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, 2023 (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 2022 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 customer designations. The consumer segment, formerly known as the DGSE segment, focuses on the recommercialization of luxury hard assets, and the commercial segment formerly known as the ECHG segment, focuses on the recommercialization of business IT equipment and electronic devices. Through the consumer segment, the Company recommercializes luxury hard assets and operates the Dallas Gold and Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands. Through the commercial segment, the Company recommercializes business IT equipment and 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, and 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 the consumer and commercial segments, Envela also leases unused space at its Company headquarters in Irving, Texas to third-party tenants. 25 Table of Contents Consumer Segment Business Overview The consumer segment is headquartered in Dallas, Texas and 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. The Company wholesales and retails these items through its Charleston Gold & Diamond Exchange and Dallas Gold & Silver Exchange operations. Dallas Gold & Silver Exchange and Charleston Gold & Diamond Exchange have specialized in buying and selling jewelry for almost 50 years, making our expert staff among the best in the business. Dallas Gold & Silver Exchange also maintains a number of related operations, on-site jewelry and watch repair and restoration at its Dallas flagship location, and design of custom bridal and fashion jewelry. In addition, it also has a precious-metal bullion-trading operation that buys and sells all forms of gold, silver, platinum and palladium products, including United States and other government-issue coins, private-mint medallions, art bars and trade unit bars. For additional information regarding the consumer segment, see “Item 1. Business - Operating Segments - DGSE Segment.” in the Company’s 2022 Annual Report. Consumer Segment Recommerce Activities We operate a sustainable marketplace for preowned luxury goods. We buy and sell coins, diamonds, jewelry, and related accessories and other merchandise. Our ability to offer quality pre-owned goods at prices significantly lower than original retail prices attracts value-conscious customers. The consumer segment 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 us. 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. Consumer Segment Precious Metals Pricing and Business Impact We are exposed to various market risks. Market risk is the potential loss arising from the adverse changes in market prices and rates. The nature of the consumer operations results in exposure to fluctuations in commodity prices, specifically diamonds, platinum, gold and silver. We do not currently use derivatives to hedge these risks. 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. Our retail sales and gross margin could be materially impacted if prices of diamonds, platinum, gold, or silver rise so significantly that our consumers’ behavior changes or if price increases cannot be passed onto our customers. Because the consumer segment buys and resells precious metals, it is impacted by fluctuations and 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. Such fluctuations, particularly with respect to gold, which accounts for a majority of our merchandise costs, can have a significant impact on its earnings and cash availability. 26 Table of Contents We continue to monitor the economic impact on our operations from surging inflation and the conflict in Ukraine. Uncertainties exist that could affect our operations or cash flows in the future, such as continued inflationary environmental changes (including, but not limited to, labor, materials, and advertising costs). The Company’s ability to recruit and retain qualified team members, organized retail crime, or the consumers’ ability to spend on discretionary categories. Consumer Segment Growth and Expansion Our continued strategy will be to expand the number of locations we operate through opening new (“de novo”) locations in both current markets within DFW and South Carolina. The Company expects to soon expand into Arizona, see Note 16 – Subsequent Events, to these interim condensed consolidated financial statements. Our ability to add new stores is dependent on several variables, such as projected achievement of internal investment hurdles, the availability of acceptable sites, the regulatory environment, local zoning ordinances, access to capital and the availability of qualified personnel. We see opportunity for further expansion through de novo openings in the United States. The Company expects capital expenditures over the next twelve months including the potential purchase of additional properties. Commercial Segment Business Overview The commercial segment operates Echo, ITAD USA, Teladvance, CEX and Avail, through which it primarily buys and resells or recycles 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 offers its customers the ability to further offer their customers the ability to upgrade their old phones through a trade-in program supported by Teladvance. Like the consumer segment, the commercial segment also maintains relationships with refiners for which it sells extracted valuable materials from electronics and IT equipment deemed unsuitable for retail or wholesale customers. Commercial Segment Recommerce Activities A portion of the commercial 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 and supply limitations. Commercial Segment Metals Pricing and Business Impact The commercial 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. As discussed below, we have seen a recent decrease of recycled items, which we believe is primarily due to the supply chain problems downstream with our customers. 27 Table of Contents Commercial Segment Growth and Expansion The commercial strategy is to expand both organically and through acquisitions. As an organization, we strive to deliver value through organic growth, high customer loyalty and retention as well as strategic acquisitions. We are committed to continuous innovation. Many of our clients have made commitments to going carbon neutral over the next few years and we see the potential to further expand key relationships as we partner with them in more ways to help them achieve their goal. With an emphasis on increasing recurring revenues and expanding our margins, commercially we believe our organic strategy will ultimately drive strong financial performance, including cash flow to support our acquisition strategy. Commercial’s business strategy has always included pursuing synergistic acquisitions, and we plan to continue to expand the business by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance its growth. For additional information regarding the commercial segment, see “Item 1. Business—Operating Segments—ECHG Segment.” in the Company’s 2022 Annual Report. Economic Conditions Surging inflation, supply chain disruptions and the war in Ukraine have affected the recommerce business in unpredictable ways. There have been fewer customers raising money by selling items. For more information, see Note 17 to these interim condensed consolidated financial statements. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting (“U.S. GAAP”) principles. The preparation of these financial statements requires our management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. While our significant accounting policies are more fully described in “Note 1 — Accounting Policies and Nature of Operations” in the Company’s 2022 Annual Report, we believe that the accounting estimates discussed below relate to the more significant areas involving management’s judgments and estimates. Inventories The consumer Segment inventory is valued at the lower of cost or net realizable value (“NRV”). We acquire a majority of our inventory from individual customers, including pre-owned jewelry, watches, bullion, rare coins and monetary collectibles. We acquire these items based on our own internal estimate of the fair value of the items at the time of purchase. We consider factors such as the current spot market price of precious metals and current market demand for the items being purchased. It supplements these purchases from individual customers with inventory purchased from wholesale vendors. These wholesale purchases can take the form of full asset purchases, or consigned inventory. Consigned inventory is accounted for on our balance sheet with a fully offsetting contra account so that consigned inventory has a net zero balance. The majority of our inventory has some component of its value that is based on the spot market price of precious metals. Because the overall market value for precious metals regularly fluctuates, these fluctuations could have either a positive or negative impact on the value of our inventory and could positively or negatively impact our profitability. We monitor these fluctuations to evaluate any necessary impairment to inventory. 28 Table of Contents The Echo inventory principally includes processed and unprocessed electronic scrap materials. The value of the material is derived from recycling the precious and other scrap metals included in the scrap. The processed and unprocessed materials are carried at the lower of the average cost of the material during the month of purchase or NRV. The in-transit material is carried at lower of cost or NRV using the retail method. Under the retail method the valuation of the inventory at cost and the resulting gross margins are calculated by applying a cost to retail ratio to the retail value of the inventory. For the three months ended March 31, 2023, we have not identified critical accounting estimates that involve a significant level of estimation uncertainty and would have a material impact on our results. Refer to our significant accounting policies are more fully described in Note 3 to these interim condensed consolidated financial statements. Recent Accounting Pronouncements See Note 3- Accounting Policies and Estimates, to these interim condensed consolidated financial statements for recently adopted accounting pronouncements. Use of Non-U.S. GAAP Financial Measures In this management’s discussion and analysis, we use supplemental measures of our performance, which are derived from our interim consolidated financial information, but which are not presented in our interim consolidated financial statements prepared in accordance with U.S. GAAP. We believe that providing these non-U.S. GAAP financial measures adds a meaningful presentation of our operating and financial performance. See the reconciliation of net income to EBITDA (defined below), in Non-U.S. GAAP Financial Measures below. Non-U.S. GAAP Financial Measures EBITDA is a key performance measure that our management uses to assess our operating performance. Because EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure as an overall assessment of our performance, to evaluate the effectiveness of our business strategies and for business planning purposes. EBITDA may not be comparable to similarly titled metrics of other companies. EBITDA means earnings before interest expense, other (income) expense, net, income tax expense, and depreciation and amortization. EBITDA is a non-U.S. GAAP measure and should not be considered as an alternative to the presentation of net income or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. The following table provides a reconciliation of net income to EBITDA: For the three months Ended March 31, 2023 2022 Consumer Commercial Consolidated Consumer Commercial Consolidated EBITDA Reconciliation: Net Income $ 1,136,884 $ 1,389,433 $ 2,526,317 $ 1,876,140 $ 771,085 $ 2,647,225 Add (deduct): Depreciation and amortization 98,134 256,217 354,351 106,963 184,984 291,947 Other (income) expense (23,534 ) (187,245 ) (210,779 ) 27,992 30,584 58,576 Interest expense 59,618 57,446 117,064 61,241 61,998 123,239 Income tax expense 317,841 399,805 717,646 13,177 17,115 30,292 EBITDA $ 1,588,943 $ 1,915,656 $ 3,504,599 $ 2,085,513 $ 1,065,766 $ 3,151,279 29 Table of Contents Results of Operations The following disaggregation of total revenue is listed by sales category and segment for the three months ended March 31, 2023 and 2022: CONSOLIDATED Three Months Ended March 31, 2023 2022 Revenues Gross Profit Margin Revenues Gross Profit Margin Consumer Resale $ 33,719,960 $ 3,304,932 9.8 % $ 33,677,133 $ 3,742,852 11.1 % Recycled 2,984,437 680,036 22.8 % 2,105,739 480,610 22.8 % Subtotal 36,704,397 3,984,968 10.9 % 35,782,872 4,223,462 11.8 % Commercial Resale 8,558,090 5,799,126 67.8 % 9,579,857 4,574,268 47.7 % Recycled 3,126,553 1,625,808 52.0 % 2,052,369 913,304 44.5 % Subtotal 11,684,643 7,424,934 63.5 % 11,632,226 5,487,572 47.2 % $ 48,389,040 $ 11,409,902 23.6 % $ 47,415,098 $ 9,711,034 20.5 % Comparison of three months ended March 31, 2023 and 2022 Resale Revenue Three Months Ended March 31, Change 2023 2022 Amount % Resale Revenue Consumer $ 33,719,960 $ 33,677,133 $ 42,827 0 % Commercial $ 8,558,090 $ 9,579,857 $ (1,021,767 ) -11 % 30 Table of Contents Resale revenue related to the consumer segment increased by $42,827, or 0.13% during the three months ended March 31, 2023, to $33,719,960, as compared to $33,677,133 during the same period in 2022. Resale revenue, such as bullion, jewelry, watches, and rare coins, increased slightly during the period. Resale revenue related to the commercial segment decreased by $1,021,767, or 11%, during the three months ended March 31, 2023, to $8,558,090, as compared to $9,579,857 during the same period in 2022. Resale revenue decreased primarily due to supply chain issues the Company experienced during the three months ending March 31, 2023. Recycled Revenue Three Months Ended March 31, Change 2023 2022 Amount % Recycled Revenue Consumer $ 2,984,437 $ 2,105,739 $ 878,698 42 % Commercial $ 3,126,553 $ 2,052,369 $ 1,074,184 52 % Recycled revenue related to the consumer segment increased by $878,698, or 42%, during the three months ended March 31, 2023, to $2,984,437, as compared to $2,105,739 during the same period in 2022. Recycled revenue, such as bullion, jewelry, watches, and rare coins, increased primarily during the period ending March 31, 2023 due to increased purchases of non-retail precious metals to be recycled instead of being sold to retail consumers. Recycled revenue related to the commercial segment increased by $1,074,184, or 52%, during the three months ended March 31, 2023, to $3,126,553, as compared to $2,052,369 during the same period in 2022. Recycled revenue increased primarily due to an increase of electronic material to be recycled from material not suitable to resale to commercial customers during the three months ending March 31, 2023. 31 Table of Contents Gross Profit - Resale Three Months Ended March 31, Change 2023 2022 Amount % Gross Profit - Resale Consumer $ 3,304,932 $ 3,742,852 $ (437,920 ) -12 % Commercial $ 5,799,126 $ 4,574,268 $ 1,224,858 27 % Resale gross profit related to the consumer operations for the three months ended March 31, 2023, decreased by $437,920, or 12%, to $3,304,932, as compared to resale gross profit of $3,752,852 during the same period in 2022. The decrease in resale gross profit was due primarily to the need to purchase retail inventory following the 2022 Christmas season; therefore, in connection with inflationary pressures and rising prices of metals, there was an increase in purchase prices for the three months ended March 31, 2023. Resale gross profit related to the commercial operations for the three months ended March 31, 2023, increased by $1,224,858, or 27%, to $5,799,126, as compared to resale gross profit of $4,574,268 during the same period in 2022. The increase in resale gross profit was primarily due to increased sales prices on material sold. Gross Profit - Recycled Three Months Ended March 31, Change 2023 2022 Amount % Gross Profit - Recycled Consumer $ 680,036 $ 480,610 $ 199,426 41 % Commercial $ 1,625,808 $ 913,304 $ 712,504 78 % Recycled gross profit related to the consumer operations for the three months ended March 31, 2023, increased by $199,426, or 41%, to $680,036, as compared to gross profit of $480,610 during the same period in 2022. The increase in recycled gross profit was due primarily to 42% increase in recycled sales during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. 32 Table of Contents Recycled gross profit related to the commercial operations for the three months ended March 31, 2023, increased by $712,504, or 78%, to $1,625,808, as compared to gross profit of $913,304 during the same period in 2022. The increase in recycled gross profit was due primarily to 52% increase in recycled sales during the three months ended March 31, 2023 and an increase in margin percentage to 52% for the three months ended March 31, 2023, as compared to 44%, for the three months ended March 31, 2022. For The Three Months Ended March 31, 2023 2022 Consumer Commercial Consolidated Consumer Commercial Consolidated Revenue: Sales $ 36,704,397 $ 11,684,643 $ 48,389,040 $ 35,782,872 $ 11,632,226 $ 47,415,098 Cost of goods sold 32,719,429 4,259,709 36,979,138 31,559,410 6,144,654 37,704,064 Gross profit 3,984,968 7,424,934 11,409,902 4,223,462 5,487,572 9,711,034 Expenses: Selling, general and administrative expenses 2,396,025 5,509,278 7,905,303 2,137,949 4,421,806 6,559,755 Depreciation and amortization 98,134 256,217 354,351 106,963 184,984 291,947 2,494,159 5,765,495 8,259,654 2,244,912 4,606,790 6,851,702 Operating income 1,490,809 1,659,439 3,150,248 1,978,550 880,782 2,859,332 Other income/expense: Other income (expense) 23,534 187,245 210,779 (27,992 ) (30,584 ) (58,576 ) Interest expense 59,618 57,446 117,064 61,241 61,998 123,239 Income before income taxes 1,454,725 1,789,238 3,243,963 1,889,317 788,200 2,677,517 Income tax expense 317,841 399,805 717,646 13,177 17,115 30,292 Net income $ 1,136,884 $ 1,389,433 $ 2,526,317 $ 1,876,140 $ 771,085 $ 2,647,225 Selling, General and Administrative Three Months Ended March 31, Change 2023 2022 Amount % Selling, General and Administrative Consumer $ 2,396,026 $ 2,137,949 $ 258,077 12 % Commercial $ 5,509,278 $ 4,421,806 $ 1,087,472 25 % Selling, General and Administrative Expenses, for the consumer segment, f or the three months ended March 31, 2023, increased by $258,077, or 12%, to $2,396,026, as compared to $2,137,949 during the same period in 2022. The increase was primarily due to increased expenses related to expanding our footprint into Arizona. During the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses. Selling, General and Administrative Expenses, for the commercial segment, f or the three months ended March 31, 2023, increased by $1,087,472, or 25%, to $5,509,278, as compared to $4,421,806 during the same period in 2022. The increase was primarily due to increased expenses related to expanding the commercial business by increasing the infrastructure. During the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses. Depreciation and Amortization Three Months Ended March 31, Change 2023 2022 Amount % Depreciation and Amortization Consumer $ 98,134 $ 106,963 $ (8,829 ) -8 % Commercial $ 256,217 $ 184,984 $ 71,233 39 % 33 Table of Contents Depreciation and amortization, for the consumer segment, f or the three months ended March 31, 2023, decreased by $8,829, or 8%, to $98,134, as compared to $106,963 during the same period in 2022. The decrease was primarily due to some of the fixed assets being fully depreciated. Depreciation and amortization, for the commercial segment, f or the three months ended March 31, 2023, increased by $71,233, or 39%, to $256,217, as compared to $184,984 during the same period in 2022. The increase was primarily due to the amortization of increased intangible assets added from the Avail Transaction during the latter half of fiscal 2022. Other Income (Expense) Three Months Ended March 31, Change 2023 2022 Amount % Other Income (Expense) Consumer $ 23,534 $ (27,992 ) $ 51,526 184 % Commercial $ 187,245 $ (30,584 ) $ 217,829 712 % Other income (expense), for the consumer segment, f or the three months ended March 31, 2023, increased by $51,526, or 184%, to $23,534, as compared to a net expense of $(27,992) during the same period in 2022. The increase in other income was primarily due to interest earned from bank accounts for the three months ended March 31, 2023. In addition, during the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses. Other income (expense), for the commercial segment, f or the three months ended March 31, 2023, increased by $217,829, or 712%, to $187,245, as compared to a net expense of $(30,584) during the same period in 2022. The increase in other income was primarily due to interest earned from bank accounts, of $61,378 and notes receivable interest received, of $94,115 from notes receivable formerly written off during fiscal year 2021. In addition, during the three months ended March 31, 2022, the corporate building overhead expenses were classified as other expenses. Starting January 1, 2023, those expenses have been classified as operating expenses within selling, general and administrative expenses. Interest Expense Three Months Ended March 31, Change 2023 2022 Amount % Interest Expense Consumer $ 59,617 $ 61,241 $ (1,624 ) -3 % Commercial $ 57,446 $ 61,998 $ (4,552 ) -7 % Interest expense, for the consumer segment, f or the three months ended March 31, 2023, decreased by $1,624, or 3%, to $59,617, as compared to $61,241 during the same period in 2022. The decrease was primarily due to reduced loan balances during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Interest expense, for the commercial segment, f or the three months ended March 31, 2023, decreased by $4,552, or 7%, to $57,446, as compared to $61,998 during the same period in 2022. The decrease was primarily due to reduced loan balances during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. 34 Table of Contents Income Tax Expense Three Months Ended March 31, Change 2023 2022 Amount % Income Tax Expense Consumer $ 317,841 $ 13,177 $ 304,664 2312 % Commercial $ 399,805 $ 17,115 $ 382,690 2236 % Income tax expense, for both segments, for the three months ended March 31, 2023, was $717,646, an increase of $687,354, as compared to income tax expense of $30,292 for the three months ended March 31, 2022. Currently, the Company has a deferred tax asset reflecting net operating losses brought over from prior years. Through fiscal 2022, there was an off-setting valuation allowance associated with the deferred tax asset. The valuation allowance was written off as of December 31, 2022. Starting with the three months ended March 31, 2023, the Company will have a federal tax rate of approximately 21%, in addition to other state and local taxes, on net income. The effective income tax rate was 22.1% and 1.1% for the three months ended March 31, 2023 and 2022, 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, as was the Company’s case for the increase for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Net Income Three Months Ended March 31, Change 2023 2022 Amount % Net Income Consumer $ 1,136,884 $ 1,876,140 $ (739,256 ) -39 % Commercial $ 1,389,433 $ 771,085 $ 618,348 80 % Net income related to the consumer operations for the three months ended March 31, 2023, decreased by $739,256, or 39%, to $1,136,884, as compared to $1,876,140 during the same period in 2022. The decrease in net income was due primarily to the increased tax expense of $304,664, and the decrease in resale gross profit of $437,920 for the three months ended March 31, 2023, compared to the three month ended March 31, 2022. Net income related to the commercial operations for the three months ended March 31, 2023, increased by $618,348, or 80%, to $1,389,433, as compared to $771,085 during the same period in 2022. The increase in net income was due primarily to an increase in gross profit of $1,937,362, offset by an increase in selling, general and administrative expenses of $787,472 and increased tax expense of $382,690 for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. 35 Table of Contents Earnings Per Share Three Months Ended March 31, Change 2023 2022 Amount % Earnings Per Share $ 0.09 $ 0.10 $ (0.01 ) -10 % Earnings per share, for the three months ended March 31, 2023, for net income per basic and diluted shares attributable to holders of our Common Stock was $0.09, compared to $0.10 per basic and diluted shares attributable to holders of our Common Stock for the three months ended March 31, 2022. Liquidity and Capital Resources The following table summarizes our cash flows for the periods indicated. Three Months Ended March 31, 2023 2022 Net cash provided by (used in): Operating activities $ 2,924,025 $ 3,358,769 Investing activities 569,522 (93,384 ) Financing activities (310,807 ) (1,906,274 ) Net increase in cash and cash equivalents $ 3,182,740 $ 1,359,111 During the three months ended March 31, 2023, cash provided by operations totaled $2,924,025, which was primarily driven by net income of $2,526,317, reduction from non-cash charges, net of $689,516, and the increase in customer deposits and other liabilities of $1,484,605. In addition, the foregoing was offset by the decrease in accounts payable and accrued expenses of $821,413, an increase in other assets of $228,959, an increase of trade receivables of $328,487, the increase in inventories of $350,053 and the increase in prepaid expenses of $47,847. During the three months ended March 31, 2023, cash provided by investing totaled $569,522, which primarily consisted of payments received from notes receivable of $578,250, offset by the purchase of property and equipment of $8,728. During the three months ended March 31, 2023, cash used in financing totaled $310,807, which consisted of principal payments made against the notes payable loans of $310,807. 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 potential property purchases by the consumer segment for retail locations and the build-out of those purchased properties. The Company has no capital expenditure commitments as of March 31, 2023. For more information, see Note 16 to our interim condensed consolidated financial statements. 36 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 two FSB loans. For more information, see Note 13 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 (the “FSB Facility”) 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, 2023. 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 Company leases certain of its facilities under operating leases. The minimum rental commitments, under non-cancellable operating leases, excluding imputed interest, as of March 31, 2023 are as follows: Operating Leases Total 2023 2024 2025 2026 Thereafter Consumer (excluding the three months ending March 31, 2023) $ 1,798,757 $ 406,955 $ 552,414 $ 434,274 $ 355,000 $ 50,114 Commercial (excluding the three months ending March 31, 2023) 4,244,112 1,018,905 1,396,129 1,321,297 474,326 33,455 Total $ 6,042,869 $ 1,425,860 $ 1,948,543 $ 1,755,571 $ 829,326 $ 83,569 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. 37 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.