling and the reuse of electronic components. 14 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 March 31, 2022 and 2021: For The Three Months Ended March 31, 2022 2021 DGSE ECHG Consolidated DGSE ECHG Consolidated Revenue: Sales $ 35,782,872 $ 11,632,226 $ 47,415,098 $ 18,914,501 $ 6,575,940 $ 25,490,441 Cost of goods sold 31,559,410 6,144,654 37,704,064 16,106,866 3,079,311 19,186,177 Gross profit 4,223,462 5,487,572 9,711,034 2,807,635 3,496,629 6,304,264 Expenses: Selling, general and administrative expenses 2,137,949 4,421,806 6,559,755 1,782,437 2,370,792 4,153,229 Depreciation and amortization 106,963 184,984 291,947 96,822 108,090 204,912 2,244,912 4,606,790 6,851,702 1,879,259 2,478,882 4,358,141 Operating income 1,978,550 880,782 2,859,332 928,376 1,017,747 1,946,123 Other income/expense: Other income (expense) ( 27,992 ) ( 30,584 ) ( 58,576 ) 111,731 160,210 271,941 Interest expense 61,241 61,998 123,239 68,485 110,537 179,022 Income before income taxes 1,889,317 788,200 2,677,517 971,622 1,067,420 2,039,042 Income tax expense 13,177 17,115 30,292 13,705 17,065 30,770 Net income $ 1,876,140 $ 771,085 $ 2,647,225 $ 957,917 $ 1,050,355 $ 2,008,272 NOTE 11 — 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. 15 Table of Contents The following disaggregation of total revenue is listed by sales category and segment for the three months ended March 31, 2022 and 2021: CONSOLIDATED Three Months Ended March 31, 2022 2021 Revenues Gross Profit Margin Revenues Gross Profit Margin DGSE Resale $ 33,677,133 $ 3,742,852 11.1 % $ 17,320,641 $ 2,457,144 14.2 % Recycled 2,105,739 480,610 22.8 % 1,593,860 350,491 22.0 % Subtotal 35,782,872 4,223,462 11.8 % 18,914,501 2,807,635 14.8 % ECHG Resale 9,579,857 4,574,268 47.7 % 4,740,992 2,612,184 55.1 % Recycled 2,052,369 913,304 44.5 % 1,834,948 884,445 48.2 % Subtotal 11,632,226 5,487,572 47.2 % 6,575,940 3,496,629 53.2 % $ 47,415,098 $ 9,711,034 20.5 % $ 25,490,441 $ 6,304,264 24.7 % 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. 16 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 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. 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 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 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 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 . 17 Table of Contents 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 for the three months ended March 31, 2022 and 2021. NOTE 12 — 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 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. 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. 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. 18 Table of Contents Future annual minimum lease payments as of March 31, 2022: Operating Leases DGSE 2022 (excluding the three months ending March 31, 2022) $ 381,790 2023 499,984 2024 507,414 2025 364,269 2026 and thereafter 333,114 Total minimum lease payments 2,086,571 Less imputed interest ( 178,906 ) DGSE Sub-Total 1,907,665 ECHG 2022 (excluding the three months ending March 31, 2022) 991,870 2023 1,357,381 2024 1,396,129 2025 1,321,297 2026 and thereafter 507,780 Total minimum lease payments 5,574,457 Less imputed interest ( 430,822 ) ECHG Sub-Total 5,143,635 Total 7,051,300 Current portion 1,584,169 $ 5,467,131 NOTE 13 — BASIC AND DILUTED AVERAGE SHARES 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 March 31, 2022 2021 Basic weighted average shares 26,924,631 26,924,631 Effect of potential dilutive securities 15,000 15,000 Diluted weighted average shares 26,939,631 26,939,631 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 Long-term debt consists of the following: Outstanding Balance March 31, December 31, Current 2022 2021 Interest Rate Maturity DGSE Note payable, Farmers Bank (1) $ 2,745,186 $ 2,770,729 3.10 % November 15, 2026 Note payable, Truist Bank (2) 900,436 909,073 3.65 % July 9, 2030 Note payable, Texas Bank & Trust (3) 469,556 474,009 3.75 % September 14, 2025 Note payable, Texas Bank & Trust (4) 1,737,081 1,752,446 3.25 % July 30, 2031 DGSE Sub-Total 5,852,259 5,906,257 ECHG Note payable, Farmers Bank (1) 6,228,505 6,286,459 3.10 % November 15, 2026 Line of Credit (5) - 1,700,000 3.10 % November 15, 2024 Avail Transaction note (6) 1,933,333 2,000,000 0.00 % April 1, 2025 ECHG Sub-Total 8,161,838 9,986,459 Envela Note payable, Texas Bank & Trust (7) 2,815,759 2,843,415 3.25 % November 4, 2025 Sub-Total 16,829,856 18,736,131 Current portion 1,003,592 2,120,457 $ 15,826,264 $ 16,615,674 (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. 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 $ 1,195,000 . 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). 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 , 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 . (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 , five-year loan (the “TB&T Frisco Loan”), bearing an annual interest rate of 3.75 %, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $ 10,509 . (5) On November 23, 2021, the Company secured a 36-month line of credit from Farmers State Bank of Oakley Kansas (“FSB Facility”) for $ 3,500,000 at a 3.1 % annual interest rate. 19 Table of Contents (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, Amount 2022 (excluding the three months ended March 31, 2022) $ 76,667 2023 105,428 2024 108,743 2025 112,163 2026 2,342,185 Subtotal $ 2,745,186 Note payable, Truist Bank - DGSE Year Ending December 31, Amount 2022 (excluding the three months ended March 31, 2022) $ 26,018 2023 35,988 2024 37,342 2025 38,748 2026 40,206 Thereafter 722,134 Subtotal $ 900,436 20 Table of Contents Note payable, Texas Bank & Trust - DGSE Year Ending December 31, Amount 2022 (excluding the three months ended March 31, 2022) $ 13,370 2023 18,503 2024 19,209 2025 418,474 Subtotal $ 469,556 Note payable, Texas Bank & Trust - DGSE Year Ending December 31, Amount 2022 (excluding the three months ended March 31, 2022) $ 52,616 2023 72,442 2024 74,832 2025 77,300 2026 79,600 Thereafter 1,380,291 Subtotal $ 1,737,081 Note payable, Farmers Bank - ECHG Year Ending December 31, Amount 2022 (excluding the three months ended March 31, 2022) $ 173,949 2023 239,204 2024 246,725 2025 254,484 2026 5,314,143 Subtotal $ 6,228,505 Note payable - Avail Transaction Year Ending December 31, Amount 2022 (excluding the three months ended March 31, 2022) $ 433,333 2023 666,667 2024 666,667 2025 166,666 Subtotal $ 1,933,333 21 Table of Contents Note payable, Texas Bank & Trust - Envela Year Ending December 31, Amount 2022 (excluding the three months ended March 31, 2022) $ 82,078 2023 112,653 2024 116,441 2025 2,504,587 Subtotal $ 2,815,759 $ 16,829,856 Future scheduled aggregate amount of principal payments and maturities of our notes payable as of March 31, 2022 are as follows: Scheduled Principal Loan Scheduled Principal Payments and Maturities by Year: Payments Maturities Total 2022 (excluding the three months ended March 31, 2022) $ 858,031 $ - $ 858,031 2023 1,250,885 - 1,250,885 2024 1,269,959 - 1,269,959 2025 595,940 2,976,482 3,572,422 2026 434,243 7,341,891 7,776,134 2027 and Thereafter 555,443 1,546,982 2,102,425 Total $ 4,964,501 $ 11,865,355 $ 16,829,856 NOTE 15 — STOCK-BASED COMPENSATION The Company accounts for share-based compensation by measuring the cost of employee services received in exchange for an award of equity instruments, including grants of stock options, based on the fair value of the award at the date of grant. In addition, to the extent that the Company receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in the consolidated statement of cash flows. There was no stock-based compensation expense for the three months ended March 31, 2022 and 2021. 22 Table of Contents NOTE 16 — 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, 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. 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 . Both notes were being serviced by operational cash flow. On November 23, 2021, both notes were refinanced by Farmers State Bank of Oakley Kansas. For the three months ended March 31, 2022 and 2021, the Company paid Mr. Loftus $ 0 and $ 143,189 , respectively, in interest on the Company’s notes payable, related party. NOTE 17 — SUBSEQUENT EVENTS The 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. 23 Table of Contents