Envela Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context indicates otherwise for one of our specific operating segments, references to “we,” “us,” “our,” the “Company” and “Envela” refer to the consolidated business operations of Envela Corporation, and all of its direct and indirect subsidiaries. Forward-Looking Statements This Quarterly Report on Form 10-Q for the quarter ended June 30, 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. 26 Table of Contents 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. 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 The Company operates 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. 27 Table of Contents 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. 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. On May 4, 2023, the Company closed on a building, in Phoenix, Arizona, for $1,231,150 and will begin to prepare the building to house our next retail location. We continue to search for other locations to expand. 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. 28 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 16 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 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. The consumer Segment 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. 29 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 and six months ended June 30, 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 provide a reconciliation of net income to EBITDA for the three months ending June 30, 2023 and 2022: For the three months ended June 30, 2023 2022 Consumer Commercial Consolidated Consumer Commercial Consolidated EBITDA Reconciliation: Net Income $ 1,168,309 $ 435,400 $ 1,603,709 $ 1,766,584 $ 2,081,274 $ 3,847,858 Add (deduct): Depreciation and amortization 79,408 256,766 336,174 101,434 178,082 279,516 Other income (23,929 ) (129,723 ) (153,652 ) (9,397 ) (12,004 ) (21,401 ) Interest expense 58,209 56,479 114,688 61,663 59,379 121,042 Income tax expense 339,672 158,902 498,574 15,391 34,861 50,252 EBITDA $ 1,621,669 $ 777,824 $ 2,399,493 $ 1,935,675 $ 2,341,592 $ 4,277,267 30 Table of Contents The following table provide a reconciliation of net income to EBITDA for the six months ending June 30, 2023 and 2022: For the six months Ended June 30, 2023 2022 Consumer Commercial Consolidated Consumer Commercial Consolidated EBITDA Reconciliation: Net Income $ 2,305,193 $ 1,824,833 $ 4,130,026 $ 3,642,725 $ 2,852,358 $ 6,495,083 Add (deduct): Depreciation and amortization 177,542 512,983 690,525 208,397 363,066 571,463 Other income (47,463 ) (316,968 ) (364,431 ) (24,014 ) (24,027 ) (48,041 ) Interest expense 117,827 113,925 231,752 122,904 121,377 244,281 Income tax expense 657,513 558,707 1,216,220 28,568 51,976 80,544 EBITDA $ 3,210,612 $ 2,693,480 $ 5,904,092 $ 3,978,580 $ 3,364,750 $ 7,343,330 Results of Operations The following disaggregation of total revenue is listed by sales category and segment for the three months ended June 30, 2023 and 2022: CONSOLIDATED Three Months Ended June 30, 2023 2022 Revenues Gross Profit Margin Revenues Gross Profit Margin Consumer Resale $ 36,645,641 $ 3,353,835 9.2 % $ 28,165,026 $ 3,719,954 13.2 % Recycled 2,995,793 740,807 24.7 % 2,174,101 468,630 21.6 % Subtotal 39,641,434 4,094,642 10.3 % 30,339,127 4,188,584 13.8 % Commercial Resale 7,566,236 5,051,337 66.8 % 9,102,001 5,566,507 61.2 % Recycled 3,095,857 1,616,068 52.2 % 3,198,590 1,722,909 53.9 % Subtotal 10,662,093 6,667,405 62.5 % 12,300,591 7,289,416 59.3 % $ 50,303,527 $ 10,762,047 21.4 % $ 42,639,718 $ 11,478,000 26.9 % Comparison of three months ended June 30, 2023 and 2022 Resale Revenue Three Months Ended June 30, Change 2023 2022 Amount % Resale Revenue Consumer $ 36,645,641 $ 28,165,026 $ 8,480,615 30 % Commercial $ 7,566,236 9,102,001 $ (1,535,765 ) -17 % 31 Table of Contents Resale revenue related to the consumer segment increased by $8,480,615, or 30%, during the three months ended June 30, 2023, to $36,645,641, as compared to $28,165,026 during the same period in 2022. Resale revenue, such as bullion, jewelry, watches, and rare coins, increased due to heavy on-line advertising. Resale revenue related to the commercial segment decreased by $1,535,765, or 17%, during the three months ended June 30, 2023, to $7,566,236, as compared to $9,102,001 during the same period in 2022. Resale revenue decreased primarily due to a lower than expected volume of inventory purchased for resale during the three months ending June 30, 2023. Recycled Revenue Three Months Ended June 30, Change 2023 2022 Amount % Recycled Revenue Consumer $ 2,995,793 2,174,101 $ 821,692 38 % Commercial $ 3,095,857 3,198,590 $ (102,733 ) -3 % Recycled revenue related to the consumer segment increased by $821,692, or 38%, during the three months ended June 30, 2023, to $2,995,793, as compared to $2,174,101 during the same period in 2022. Recycled revenue increased primarily during the period ending June 30, 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 decreased by $102,733, or 3%, during the three months ended June 30, 2023, to $3,095,857, as compared to $3,198,590 during the same period in 2022. Recycled revenue slightly decreased primarily due to a decrease of electronic material purchased to be recycled from material not suitable to resale to commercial customers during the three months ending June 30, 2023. Gross Profit - Resale Three Months Ended June 30, Change 2023 2022 Amount % Gross Profit - Resale Consumer $ 3,353,835 $ 3,719,954 $ (366,119 ) -10 % Commercial $ 5,051,337 5,566,507 $ (515,170 ) -9 % Resale gross profit related to the consumer operations for the three months ended June 30, 2023, decreased by $366,119, or 10%, to $3,353,835, as compared to resale gross profit of $3,719,954 during the same period in 2022. The decrease in resale gross profit was due primarily to increased competition in the jewelry sector. Resale gross profit related to the commercial operations for the three months ended June 30, 2023, decreased by $515,170, or 9%, to $5,051,337, as compared to resale gross profit of $5,566,507 during the same period in 2022. The decrease in resale gross profit was primarily due to the decrease in sales volume in the three months ended June 30, 2023 as compared to the same period in 2022. 32 Table of Contents Gross Profit - Recycled Three Months Ended June 30, Change 2023 2022 Amount % Gross Profit - Recycled Consumer $ 740,807 468,630 $ 272,177 58 % Commercial $ 1,616,068 1,722,909 $ (106,841 ) -6 % Recycled gross profit related to the consumer operations for the three months ended June 30, 2023, increased by $272,177, or 58%, to $740,807, as compared to gross profit of $468,630 during the same period in 2022. The increase in recycled gross profit was primarily due to the increase of approximately 38% in recycled sales during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Recycled gross profit related to the commercial operations for the three months ended June 30, 2023, decreased by $106,841, or 6%, to $1,616,068, as compared to gross profit of $1,722,909 during the same period in 2022. The decrease in recycled gross profit was due primarily to a 3% decrease in recycled sales during the three months ended June 30, 2023, as compared to the same period in 2022. For The Three Months Ended June 30, 2023 2022 Consumer Commercial Consolidated Consumer Commercial Consolidated Revenue: Sales $ 39,641,434 $ 10,662,093 $ 50,303,527 $ 30,339,127 $ 12,300,591 $ 42,639,718 Cost of goods sold 35,546,792 3,994,688 39,541,480 26,150,543 5,011,175 31,161,718 Gross profit 4,094,642 6,667,405 10,762,047 4,188,584 7,289,416 11,478,000 Expenses: Selling, general and administrative expenses 2,472,973 5,889,581 8,362,554 2,252,909 4,947,824 7,200,733 Depreciation and amortization 79,408 256,766 336,174 101,434 178,082 279,516 2,552,381 6,146,347 8,698,728 2,354,343 5,125,906 7,480,249 Operating income 1,542,261 521,058 2,063,319 1,834,241 2,163,510 3,997,751 Other income/expense: Other income 23,929 129,723 153,652 9,397 12,004 21,401 Interest expense 58,209 56,479 114,688 61,663 59,379 121,042 Income before income taxes 1,507,981 594,302 2,102,283 1,781,975 2,116,135 3,898,110 Income tax expense 339,672 158,902 498,574 15,391 34,861 50,252 Net income $ 1,168,309 $ 435,400 $ 1,603,709 $ 1,766,584 $ 2,081,274 $ 3,847,858 Selling, General and Administrative Three Months Ended June 30, Change 2023 2022 Amount % Selling, General and Administrative Consumer $ 2,472,973 $ 2,252,909 $ 220,064 10 % Commercial $ 5,889,581 $ 4,947,824 $ 941,757 19 % 33 Table of Contents Selling, General and Administrative Expenses, for the consumer segment , for the three months ended June 30, 2023, increased by $220,064, or 10%, to $2,472,973, as compared to $2,252,009 during the same period in 2022. The increase was primarily due to increased expenses related to expanding our footprint into Arizona and other markets. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated here to be included in selling, general, and administrative expenses for comparison purposes. During the three-month period ending on June 30, 2023, there was a significant increase in selling, general, and administrative expenses amounting to $941,757 compared to the same period in 2022. This increase can primarily be attributed to factors such as an increase in staff, higher salaries and related costs, as well as the Company's ongoing expansion in the consumer segment, which includes increased spending on marketing and professional services. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated here to be included in selling, general, and administrative expenses for comparison purposes. Depreciation and Amortization Three Months Ended June 30, Change 2023 2022 Amount % Depreciation and Amortization Consumer $ 79,408 $ 101,434 $ (22,026 ) -22 % Commercial $ 256,766 $ 178,082 $ 78,684 44 % Depreciation and amortization, for the consumer segment, for the three months ended June 30, 2023, decreased by $22,026, or 22%, to $79,408, as compared to $101,434 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, for the three months ended June 30, 2023, increased by $78,684, or 44%, to $256,766, as compared to $178,082 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 Three Months Ended June 30, Change 2023 2022 Amount % Other Income Consumer $ 23,929 $ 9,397 $ 14,532 155 % Commercial $ 129,723 $ 12,004 $ 117,719 981 % Other income, for the consumer segment, for the three months ended June 30, 2023, increased by $14,532, or 155%, to $23,929, as compared to $9,397 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 June 30, 2023. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated to be included in selling, general, and administrative expenses for comparison purposes. Other income, for the commercial segment, for the three months ended June 30, 2023, increased by $117,719, or 981%, to $129,723, as compared to $12,004 during the same period in 2022. The increase in other income was primarily due to interest earned from bank accounts of $94,874. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated to be included in selling, general, and administrative expenses for comparison purposes. 34 Table of Contents Interest Expense Three Months Ended June 30, Change 2023 2022 Amount % Interest Expense Consumer $ 58,209 $ 61,663 $ (3,454 ) -6 % Commercial $ 56,479 $ 59,379 $ (2,900 ) -5 % Interest expense, for the consumer segment, for the three months ended June 30, 2023, decreased by $3,454, or 6%, to $58,209, as compared to $61,663 during the same period in 2022. The decrease was primarily due to reduced loan balances during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Interest expense, for the commercial segment, for the three months ended June 30, 2023, decreased by $2,900, or 5%, to $56,479, as compared to $59,379 during the same period in 2022. The decrease was primarily due to reduced loan balances during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Income Tax Expense Three Months Ended June 30, Change 2023 2022 Amount % Income Tax Expense Consumer $ 339,672 $ 15,391 $ 324,281 2107 % Commercial $ 158,902 $ 34,861 $ 124,041 356 % Income tax expense, for both segments, for the three months ended June 30, 2023, was $498,574, an increase of $448,322, as compared to income tax expense of $50,252 for the three months ended June 30, 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 January 1, 2023, the Company has a federal tax rate of approximately 21%, in addition to other state and local taxes, on net income. The effective income tax rate was 23.7% and 1.3% for the three months ended June 30, 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 June 30, 2023, compared to the three months ended June 30, 2022. Net Income Three Months Ended June 30, Change 2023 2022 Amount % Net Income Consumer $ 1,168,309 $ 1,766,584 $ (598,275 ) -34 % Commercial $ 435,400 $ 2,081,274 $ (1,645,874 ) -79 % Net income related to the consumer operations for the three months ended June 30, 2023, decreased by $598,272, or 34%, to $1,168,309, as compared to $1,766,584 during the same period in 2022. The decrease in net income was due primarily to increased income tax expense of $324,281 and an increase in selling, general and administrative expenses of $220,064 due to our increasing footprint in Arizona and other markets during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. 35 Table of Contents Net income related to the commercial operations for the three months ended June 30, 2023, decreased by $1,645,874, or 79%, to $435,400, as compared to $2,081,274 during the same period in 2022. The decrease in net income was due primarily to an increase in income tax expense of $124,041, a decrease in gross profit of $622,011, added to an increase in selling, general and administrative expenses of $941,757. The increase in selling, general and administrative expenses of $941,757 can primarily be attributed to factors such as an increase in staff, higher salaries and related costs, as well as the Company's ongoing expansion in the consumer segment, which includes increased spending on marketing and professional services. Earnings Per Share Three Months Ended June 30, Change 2023 2022 Amount % Earnings Per Share $ 0.06 $ 0.14 $ (0.08 ) -57 % Earnings per share, for the three months ended June 30, 2023, for net income per basic and diluted shares attributable to holders of our Common Stock was $0.06, compared to $0.14 per basic and diluted shares attributable to holders of our Common Stock for the three months ended June 30, 2022. The following disaggregation of total revenue is listed by sales category and segment for the six months ended June 30, 2023 and 2022: CONSOLIDATED Six Months Ended June 30, 2023 2022 Revenues Gross Profit Margin Revenues Gross Profit Margin Consumer Resale $ 70,365,601 $ 6,658,767 9.5 % $ 61,842,159 $ 7,462,806 12.1 % Recycled 5,980,230 1,420,843 23.8 % 4,279,840 949,240 22.2 % Subtotal 76,345,831 8,079,610 10.6 % 66,121,999 8,412,046 12.7 % Commercial Resale 16,124,326 10,850,463 67.3 % 18,681,858 10,140,775 54.3 % Recycled 6,222,410 3,241,876 52.1 % 5,250,959 2,636,213 50.2 % Subtotal 22,346,736 14,092,339 63.1 % 23,932,817 12,776,988 53.4 % $ 98,692,567 $ 22,171,949 22.5 % $ 90,054,816 $ 21,189,034 23.5 % Comparison of six months ended June 30, 2023 and 2022 Resale Revenue Six Months Ended June 30, Change 2023 2022 Amount % Resale Revenue Consumer $ 70,365,601 $ 61,842,159 $ 8,523,442 14 % Commercial $ 16,124,326 $ 18,681,858 $ (2,557,532 ) -14 % 36 Table of Contents Resale revenue related to the consumer segment increased by $8,523,442, or 14%, during the six months ended June 30, 2023, to $70,365,601, as compared to $61,842,159 during the same period in 2022. Resale revenue, such as bullion, jewelry, watches, and rare coins, increased $8,523,442 during the six months ending June 30, 2023 due to heavy on-line advertising, as compared to the same period in 2022. Resale revenue related to the commercial segment decreased by $2,557,532, or 14%, during the three months ended June 30, 2023, to $16,124,326, as compared to $18,681,858 during the same period in 2022. Resale revenue decreased primarily due to supply chain issues of purchasing inventory during the six months ending June 30, 2023. Recycled Revenue Six Months Ended June 30, Change 2023 2022 Amount % Recycled Revenue Consumer $ 5,980,230 $ 4,279,840 $ 1,700,390 40 % Commercial $ 6,222,410 $ 5,250,959 $ 971,451 19 % Recycled revenue related to the consumer segment increased by $1,700,390, or 40%, during the six months ended June 30, 2023, to $5,980,230, as compared to $4,279,840 during the same period in 2022. Recycled revenue increased $1,700,390 during the six months ending June 30, 2023, compared to the six months ended June 30, 2022 primarily due to increased inventory purchased that was not selected to be exhibited in our retail showcases. Inventory was scrapped for its precious metal content. Recycled revenue related to the commercial segment increased by $971,451, or 19%, during the six months ended June 30, 2023, to $6,222,410, as compared to $5,250,959 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 six months ending June 30, 2023, compared to the six months ending June 30, 2022. Gross Profit - Resale Six Months Ended June 30, Change 2023 2022 Amount % Gross Profit - Resale Consumer $ 6,658,767 $ 7,462,806 $ (804,039 ) -11 % Commercial $ 10,850,463 $ 10,140,775 $ 709,688 7 % Resale gross profit related to the consumer operations for the six months ended June 30, 2023, decreased by $804,039, or 11%, to $6,658,767, as compared to resale gross profit of $7,462,806 during the same period in 2022 due to increased competition in the jewelry sector. Resale gross profit related to the commercial operations for the six months ended June 30, 2023, increased by $709,688, or 7%, to $10,850,463, as compared to resale gross profit of $10,140,775 during the same period in 2022. The increase in resale gross profit was primarily due to increased sales prices on material sold. 37 Table of Contents Gross Profit - Recycled Six Months Ended June 30, Change 2023 2022 Amount % Gross Profit - Recycled Consumer $ 1,420,843 $ 949,240 $ 471,603 50 % Commercial $ 3,241,876 $ 2,636,213 $ 605,663 23 % Recycled gross profit related to the consumer operations for the six months ended June 30, 2023, increased by $471,603, or 50%, to $1,420,843, as compared to gross profit of $949,240 during the same period in 2022. The increase in recycled gross profit was primarily due to the increase of approximately 40% in recycled sales during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Recycled gross profit related to the commercial operations for the six months ended June 30, 2023, increased by $605,663, or 23%, to $3,241,876, as compared to gross profit of $2,636,213 during the same period in 2022. The increase in recycled gross profit was due primarily to 19% increase in recycled sales during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. For The Six Months Ended June 30, 2023 2022 Consumer Commercial Consolidated Consumer Commercial Consolidated Revenue: Sales $ 76,345,831 $ 22,346,736 $ 98,692,567 $ 66,121,999 $ 23,932,817 $ 90,054,816 Cost of goods sold 68,266,221 8,254,397 76,520,618 57,709,953 11,155,829 68,865,782 Gross profit 8,079,610 14,092,339 22,171,949 8,412,046 12,776,988 21,189,034 Expenses: Selling, general and administrative expenses 4,868,998 11,398,859 16,267,857 4,433,466 9,412,238 13,845,704 Depreciation and amortization 177,542 512,983 690,525 208,397 363,066 571,463 5,046,540 11,911,842 16,958,382 4,641,863 9,775,304 14,417,167 Operating income 3,033,070 2,180,497 5,213,567 3,770,183 3,001,684 6,771,867 Other income/expense: Other income 47,463 316,968 364,431 24,014 24,027 48,041 Interest expense 117,827 113,925 231,752 122,904 121,377 244,281 Income before income taxes 2,962,706 2,383,540 5,346,246 3,671,293 2,904,334 6,575,627 Income tax expense 657,513 558,707 1,216,220 28,568 51,976 80,544 Net income $ 2,305,193 $ 1,824,833 $ 4,130,026 $ 3,642,725 $ 2,852,358 $ 6,495,083 Selling, General and Administrative Six Months Ended June 30, Change 2023 2022 Amount % Selling, General and Administrative Consumer $ 4,868,998 $ 4,433,466 $ 435,532 10 % Commercial $ 11,398,859 $ 9,412,238 $ 1,986,621 21 % Selling, General and Administrative Expenses, for the consumer segment, for the six months ended June 30, 2023, increased by $435,532, or 10%, to $4,868,998, as compared to $4,433,466 during the same period in 2022. The increase was primarily due to increased expenses related to expanding our footprint into Arizona and other markets. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated to be included in selling, general, and administrative expenses for comparison purposes. 38 Table of Contents Selling, General and Administrative Expenses, for the commercial segment, for the six months ended June 30, 2023, increased by $1,986,621, or 21%, to $11,398,859, as compared to $9,412,238 during the same period in 2022. The increase was primarily due to increased expenses related to expanding the commercial business by increasing the corporate infrastructure. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated to be included in selling, general, and administrative expenses for comparison purposes. Depreciation and Amortization Six Months Ended June 30, Change 2023 2022 Amount % Depreciation and Amortization Consumer $ 177,542 $ 208,397 $ (30,855 ) -15 % Commercial $ 512,983 $ 363,066 $ 149,917 41 % Depreciation and amortization, for the consumer segment, for the six months ended June 30, 2023, decreased by $30,855, or 15%, to $177,542, as compared to $208,397 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, for the six months ended June 30, 2023, increased by $149,917, or 41%, to $512,983, as compared to $363,066 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) Six Months Ended June 30, Change 2023 2022 Amount % Other Income Consumer $ 47,463 $ 24,014 $ 23,449 98 % Commercial $ 316,968 $ 24,027 $ 292,941 1219 % Other income, for the consumer segment, for the six months ended June 30, 2023, was $47,463, as compared to $24,014 during the same period in 2022, an increase of $23,449, or 98%. The increase in other income was primarily due to increase interest earned from bank accounts for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated to be included in selling, general, and administrative expenses for comparison purposes. Other income, for the commercial segment, for the six months ended June 30, 2023, was $316,968, as compared to $24,027 during the same period in 2022, an increase of $292,941, or 1219%. The increase in other income for the six months ended June 30, 2023 was primarily due to interest earned from bank accounts of $156,252, notes receivable interest received of $94,115 from notes receivable formerly written off during fiscal year 2021, and rental income, of $48,000, from third party tenants of the corporate headquarters allocated to the commercial segment, as compared to $24,000 of rental income from third party tenants for the six months ended June 30, 2022. Additionally, starting January 1, 2023, expenses previously classified as other expenses related to corporate campus overhead have been classified as operating expenses within the selling, general, and administrative expenses category. The corporate campus overhead for 2022 initially recorded as other expense has been restated to be included in selling, general, and administrative expenses for comparison purposes. 39 Table of Contents Interest Expense Six Months Ended June 30, Change 2023 2022 Amount % Interest Expense Consumer $ 117,827 $ 122,904 $ (5,077 ) -4 % Commercial $ 113,925 $ 121,377 $ (7,452 ) -6 % Interest expense, for the consumer segment, for the six months ended June 30, 2023, decreased by $5,077, or 4%, to $117,827, as compared to $122,904 during the same period in 2022. The decrease was primarily due to reduced loan balances during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Interest expense, for the commercial segment, for the six months ended June 30, 2023, decreased by $7,452, or 6%, to $113,925, as compared to $121,377 during the same period in 2022. The decrease was primarily due to reduced loan balances during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Income Tax Expense Six Months Ended June 30, Change 2023 2022 Amount % Income Tax Expense Consumer $ 657,513 $ 28,568 $ 628,945 2202 % Commercial $ 558,707 $ 51,976 $ 506,731 975 % Income tax expense, for both segments, for the six months ended June 30, 2023, was $1,216,220, an increase of $1,135,676, as compared to income tax expense of $80,544 for the six months ended June 30, 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 January 1, 2023, the Company has a federal tax rate of approximately 21%, in addition to other state and local taxes, on net income before taxes. The effective income tax rate was 22.7% and 1.2% for the six months ended June 30, 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 six months ended June 30, 2023, compared to the six months ended June 30, 2022. Net Income Six Months Ended June 30, Change 2023 2022 Amount % Net Income Consumer $ 2,305,193 $ 3,642,725 $ (1,337,532 ) -37 % Commercial $ 1,824,833 $ 2,852,358 $ (1,027,525 ) -36 % Net income related to the consumer operations for the six months ended June 30, 2023, decreased by $1,337,532, or 37%, to $2,305,193, as compared to $3,642,725 during the same period in 2022. The decrease in net income was due primarily to the increased tax expense of $628,945, the decrease in gross profit of $332,436 and the increase in selling, general and administrative expenses of $435,532 for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. 40 Table of Contents Net income related to the commercial operations for the six months ended June 30, 2023, decreased by $1,027,525, or 36%, to $1,824,833, as compared to $2,852,358 during the same period in 2022. The decrease in net income for the six months ended June 30, 2023 was due primarily to an increase in gross profit of $1,315,351 and an increase in other income of $292,941, offset by an increase in income tax expense of $506,731 and an increase in selling, general and administrative expenses of $1,986,621, compared to the six months ended June 30, 2022. Earnings Per Share Six Months Ended June 30, Change 2023 2022 Amount % Earnings Per Share $ 0.15 $ 0.24 $ (0.09 ) -38 % Earnings per share, for the six months ended June 30, 2023, for net income per basic and diluted shares attributable to holders of our Common Stock was $0.15, compared to $0.24 per basic and diluted shares attributable to holders of our Common Stock for the six months ended June 30, 2022. Liquidity and Capital Resources The following table summarizes our cash flows for the periods indicated. Six Months Ended June 30, 2023 2022 Net cash provided by (used in): Operating activities $ 2,748,490 $ 6,362,641 Investing activities (722,621 ) (420,917 ) Financing activities (815,062 ) (2,144,396 ) Net increase in cash and cash equivalents $ 1,210,807 $ 3,797,328 During the six months ended June 30, 2023, cash flows provided by operations totaled $2,748,490, and during the six months ended June 30, 2021, cash flows provided by operations totaled $6,362,641, a decrease of $3,614,151. Cash provided by operations for the six months ended June 30, 2023 was driven primarily by net income added to non-cash items of depreciation and amortization, bad debt and deferred taxes of $5,869,173, a reduction of prepaid expenses of $75,838 and an increase in customer deposits and other liabilities of $65,948, offset by an increase in inventories of $2,762,524, a decrease in accounts payable and accrued expenses of $218,632, an increase in other assets of $202,788 and an increase in trade receivables of $78,053. Cash provided by operations for the six months ended June 30, 2022 was driven largely by net income added to non-cash items of depreciation, amortization and bad debt of $7,091,546, a decrease in trade receivables of $1,452,651, an increase in customer deposits and other liabilities of $1,019,363, a decrease in other assets of $754,759 and an increase in accounts payable and accrued expenses of $767,122, offset by an increase in inventories of $3,755,662 and the increase in prepaid expenses of $981,616. During the six months ended June 30, 2023 and 2022, cash flows used in investing activities totaled $722,621 and $420,917, respectively, a period-over-period increase of $301,704. Cash used in investing activities during the six months ended June 30, 2023 was primarily due to the purchase of property and equipment of $1,300,871, offset by the reduction in note receivable of $578,250. Cash used in investing activities during the six months ended June 30, 2022 was primarily due to the purchase of additional property and equipment of $203,929 and the addition to the acquisition of Avail assets and liabilities of $216,988. During the six months ended June 30, 2023 and 2022, cash flows used in financing totaled $815,062 and $2,144,396, respectively, a period-over-period decrease of $1,329,334. Cash used in financing during the six months ended June 30, 2023 was primarily due from payments made against notes payable of $620,242 and the repurchase of Company stock on the open market. Cash used in financing during the six months ended June 30, 2022 was primarily due from payments made against notes payable of $444,396 and payments made against the line of credit of $1,700,000. 41 Table of Contents We expect our capital expenditures to total approximately $2,500,000 during the next 12 months. These expenditures will be driven by the purchase of additional equipment and potential property purchases by both segments seeking to expand the Company into other markets. The Company has an outstanding capital commitment of $100,000 to build-out the consumer building purchased in Phoenix, Arizona on May 4, 2023. 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 June 30, 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 June 30, 2023 are as follows: Operating Leases Total 2023 2024 2025 2026 Thereafter Consumer (excluding the six months ending June 30, 2023) $ 1,663,459 $ 271,657 $ 552,414 $ 434,274 $ 355,000 $ 50,114 Commercial (excluding the six months ending June 30, 2023) 3,904,737 679,530 1,396,129 1,321,297 474,326 33,455 Total $ 5,568,196 $ 951,187 $ 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. 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. 42 Table of Contents