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 March 31, 2022 (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 2021 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 two recommerce business segments represented by its two direct subsidiaries, DGSE and ECHG. 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. Through ECHG, the Company recommercializes business IT equipment and consumer electronic devices and operates Echo, ITAD USA, Teladvance, CEX and Avail. Echo focuses on end-of-life electronics recycling and sustainability, 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. In addition to its operations through DGSE and ECHG, Envela also leases unused space at its Company headquarters in Irving, Texas to commercial tenants. DGSE Business Overview 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 2021 Annual Report. 24 Table of Contents 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. Because DGSE buys and resells precious metals, it is impacted by changes in precious metal pricing which rises and falls based upon global supply and demand dynamics, with the greatest impact on us relating to gold as it represents a significant portion of the precious metal in which we trade. Gold prices surged during the beginnings of the COVID-19 pandemic, rising steeply during Fiscal 2020 but receding somewhat toward the end of Fiscal 2020. Gold prices started January 1, 2021 at $1,891 an ounce, as determined by the London AM Fix and dipped to a low of $1,683 an ounce on March 30, 2021. Gold then began to rebound throughout the remainder of the year closing at $1,820 on December 31, 2021, as determined by the London AM Fix. During fiscal year 2021, gold prices receded 4% from December 31, 2020. Gold rose 7% to $1,942 during the first three months of Fiscal 2022. The COVID-19 pandemic continues to affect the recommerce business in unpredictable ways. Although there are variants of COVID-19 affecting the health of the United States, employment figures improved throughout 2021. The unemployment rate improved from over six percent (6%) in January of 2021 to four percent (4%), as of January 2022. 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 new openings in the United States. The Company expects capital expenditures over the next twelve months including potential purchase of additional properties by DGSE. 25 Table of Contents ECHG Business Overview ECHG owns and operates Echo, ITAD USA, Teladvance, CEX and Avail, 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, CEX and Avail operates as value-added resellers 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. 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 2021 Annual Report. COVID-19 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 and Omnicron variants. 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. Critical Accounting Policies and Estimates For a discussion of critical accounting policies, see Note 3 to the interim condensed consolidated financial statements included herein. 26 Table of Contents Results of Operations General 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 % Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021 Revenue. Revenue related to DGSE’s continuing operations increased by $16,868,371, or 89%, during the three months ended March 31, 2022, to $35,782,872, as compared to revenue of $18,914,501 during the same period in 2021. Resale revenue, such as bullion, jewelry, watches and rare coins, increased by $16,356,492, or 94%, during the three months ended March 31, 2022, to $33,677,133 as compared to resale revenue of $17,320,641 during the same period in 2021. Recycled-material sales increased 32% to $2,105,739 for the three months ended March 31, 2022, as compared to recycled-material sales of $1,593,860, for the three months ended March 31, 2021. Revenue increased for resale and recycled items for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to the effectiveness of DGSE’s on-line advertising and marketing campaign that saw DGSE increase its advertising budget by 56% during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Revenue related to ECHG’s continuing operations for the three months ended March 31, 2022 increased by $5,056,286, or 77%, to $11,632,226, as compared to revenue of $6,575,940 during the same period in 2021. Resale revenue increased by $4,838,865, or 102%, to $9,579,857, for the three months ended March 31, 2022, as compared to revenue of $4,740,992 during the three months ended March 31, 2021. Recycled sales increased by $217,421 or 12%, to $2,052,369 for the three months ended March 31, 2022, as compared to recycled sales of $1,834,948 for the three months ended March 31, 2021. Revenue increased for resale and recycled items for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, primarily due to the addition of Avail and CEX for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The Company has had no layoffs to-date or terminations due to the COVID-19 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. 27 Table of Contents Gross Profit. Gross profit related to DGSE’s operations for the three months ended March 31, 2022, increased by $1,415,827 or 50%, to $4,223,462, as compared to gross profit of $2,807,635 during the same period in 2021. Resale gross profit increased by $1,285,708, or 52%, to $3,742,852 for the three month ended March 31, 2022, as compared to resale gross profit of $2,457,144 during the three months ended March 31, 2021. Recycled gross profit increased by $130,119, or 37%, to $480,610 for the three months ended March 31, 2022, as compared to recycled gross profit of $350,491 during the three months ended March 31, 2021. The increase in resale and recycled gross profit was due primarily to the increase in sales for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Gross profit related to ECHG for the three months ended March 31, 2022 increased by $1,990,943, or 57%, to $5,487,572 as compared to gross profit of $3,496,629 during the same period in 2021. Gross profit for resale revenue for the three months ended March 31, 2022 increased by $1,962,084, or 75%, to $4,574,268, as compared to gross profit for resale revenue of $2,612,184 during the same period in 2021. Gross profit for recycled sales for the three months ended March 31, 2022 increased $28,859, or 3%, to $913,304, as compared to gross profit for recycled sales of $884,445, during the same period in 2021. The gross profit increase for the resale and recycled items for the three months ended March 31, 2022, compared to the three months ended March 31, 2021 is primarily due to the increased sales in each category. Selling, General and Administrative Expenses. For the three months ended March 31, 2022, SG&A expenses for DGSE increased by $355,512, or 20%, to $2,137,949, as compared to SG&A expenses of $1,782,437 during the same period in 2021. The increase in SG&A expenses was primarily due to increased payroll and related expenses from personnel needed for the increase in business, and for the addition of a new DGSE retail location that opened for business during the quarter ended March 31, 2022, as compared to the three months ended March 31, 2021. For the three months ended March 31, 2022, SG&A expenses for ECHG increased by $2,051,014 or 87%, to $4,421,806, as compared to SG&A expenses of $2,370,792 during the same period in 2021. The increase in SG&A expenses was primarily due to the addition of CEX and Avail businesses during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Depreciation and Amortization . For the three months ended March 31, 2022, depreciation and amortization expense for DGSE was $106,963, compared to an expense of $96,822 for the same period in 2021, an increase of $10,141, or 10%. The increase of $10,141 from the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, is primarily due to the new retail building purchased during 2021 but not placed into service until January 2022. For the three months ended March 31, 2022, depreciation and amortization expense for ECHG was $184,984, compared to an expense of $108,090 for the same period in 2021, an increase of $76,894, or 71%. The increase of $76,894 from the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, is primarily due to the added depreciable assets and intangibles from the purchase of assets from the CExchange and Avail Transactions during Fiscal 2021. Interest Expense . For the three months ended March 31, 2022, interest expense for DGSE was $61,241, a decrease of $7,244 or 11%, compared to interest expense of $68,485 during the same period in 2021. The decrease was primarily the netting effect of additional interest from a new loan to purchase a retail building netted against the reduction of interest expense from refinancing the related party loan by Farmers State Bank of Oakley Kansas, reducing the annual interest rate from 6% to 3.1%. For the three months ended March 31, 2022, interest expense for ECHG was $61,998, a decrease of $48,539 or 44%, as compared to the interest expense of $110,537, during the same period in 2021. The decrease was primarily due to refinancing the related party loan by Farmers State Bank of Oakley Kansas, reducing the annual interest rate from 6% to 3.1%. Other. For the three months ended March 31, 2022, net other expense for DGSE was $27,992, an increase of $139,723, compared to net other income of $111,731 during the same period in 2021. The increase in net other expense as compared to net other income was primarily due to DGSE’s portion of operating expenses above rental income for the Company’s corporate building. The corporate building’s rental income and expenses were equally shared between the two segments. The Company’s corporate building’s largest tenant vacated the property during the fourth quarter of Fiscal 2021. 28 Table of Contents For the three months ended March 31, 2022, net other expense for ECHG was $30,584, an increase of $190,794, as compared to net other income of $160,210, during the same period in 2021. The increase in net other expense as compared to net other income was primarily due to ECHG’s portion of operating expenses above rental income for the Company’s corporate building. The corporate building’s rental income and expenses were equally shared between the two segments. The Company’s corporate building’s largest tenant vacated the property during the fourth quarter of Fiscal 2021. Income Tax Expense. For the three months ended March 31, 2022, income tax expense was $30,292, a decrease of $478, as compared to income tax expense of $30,770 for the three months ended March 31, 2021. The effective income tax rate was 1.1% and 1.5% for the three months ended March 31, 2022 and 2021, 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 $2,647,225 for the three months ended March 31, 2022, as compared to a net income of $2,008,272 for the three months ended March 31, 2021, an increase in net income of $638,953. The increase is due primarily to increased revenue and gross profit for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Earnings Per Share. For the three months ended March 31, 2022, our net income per basic and diluted shares attributable to holders of our Common Stock was $0.10, compared to $0.07 per basic and diluted shares attributable to holders of our Common Stock for the three months ended March 31, 2021. Liquidity and Capital Resources During the three months ended March 31, 2022, cash flows provided by operations totaled $3,358,769, and during the three months ended March 31, 2021, cash flows used in operations totaled $384,912, an increase of $3,743,681. Cash provided by operations for the three months ended March 31, 2022 was driven largely by net income added to non-cash items of depreciation and amortization totaling $2,939,173, a decrease in trade receivables of $1,809,396, an increase in accounts payable and accrued expenses of $81,088, an increase in customer deposits and other liabilities of $64,969, offset by an increase in inventories of $573,139, an increase in prepaid expenses of $173,436 and an increase in other assets of $794,731. Cash used in operations for the three months ended March 31, 2021 was driven largely by net income added to non-cash items of depreciation and amortization and bad debt totaling $2,219,433, an increase in customer deposits and other liabilities of $260,615, offset by the increase of trade receivables of $344,103, an increase in inventories of $1,623,485, an increase in prepaid expenses of $576,578, an increase in other assets of $100,000 and a decrease in accounts payable and accrued expenses of $240,410. During the three months ended March 31, 2022 and 2021, cash used in investing activities totaled $93,384 and $324,035, respectively, a period-over-period decrease of $230,651. The use of cash in investing activities during the three months ended March 31, 2022 was primarily due to the purchase of additional property and equipment of $93,384. The use of cash in investing activities during the three months ended March 31, 2021 was primarily due to investing in notes receivable of $123,472 to CExchange and the purchase of additional property and equipment of $200,563. During the three months ended March 31, 2022 and 2021, cash used in financing totaled $1,906,274 and $112,092, respectively, a period over period increase of $1,794,182. The cash used in financing during the three months ended March 31, 2022 were payments made against the notes payable of $206,274 and payments made against the line of credit of $1,700,000. The cash used in financing during the three months ended March 31, 2021 were payments made against the notes payable of $40,239 and notes payable, related party of $71,853. We expect our capital expenditures to total approximately $1,000,000 during the next 12 months. These expenditures will be driven by the purchase of additional equipment and the purchase of potential properties by DGSE for retail locations and the build-out of those purchased properties. The Company has no capital expenditure commitments as of March 31, 2022. 29 Table of Contents Our primary source of liquidity and capital resources currently consist of cash generated from our operating results and current borrowings, including the Truist Lewisville Loan, the TB&T Grapevine Loan, the TB&T Irving Loan, the TB&T Frisco Loan and the two Farmers State Bank of Oakley Kansas loans. For more information, see Note 14 to our interim condensed financial statements, which is incorporated into this item by reference. In addition, on November 23, 2021, the Company secured a thirty six month line of credit from Farmers State Bank of Oakley Kansas for up to $3,500,000. The FSB Facility has an annual interest rate of 3.1%. We maintain the FSB 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 FSB Facility as of Mach 31, 2022. 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 and the war between Ukraine and Russia has adversely affected global economic business conditions. Future sales of products like ours have and may continue to decline or fluctuate due to increased or fluctuating commodities prices, particularly gold. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic and the war between Ukraine and Russia, the ultimate impact, including the impact on our liquidity and capital resources, is highly uncertain and subject to change. The duration of any such impact cannot be predicted, and the Company believes additional liquidity may be necessary to support ongoing operations during this period of uncertainty. For more information, see Note 17 to our interim condensed consolidated financial statements. The Company leases certain of its facilities under operating leases. For more information on the minimum rental commitments under non-cancellable operating leases as of March 31, 2022, see Note 12 to our interim condensed consolidated financial statements. 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. 30 Table of Contents 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.