UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q_____________________
(Mark One)FORM 10-Q
_____________________
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172022
or
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to |
For the transition period from ___ to ___
Commission File Number 1-11048001-11048
_____________________
DGSE Companies, Inc.
(Exact name of registrant as specified in its charter)
ENVELA CORPORATION | ||
( |
_____________________
Nevada | 88-0097334 | |
(STATE OF INCORPORATION) | (I.R.S. EMPLOYER IDENTIFICATION NO.) |
13022 Preston Road1901 GATEWAY DRIVE, STE 100, IRVING, TX 75038
Dallas, Texas 75240
(972) 587-4049
(Address, including zip code, and telephone
number, including area code, of registrant’s
principal executive offices)ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
N/A(972) 587-4049
(Former name, former address and former fiscal year, if changed since last report)REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
www.envela.com
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of exchange on which registered | ||
COMMON STOCK, par value $0.01 per share | ELA | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ No¨ ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx ☒ No¨ ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
(Do not check if a smaller reporting company)
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to sectionSection 13(a) of the Exchange Act¨Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ ☐ Nox ☒
IndicateAs of November 2, 2022, the number ofregistrant had 26,924,631 shares outstanding of each of the issuer’s classes of common stock as of November 7, 2017:outstanding.
DGSE COMPANIES, INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
Item 1. Financial Statements
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF INCOME
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 615,611 | $ | 1,412,082 | ||||
Trade receivables, net of allowances | 741,419 | 245,095 | ||||||
Trade receivables, net of allowances, related party | 23,496 | 40,627 | ||||||
Inventories | 8,576,593 | 9,384,136 | ||||||
Prepaid expenses | 311,235 | 55,029 | ||||||
Note receivable, current | 33,525 | - | ||||||
Total current assets | 10,301,879 | 11,136,969 | ||||||
Property and equipment, net | 1,560,240 | 1,665,103 | ||||||
Note receivable, long term | 641,475 | - | ||||||
Other assets | 77,196 | 110,605 | ||||||
Total assets | $ | 12,580,790 | $ | 12,912,677 | ||||
LIABILITIES | ||||||||
Current Liabilities: | ||||||||
Current maturities of capital leases | $ | 4,714 | $ | 12,590 | ||||
Accounts payable - trade | 479,818 | 1,103,022 | ||||||
Accounts payable - trade, related party | 4,105,705 | 4,107,425 | ||||||
Accrued expenses | 730,408 | 1,209,902 | ||||||
Customer deposits and other liabilities | 254,634 | 572,362 | ||||||
Total current liabilities | 5,575,279 | 7,005,301 | ||||||
Capital lease obligations, less current maturities | - | 1,074 | ||||||
Total liabilities | 5,575,279 | 7,006,375 | ||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $0.01 par value; 60,000,000 shares authorized 26,924,381 and 26,905,631 shares issued and outstanding | 269,244 | 269,056 | ||||||
Additional paid-in capital | 40,172,677 | 40,162,177 | ||||||
Accumulated deficit | (33,436,410 | ) | (34,524,931 | ) | ||||
Total stockholders' equity | 7,005,511 | 5,906,302 | ||||||
Total liabilities and stockholders' equity | $ | 12,580,790 | $ | 12,912,677 |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Unaudited) |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales |
| $ | 45,197,686 |
|
| $ | 37,680,769 |
|
| $ | 135,252,502 |
|
| $ | 96,895,216 |
|
Cost of goods sold |
|
| 33,342,029 |
|
|
| 29,570,653 |
|
|
| 102,207,811 |
|
|
| 75,352,946 |
|
Gross margin |
|
| 11,855,657 |
|
|
| 8,110,116 |
|
|
| 33,044,691 |
|
|
| 21,542,270 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
| 7,753,702 |
|
|
| 5,230,473 |
|
|
| 21,397,360 |
|
|
| 14,214,927 |
|
Depreciation and amortization |
|
| 534,964 |
|
|
| 216,176 |
|
|
| 1,106,427 |
|
|
| 637,307 |
|
Total operating expenses |
|
| 8,288,666 |
|
|
| 5,446,649 |
|
|
| 22,503,787 |
|
|
| 14,852,234 |
|
Operating income |
|
| 3,566,991 |
|
|
| 2,663,467 |
|
|
| 10,540,904 |
|
|
| 6,690,036 |
|
Interest expense |
|
| 119,957 |
|
|
| 188,853 |
|
|
| 364,238 |
|
|
| 545,579 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of Federal Loan |
|
| - |
|
|
| 1,668,200 |
|
|
| - |
|
|
| 1,668,200 |
|
Write-off of notes receivable and accrued interest receivable |
|
| - |
|
|
| (949,174 | ) |
|
| - |
|
|
| (949,174 | ) |
Other income (expense), net |
|
| (65,264 | ) |
|
| (60,784 | ) |
|
| (219,269 | ) |
|
| 494,212 |
|
Income before income taxes |
|
| 3,381,770 |
|
|
| 3,132,856 |
|
|
| 9,957,397 |
|
|
| 7,357,695 |
|
Income tax expense |
|
| 64,061 |
|
|
| 26,455 |
|
|
| 144,605 |
|
|
| 89,910 |
|
Net income |
| $ | 3,317,709 |
|
| $ | 3,106,401 |
|
| $ | 9,812,792 |
|
| $ | 7,267,785 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 0.12 |
|
| $ | 0.12 |
|
| $ | 0.36 |
|
| $ | 0.27 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 0.12 |
|
| $ | 0.12 |
|
| $ | 0.36 |
|
| $ | 0.27 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 26,924,631 |
|
|
| 26,924,631 |
|
|
| 26,924,631 |
|
|
| 26,924,631 |
|
Diluted |
|
| 26,939,631 |
|
|
| 26,939,631 |
|
|
| 26,939,631 |
|
|
| 26,939,631 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
DGSE COMPANIES, INC.ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)BALANCE SHEETS
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
Sales | $ | 15,678,361 | $ | 10,572,071 | $ | 47,549,134 | $ | 37,844,993 | ||||||||
Cost of goods sold | 12,782,357 | 8,704,491 | 39,345,247 | 31,546,514 | ||||||||||||
Gross margin | 2,896,004 | 1,867,580 | 8,203,887 | 6,298,479 | ||||||||||||
Expenses: | ||||||||||||||||
Selling, general and administrative expenses | 2,156,843 | 2,184,041 | 6,712,428 | 7,401,556 | ||||||||||||
Loss on the sale of assets | - | 1,026,078 | - | 1,026,078 | ||||||||||||
Depreciation and amortization | 67,272 | 77,878 | 245,048 | 287,278 | ||||||||||||
2,224,115 | 3,287,997 | 6,957,476 | 8,714,912 | |||||||||||||
Operating income (loss) | 671,889 | (1,420,417 | ) | 1,246,411 | (2,416,433 | ) | ||||||||||
Other (income) expense: | ||||||||||||||||
Other income, net | (8,580 | ) | (3,110 | ) | (23,239 | ) | (3,371 | ) | ||||||||
Interest expense | 50,316 | 88,909 | 149,522 | 284,679 | ||||||||||||
41,736 | 85,799 | 126,283 | 281,308 | |||||||||||||
Income (loss) from continuing operations before income taxes | 630,153 | (1,506,216 | ) | 1,120,128 | (2,697,741 | ) | ||||||||||
Income tax expense | 26,279 | 4,334 | 31,607 | 39,960 | ||||||||||||
Income (loss) from continuing operations | 603,874 | (1,510,550 | ) | 1,088,521 | (2,737,701 | ) | ||||||||||
Discontinued operations: | ||||||||||||||||
Income from discontinued operations, net of taxes | - | 825 | - | 661 | ||||||||||||
Net income (loss) | $ | 603,874 | $ | (1,509,725 | ) | $ | 1,088,521 | $ | (2,737,040 | ) | ||||||
Basic net income (loss) per common share: | ||||||||||||||||
Income (loss) from continuing operations | $ | 0.02 | $ | (0.12 | ) | $ | 0.04 | $ | (0.22 | ) | ||||||
Income (loss) from discontinued operations | - | - | - | - | ||||||||||||
Net income (loss) per share | $ | 0.02 | $ | (0.12 | ) | $ | 0.04 | $ | (0.22 | ) | ||||||
Diluted net income (loss) per share: | ||||||||||||||||
Income (loss) from continuing operations | $ | 0.02 | $ | (0.12 | ) | $ | 0.04 | $ | (0.22 | ) | ||||||
Income (loss) from discontinued operations | - | - | - | - | ||||||||||||
Net income (loss) per share | $ | 0.02 | $ | (0.12 | ) | $ | 0.04 | $ | (0.22 | ) | ||||||
Weighted-average number of common shares | ||||||||||||||||
Basic | 26,924,381 | 12,358,466 | 26,916,414 | 12,327,753 | ||||||||||||
Diluted | 27,434,586 | 12,358,466 | 27,394,132 | 12,327,753 |
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Assets |
| (unaudited) |
|
|
| |||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 14,968,756 |
|
| $ | 10,138,148 |
|
Trade receivables, net of allowances |
|
| 7,191,109 |
|
|
| 7,166,533 |
|
Inventories |
|
| 18,063,063 |
|
|
| 14,048,436 |
|
Current right-of-use assets from operating leases |
|
| 1,665,903 |
|
|
| 1,604,736 |
|
Prepaid expenses |
|
| 1,652,226 |
|
|
| 439,038 |
|
Other current assets |
|
| 709,204 |
|
|
| 969,624 |
|
Total current assets |
|
| 44,250,261 |
|
|
| 34,366,515 |
|
Property and equipment, net |
|
| 9,513,382 |
|
|
| 9,806,188 |
|
Goodwill |
|
| 3,621,453 |
|
|
| 6,140,465 |
|
Intangible assets, net |
|
| 5,189,120 |
|
|
| 3,024,245 |
|
Operating lease right-of-use assets, less current portion |
|
| 4,616,902 |
|
|
| 5,692,141 |
|
Other long-term assets |
|
| 186,761 |
|
|
| 237,761 |
|
Total assets |
| $ | 67,377,879 |
|
| $ | 59,267,315 |
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable-trade |
| $ | 4,441,613 |
|
| $ | 2,488,396 |
|
Line of credit |
|
| - |
|
|
| 1,700,000 |
|
Notes payable |
|
| 1,246,083 |
|
|
| 1,065,794 |
|
Current operating lease liabilities |
|
| 1,658,990 |
|
|
| 1,573,824 |
|
Accrued expenses |
|
| 1,760,809 |
|
|
| 1,789,366 |
|
Customer deposits and other liabilities |
|
| 992,633 |
|
|
| 1,179,224 |
|
Total current liabilities |
|
| 10,100,128 |
|
|
| 9,796,604 |
|
Notes payable, less current portion |
|
| 15,039,700 |
|
|
| 15,970,337 |
|
Long-term operating lease liabilities, less current portion |
|
| 4,797,942 |
|
|
| 5,873,057 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
| 29,937,770 |
|
|
| 31,639,998 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding |
|
| - |
|
|
| - |
|
Common stock, $0.01 par value; 60,000,000 shares authorized; 26,924,631 shares issued and outstanding |
|
| 269,246 |
|
|
| 269,246 |
|
Additional paid-in capital |
|
| 40,173,000 |
|
|
| 40,173,000 |
|
Accumulated deficit |
|
| (3,002,137 | ) |
|
| (12,814,929 | ) |
Total stockholders’ equity |
|
| 37,440,109 |
|
|
| 27,627,317 |
|
Total liabilities and stockholders’ equity |
| $ | 67,377,879 |
|
| $ | 59,267,315 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
DGSE COMPANIES, INC.ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income (loss) | $ | 1,088,521 | $ | (2,737,040 | ) | |||
Income from discontinued operations, net of tax | - | 661 | ||||||
1,088,521 | (2,737,701 | ) | ||||||
Adjustments to reconcile income (loss) from continuing operations to net cash used in operating activities of continuing operations: | ||||||||
Depreciation and amortization | 245,048 | 287,278 | ||||||
Loss on sale of assets | - | 1,026,078 | ||||||
Stock based compensation to employees, officers and directors | 10,688 | 63,950 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade receivables, net | (479,193 | ) | 4,122 | |||||
Inventories | 807,543 | 417,338 | ||||||
Prepaid expenses | (256,206 | ) | 11,244 | |||||
Note receivable | (675,000 | ) | - | |||||
Other assets | 33,409 | 93,621 | ||||||
Accounts payable and accrued expenses | (1,104,418 | ) | 1,042,271 | |||||
Customer deposits and other liabilities | (317,727 | ) | (458,444 | ) | ||||
Net cash used in operating activities of continuing operations | (647,335 | ) | (250,243 | ) | ||||
Cash Flows From Investing Activities: | ||||||||
Proceeds from sale of assets | - | 2,124,416 | ||||||
Purchase of property and equipment | (140,186 | ) | (887,201 | ) | ||||
Net cash provided by (used in) investing activities of continuing operations | (140,186 | ) | 1,237,215 | |||||
Cash Flows From Financing Activities: | ||||||||
Repayment of debt | - | (1,589,521 | ) | |||||
Payments on capital lease obligations | (8,950 | ) | (9,005 | ) | ||||
Net cash used in financing activities of continuing operations | (8,950 | ) | (1,598,526 | ) | ||||
Cash Flows from Discontinued Operations: | ||||||||
Net cash provided by operating activities of discontinued operations | - | 661 | ||||||
Net change in cash and cash equivalents | (796,471 | ) | (610,893 | ) | ||||
Cash and cash equivalents, beginning of period | 1,412,082 | 1,752,711 | ||||||
Cash and cash equivalents, end of period | $ | 615,611 | $ | 1,141,818 | ||||
Supplemental Disclosures: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 149,521 | $ | 237,849 | ||||
Income taxes | $ | - | $ | - |
For the Nine Months Ended September 30, |
| 2022 |
|
| 2021 |
| ||
|
| (Unaudited) |
|
| (Unaudited) |
| ||
Operations |
|
|
|
|
|
| ||
Net income |
| $ | 9,812,792 |
|
| $ | 7,267,785 |
|
Adjustments to reconcile net income to net cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation, amortization, and other |
|
| 1,106,427 |
|
|
| 637,307 |
|
Bad debt expense |
|
| 73,418 |
|
|
| 28,532 |
|
Gain on forgiveness of Federal Loan |
|
| - |
|
|
| (1,668,200 | ) |
Write-off of note receivables and accrued interest receivable |
|
| - |
|
|
| 949,174 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade receivables |
|
| (97,994 | ) |
|
| (2,871,070 | ) |
Inventories |
|
| (4,014,627 | ) |
|
| (2,647,432 | ) |
Prepaid expenses |
|
| (1,213,187 | ) |
|
| (886,591 | ) |
Intangible Assets |
|
| (15,300 | ) |
|
| - |
|
Other assets |
|
| 311,420 |
|
|
| (417,347 | ) |
Accounts payable and accrued expenses |
|
| 1,924,658 |
|
|
| 100,952 |
|
Operating leases |
|
| 24,123 |
|
|
| 21,737 |
|
Customer deposits and other liabilities |
|
| (186,590 | ) |
|
| 511,610 |
|
Net cash provided by operations |
|
| 7,725,140 |
|
|
| 1,026,457 |
|
Investing |
|
|
|
|
|
|
|
|
Investment in note receivable |
|
| - |
|
|
| (300,000 | ) |
Purchase of property and equipment |
|
| (227,197 | ) |
|
| (3,064,277 | ) |
Acquisition of CExchange assets and liabilities, net of cash acquired |
|
| - |
|
|
| 13,136 |
|
Adjustment to the purchase price of the Avail Transaction |
|
| (216,988 | ) |
|
| - |
|
Net cash used in investing |
|
| (444,185 | ) |
|
| (3,351,141 | ) |
Financing |
|
|
|
|
|
|
|
|
Payments on notes payable, related party |
|
| - |
|
|
| (218,820 | ) |
Payments on notes payable |
|
| (750,347 | ) |
|
| (123,352 | ) |
Proceeds from notes to purchase property |
|
| - |
|
|
| 1,772,000 |
|
Payments on line of credit |
|
| (1,700,000 | ) |
|
| - |
|
Net cash provided by (used in) financing |
|
| (2,450,347 | ) |
|
| 1,429,828 |
|
Net change in cash and cash equivalents |
|
| 4,830,608 |
|
|
| (894,856 | ) |
Cash and cash equivalents, beginning of period |
|
| 10,138,148 |
|
|
| 9,218,036 |
|
Cash and cash equivalents, end of period |
| $ | 14,968,756 |
|
| $ | 8,323,180 |
|
Supplemental Disclosures |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 372,819 |
|
| $ | 541,863 |
|
Income taxes |
| $ | 133,000 |
|
| $ | 86,000 |
|
Non cash activites: |
|
|
|
|
|
|
|
|
Acquisition of CExchange assets and liabilities |
| $ | - |
|
| $ | 1,555,892 |
|
Adjustment to the Avail Transaction purchase price allocation |
| $ | 2,736,000 |
|
| $ | - |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5 |
Table of Contents |
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months ended September 30, 2021 and 2022
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Total |
| |||||||
|
| Common Stock |
|
| Preferred Stock |
|
| Paid-in |
|
| Accumulated |
| Stockholders' |
| ||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at June 30, 2021 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (18,702,420 | ) |
| $ | 21,739,826 |
|
Net Income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,106,401 |
|
|
| 3,106,401 |
|
Balances at September 30, 2021 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (15,596,019 | ) |
| $ | 24,846,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Total |
| |||||||
|
| Common Stock |
|
| Preferred Stock |
|
| Paid-in |
|
| Accumulated |
|
| Stockholders' |
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at June 30, 2022 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (6,319,846 | ) |
| $ | 34,122,400 |
|
Net Income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,317,709 |
|
|
| 3,317,709 |
|
Balances at September 30, 2022 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (3,002,137 | ) |
| $ | 37,440,109 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
DGSE COMPANIES, INC.ENVELA CORPORATION AND SUBSIDIARIES
NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Nine Months ended September 30, 2021 and 2022
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Total |
| |||||||
|
| Common Stock |
|
| Preferred Stock |
|
| Paid-in |
|
| Accumulated |
|
| Stockholders' |
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at December 31, 2020 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (22,863,804 | ) |
| $ | 17,578,442 |
|
Net Income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,267,785 |
|
|
| 7,267,785 |
|
Balances at September 30, 2021 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (15,596,019 | ) |
| $ | 24,846,227 |
|
Note 1 - Basis of Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Accumulated |
|
| Total |
| |||||||
|
| Common Stock |
|
| Preferred Stock |
|
| Paid-in |
|
|
|
|
| Stockholders' |
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at December 31, 2021 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (12,814,929 | ) |
| $ | 27,627,317 |
|
Net Income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 9,812,792 |
|
|
| 9,812,792 |
|
Balances at September 30, 2022 |
|
| 26,924,631 |
|
| $ | 269,246 |
|
|
| - |
|
| $ | - |
|
| $ | 40,173,000 |
|
| $ | (3,002,137 | ) |
| $ | 37,440,109 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7 |
Table of Contents |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The interim condensed consolidated financial statements of DGSE Companies, Inc.,Envela Corporation, a Nevada corporation, and its subsidiaries (the(together with its subsidiaries, the “Company” or “DGSE”“Envela”), included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the Commission’sSEC’s rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company suggests that these financial statements be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (such fiscal year, “Fiscal 2016” and such2021 filed with the SEC on March 16, 2022 (the “2021 Annual Report on Form 10-K, the “Fiscal 2016 10-K”Report”). In the opinion of the management of the Company, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly its results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Certain reclassifications were madeThe information provided as of September 30, 2022 in these notes to the prior year'sinterim condensed consolidated financial statements to conform to the current year presentation.is unaudited.
NoteNOTE 2 - Principles— PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
Envela and its subsidiaries engage in diverse business activities within the recommerce sector. These activities include being one of Consolidationthe nation’s premier authenticated recommerce retailers of luxury hard assets; providing end-of-life asset recycling and Nature of Operationsresale to businesses, organization and retail consumers; offering data destruction and IT asset management; and providing products, services and solutions to industrial and commercial companies. Envela operates primarily via two operating and reportable segments. Through DGSE, LLC (“DGSE”), the Company operates Dallas Gold & Silver Exchange, Charleston Gold & Diamond Exchange, and Bullion Express brands. Through ECHG, LLC (“ECHG”), the Company operates Echo Environmental Holdings, LLC (“Echo”), ITAD USA Holdings, LLC (“ITAD USA”), CEX Holdings, LLC (“CEX”), Avail Recovery Solutions, LLC (“Avail”) and Teladvance, LLC (“Teladvance”). Envela is a Nevada corporation, headquartered in Irving, Texas.
DGSE primarily buys and sellsresells or recycles luxury hard assets like jewelry, diamonds, gemstones, fine watches, rare coins and related collectibles, precious-metal bullion products, togold, silver and other precious-metals. DGSE operates seven jewelry stores at both the retail and wholesale customers throughoutlevels in Texas and South Carolina. Buying and selling items for their precious-metals content is a major method by which DGSE markets itself. DGSE also offers jewelry repair services, custom-made jewelry and consignment items, and maintains relationships with refiners for precious-metal items that are not appropriate for resale. The Company also maintains a presence in the United Statesretail market through its facilities in South Carolinawebsites, www.dgse.com and Texas, andwww.cgdeinc.com.
ECHG, through its various internet sites.subsidiaries, primarily buys electronic components from business and other organizations, such as school districts, for end-of-life recycling and resale, or to add life to electronic devices by data destruction and refurbishment for reuse. ECHG also conducts such recycling and resale at the retail level. Echo focuses on end-of-life electronics recycling and sustainability and ITAD USA provides IT equipment disposition, including compliance and data sanitization services. Teladvance, CEX and Avail operate as value-added resellers by providing offerings and services to companies looking either to upgrade capabilities or dispose of electronic equipment. Like DGSE, ECHG also maintains relationships with refiners or recyclers to which it sells valuable materials it extracts from electronics and IT equipment that are not appropriate for resale or reuse. ECHG’s customers are companies and organizations that are based domestically and internationally.
8 |
Table of Contents |
For additional information on the businesses of both DGSE and ECHG, see “Item 1. Business – Operating Segments” in the Company’s 2021 Annual Report.
The interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated.
NoteNOTE 3 - Critical Accounting Policies and Estimates— ACCOUNTING POLICIES AND ESTIMATES
Financial Instruments
Financial Instruments
The carrying amounts reported in the condensed consolidated balance sheets for cash equivalents, trade receivables, trade receivables related party,inventories, prepaid expenses, other current assets, accounts payable, accounts payable related partyaccrued expenses and accrued expensescustomer deposits and other liabilities approximate fair value because of the immediate or short-term maturitynature of these financial instruments. The carrying amount reported for the Company’s capital lease approximates fair value because the underlying instrument has an interest rate with current market rates. This instrument is not held for trading purposes.
On September 22, 2017, the Company entered into an Asset Purchase Agreement (the “Agreement”) with David LarsonNotes payable and the Larson Group, LLC (David Larson and the Larson Group, LLC are collectively referred to as the “Buyer”). David Larson ran the wholesale watch division for the Company until his resignation on August 2, 2017. The Buyer purchased $675,000line of fine watches from the Company to be paid according to the Agreement. Monthly payments of principal and interest of $4,992.89 (amortized for 15 years at an interest rate of 4% per annum) with the outstanding loan and accrued interest payable to the Company on the maturity date of October 15, 2024. The carrying amount reported on the Company’s Note receivablecredit approximate fair value becausedue to the underlying instrument has anmarket interest rate with current market rates. This instrument is not held for trading purposes.charged.
Earnings Per Share
Basic earnings per share of our common stock, par value $0.01 per share (our “Common Stock”), is computed by dividing net earnings available to holders of the Company’s common stockCommon Stock by the weighted average number of common shares of Common Stock outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts requiring the Company to issue common stockCommon Stock were exercised or converted into common stock.Common Stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method.
Recent Accounting PronouncementGoodwill
In May 2014,Goodwill is not amortized but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year, or earlier if events or circumstances indicate the carrying value may be impaired. The Company’s goodwill is related to ECHG only and not the entire Company. ECHG has its own, separate financial information to perform goodwill impairment testing at least annually or if events indicate that those assets may be impaired. As a result of the current market and economic conditions related to the coronavirus pandemic (“COVID-19”), surging inflation and the war between Ukraine and Russia, in accordance with step 1 of the guidelines set forth in the Financial Accounting Standards BoardBoard’s (“FASB”) issued Accounting Standards Update No. 2014-09,RevenueCodification (“ASC”) 350-20-35-3A, the Company concluded there were no impairments of goodwill that resulted from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflectsthose triggering events for the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principlethree and in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In August 2015, the FASB issued Accounting Standards Update No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard is to be applied retrospectively, with early application permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.nine months ended September 30, 2022. The Company will continue to evaluate goodwill for the ECHG segment. For tax purposes, goodwill is evaluating the new standard, but does not anticipate a material impact to the consolidated financial statements once implemented in 2018.amortized and deductible over fifteen years.
ECHG goodwill was allocated in connection with three acquisitions of the assets now held by Echo on May 20, 2019 (the “Echo Transaction”), of the assets now held by Teladvance on June 9, 2021 (the “CExchange Transaction”) and of the assets now held by Avail on October 29, 2021 (the “Avail Transaction”). The preliminary goodwill associated with the Avail Transaction was $3,491,285, which was the initial purchase price less the approximate fair value of the net assets purchased. There have been several adjustments made to goodwill concerning the Avail Transaction during the nine months ended September 30, 2022. On February 25,May 31, 2022, an additional cash payment was made of $216,988 due to certain conditions being met concerning the cash balance upon a certain date. The cash payment increased goodwill for the Avail Transaction to $3,708,273. During the three months ended September 30, 2022, a third party valuation company identified $2,736,000 of intangibles that were not initially included in the fair value of Avail’s net assets that reduced the Avail Transaction goodwill to $972,272. There have been no other adjustments or impairment charges to goodwill. As of September 30, 2022 and December 31, 2021, goodwill was $3,621,453 and $6,140,465, respectively.
9 |
Table of Contents |
Recent Accounting Pronouncements
In June 2016, the FASB issued itsa new leasecredit loss accounting guidance in Accounting Standards Update No. 2016-02 (“standard ASU 2016-02”),Leases (Topic 842). Under2016-13. The new accounting standard introduces the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606,Revenue from Contracts with Customers. Under the new guidance, lesseescurrent expected credit losses methodology for estimating allowances for credit losses which will be based on expected losses rather than incurred losses. We will be required to recognizeuse a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basisforward-looking expected credit loss methodology for accounts receivable, loans and a right-of-use asset, which is an asset that representsother financial instruments. The standard will be adopted upon the lessee’s right to use, or control the use of, a specified asseteffective date for the lease term for all leases (with the exception of short-term leases) at the commencement date. ASU 2016-02 is effective for fiscal yearsus beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must applyJanuary 1, 2023 by using a modified retrospective transition approach for leases existing at, or entered into after,to align our credit loss methodology with the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.new standard. The Company is evaluating the financial statement implications of adopting ASU 2016-02.2016-13.
NoteThere were no other new accounting standards that had a material impact on the Company’s consolidated financial statements during the nine-month period ended September 30, 2022, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of September 30, 2022 that the Company expects to have a material impact on its consolidated financial statements.
NOTE 4 - Inventories— INVENTORIES
A summary of inventories is as follows:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Jewelry | $ | 6,789,259 | $ | 7,193,126 | ||||
Scrap gold | 711,524 | 885,194 | ||||||
Bullion | 586,251 | 292,591 | ||||||
Rare coins and Other | 489,559 | 1,013,225 | ||||||
$ | 8,576,593 | $ | 9,384,136 |
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
DGSE |
|
|
|
|
|
| ||
Resale |
| $ | 15,311,602 |
|
| $ | 10,422,072 |
|
Recycle |
|
| 8,484 |
|
|
| 11,995 |
|
Subtotal |
|
| 15,320,086 |
|
|
| 10,434,067 |
|
ECHG |
|
|
|
|
|
|
|
|
Resale |
|
| 1,637,723 |
|
|
| 3,350,159 |
|
Recycle |
|
| 1,105,254 |
|
|
| 264,210 |
|
Subtotal |
|
| 2,742,977 |
|
|
| 3,614,369 |
|
|
| $ | 18,063,063 |
|
| $ | 14,048,436 |
|
NOTE 5 — ACQUISITION
On October 29, 2021, ECHG entered into the Avail Transaction to purchase all of the assets, liabilities and rights and interests of Avail for $4,500,000. The purchase was facilitated by an initial payment of $2,500,000 at closing, with the remaining $2,000,000 represented by an installment note (the “Avail Installment Note”) made by ECHG to the seller to be paid out by 12 quarterly payments starting April 1, 2022, of $166,667 each. See Note 14 to our consolidated financial statements for more information on this loan. The Avail Installment Note for the Avail Transaction does not bear interest but the imputed interest rate was determined to be 3.1%.
As part of the Avail Transaction, goodwill was preliminarily recorded as $3,491,284, which was the purchase price less the approximate fair value of the net assets purchased. On May 31, 2022, an additional cash payment of $216,988 was made due to certain conditions being met concerning the cash balance upon a certain date. The additional cash payment was not part of the Avail Installment Note of $2,000,000 from the initial closing of the Avail Transaction. The additional cash payment increased goodwill and the purchase price amount by $216,988, thereby increasing goodwill for the Avail Transaction to $3,708,273. On September 30, 2022, a third party valuation company identified $2,736,000 of intangibles as part of the Avail Transaction not initially included in the fair value of Avail’s net assets. The intangibles identified of $2,736,000, decreases goodwill by $2,736,000 to $972,272, as shown in the purchase price allocation table below. The Avail Transaction was initially recorded as preliminary, but with the third party valuation complete, the purchase price allocation below is considered final. The Company’s goodwill is related to the ECHG segment. ECHG has its own separate financial information to perform goodwill impairment testing. The Company will evaluate goodwill based on cash flows for the ECHG segment. For tax purposes, goodwill is amortized and deductible over 15 years.
10 |
Table of Contents |
Note 5 - BasicThe purchase price allocation of the Avail Transaction is listed below:
|
| Initial |
|
| Final |
| ||
Description |
| Allocation |
|
| Allocation |
| ||
|
|
|
|
|
|
| ||
Assets |
|
|
|
|
|
| ||
Cash |
| $ | 988,870 |
|
| $ | 988,870 |
|
Account receivables |
|
| 395,144 |
|
|
| 395,144 |
|
Inventories |
|
| 486,736 |
|
|
| 486,736 |
|
Prepaid expenses |
|
| 93,727 |
|
|
| 93,727 |
|
Intangible assets - Trademarks/Tradenames |
|
| - |
|
|
| 1,272,000 |
|
Intangible assets - Customer Relationships |
|
| - |
|
|
| 1,464,000 |
|
Fixed assets - net |
|
| 247,038 |
|
|
| 247,038 |
|
Right-of-use assets |
|
| 609,511 |
|
|
| 609,511 |
|
Other assets |
|
| 13,268 |
|
|
| 13,268 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Account payables |
|
| (562,778 | ) |
|
| (562,778 | ) |
Accrued liabilities |
|
| (653,289 | ) |
|
| (653,289 | ) |
Operating lease liabilities |
|
| (609,511 | ) |
|
| (609,511 | ) |
|
|
|
|
|
|
|
|
|
Net assets |
|
| 1,008,716 |
|
|
| 3,744,716 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 3,491,284 |
|
|
| 972,272 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
| $ | 4,500,000 |
|
| $ | 4,716,988 |
|
11 |
Table of Contents |
The following table compares the results of Avail as part of Company’s financial results for the three months ended September 30, 2022, and Diluted Average Sharesthe Company’s results of operations as if they were combined for the three months ended September 30, 2021:
|
| Consolidated Statement of |
|
|
|
| ||
|
| Income |
|
| Proforma Combined |
| ||
|
| For the Three Months Ended |
|
| For the Three Months Ended |
| ||
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
|
|
|
|
|
|
| ||
Revenue |
| $ | 45,197,686 |
|
| $ | 40,057,210 |
|
Income from continuing operations |
| $ | 3,381,770 |
|
| $ | 3,496,441 |
|
Net income |
| $ | 3,317,709 |
|
| $ | 3,432,380 |
|
Basic net income per common share |
| $ | 0.12 |
|
| $ | 0.13 |
|
Diluted net income per common share |
| $ | 0.12 |
|
| $ | 0.13 |
|
The following table compares the results of Avail as part of the Company’s financial results for the nine months ended September 30, 2022, and the Company’s results of operations as if they were combined for the nine months ended September 30, 2021:
|
| Consolidated Statement of |
|
|
|
| ||
|
| Income |
|
| Proforma Combined |
| ||
|
| For the Nine Months Ended |
|
| For the Nine Months Ended |
| ||
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
|
|
|
|
|
|
| ||
Revenue |
| $ | 135,252,502 |
|
| $ | 102,710,504 |
|
Income from continuing operations |
| $ | 9,957,397 |
|
| $ | 8,424,665 |
|
Net income |
| $ | 9,812,792 |
|
| $ | 8,280,060 |
|
Basic net income per common share |
| $ | 0.36 |
|
| $ | 0.31 |
|
Diluted net income per common share |
| $ | 0.36 |
|
| $ | 0.31 |
|
12 |
Table of Contents |
NOTE 6 — GOODWILL
The changes in goodwill is as follows:
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Opening balance |
| $ | 6,140,465 |
|
| $ | 1,367,109 |
|
Additions/(Reductions) (1) |
|
| (2,519,012 | ) |
|
| 4,773,356 |
|
Goodwill |
| $ | 3,621,453 |
|
| $ | 6,140,465 |
|
(1) Additions ending December 31, 2021 totaling $4,773,356 is a combination of the CExchange Transaction on June 9, 2021 of $1,282,072 and the Avail Transaction’s preliminary purchase price allocation on October 29, 2021, of $3,491,284. The reduction in goodwill of $2,519,012 for the nine months ending September 30, 2022, is a combination of an additional cash payment made on May 31, 2022 of $216,988, which increased goodwill for the Avail Transaction, offset by the effect of the third party valuation report identifying $2,736,000 of intangible assets that were not initially included in the fair value of Avail’s net assets, reducing goodwill and increasing intangible assets.
13 |
Table of Contents |
NOTE 7 — PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
DGSE |
|
|
|
|
|
| ||
Land |
| $ | 1,640,220 |
|
| $ | 1,640,220 |
|
Building and improvements |
|
| 2,781,904 |
|
|
| 2,764,529 |
|
Leasehold improvements |
|
| 1,450,695 |
|
|
| 1,450,695 |
|
Machinery and equipment |
|
| 1,078,595 |
|
|
| 1,056,315 |
|
Furniture and fixtures |
|
| 603,944 |
|
|
| 526,250 |
|
Vehicles |
|
| 22,859 |
|
|
| 22,859 |
|
|
|
| 7,578,217 |
|
|
| 7,460,868 |
|
Less: accumulated depreciation |
|
| (2,578,405 | ) |
|
| (2,343,923 | ) |
|
|
|
|
|
|
|
|
|
Sub-Total |
|
| 4,999,812 |
|
|
| 5,116,945 |
|
|
|
|
|
|
|
|
|
|
ECHG |
|
|
|
|
|
|
|
|
Building and improvements |
|
| 151,647 |
|
|
| 135,491 |
|
Machinery and equipment |
|
| 1,152,154 |
|
|
| 1,109,306 |
|
Furniture and fixtures |
|
| 145,950 |
|
|
| 145,950 |
|
|
|
| 1,449,751 |
|
|
| 1,390,747 |
|
Less: accumulated depreciation |
|
| (442,793 | ) |
|
| (212,147 | ) |
|
|
|
|
|
|
|
|
|
Sub-Total |
|
| 1,006,958 |
|
|
| 1,178,600 |
|
|
|
|
|
|
|
|
|
|
Envela |
|
|
|
|
|
|
|
|
Land |
|
| 1,106,664 |
|
|
| 1,106,664 |
|
Building and improvements |
|
| 2,502,216 |
|
|
| 2,456,324 |
|
Machinery and equipment |
|
| 28,627 |
|
|
| 23,676 |
|
|
|
|
|
|
|
|
|
|
|
|
| 3,637,507 |
|
|
| 3,586,664 |
|
Less: accumulated depreciation |
|
| (130,895 | ) |
|
| (76,021 | ) |
|
|
|
|
|
|
|
|
|
Sub-Total |
|
| 3,506,612 |
|
|
| 3,510,643 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 9,513,382 |
|
| $ | 9,806,188 |
|
14 |
Table of Contents |
NOTE 8 — INTANGIBLE ASSETS
Intangible assets consist of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
DGSE |
|
|
|
|
|
| ||
Domain names |
| $ | 41,352 |
|
| $ | 41,352 |
|
Point of sale system |
|
| 330,000 |
|
|
| 330,000 |
|
|
|
| 371,352 |
|
|
| 371,352 |
|
Less: accumulated amortization |
|
| (319,002 | ) |
|
| (269,502 | ) |
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 52,350 |
|
|
| 101,850 |
|
|
|
|
|
|
|
|
|
|
ECHG |
|
|
|
|
|
|
|
|
Trademarks (1) |
|
| 1,483,000 |
|
|
| 1,483,000 |
|
Customer Contracts (1) |
|
| 1,873,000 |
|
|
| 1,873,000 |
|
Trademarks/Tradenames (2) |
|
| 114,000 |
|
|
| 114,000 |
|
Customer Relationships (2) |
|
| 345,000 |
|
|
| 345,000 |
|
Trademarks/Tradenames (3) |
|
| 1,272,000 |
|
|
| - |
|
Customer Relationships (3) |
|
| 1,464,000 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| 6,551,000 |
|
|
| 3,815,000 |
|
Less: accumulated amortization |
|
| (1,429,530 | ) |
|
| (892,605 | ) |
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 5,121,470 |
|
|
| 2,922,395 |
|
|
|
|
|
|
|
|
|
|
Envela |
|
|
|
|
|
|
|
|
Software development |
|
| 15,300 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| $ | 5,189,120 |
|
| $ | 3,024,245 |
|
(1) Intangibles relate to the Echo Transaction on May 20, 2019.
(2) Intangibles relate to the CExchange Transaction on June 9, 2021.
(3) Intangibles relate to the Avail Transaction on October 29, 2021
The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2022:
|
| DGSE |
|
| ECHG |
|
| Envela |
|
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
2022 (excluding the nine months ending September 30, 2022) |
| $ | 16,500 |
|
| $ | 163,775 |
|
| $ | - |
|
| $ | 180,275 |
|
2023 |
|
| 30,350 |
|
|
| 655,100 |
|
|
| 3,060 |
|
| $ | 688,510 |
|
2024 |
|
| 5,500 |
|
|
| 655,100 |
|
|
| 3,060 |
|
| $ | 663,660 |
|
2025 |
|
| - |
|
|
| 655,100 |
|
|
| 3,060 |
|
| $ | 658,160 |
|
2026 |
|
| - |
|
|
| 655,100 |
|
|
| 3,060 |
|
| $ | 658,160 |
|
Thereafter |
|
| - |
|
|
| 2,337,295 |
|
|
| 3,060 |
|
| $ | 2,340,355 |
|
|
| $ | 52,350 |
|
| $ | 5,121,470 |
|
| $ | 15,300 |
|
| $ | 5,189,120 |
|
15 |
Table of Contents |
NOTE 9— ACCRUED EXPENSES
Accrued expenses consist of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
DGSE |
|
|
|
|
|
| ||
Accrued interest |
| $ | 11,266 |
|
| $ | 12,627 |
|
Payroll |
|
| 67,706 |
|
|
| 131,325 |
|
Property taxes |
|
| 179,885 |
|
|
| 88,046 |
|
Sales tax |
|
| 63,229 |
|
|
| 150,070 |
|
Other administrative expenss |
|
| 424 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 322,510 |
|
|
| 382,068 |
|
|
|
|
|
|
|
|
|
|
ECHG |
|
|
|
|
|
|
|
|
Accrued interest |
|
| 7,788 |
|
|
| 14,547 |
|
Payroll |
|
| 162,592 |
|
|
| 334,431 |
|
Unvouchered payables - inventory |
|
| 619,018 |
|
|
| 461,481 |
|
Material & shipping costs (COGS) |
|
| 206,200 |
|
|
| 78,647 |
|
Other accrued expenses |
|
| 35,761 |
|
|
| 51,506 |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 1,031,359 |
|
|
| 940,612 |
|
|
|
|
|
|
|
|
|
|
Envela |
|
|
|
|
|
|
|
|
Accrued interest |
|
| 7,375 |
|
|
| 8,355 |
|
Payroll |
|
| 12,589 |
|
|
| 25,175 |
|
Professional fees |
|
| 188,628 |
|
|
| 220,101 |
|
Property Tax |
|
| 65,100 |
|
|
| 84,920 |
|
Other administrative expenses |
|
| 11,961 |
|
|
| 18,453 |
|
State income tax |
|
| 121,287 |
|
|
| 109,682 |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 406,940 |
|
|
| 466,686 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,760,809 |
|
| $ | 1,789,366 |
|
NOTE 10 — SEGMENT INFORMATION
We determine our business segments based upon an internal reporting structure. Our financial performance is based on the following two segments: DGSE and ECHG.
The DGSE segment includes Dallas Gold & Silver Exchange, which has six retail stores in the Dallas/Fort Worth Metroplex, and Charleston Gold & Diamond Exchange, which has one retail store in Mt. Pleasant, South Carolina. The DGSE segment also includes the Bullion Express brand and the bullion-trading operation, which operates out of the DGSE stores.
The ECHG segment includes Echo, ITAD USA, Teladvance, CEX and Avail. These five companies are involved in recycling and reuse of electronic components.
16 |
Table of Contents |
We allocate a portion of certain corporate costs and expenses, including information technology as well as rental income and expenses relating to our corporate headquarters, to our business segments. These income and expenses are included in selling, general and administrative (“SG&A”) expenses, depreciation and amortization, other income, interest expense and income tax expense. Our management team evaluates each segment and makes decisions about the allocation of resources according to each segment’s profit. Allocation amounts are generally agreed upon by management and may differ from arms-length allocations.
The following separates DGSE’s and ECHG’s financial results of operations for the three months ended September 30, 2022 and 2021:
|
| For The Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||
|
| DGSE |
|
| ECHG |
|
| Consolidated |
|
| DGSE |
|
| ECHG |
|
| Consolidated |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales |
| $ | 30,427,254 |
|
| $ | 14,770,432 |
|
| $ | 45,197,686 |
|
| $ | 25,482,379 |
|
| $ | 12,198,390 |
|
| $ | 37,680,769 |
|
Cost of goods sold |
|
| 26,677,891 |
|
|
| 6,664,138 |
|
|
| 33,342,029 |
|
|
| 22,422,881 |
|
|
| 7,147,772 |
|
|
| 29,570,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
| 3,749,363 |
|
|
| 8,106,294 |
|
|
| 11,855,657 |
|
|
| 3,059,498 |
|
|
| 5,050,618 |
|
|
| 8,110,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 2,369,588 |
|
|
| 5,384,114 |
|
|
| 7,753,702 |
|
|
| 1,772,034 |
|
|
| 3,458,439 |
|
|
| 5,230,473 |
|
Depreciation and amortization |
|
| 103,022 |
|
|
| 431,942 |
|
|
| 534,964 |
|
|
| 98,787 |
|
|
| 117,389 |
|
|
| 216,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
| 2,472,610 |
|
|
| 5,816,056 |
|
|
| 8,288,666 |
|
|
| 1,870,821 |
|
|
| 3,575,828 |
|
|
| 5,446,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 1,276,753 |
|
|
| 2,290,238 |
|
|
| 3,566,991 |
|
|
| 1,188,677 |
|
|
| 1,474,790 |
|
|
| 2,663,467 |
|
Interest expense |
|
| 60,619 |
|
|
| 59,338 |
|
|
| 119,957 |
|
|
| 79,563 |
|
|
| 109,290 |
|
|
| 188,853 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of Federal Loan |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 675,210 |
|
|
| 992,990 |
|
|
| 1,668,200 |
|
Write-off of notes receivable and accrued interest receivable |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (949,174 | ) |
|
| (949,174 | ) |
Other income (expense), net |
|
| 5,957 |
|
|
| (71,221 | ) |
|
| (65,264 | ) |
|
| (37,823 | ) |
|
| (22,961 | ) |
|
| (60,784 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 1,222,091 |
|
|
| 2,159,679 |
|
|
| 3,381,770 |
|
|
| 1,746,501 |
|
|
| 1,386,355 |
|
|
| 3,132,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| 20,243 |
|
|
| 43,818 |
|
|
| 64,061 |
|
|
| 10,288 |
|
|
| 16,167 |
|
|
| 26,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 1,201,848 |
|
| $ | 2,115,861 |
|
| $ | 3,317,709 |
|
| $ | 1,736,213 |
|
| $ | 1,370,188 |
|
| $ | 3,106,401 |
|
The following separates DGSE’s and ECHG’s financial results of operations for the nine months ended September 30, 2022 and 2021:
|
| For The Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||
|
| DGSE |
|
| ECHG |
|
| Consolidated |
|
| DGSE |
|
| ECHG |
|
| Consolidated |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales |
| $ | 96,549,253 |
|
| $ | 38,703,249 |
|
| $ | 135,252,502 |
|
| $ | 67,409,204 |
|
| $ | 29,486,012 |
|
| $ | 96,895,216 |
|
Cost of goods sold |
|
| 84,387,844 |
|
|
| 17,819,967 |
|
|
| 102,207,811 |
|
|
| 58,445,075 |
|
|
| 16,907,871 |
|
|
| 75,352,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 12,161,409 |
|
|
| 20,883,282 |
|
|
| 33,044,691 |
|
|
| 8,964,129 |
|
|
| 12,578,141 |
|
|
| 21,542,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 6,702,031 |
|
|
| 14,695,329 |
|
|
| 21,397,360 |
|
|
| 5,444,366 |
|
|
| 8,770,561 |
|
|
| 14,214,927 |
|
Depreciation and amortization |
|
| 311,419 |
|
|
| 795,008 |
|
|
| 1,106,427 |
|
|
| 293,044 |
|
|
| 344,263 |
|
|
| 637,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total opeating expenses |
|
| 7,013,450 |
|
|
| 15,490,337 |
|
|
| 22,503,787 |
|
|
| 5,737,410 |
|
|
| 9,114,824 |
|
|
| 14,852,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 5,147,959 |
|
|
| 5,392,945 |
|
|
| 10,540,904 |
|
|
| 3,226,719 |
|
|
| 3,463,317 |
|
|
| 6,690,036 |
|
Interest expense |
|
| 183,523 |
|
|
| 180,715 |
|
|
| 364,238 |
|
|
| 216,740 |
|
|
| 328,839 |
|
|
| 545,579 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of Federal Loan |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 675,210 |
|
|
| 992,990 |
|
|
| 1,668,200 |
|
Write-off of notes receivable and accrued interest receivable |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (949,174 | ) |
|
| (949,174 | ) |
Other income (expense), net |
|
| (71,053 | ) |
|
| (148,216 | ) |
|
| (219,269 | ) |
|
| 193,368 |
|
|
| 300,844 |
|
|
| 494,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 4,893,383 |
|
|
| 5,064,014 |
|
|
| 9,957,397 |
|
|
| 3,878,557 |
|
|
| 3,479,138 |
|
|
| 7,357,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| 48,811 |
|
|
| 95,794 |
|
|
| 144,605 |
|
|
| 38,178 |
|
|
| 51,732 |
|
|
| 89,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 4,844,572 |
|
| $ | 4,968,220 |
|
| $ | 9,812,792 |
|
| $ | 3,840,379 |
|
| $ | 3,427,406 |
|
| $ | 7,267,785 |
|
17 |
Table of Contents |
NOTE 11 — REVENUE RECOGNITION
ASC 606 provides guidance to identify performance obligations for revenue-generating transactions. The initial step is to identify the contract with a customer created with the sales invoice or a repair ticket. Secondly, we identify the performance obligations in the contract, as we promise to deliver the purchased item or promised repairs in return for payment or future payment as a receivable. The third step is determining the transaction price of the contract obligation, as in the full ticket price, negotiated price or a repair price. The next step is to allocate the transaction price to the performance obligations, as we designate a separate price for each item. The final step in the guidance is to recognize revenue as each performance obligation is satisfied.
The following disaggregation of total revenue is listed by sales category and segment for the three months ended September 30, 2022 and 2021:
CONSOLIDATED |
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||
|
| Revenues |
|
| Gross Profit |
|
| Margin |
|
| Revenues |
|
| Gross Profit |
|
| Margin |
| ||||||
DGSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Resale |
| $ | 28,172,732 |
|
| $ | 3,251,153 |
|
|
| 11.5 | % |
| $ | 23,407,095 |
|
| $ | 2,645,445 |
|
|
| 11.3 | % |
Recycled |
|
| 2,254,522 |
|
|
| 498,210 |
|
|
| 22.1 | % |
|
| 2,075,284 |
|
|
| 414,053 |
|
|
| 20.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 30,427,254 |
|
|
| 3,749,363 |
|
|
| 12.3 | % |
|
| 25,482,379 |
|
|
| 3,059,498 |
|
|
| 12.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECHG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resale |
|
| 11,518,168 |
|
|
| 6,465,386 |
|
|
| 56.1 | % |
|
| 8,288,951 |
|
|
| 3,450,652 |
|
|
| 41.6 | % |
Recycled |
|
| 3,252,264 |
|
|
| 1,640,908 |
|
|
| 50.5 | % |
|
| 3,909,439 |
|
|
| 1,599,966 |
|
|
| 40.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 14,770,432 |
|
|
| 8,106,294 |
|
|
| 54.9 | % |
|
| 12,198,390 |
|
|
| 5,050,618 |
|
|
| 41.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 45,197,686 |
|
| $ | 11,855,657 |
|
|
| 26.2 | % |
| $ | 37,680,769 |
|
| $ | 8,110,116 |
|
|
| 21.5 | % |
The following disaggregation of total revenue is listed by sales category and segment for the nine months ended September 30, 2022 and 2021:
CONSOLIDATED |
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||
|
| Revenues |
|
| Gross Profit |
|
| Margin |
|
| Revenues |
|
| Gross Profit |
|
| Margin |
| ||||||
DGSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Resale |
| $ | 90,014,891 |
|
| $ | 10,713,959 |
|
|
| 11.9 | % |
| $ | 61,621,574 |
|
| $ | 7,781,229 |
|
|
| 12.6 | % |
Recycled |
|
| 6,534,362 |
|
|
| 1,447,450 |
|
|
| 22.2 | % |
|
| 5,787,630 |
|
|
| 1,182,900 |
|
|
| 20.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 96,549,253 |
|
|
| 12,161,409 |
|
|
| 12.6 | % |
|
| 67,409,204 |
|
|
| 8,964,129 |
|
|
| 13.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECHG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resale |
|
| 30,200,026 |
|
|
| 16,606,161 |
|
|
| 55.0 | % |
|
| 21,625,853 |
|
|
| 9,082,521 |
|
|
| 42.0 | % |
Recycled |
|
| 8,503,223 |
|
|
| 4,277,121 |
|
|
| 50.3 | % |
|
| 7,860,159 |
|
|
| 3,495,620 |
|
|
| 44.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
| 38,703,249 |
|
|
| 20,883,282 |
|
|
| 54.0 | % |
|
| 29,486,012 |
|
|
| 12,578,141 |
|
|
| 42.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 135,252,502 |
|
| $ | 33,044,691 |
|
|
| 24.4 | % |
| $ | 96,895,216 |
|
| $ | 21,542,270 |
|
|
| 22.2 | % |
18 |
Table of Contents |
DGSE’s over-the-counter sales with the retail public and wholesale dealers are recognized when merchandise is delivered, and payment has been made either by immediate payment or through a receivable obligation at one of our retail locations. We also recognize revenue upon the shipment of goods when retail and wholesale customers have fulfilled their obligation to pay, or promise to pay through e-commerce or phone sales. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. Crafted-precious-metal items at the end of their useful lives are sold to a refiner. Since the local refiner is located in the Dallas/Fort Worth area, we deliver the metal to the refiner. The metal is melted and assayed, price is determined from the assay and payment is made usually in a day or two. Revenue is recognized from the sale once payment is received.
DGSE also offers a structured layaway plan. When a retail customer utilizes the layaway plan, we collect a minimum payment of 25% of the sales price, establish a payment schedule for the remaining balance and hold the merchandise as collateral as security against the customer’s deposit until all amounts due are paid in full. Revenue for layaway sales is recognized when the merchandise is paid in full and delivered to the retail customer. Layaway revenue is also recognized when a customer fails to pay in accordance with the sales contract and the sales item is returned to inventory with the forfeit of deposited funds, typically after 90 days.
In limited circumstances, we exchange merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which we recognize revenue in accordance with ASC 845, Nonmonetary Transactions. When we exchange merchandise for similar merchandise and there is no monetary component to the exchange, we do not recognize any revenue. Instead, the basis of the merchandise relinquished becomes the basis of the merchandise received, less any indicated impairment of value of the merchandise relinquished. When we exchange merchandise for similar merchandise and there is a monetary component to the exchange, we recognize revenue to the extent of the monetary assets received and determines the cost of sale based on the ratio of monetary assets received to monetary and non-monetary assets received multiplied by the cost of the assets surrendered.
The Company offers the option of third-party financing to customers wishing to borrow money for the purchase. The customer applies on-line with the financing company and upon going through the credit check will be approved or denied. If accepted, the customer is allowed to purchase according to the limits set by the financing company. Once the customer does purchase merchandise, based on their financing agreement, we record and recognize the sale at that point, based on the promise to pay by the finance company up to the customer’s approved limit.
We have a return policy (money-back guarantee). The policy covers retail transactions involving jewelry, graded rare coins and currency only. Customers may return jewelry, graded rare coins and currency purchased within 30 days of the receipt of the items for a full refund as long as the items are returned in exactly the same condition as they were delivered. In the case of jewelry, graded rare coins and currency sales on account, customers may cancel the sale within 30 days of making a commitment to purchase the items. The receipt of a deposit and a signed purchase order evidences the commitment. Any customer may return a jewelry item or graded rare coins and currency if they can demonstrate that the item is not authentic, or there was an error in the description of a graded coin or currency piece. Returns are accounted for as a reversal of the original transaction, with the effect of reducing revenues and cost of sales, and returning the merchandise to inventory. We have established an allowance for estimated returns related to sales based on historical returns and reduced our reported revenues and cost of sales accordingly. Our return allowance as of September 30, 2022 and December 31, 2021 remained the same for both periods, at approximately $28,000.
ECHG has several revenue streams and recognize revenue according to ASC 606 at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to the customer. The revenue streams are as follows.
· | Outright sales are recorded when product is shipped. Once the price is established and the terms are agreed to and the product is shipped, the revenue is recognized. Echo and ITAD USA (collectively, the “Echo Entities”) have fulfilled their performance obligation with an agreed upon transaction price, payment terms and shipping the product. |
19 |
Table of Contents |
· | Echo recognizes refining revenue when our inventory arrives at the destination port and the performance obligation is satisfied by transferring the control of the promised goods that are identified in the customer contract. Ninety percent (90%) of our refining revenue is generated from one refining partner that has an international refining facility. This refining partner pays us sixty percent (60%) of our Invoice within five working days upon the receipt of the Ocean Bill of Lading issued by the Ocean Carrier. Refining revenue from an invoice is recognized in full when our performance obligation is satisfied when the inventory arrives at the destination. Under the guidance of ASC 606, an estimate of the variable consideration that we expect to be entitled is included in the transaction price stated at the current precious metal spot price and weight of the precious metal. An adjustment to revenue is made in the period once the underlying weight and any precious metal spot price movement is resolved, which is usually around six weeks. Any adjustment from the resolution of the underlying uncertainty is netted with the remaining forty percent (40%) due from the original contract. | |
· | Hard drive sales by the Echo Entities are limited to customers who are required to prepay shipments. Once the commodity price is established and agreed upon by both parties, customers send payment in advance. The Company releases the shipment on the same day when payment receipt is confirmed, and revenue is recognized on day of shipment. If payment is received on the last day of the month and shipment goes out the following day the payment received is deferred revenue and recognized the following month when the shipment is made. | |
· | Echolso provides recycling services according to a Scope of Work where services are recognized when promised services are rendered. We conduct recycling services at our Echo facility or at a client’s facility. The Scope of Work will determine the charges and whether it is completed on campus or off campus. Payment terms are also dictated in the Scope of Work. |
Accounts Receivable: We record trade receivables when revenue is recognized. When appropriate, we will record an allowance for doubtful accounts, which is primarily determined by an analysis of our trade receivables aging. The allowance is determined based on historical experience of collecting past due amounts, based on the degree of their aging. In addition, specific accounts that are doubtful of collection are included in the allowance. These provisions are reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms. DGSE had no allowance for doubtful accounts balance as of September 30, 2022 and December 31, 2021. Some of ECHG’s customers are on payment terms, and although low risk, occasionally the need arises to record an allowance for receivables that are deemed high risk to collect. We established an allowance for estimated uncollectable receivables related to sales based on historical collections. Our allowance as of September 30, 2022 and December 31, 2021 was $75,000 and $1,582, respectively.
Income Taxes: Income taxes are accounted for under the asset and liability method prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized.
We account for our position in tax uncertainties in accordance with ASC 740, Income Taxes. The guidance establishes standards for accounting for uncertainty in income taxes. The guidance provides several clarifications related to uncertain tax positions. Most notably, a “more likely-than-not” standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent likelihood of realization. The guidance applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First, we must determine whether any amount of the tax benefit may be recognized. Second, we determine how much of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition.) No additional liabilities have been recognized as a result of the implementation. We do not believe we have not taken a tax position that, if successfully challenged, would have a material effect on the financial statements or the effective tax rate for the three and nine months ended September 30, 2022 and 2021.
20 |
Table of Contents |
NOTE 12 — LEASES
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the interest rate that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment at the time of the lease signing. If we cannot readily determine the discount rate implicit in lease agreements, we utilize our incremental borrowing rate.
The Company has seven operating leases as of September 30, 2022—five in the Dallas/Fort Worth Metroplex, one in Mt. Pleasant, South Carolina and one in Chandler, Arizona. The lease for DGSE’s flagship store located at 13022 Preston Road, Dallas, Texas expires on January 31, 2027, with an option to extend the lease for an additional five years, at the prevailing market rate for comparable space in comparable buildings in the vicinity. The lease for DGSE’s Grand Prairie, Texas location was renewed starting July 1, 2022, expiring June 30, 2027, with an option to extend the lease for an additional five years. The lease for DGSE’s Mt. Pleasant, South Carolina location expires April 30, 2025, with no additional renewal options. The lease for DGSE’s Euless, Texas location expires June 30, 2025, with an option to extend the lease for an additional five years. The lease for ECHG’s Echo location on W. Belt Line Road, in Carrollton, Texas, expires January 31, 2026. The lease for ECHG’s Teladvance location, which also houses ITAD USA, on Realty Road in Carrollton, Texas expires January 31, 2027. The lease for ECHG’s Avail location in Chandler, Arizona expires May 31, 2025. All of the Company’s seven leases as of September 30, 2022 are triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance. Leasing costs for the three months ended September 30, 2022 and 2021 was $655,669 and $620,829 respectively. Leasing costs for the nine months ended September 30, 2022 and 2021 was $1,938,392 and $1,516,262, respectively, comprised of a combination of minimum lease payments and variable lease costs.
As of September 30, 2022, assuming none of the extension options are exercised the weighted average remaining lease term and weighted average discount rate for operating leases was 2.5 years and 4.4%, respectively. The remaining lease term and discount rate are being averaged compared to the total leases. For the three months ended September 30, 2022 and 2021, the Company’s cash paid for operating lease liabilities was $654,471 and $619,584, respectively. For the nine months ended September 30, 2022 and 2021, the Company’s cash paid for operating lease liabilities was $1,934,791 and $1,496,524, respectively.
21 |
Table of Contents |
Future annual minimum lease payments as of September 30, 2022:
|
| Operating |
| |
|
| Leases |
| |
DGSE |
|
|
| |
2022 (excluding the nine months ending September 30, 2022) |
| $ | 134,498 |
|
2023 |
|
| 541,984 |
|
2024 |
|
| 552,414 |
|
2025 |
|
| 412,269 |
|
2026 and thereafter |
|
| 405,114 |
|
|
|
|
|
|
Total minimum lease payments |
|
| 2,046,279 |
|
Less imputed interest |
|
| (167,168 | ) |
|
|
|
|
|
DGSE Sub-Total |
|
| 1,879,111 |
|
|
|
|
|
|
ECHG |
|
|
|
|
2022 (excluding the nine months ending September 30, 2022) |
|
| 330,753 |
|
2023 |
|
| 1,357,381 |
|
2024 |
|
| 1,396,129 |
|
2025 |
|
| 1,321,297 |
|
2026 and thereafter |
|
| 507,780 |
|
|
|
|
|
|
Total minimum lease payments |
|
| 4,913,340 |
|
Less imputed interest |
|
| (335,519 | ) |
|
|
|
|
|
ECHG Sub-Total |
|
| 4,577,821 |
|
|
|
|
|
|
Total |
|
| 6,456,932 |
|
|
|
|
|
|
Current portion |
|
| 1,658,990 |
|
|
|
|
|
|
|
| $ | 4,797,942 |
|
NOTE 13 — BASIC AND DILUTED AVERAGE SHARES
A reconciliation of basic and diluted weighted average common shares for the three months ended September 30, 2022 and 2021 is as follows:
For the Three Months Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Basic weighted average shares | 26,924,631 | 26,924,631 | ||||||
Effect of potential dilutive securities | 15,000 | 15,000 | ||||||
Diluted weighted average shares | 26,939,631 | �� | 26,939,631 |
22 |
Table of Contents |
A reconciliation of basic and diluted weighted average common shares for the nine months ended September 30, 20172022 and 20162021 is as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Basic weighted average shares | 26,924,381 | 12,358,466 | 26,916,414 | 12,327,753 | ||||||||||||
Effect of potential dilutive securities | 510,205 | - | 477,718 | - | ||||||||||||
Diluted weighted average shares | 27,434,586 | 12,358,466 | 27,394,132 | 12,327,753 |
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Basic weighted average shares | 26,924,631 | 26,924,631 | ||||||
Effect of potential dilutive securities | 15,000 | 15,000 | ||||||
Diluted weighted average shares | 26,939,631 | 26,939,631 |
For the three and nine months ended September 30, 20172022 and 2016,2021, there were 1,015,00015,000 common stock options outstanding and 5,015,000 of common share options,unexercised and no warrants or and Restricted Stock Units (RSU’s) unexercised(RSUs) outstanding and unexercised.
NOTE 14 — LONG-TERM DEBT
Long-term debt consists of the following:
|
| Outstanding Balance |
|
|
|
|
|
| |||||||
|
| September 30, |
|
| December 31, |
|
| Current |
|
|
| ||||
|
| 2022 |
|
| 2021 |
|
| Interest Rate |
|
| Maturity | ||||
DGSE |
|
|
|
|
|
|
|
|
|
|
| ||||
Note payable, Farmers Bank (1) |
| $ | 2,694,427 |
|
| $ | 2,770,729 |
|
|
| 3.10 | % |
| November 15, 2026 | |
Note payable, Truist Bank (2) |
|
| 883,231 |
|
|
| 909,073 |
|
|
| 3.65 | % |
| July 9, 2030 | |
Note payable, Texas Bank & Trust (3) |
|
| 460,717 |
|
|
| 474,009 |
|
|
| 3.75 | % |
| September 14, 2025 | |
Note payable, Texas Bank & Trust (4) |
|
| 1,706,637 |
|
|
| 1,752,446 |
|
|
| 3.75 | % |
| July 30, 2031 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
DGSE Sub-Total |
|
| 5,745,012 |
|
|
| 5,906,257 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ECHG |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Note payable, Farmers Bank (1) |
|
| 6,113,338 |
|
|
| 6,286,459 |
|
|
| 3.10 | % |
| November 15, 2026 | |
Line of Credit (5) |
|
| - |
|
|
| 1,700,000 |
|
|
| 3.10 | % |
| November 15, 2024 | |
Avail Transaction note payable (6) |
|
| 1,666,667 |
|
|
| 2,000,000 |
|
|
| 0.00 | % |
| April 1, 2025 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ECHG Sub-Total |
|
| 7,780,005 |
|
|
| 9,986,459 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Envela |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Note payable, Texas Bank & Trust (7) |
|
| 2,760,766 |
|
|
| 2,843,415 |
|
|
| 3.25 | % |
| November 4, 2025 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sub-Total |
|
| 16,285,783 |
|
|
| 18,736,131 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current portion |
|
| 1,246,083 |
|
|
| 2,765,794 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| $ | 15,039,700 |
|
| $ | 15,970,337 |
|
|
|
|
|
|
|
(1) On May 20, 2019, in connection with the Echo Transaction, the Company entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Company’s Board of Directors (the “Board”). ECHG executed a five-year, $6,925,979 note for the Echo Transaction, amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly was $49,646. DGSE executed a five-year, $3,074,021 note to pay off the accounts payable – related party balance to a former Related Party as of May 20, 2019. That promissory note was also amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly on the note for DGSE was $22,203. On November 23, 2021, the ECHG and DGSE notes, with remaining principal balances of $6,309,962 and $2,781,087, respectively, were refinanced by Farmers State Bank of Oakley, Kansas with annual interest rates of 3.1%. (the “FSB ECHG Loan” and “FSB DGSE Loan”, respectively). The FSB ECHG Loan and FSB DGSE Loan have monthly interest and principal payments of $35,292 and $15,555, respectively. For
23 |
Table of Contents |
(2) On July 9, 2020, DGSE closed the threepurchase of a retail building located at 610 E. Round Grove Road in Lewisville, Texas for $1,195,000. The purchase was partly financed through a $956,000, 10 year loan (the “Truist Lewisville Loan”), bearing an annual interest rate of 3.65%, amortized over 20 years, payable to Truist Bank (f/k/a BB&T Bank). The note has monthly interest and nine months endedprincipal payments of $5,645.
(3) On September 14, 2020, 1106 NWH Holdings, LLC, a wholly owned subsidiary of DGSE, closed on the purchase of a retail building located at 1106 W. Northwest Highway in Grapevine, Texas for $620,000. The purchase was partly financed through a $496,000, five-year loan (the “TB&T Grapevine Loan”), bearing an annual interest rate of 3.75%, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $2,941.
(4) On July 30, 2021, 9166 Gaylord Holdings, LLC, a wholly owned subsidiary of DGSE, closed the purchase of a retail building located at 9166 Gaylord Parkway in Frisco, Texas for $2,215,500. The purchase was partly financed through a $1,772,000, five-year loan (the “TB&T Frisco Loan”), bearing an annual interest rate of 3.75%, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $10,509.
(5) On November 23, 2021, the Company secured a 36-month line of credit from Farmers State Bank of Oakley, Kansas (“FSB Facility”) for $3,500,000 at a 3.1% annual interest rate.
(6) On October 29, 2021, ECHG entered into the Avail Transaction to purchase all of the assets, liabilities and rights and interests of Avail for $4,500,000. The purchase was facilitated by an initial payment of $2,500,000 at closing, and the remaining $2,000,000 represented by the Avail Installment Note to be paid out by 12 quarterly payments starting April 1, 2022, of $166,667 each. The Avail Installment Note for the Avail Transaction does not bear interest but the purchase price imputed at an annual 3.1% interest.
(7) On November 4, 2020, 1901 Gateway Holdings, LLC, a wholly owned subsidiary of the Company, closed on the purchase of an office building located at 1901 Gateway Drive, Irving, Texas for $3.521 million. The building was partially financed through a $2,960,000, 5-year loan (the “TB&T Irving Loan”), bearing an annual interest rate of 3.25%, amortized over 20 years, payable to Texas Bank and Trust. The note has monthly interest and principal payments of $16,792.
Future scheduled principal payments of our notes payable and notes payable, related party, as of September 30, 2016 there were 6,015,000 common share options, warrants, and RSUs were not added to the diluted average shares because inclusion of such shares would be antidilutive. On October 26, 2016, 5,000,000 stock option shares expired unexercised by Elemetal at a price of $15 a share.2022 are as follows:
Note payable, Farmers State Bank - DGSE |
|
|
| |
|
|
|
| |
Year Ending December 31, |
| Amount |
| |
|
|
|
| |
2022 (excluding the nine months ended September 30, 2022) |
| $ | 25,908 |
|
2023 |
|
| 105,428 |
|
2024 |
|
| 108,743 |
|
2025 |
|
| 112,162 |
|
2026 |
|
| 2,342,186 |
|
Subtotal |
| $ | 2,694,427 |
|
Note 6 - Long-Term Debt
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Note payable, Truist Bank - DGSE |
|
|
| |
|
|
|
| |
Year Ending December 31, |
| Amount |
| |
|
|
|
| |
2022 (excluding the nine months ended September 30, 2022) |
| $ | 8,813 |
|
2023 |
|
| 35,988 |
|
2024 |
|
| 37,342 |
|
2025 |
|
| 38,748 |
|
2026 |
|
| 40,206 |
|
Thereafter |
|
| 722,134 |
|
Subtotal |
| $ | 883,231 |
|
|
|
|
|
|
Note payable, Texas Bank & Trust - DGSE |
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
| Amount |
| |
|
|
|
|
|
2022 (excluding the nine months ended September 30, 2022) |
| $ | 4,531 |
|
2023 |
|
| 18,503 |
|
2024 |
|
| 19,209 |
|
2025 |
|
| 418,474 |
|
Subtotal |
| $ | 460,717 |
|
|
|
|
|
|
Note payable, Texas Bank & Trust - DGSE |
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
| Amount |
| |
|
|
|
|
|
2022 (excluding the nine months ended September 30, 2022) |
| $ | 17,595 |
|
2023 |
|
| 72,291 |
|
2024 |
|
| 74,676 |
|
2025 |
|
| 77,139 |
|
2026 |
|
| 79,432 |
|
Thereafter |
|
| 1,385,504 |
|
Subtotal |
| $ | 1,706,637 |
|
|
|
|
|
|
Note payable, Farmers Bank - ECHG |
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
| Amount |
| |
|
|
|
|
|
2022 (excluding the nine months ended September 30, 2022) |
| $ | 58,779 |
|
2023 |
|
| 239,204 |
|
2024 |
|
| 246,725 |
|
2025 |
|
| 254,484 |
|
2026 |
|
| 5,314,146 |
|
Subtotal |
| $ | 6,113,338 |
|
25 |
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Note payable - Avail Transaction |
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
| Amount |
| |
|
|
|
|
|
2022 (excluding the nine months ended September 30, 2022) |
| $ | 166,667 |
|
2023 |
|
| 666,668 |
|
2024 |
|
| 666,668 |
|
2025 |
|
| 166,664 |
|
Subtotal |
| $ | 1,666,667 |
|
|
|
|
|
|
Note payable, Texas Bank & Trust - Envela |
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
| Amount |
| |
|
|
|
|
|
2022 (excluding the nine months ended September 30, 2022) |
| $ | 27,589 |
|
2023 |
|
| 112,670 |
|
2024 |
|
| 116,459 |
|
2025 |
|
| 2,504,048 |
|
Subtotal |
| $ | 2,760,766 |
|
|
| $ | 16,285,783 |
|
Future scheduled aggregate amount of principal payments and maturities of our notes payable as of September 30, 2022 are as follows:
Outstanding Balance | ||||||||||||||
September 30, | December 31, | Current | ||||||||||||
2017 | 2016 | Interest Rate | Maturity | |||||||||||
Capital lease (1) | $ | 4,714 | $ | 13,664 | 4.20 | % | May 1, 2018 | |||||||
Sub-Total | 4,714 | 13,664 | ||||||||||||
Less: Current maturities of capital lease | 4,714 | 12,590 | ||||||||||||
Capital lease obligation, less current maturities | $ | - | $ | 1,074 |
|
| Scheduled |
|
|
|
|
|
|
| |||
|
| Principal |
|
| Loan |
|
|
|
| |||
Scheduled Principal Payments and Maturities by Year: |
| Payments |
|
| Maturities |
|
| Total |
| |||
2022 (excluding the nine months ended September 30, 2022) |
| $ | 309,882 |
|
| $ | - |
|
| $ | 309,882 |
|
2023 |
|
| 1,250,752 |
|
|
| - |
|
|
| 1,250,752 |
|
2024 |
|
| 1,269,822 |
|
|
| - |
|
|
| 1,269,822 |
|
2025 |
|
| 595,237 |
|
|
| 2,976,482 |
|
|
| 3,571,719 |
|
2026 |
|
| 434,080 |
|
|
| 7,341,890 |
|
|
| 7,775,970 |
|
2027 and Thereafter |
|
| 560,656 |
|
|
| 1,546,982 |
|
|
| 2,107,638 |
|
Total |
| $ | 4,420,429 |
|
| $ | 11,865,354 |
|
| $ | 16,285,783 |
|
Note 7 - Stock-Based CompensationNOTE 15 — STOCK-BASED COMPENSATION
The Company accounts for share-based compensation by measuring the cost of the employee services received in exchange for an award of equity instruments, including grants of stock options, based on the fair value of the award at the date of grant. In addition, to the extent that the Company receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in the consolidated statement of cash flows.
Stock-basedThere was no stock-based compensation expense for the three months ended September 30, 2017 and 2016 was $0 and $25,628, respectively, and stock based compensation expense for the nine months ended September 30, 20172022 and 2016 was $10,688 and $63,950, respectively, relating to employee and director RSUs, and included in selling, general and administrative expenses in the accompanying consolidated statements of operations.2021.
NOTE 16 — RELATED PARTY TRANSACTIONS
The following table represents our total compensation cost related to nonvested awards not yet recognized at year ended December 31, 2016, and September 30, 2017:
Number of | ||||||||||||||||||
shares | Price of | Unrecognized | Unrecognized | |||||||||||||||
granted, | stock at | expense at | expense at | |||||||||||||||
Date of grant | Employee | unvested | grant date | December 31, 2016 | September 30, 2017 | |||||||||||||
April 27, 2016 | Matthew Peakes | 150,000 | $ | 0.57 | $ | 85,500 | - | |||||||||||
Former CEO and President | ||||||||||||||||||
January 23, 2014 | Nabil Lopez | 500 | $ | 2.18 | 1,090 | - | ||||||||||||
January 23, 2014 | Steve Thomas | 500 | $ | 2.18 | 1,090 | - | ||||||||||||
January 23, 2014 | Jessica Moore | 500 | $ | 2.18 | 1,090 | - | ||||||||||||
January 23, 2014 | Robert Burnside | 250 | $ | 2.18 | 545 | 545 | ||||||||||||
January 23, 2014 | Dave Larson | 250 | $ | 2.18 | 545 | - | ||||||||||||
Total cost unrecognized | $ | 89,860 | $ | 545 |
Matthew Peakes had 18,750 RSUs vest on April 27, 2017 due to being employed by the Company on that date. Upon vesting, stock compensation cost was recognized for $10,688 in the second quarter of 2017. He resigned on June 30, 2017 and all remaining RSUs, granted to him, were forfeited. Nabil Lopez, Steve Thomas, Jessica Moore, and Dave Larson are no longer employed by the Company and forfeited their nonvested RSUs. Only 250 nonvested stock awards remain unrecognized as of September 30, 2017.
Note 8 - Related Party Transactions
DGSE has a corporate policy governing the identification, review, consideration and approval or ratification of transactions with related persons, as that term is defined in the Instructions to Item 404(a) of Regulation S-K, promulgated under the Securities Act (“Related(each such person a “Related Party”). Under this policy, all Related Party transactions are identified and approved prior to consummation of the transaction to ensure they are consistent with DGSE’sthe Company’s best interests and the best interests of its stockholders. Among other factors, DGSE’sthe Company’s Board considers the size and duration of the transaction, the nature and interest of the of the Related Party in the transaction, whether the transaction may involve a conflict of interest, and if the transaction is on terms that are at least as favorable to DGSEthe Company as would be available in a comparable transaction with an unaffiliated third party. DGSE’sThe Company’s Board reviews all Related Party transactions at least annually to determine if it is in DGSE’sthe best interestsinterest of the Company and the best interests of DGSE’sCompany’s stockholders to continue, modify, or terminate any of the Related Party transactions. DGSE’s Related Person
On May 20, 2019, in connection with the Echo Transaction, Policy is available for review in its entirety under the “Investors” menuCompany entered into two loan agreements with John R. Loftus, the Company’s CEO, President and Chairman of the Board. ECHG executed a five-year, $6,925,979 note for the Echo Transaction, amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly was $49,646. DGSE executed a five-year, $3,074,021 note to pay off the accounts payable – related party balance to a former Related Party as of May 20, 2019. That promissory note was also amortized over 20 years at a 6% annual interest rate. The interest and principal payment due monthly on the note for DGSE was $22,203. Both notes were being serviced by operational cash flow. On November 23, 2021, both notes were refinanced by Farmers State Bank of Oakley, Kansas through the FSB ECHG Loan and FSB DGSE Loan. For the three months ended September 30, 2022 and 2021, the Company paid Mr. Loftus $0 and $157,366, respectively, in interest on the Company’s corporate relations website at www.DGSECompanies.com.
Elemetal, LLC (“Elemetal”) is DGSE’s largest shareholder. Elemetal and its affiliates are also DGSE’s primary refiner and bullion trading partner. Innotes payable, related party. For the nine months ended September 30, 2017, 20% of sales2022 and 13% of purchases were transactions with Elemetal, and in the same period of 2016, these transactions represented 35% of DGSE’s sales and 20% of DGSE’s purchases. As of September 30, 2017, the Company was obligated to pay $4,105,705 to Elemetal as a trade payable, and had a $23,496 receivable from Elemetal. As of December 31, 2016, the Company was obligated to pay $4,107,425 to Elemetal as a trade payable, and had a $40,627 receivable from Elemetal. In the nine months ended September 30, 2017 and 2016,2021, the Company paid Elemetal $149,521Mr. Loftus $0 and $187,784,$442,719, respectively, in interest on the Company’s outstanding payable.
On July 19, 2012, DGSE entered into a loan agreement with NTR Metals, LLC (“NTR”), an affiliate of DGSE’s largest stockholder Elemetal, pursuant to which NTR, agreed to provide the Company a guidance line of revolving credit in an amount up to $7,500,000 (the “Loan Agreement”). The Loan Agreement anticipated termination-at which point all amounts outstanding thereunder would be due andnotes payable, (such amounts, the Obligations”)–upon the earlier of: (i) August 1, 2014; (ii) the date that is twelve months after DGSE receives notice from NTR demanding the repayment of the Obligations; (iii) the date the Obligations are accelerated in accordance with the terms of the Loan Agreement; or, (iv) the date on which the commitment terminates under the Loan Agreement. In connection with the Loan Agreement, DGSE granted a security interest in the respective personal property of each of its subsidiaries. The loan carried an interest rate of two percent (2%) per annum for all funds borrowed pursuant to the Loan Agreement. Proceeds received by DGSE pursuant to the terms of the Loan Agreement were used for repayment of all outstanding financial obligations incurred in connection with that certain Loan Agreement, dated as of December 22, 2005, between DGSE and Texas Capital Bank, and additional proceeds were used as working capital in the ordinary course of business. On February 25, 2014, we entered into a one-year extension of the Loan Agreement with NTR, extending the termination date to August 1, 2015, and on February 4, 2015, we entered into an additional two-year extension, extending the termination date to August 1, 2017. On December 9, 2016, DGSE and NTR closed the transactions contemplated by stock purchase agreement dated June 20, 2016 (the “Elemetal Agreement”) whereby DGSE issued NTR 5,948,560 shares of common stock for $0.41 per share in exchange for the cancellation and forgiveness of the outstanding Obligations. As of September 30, 2017 and December 31, 2016, the outstanding balance of the NTR loan was $0. In the nine months ended September 30, 2017 and 2016, the Company paid NTR $0 and $34,421, respectively, in interest on the Company’s line of credit.related party.
In April 2013, DGSE moved its principal corporate officesNOTE 17 — CONTINGENCIES
COVID-19 continues to office space at 15850 Dallas Parkway, Suite 140, Dallas, Texas. This propertyadversely affect global economic business conditions, including but not limited to contributing to surging inflation and supply chain interruptions, which also continue to adversely affect global economic business conditions. Future sales on products like ours could decline or fluctuate due to increased or fluctuating commodities prices, particularly gold. The Federal Reserve has recently stated raising interest rates to combat inflation and restore price stability and it is owned by an affiliateexpected that rates will continue to rise throughout the remainder of Elemetal,2022. Although we are continuing to monitor and also servesassess the effects of the COVID-19 pandemic, inflation levels and supply chain interruptions, as its headquarters. DGSE leased space inwell as the buildingeconomic effects of the foregoing, the ultimate impact is highly uncertain and subject to a lease that expired in December 2015. The Company continuedchange. In addition, the economic effects of the foregoing are subject to, pay this leaseamong other things, the effect of government responses on a month-to-month basis with no increase in the rent until our new Midtown retail location was completed in December 2016. The Midtown location is large enough to facilitate the retail space and our corporate offices. In the nine months ended September 30, 2017 and 2016, the Company recognized rent expense of $0 and $67,500, respectively, related to the space rented from Elemetal.operations.
Note 9 - Legal Proceedings
In addition to what was disclosed in our Annual Report on Form 10-K forThe global tension caused by the year ended December 31, 2016, we received a notice fromconflict between Russia and Ukraine has upset the Texas Comptroller that we would have a sales and use tax audit forstability within the time period of July 1, 2013 through December 31, 2016. We expect the process to take all of 2017 and at this time, we are unable to determine if the company has any sales tax exposure, therefore, we will not reserve for the sales and use tax audit.
Note 10 - Discontinued Operations
During the first half of 2014, the Company elected to discontinue the operations of Southern Bullion, due to the lack of profitability and management's belief that it was unlikely that profitability would be reached in the foreseeable future. The significant change in the precious metals market in 2013, including a 30% decline in the spot price of gold since the acquisition of Southern Bullion in 2011, had a disproportionately negative impact on the customer traffic, transactional volume and profitabilityregion of the Southern Bullionformer Soviet era block. This could lead to further volatility in global energy and other industries that could negatively impact our operations. As a result, during 2013, the Southern BullionThe U.S. government has imposed sanctions and export controls against Russia and Russian interests and threatened additional sanctions and controls, which have impacted global supply chains. The impact of these measures, as well as other measures taken, as it concerns our operations generated a net loss of approximately $1.9 million. The operating results for all Southern Bullion operations have been reclassified as discontinued operations in the consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016.is currently unknown.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue: | ||||||||||||||||
Sales | $ | - | $ | - | $ | - | $ | - | ||||||||
Cost of goods sold | - | - | - | - | ||||||||||||
Gross margin | - | - | - | - | ||||||||||||
Expenses: | ||||||||||||||||
Selling, general and administrative expenses | - | - | - | - | ||||||||||||
Depreciation | - | - | - | - | ||||||||||||
Total Expenses | - | - | - | - | ||||||||||||
Operating income (loss) | ||||||||||||||||
Other expense (income) | - | - | - | - | ||||||||||||
Other income, net | - | - | - | - | ||||||||||||
Interest (income) expense | - | - | - | - | ||||||||||||
Income from discontinued operations before income taxes | - | - | - | - | ||||||||||||
Income tax expense | - | 825 | - | 661 | ||||||||||||
Income from discontinued operations after income taxes | - | 825 | - | 661 |
As of September 30, 2017, the Company believes it has now recognized all material expenses related to the closure of Southern Bullion operations. Discontinued operations for the three and nine months ended September 30, 2016, include adjustments of existing expense accruals related to winding down the operations of Southern Bullion.
Table of Contents |
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”the “Company” and “DGSE”“Envela” refer to the consolidated business operations of DGSE Companies, Inc., the parent,Envela Corporation, and all of its direct and indirect subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended September 30, 20172022 (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,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 statements 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 as well as under the section entitled “Risk Factors” in our Fiscal 2016 10-K, and include, but are not limited to, statements regarding the potential acquisition of Elemetal Recycling, negotiations regarding a definitive acquisition agreement regarding the potential acquisition, availability of satisfactory financing, market conditions, and other risks detailed in the Company’s periodic report filings with the Securities and Exchange Commission.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-releaseto 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.
Results of Operations
General
We buy and sell jewelry, diamonds, fine watches, rare coins and currency, precious metal bullion products, scrap gold, silver, platinum and palladium as well as collectibles and other valuables. Our customers include individual consumers, dealers and institutions throughout the United States.
Many aspects of our business are impacted by changes in precious metals pricing which rise and fall based upon global supply and demand dynamics, with the greatest impact relating to gold. Fiscal 2016 saw the price of gold trending upward for the first half of the year and then falling losing seventy eight percent (78%) of that gain by year’s end, according to the London PM Fix. During the first quarter of 2017, gold prices rose again gaining ten percent (10%) by the end of the quarter. Despite the general unstableness in the price of gold, the demand for physical gold bars and coins increased worldwide during physical 2016 and the first three quarters of 2017 while the demand for jewelry firmed slightly. During the third quarter of 2017, gold prices started at $1,242 per ounce on July 1, 2017, rose to $1,347 per ounce in September and falling to $1,271 per ounce on September 30, 2017.Envela Overview
The market for buyingCompany operates through two recommerce business segments represented by its two direct subsidiaries. DGSE focuses on the recommercialization of luxury hard assets, and selling pre-ownedECHG 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, and Teladvance, CEX and Avail operate as value-added resellers by providing offerings and services to companies looking either to upgrade capabilities or “scrap” gold has been negative during the past several years. Scrap gold purchases have historically been a critical profit engine for alldispose of our locations,equipment. In addition to its operations through DGSE and our marketingECHG, Envela also leases unused space at its Company headquarters in Irving, Texas to commercial tenants.
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DGSE Business Overview
DGSE is headquartered in Dallas, Texas and focuses on sustainable, authenticated recommerce of luxury hard assets, including diamonds. Its retail strategy is aiming at making this, once again, a significant impact on our revenue, profitability and long-term growth plans.
Following a leadership changeanchored in mid-December 2016, we eschewed the unsuccessful strategies of recent years and returned to our roots: buying and selling jewelry and timepieces at exceptional prices. Our strategy is to bebeing an information resource for clients, bringbringing transparency to purchase and sale transactions, and offeroffering 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 almost 50 years, making our expert staff among the best in the business.
DGSE 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, DGSE 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 DGSE, see “Item 1. Business - Operating Segments - DGSE Segment.” in the Company’s 2021 Annual Report.
DGSE 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. 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 coins.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.
DGSE 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 DGSE’s 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 DGSE 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 DGSE’s merchandise costs, can have a significant impact on its earnings and cash availability.
We continue to monitor additional potential impacts of COVID-19 and other macroeconomic factors on our business, such as inflation and the conflict in Ukraine. Uncertainties exist that could continue to impact our operations or cash flows in the future, such as potential resurgence of COVID-19, further pricing and 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.
DGSE 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 of Dallas/Fort Worth, Texas and Mt. Pleasant, 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 de novo openings in the United States. The Company expects capital expenditures over the next twelve months including the potential purchase of additional properties by DGSE.
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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 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 DGSE, ECHG also maintains relationships with refiners for which it sells extracted valuable materials from electronics and IT equipment deemed unsuitable for retail or wholesale customers.
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 and supply limitations.
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. As discussed below, ECHG has seen a recent decrease of recycled items, which we believe is primarily due to the supply chain problems downstream with our customers.
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 and Economic Conditions
The COVID-19 pandemic continues to affect the U.S. and global economies, and as disclosed in our 2021 Annual Report, the COVID-19 pandemic also affected our business in a variety of ways beginning in the second quarter of fiscal 2020, continuing through fiscal 2021 and fiscal 2022.
The COVID-19 pandemic, 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 our interim condensed consolidated financial statements.
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The full extent and duration of the impact of the COVID-19 pandemic, surging inflation, supply chain disruptions and the war in Ukraine on the global economy generally, and on our business specifically, is currently unknown. A prolonged pandemic and recovery may have an adverse effect on our results of operations, financial position and liquidity in future periods.
Critical Accounting Policies and Estimates
For a discussion of critical accounting policies, see “Note 1 – Accounting Policies and Nature of Operations” in the Company’s 2021 Annual Report.
Results of Operations
General
The following disaggregation of total revenue is listed by sales category and segment for the three months ended September 30, 2022 and 2021:
CONSOLIDATED |
| Three Months Ended September 30, |
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| 2022 |
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| 2021 |
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| Revenues |
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| Gross Profit |
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| Margin |
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| Revenues |
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| Gross Profit |
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| Margin |
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DGSE |
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Resale |
| $ | 28,172,732 |
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| $ | 3,251,153 |
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| 11.5 | % |
| $ | 23,407,095 |
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| $ | 2,645,445 |
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|
| 11.3 | % |
Recycled |
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| 2,254,522 |
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| 498,210 |
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| 22.1 | % |
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| 2,075,284 |
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| 414,053 |
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| 20.0 | % |
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Subtotal |
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| 30,427,254 |
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| 3,749,363 |
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| 12.3 | % |
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| 25,482,379 |
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| 3,059,498 |
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| 12.0 | % |
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ECHG |
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Resale |
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| 11,518,168 |
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| 6,465,386 |
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| 56.1 | % |
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| 8,288,951 |
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| 3,450,652 |
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| 41.6 | % |
Recycled |
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| 3,252,264 |
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| 1,640,908 |
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| 50.5 | % |
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| 3,909,439 |
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| 1,599,966 |
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| 40.9 | % |
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Subtotal |
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| 14,770,432 |
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| 8,106,294 |
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| 54.9 | % |
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| 12,198,390 |
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| 5,050,618 |
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| 41.4 | % |
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| $ | 45,197,686 |
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| $ | 11,855,657 |
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| 26.2 | % |
| $ | 37,680,769 |
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| $ | 8,110,116 |
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| 21.5 | % |
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The following table represents our historical operating resultsdisaggregation of total revenue is listed by categories:sales category and segment for the nine months ended September 30, 2022 and 2021:
Three Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
Jewelry | $ | 5,681,955 | $ | 1,902,441 | 33.5 | % | $ | 2,741,418 | $ | 819,837 | 29.9 | % | ||||||||||||
Bullion/Rare Coin | 7,764,332 | 425,483 | 5.5 | % | 6,686,502 | 617,637 | 9.2 | % | ||||||||||||||||
Scrap | 1,734,158 | 355,458 | 20.5 | % | 816,940 | 286,947 | 35.1 | % | ||||||||||||||||
Other | 497,916 | 212,622 | 42.7 | % | 327,211 | 143,159 | 43.8 | % | ||||||||||||||||
$ | 15,678,361 | $ | 2,896,004 | 18.5 | % | $ | 10,572,071 | $ | 1,867,580 | 17.7 | % |
Nine Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
Jewelry | $ | 16,712,435 | $ | 4,581,774 | 27.4 | % | $ | 9,356,503 | $ | 2,939,271 | 31.4 | % | ||||||||||||
Bullion/Rare Coin | 25,003,580 | 2,042,255 | 8.2 | % | 24,984,939 | 2,069,333 | 8.3 | % | ||||||||||||||||
Scrap | 4,577,721 | 1,109,076 | 24.2 | % | 2,415,560 | 794,181 | 32.9 | % | ||||||||||||||||
Other | 1,255,398 | 470,782 | 37.5 | % | 1,087,991 | 495,694 | 45.6 | % | ||||||||||||||||
$ | 47,549,134 | $ | 8,203,887 | 17.3 | % | $ | 37,844,993 | $ | 6,298,479 | 16.6 | % |
CONSOLIDATED |
| Nine Months Ended September 30, |
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| 2022 |
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| 2021 |
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| Revenues |
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| Gross Profit |
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| Margin |
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| Revenues |
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| Gross Profit |
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| Margin |
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DGSE |
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Resale |
| $ | 90,014,891 |
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| $ | 10,713,959 |
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| 11.9 | % |
| $ | 61,621,574 |
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| $ | 7,781,229 |
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| 12.6 | % |
Recycled |
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| 6,534,362 |
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| 1,447,450 |
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| 22.2 | % |
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| 5,787,630 |
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| 1,182,900 |
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| 20.4 | % |
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Subtotal |
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| 96,549,253 |
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| 12,161,409 |
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| 12.6 | % |
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| 67,409,204 |
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| 8,964,129 |
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| 13.3 | % |
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ECHG |
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Resale |
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| 30,200,026 |
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| 16,606,161 |
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| 55.0 | % |
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| 21,625,853 |
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| 9,082,521 |
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| 42.0 | % |
Recycled |
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| 8,503,223 |
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| 4,277,121 |
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| 50.3 | % |
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| 7,860,159 |
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| 3,495,620 |
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| 44.5 | % |
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Subtotal |
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| 38,703,249 |
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| 20,883,282 |
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| 54.0 | % |
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| 29,486,012 |
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| 12,578,141 |
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| 42.7 | % |
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| $ | 135,252,502 |
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| $ | 33,044,691 |
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| 24.4 | % |
| $ | 96,895,216 |
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| $ | 21,542,270 |
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| 22.2 | % |
The following table represents our historical operating results, by categories, for the years ending December 31, 2016 and 2015 as required by the Securities and Exchange Commission per limited review of our Form 10-K for year ending December 31, 2016:
For the Years Ended | ||||||||||||||||||||||||
December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
Revenues | Gross Profit | Margin | Revenues | Gross Profit | Margin | |||||||||||||||||||
Jewelry | $ | 12,403,190 | $ | 3,997,011 | 32.2 | % | $ | 15,983,305 | $ | 5,026,983 | 31.5 | % | ||||||||||||
Bullion/Rare Coin | 31,133,785 | 2,542,288 | 8.2 | % | 39,822,398 | 2,858,731 | 7.2 | % | ||||||||||||||||
Scrap | 3,030,891 | 952,530 | 31.4 | % | 3,620,041 | 1,148,236 | 31.7 | % | ||||||||||||||||
Other | 1,758,743 | 816,018 | 46.4 | % | 1,491,995 | 691,894 | 46.4 | % | ||||||||||||||||
$ | 48,326,609 | $ | 8,307,847 | 17.2 | % | $ | 60,917,739 | $ | 9,725,844 | 16.0 | % |
Three Months Ended September 30, 20172022 as compared to the Three Months Ended September 30, 20162021
Revenues. RevenuesRevenue. Revenue related to DGSE’s continuing operations increased by $5,106,290,$4,944,875, or 48%19.4%, during the three months ended September 30, 2017,2022, to $15,678,361,$30,427,254, as compared to $10,572,071revenue of $25,482,379 during the same period in 2016. Jewelry2021. Resale revenue, such as bullion, jewelry, watches and rare coins, increased by $4,765,637, or 20.4%, during the three months ended September 30, 2022, to $28,172,732 as compared to resale revenue of $23,407,095 during the same period in 2021. Recycled-material sales increased by $179,238, 8.6% to $2,254,522 for the three months ended September 30, 2022, as compared to recycled-material sales of $2,075,284, for the three months ended September 30, 2021. Resale revenue for the DGSE segment increased for the three months ended September 30, 2022, when compared to the same periods in the previous fiscal year. The increases in net sales were up approximately 107%primarily due to year-over-year growth in store count, as well as increases in comparable store sales. Recycle revenue increased slightly for the three months ended September 30, 2022, when compared to the same periods in the previous fiscal year, which was primarily due to year-over-year growth in store count.
Revenue related to ECHG’s continuing operations for the three months ended September 30, 2022 increased by $2,572,042, or 21.1%, to $14,770,432, as compared to revenue of $12,198,390 during the same period in 2021. Resale revenue increased by $3,229,217, or 39.0%, to $11,518,168, for the three months ended September 30, 2022, as compared to revenue of $8,288,951 during the three months ended September 30, 2021. Recycled sales decreased by $657,175, or 16.8%, to $3,252,264 for the three months ended September 30, 2022, as compared to recycled sales of $3,909,439 for the three months ended September 30, 2021. Revenue increased for resale items for the three months ended September 30, 2022, as compared to the three months ended September 30, 2016, Bullion/Rare Coin sales were up approximately 16%,2021, was mainly due to the increased revenue from the Avail Transaction on October 29, 2021. The decrease of recycled items for the three months ended September 30, 2022, as compared to the prior year quarter. Our scrap businessthree months ended September 30, 2021, was primarily due to a shifting of product mix.
The Company has historically been onehad no layoffs to-date or terminations due to the COVID-19 pandemic, and we continue to exercise caution concerning any variants of COVID-19 that may arise. We believe the Company continues to operate at full strength and intend to take measures to keep our largest revenueemployees safe where possible.
Gross Profit. Gross profit related to DGSE’s operations for the three months ended September 30, 2022, increased by $689,865, or 22.5%, to $3,749,363 as compared to gross profit of $3,059,498 during the same period in 2021. Resale gross profit increased by $605,708, or 22.9%, to $3,251,153 for the three month ended September 30, 2022, as compared to resale gross profit of $2,645,445 during the three months ended September 30, 2021. Recycled gross profit increased by $84,157, or 20.3%, to $498,210 for the three months ended September 30, 2022, as compared to recycled gross profit of $414,053 during the three months ended September 30, 2021. The increase in resale and recycled gross profit drivers, and since we have gone back to our roots, we are increasing our purchases of scrap. Our scrap sales were up approximately 112%,for the three months ended September 30, 2022, as compared to the prior year quarter.three months ended September 30, 2021 was primarily due to an increase in store traffic compared to the same period last year.
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Gross profit related to ECHG for the three months ended September 30, 2022 increased by $3,055,676, or 60.5%, to $8,106,294 as compared to gross profit of $5,050,618 during the same period in 2021. Gross profit for resale revenue for the three months ended September 30, 2022 increased by $3,014,734, or 87.4%, to $6,465,386, as compared to gross profit for resale revenue $3,450,652 during the same period in 2021. Gross profit for recycled sales for the three months ended September 30, 2022 increased $40,942, or 2.6%, to $1,640,908, as compared to gross profit for recycled sales of $1,599,966, during the same period in 2021. The gross profit increase for the resale and recycled items for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021 primarily benefiting from the higher volumes and an improved product mix with higher pricing power.
Gross Profit.Selling, General and Administrative Expenses. For the three months ended September 30, 2017, gross profit2022, SG&A expenses for DGSE increased by $1,028,424,$597,554, or 55%33.7%, to $2,896,004,$2,369,588, as compared to $1,867,580SG&A expenses of $1,772,034 during the same period in 2016.2021. The increase in gross profitSG&A expenses was driven primarily by increased corporate overhead expenses, mostly related to future growth opportunities, and investments in our technology infrastructure as we continue to invest in our business. Additionally, due to higher advertising expenses and an increase in sales volume and sales mix. Gross margin as a percentage of revenue was 18.5% compared to 17.7% in the prior year. The increase in gross margin issalary expense for our retail employees due to the growth in our increased jewelry sales which carries a higher margin.store count.
Selling, General and Administrative Expenses.For the three months ended September 30, 2017, Selling, General and Administrative (“2022, SG&A”)&A expenses decreasedfor ECHG increased by $27,198$1,925,675 or 1%55.7%, to $2,156,843,$5,384,114, as compared to $2,184,041SG&A expenses of $3,458,439 during the same period in 2016.2021. The decreasegrowth in SG&A was achieved through continued effortsprimarily due to reduce expenses at all levels, including store-level operating expenses and corporate overhead.the Avail Recovery Solutions acquisition.
Depreciation and Amortization. For the three months ended September 30, 2017,2022, depreciation and amortization expense for DGSE was $67,272$103,022, as compared to $77,878an expense of $98,787 for the same period in 2016, a decrease2021, an increase of $10,606$4,235, or 14%4.3%. The increase of $4,235 from the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 is primarily due to the depreciation of the new retail building located in Frisco, Texas.
For the three months ended September 30, 2022, depreciation and amortization expense for ECHG was $431,942 as compared to an expense of $117,389 for the same period in 2021, an increase of $314,553, or 268%. The increase of $314,553 for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, is primarily due to catch-up amortization expense of intangible assets just identified this quarter from the Avail Transaction of October 29, 2021, resulting in additional amortization of $250,800, plus additional amortization of intangible assets and depreciation of assets from the CExchange Transaction.
Interest Expense. For the three months ended September 30, 2017,2022, interest expense for DGSE was $50,316,$60,619, a decrease of $38,593,$18,944, or 43%23.8%, as compared to $88,909interest expense of $79,563 during the same period in 2016.2021. The decrease iswas primarily due to the sale and subsequent payoffcombination of an increase from the mortgage attached tonew loan for the retail building and land located in Frisco, Texas, offset by a decrease from refinancing the related party loan by Farmers State Bank of Oakley, Kansas on Reeder Road andNovember 23, 2021 through the debt to equity exchange betweenFSB DGSE and NTR Metals, LLC eliminating an outstanding debt of $2,303,359 that bore an interest rate of two percent (2%) per annum. The Reeder Road mortgage bore an interest rate of six and seventy one-hundredths of one percent (6.70%) per annum and when sold in July 2016, eliminated a mortgage of $1,517,106.Loan.
Income (Loss) from Discontinued Operations.For the three months ended September 30, 2017, the Company incurred an2022, interest expense for ECHG was $59,338, a decrease of $49,952 or 45.7%, as compared to interest expense of $109,290 during the same period in 2021. The decrease was primarily the result of refinancing the related party loan by Farmers State Bank of Oakley, Kansas on November 23, 2021 through the FSB ECHG Loan.
Gain on Forgiveness of Federal Loan. For the three months ended September 30, 2022, other income, gain on forgiveness of Federal Loan (defined below) for DGSE was $0, a decrease of $675,210, as compared to other income, gain on forgiveness of Federal Loan of $675,210 during the same period in 2021. Envela previously applied for and received, on April 20, 2020, a federally backed loan of $1,668,200 with 1% interest (the “Federal Loan”), which was forgivable to the extent that certain criteria were met. The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the Federal Loan during the quarter ended September 30, 2021. DGSE’s portion of the forgiven loan was $675,210 for the quarter ended September 30, 2021.
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For the three months ended September 30, 2022, other income, gain on forgiveness of Federal Loan for ECHG was $0, a decrease of $992,990, as compared to other income, gain on forgiveness of Federal Loan of $992,900 during the same period in 2021. The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the Federal Loan of $1,668,200 during the quarter ended September 30, 2021. ECHG’s portion of the forgiven loan was $992,990 for the quarter ended September 30, 2021
Write-off of Note Receivables and Accrued Interest Receivable. For the three months ended September 30, 2022, other expense, write-off of notes receivables for ECHG was $0, a decrease of $949,174, as compared to other expense, write-off of notes receivables and accrued interest receivable of $949,174 during the same period in 2021. The decrease was due to two notes receivables due from CExchange of $900,000 and the associated accrued interest receivable of $49,174 written-off during the quarter ended September 30, 2021.
Other Income/Expense. For the three months ended September 30, 2022, other income for DGSE was $5,957, an increase in income of $43,780, as compared to other expense of $37,823 during the same period in 2021. The increase in income was primarily due to DGSE’s portion of corporate overhead expenses, mostly related to discontinued operations. The resultsadditional costs incurred to operate as a public company, for the three months ended September 30, 2016,2022 as compared to the corporate expenses and rents received, netted for the three months ended September 30, 2021.
For the three months ended September 30, 2022, other expense for ECHG was $71,221, an increase in expenses of $48,260, as compared to other expense of $22,961 during the reversalsame period in 2021. The increase in expense was primarily due to ECHG’s portion of an accrual of $825corporate overhead expenses, mostly related to additional costs incurred to operate as a public company, for the Southern Bullion locations closedthree months ended September 30, 2022 as compared to the corporate expenses and rents received, netted for the three months ended September 30, 2021.
Income Tax Expense. For the three months ended September 30, 2022, income tax expense was $64,061, an increase of $37,606, compared to income tax expense of $26,455 for the three months ended September 30, 2021. The effective income tax rate was 1.9% and 0.8% for the three months ended September 30, 2022 and September 30, 2021, respectively. Differences between our effective income tax rate and the U.S. federal statutory rate are mainly the result of state taxes, non-deductible expenses, non-taxable income and changes in 2014.the valuation allowance in relation to the deferred tax asset for net operating loss carryforwards.
Net Income. We recorded a net income of $3,317,709 for the three months ended September 30, 2022, as compared to a net income of $3,106,401 for the three months ended September 30, 2021, an increase in net income of $211,308, which is due primarily to an increase in gross profit of $3,745,541, a decrease in interest expense of $68,896, offset by an increase in SG&A expenses of $2,523,229, an increase in depreciation and amortization of 318,788 and a decrease in other income of $723,506.
Earnings Per Share. For the three months ended September 30, 2022, net income per basic and diluted shares attributable to holders of Common Stock was $0.12, as compared to $0.12 per basic and diluted shares attributable to holders of Common Stock for the three months ended September 30, 2021.
Nine Months Ended September 30, 20172022 as compared to the Nine Months Ended September 30, 20162021
Revenues. Revenues related to continuingDGSE’s operations increased by $9,704,141,$29,140,049, or 26%43.2%, during the nine months ended September 30, 2017,2022, to $47,549,134,$96,549,253, as compared to $37,844,993revenue of $67,409,204 during the same period in 2016. Jewelry sales were up approximately 79%2021. Resale revenue, such as bullion, jewelry, watches and rare coins, increased by $28,393,317, to $90,014,891 for the nine months ended September 30, 2022, or 46.1%, compared to resale revenue of $61,621,574 during the nine months ended September 30, 2021. Recycled revenue increased by $746,732, or 12.9%, to $6,534,362 for the nine months ended September 30, 2022, as compared to recycled revenue of $5,787,630 during the nine months ended September 30, 2021. The increased resale and recycle revenue for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2016. Bullion/Rare Coin sales stayed level2021, was primarily due to year-over-year growth in store count, as well as increases in comparable store sales.
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Revenue related to ECHG’s operations for the nine months ended September 30, 2022 increased by $9,217,237, or 31.3%, to $38,703,249, as compared to revenue of $29,486,012 during the same period in 2016. Our scrap business has historically been one2021. Resale revenue increased by $8,574,173, or 39.6%, to $30,200,026, for the nine months ended September 30, 2022, as compared to resale revenue of our largest$21,625,853 during the nine months ended September 30, 2021. Recycled revenue and profit drivers, and since we have gone backincreased by $643,064, or 8.2%, to our roots, we are increasing our purchases of scrap. Our scrap sales were up approximately 90%,$8,503,223 for the nine months ended September 30, 2022, as compared to recycled revenue of $7,860,159 for the nine months ended September 30, 2021. Revenue increased for resale items for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, primarily due to the Avail Transaction on October 29, 2021. The revenue increase from recycled items for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, was primarily due to the Avail Recovery Solutions acquisition and benefiting from the higher volumes and an improved product mix.
Gross Profit. Gross profit related to DGSE’s operations for the nine months ended September 30, 2022, increased by $3,197,280, or 35.7%, to $12,161,409 as compared to gross profit of $8,964,129 during the same period in 2016.2021. Resale gross profit increased by $2,932,730, or 37.7%, to $10,713,959 for the nine month ended September 30, 2022, as compared to resale gross profit of $7,781,229 during the nine months ended September 30, 2021. Recycled gross profit increased by $264,550, or 22.4% to $1,447,450 for the nine months ended September 30, 2022, as compared to recycled gross profit of $1,182,900 during the nine months ended September 30, 2021. The increase in resale and recycled gross profit was due primarily due to year-over-year growth in store count, as well as increases in comparable store sales.
Gross Profit.profit related to ECHG for the nine months ended September 30, 2022, increased by $8,305,141, or 66%, to $20,883,282 as compared to gross profit of $12,578,141 during the same period in 2021. Gross profit for resale revenue for the nine months ended September 30, 2022 increased by $7,523,640, or 82.8% to $16,606,161, as compared to gross profit for resale revenue of $9,082,521 during the same period in 2021. Gross profit for recycled sales for the nine months ended September 30, 2022, increased $781,501, or 22.4% to $4,277,121, as compared to gross profit for recycle sales of $3,495,620, during the same period in 2021. The gross profit increase for resale and recycle revenue for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, is primarily due to increased sales and benefiting from an improved product mix with higher pricing power.
Selling, General and Administrative Expenses. For the nine months ended September 30, 2017, gross profit2022, DGSE’s SG&A expenses increased by $1,905,408,$1,257,665, or 30%23.1%, to $8,203,887,$6,702,031, as compared to $6,298,479SG&A expenses of $5,444,366 during the same period in 2016.2021. The increase in gross profitSG&A expenses was driven primarily by increased corporate overhead expenses, mostly related to future growth opportunities, and investments in our technology infrastructure as we continue to invest in our business. Additionally, due to higher advertising expenses and an increase in sales volume and sales mix. As a percentage of revenue, gross margin increasedsalary expense for our retail employees due to 17.3%the growth in our store count, compared to 16.6% in the same period compared to the priorlast year. An overall increase in the margin was due to the greater sales in jewelry which carries a significantly higher margin.
Selling, General and Administrative Expenses.For the nine months ended September 30, 2017, Selling, General and Administrative (“2022, SG&A”)&A expenses decreasedfor ECHG increased by $689,128,$5,924,768, or 9%67.6%, to $6,712,428,$14,695,329, as compared to $7,401,556SG&A expenses of $8,770,561 during the same period in 2016.2021. The decreaseincrease in SG&A expenses was achieved through continued effortsprimarily due to reduce expenses at all levels, including store-level operatingthe added cost of the Avail and corporate overhead expenses.CExchange companies during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Depreciation and Amortization. For the nine months ended September 30, 2017,2022, DGSE’s depreciation and amortization expense was $245,048$311,419, compared to $287,278an expense of $293,044 for the same period in 2016, a decrease2021. The increase of $42,230,$18,375, or 15%. This decrease in depreciation6.3% is primarily associated withdue to the accelerated write offdepreciation of the new Frisco, Texas retail building placed into service during January of 2022.
For the nine months ended September 30, 2022, depreciation and amortization expense for ECHG was $795,008, as compared to an expense of $344,263 for the same period in 2021, an increase of $450,745, or 130.9%. The increase of $450,745 from the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, is primarily due to catch-up amortization expense of intangible assets just identified this quarter from the Avail Transaction of October 29, 2021, resulting in additional amortization of $250,800, plus additional amortization of intangible assets and depreciation of assets formerly utilized in Chicago Gold & Diamond Exchange located in Chicago, Illinois duringfrom the prior year.CExchange Transaction.
Interest Expense. For the nine months ended September 30, 2017,2022, the interest expense for DGSE was $149,522,$183,523, a decrease of $135,157,$33,217, or 48%15.3%, compared to $284,679interest expense of $216,740 during the same period in 2016.2021. The decrease iswas primarily due to the sale and subsequent payoffcombination of an increase from the mortgage attached tonew loan for the retail building and land located in Frisco, Texas, offset by a decrease from refinancing the related party loan by Farmers State Bank of Oakley, Kansas on Reeder Road andNovember 23, 2021 through the debt to equity exchange betweenFSB DGSE and NTR Metals, LLC eliminating an outstanding debt of $2,303,359 that bore an interest rate of two percent (2%) per annum. The Reeder Road mortgage bore an interest rate of six and seventy one-hundredths of one percent (6.70%) per annum and when sold in July 2016, eliminated a mortgage of $1,517,106.Loan.
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Income (Loss) from Discontinued Operations.
For the nine months ended September 30, 2017, the Company incurred an2022, interest expense for ECHG was $180,715, a decrease of $148,124 or 45%, compared to interest expense of $328,839 during the same period in 2021. The decrease was primarily the result of refinancing the related party loan by Farmers State Bank of Oakley, Kansas on November 23, 2021 through the FSB ECHG Loan.
Gain on Forgiveness of Federal Loan. For the nine months ended September 30, 2022, other income, gain on forgiveness of Federal Loan for DGSE was $0, a decrease of $675,210, as compared to other income, gain on forgiveness of Federal Loan of $675,210 during the same period in 2021. The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the Federal Loan of $1,668,200 during the quarter ended September 30, 2021. DGSE’s portion of the forgiven loan was $675,210 for the quarter ended September 30, 2021.
For the nine months ended September 30, 2022, other income, gain on forgiveness of Federal Loan for ECHG was $0, a decrease of $992,990, as compared to other income, gain on forgiveness of Federal Loan of $992,990 during the same period in 2021. The Small Business Administration, through Truist Bank (f/k/a BB&T), forgave the Federal Loan of $1,668,200 during the quarter ended September 30, 2021. ECHG’s portion of the forgiven loan was $992,990 for the quarter ended September 30, 2021
Write-off of Note Receivables and Accrued Interest Receivable. For the nine months ended September 30, 2022, other expense, write-off of notes receivables for ECHG was $0, a decrease of $949,174, as compared to other expense, write-off of notes receivables and accrued interest receivable of $949,174 during the same period in 2021. The decrease was due to two notes receivables due from CExchange of $900,000 and the associated accrued interest receivable of $49,174 written-off during the quarter ended September 30, 2021.
Other Income/Expense. For the nine months ended September 30, 2022, other expense for DGSE was $71,053, an increase in expenses of $264,421, compared to other income of $193,368 during the same period in 2021. The increase in expense was primarily due to DGSE’s portion of corporate overhead expenses, mostly related to discontinued operations. The resultsadditional costs incurred to operate as a public company. Other income for the nine months ended September 30, 2016,2021 only included the rental income from corporate tenants in the Company’s corporate building and therefore are not comparable. In subsequent quarters, the Company’s corporate overhead expenses and rental income are netted into other income/expense.
For the nine months ended September 30, 2022, other expense for ECHG was a reversal$148,216, an increase in expenses of an accrual$449,060, compared to other income of $661$193,368 during the same period in 2021. The increase in expense was primarily due to ECHG’s portion of corporate overhead expenses, mostly related to additional costs incurred to operate as a public company. Other income for the Southern Bullion locations closednine months ended September 30, 2021 only included the rental income from corporate tenants in 2014.the Company’s corporate building and therefore are not comparable. In subsequent quarters, the Company’s corporate overhead expenses and rental income are netted into other income/expense.
Income Tax Expense. For the nine months ended September 30, 2022, income tax expense was $144,605, an increase of $54,695, or 60.8%, as compared to income tax expense of $89,910 for the nine months ended September 30, 2021. The effective income tax rate was 1.5% and 1.2% for the nine months ended September 30, 2022 and 2021, respectively. Differences between our effective income tax rate and the U.S federal statutory rate are mainly the result of state taxes, non-deductible expenses, non-taxable income, changes in reserves for uncertain tax positions and unused net operating loss carryforwards.
Net Income. We recorded a net income of $9,812,792 for the nine months ended September 30, 2022, as compared to a net income of $7,267,785 for the nine months ended September 30, 2021, an increase in net income of $2,545,007, which is due primarily to an increase in gross profit of $11,502,421, a decrease in interest expense of $181,341, offset by an increase in SG&A expenses of $7,182,433, an increase in other expense of $1,432,507 and an increase in depreciation and amortization expense of $469,120.
Earnings Per Share. For the nine months ended September 30, 2022, the net income per basic and diluted shares attributable to common stockholders is $0.36, as compared to $0.27 per basic and diluted shares for the nine months ended September 30, 2021.
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Liquidity and Capital Resources
During the nine months ended September 30, 2017 and 2016,2022, cash flows used in operating activitiesprovided by operations totaled $647,336$7,725,140, and $250,243, respectively,during the nine months ended September 30, 2021, cash flows provided by operations totaled $1,026,457, an increase of $397,093.$6,698,683. Cash used in operating activitiesprovided by operations for the nine months ended September 30, 2017,2022 was driven largely by a reductionnet income added to non-cash items of depreciation, amortization and bad debt of $10,992,637, an increase in accounts payable and accrued expenses of $1,104,418,$1,924,658, a decrease in other assets of $311,422, offset by an increase in inventories of $4,014,627, an increase in prepaid expenses of $256,206, an increase of trade accounts receivables of $479,193,$1,213,187, an increase in notes receivabletrade receivables of $675,000,$97,994 and a reduction ofdecrease in customer deposits and other liabilities of $317,727,$186,590. Cash provided by operations for the nine months ended September 30, 2021 was driven largely by net income added to non-cash items of depreciation, amortization, bad debt, gain on forgiveness of Federal Loan and write-off of note receivables and accrued interest receivable of $7,214,598, an increase in accounts payable and accrued expenses of $100,952 and an increase in customer deposits and other liabilities of $511,610, offset by a reductionthe increase in trade receivables of $2,871,070, an increase in inventories of $807,543,$2,647,432, an increase in prepaid expenses of $886,591 and the net income, from continuing operationsincrease in other assets of $1,088,521.$417,347.
During the nine months ended September 30, 20172022 and 2016,2021, cash flows used in investing activities totaled $140,185 for the nine months ended September 30, 2017,$444,185 and cash flows provided by investing activities totaled $1,237,215 for the nine months ended September 30, 2016,$3,351,141, respectively, a period-over-period decrease of $1,377,400.$2,906,956. The use of cash in investing activities during the nine months ended September 30, 20172022 was primarily due to the resultpurchase of additional property and equipment of $227,197 and the additional cash payment, as part of the continuing buildout expenses to the Midtown location at 13022 Preston Road, Dallas, Texas.Avail Transaction of $216,988. The use of cash provided byin investing activities during the nine months ended September 30, 2016, principally relates2021 was primarily due to the saleincrease in notes receivable of our largest store located in Dallas Texas for $2,124,416, offset by purchases$300,000 and the purchase of additional property and equipment of approximately $857,000 primarily related to the build-out$3,064,277, offset by acquisition of the Company’s new flagship store in Dallas known as Midtown.CExchange’s assets and liabilities, net of cash acquired of $13,136.
During the nine months ended September 30, 2017 and 2016,2022, cash flows used in financing activities totaled $8,950$2,450,347 and $1,598,526, respectively, a decrease of $1,589,576. The use of cash in financing activities forduring the nine months endingended September 30, 2017 is the result2021, cash flows provided by financing totaled $1,429,828, a period-over-period increase of payments on the capital lease obligation, whereas,cash flows used in financing of $3,880,175. Cash used in financing during the nine months endingended September 30, 20162022 was the resultprimarily due from payments made against notes payable of repayment of debt$750,347 and payments on capital lease obligations.made against the line of credit of $1,700,000. Cash provided by financing during the nine months ended September 30, 2021 was primarily due from proceeds from notes to purchase property of $1,772,000, offset by payments made against notes payable of $123,352 and payments made against notes payable, related party of $218,820.
We expect our capital expenditures to total approximately $50,000$1,500,000 during the next twelve12 months. These expenditures will be largely driven by the continued buildoutpurchase of additional equipment and the purchase of potential properties by DGSE for retail locations and for build-out of those purchased properties. The Company has no capital expenditure commitments as of September 30, 2022.
Our primary source of liquidity and capital resources currently consist of cash generated from our flagship location at 13022 Preston Road, Dallas, Texas.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, the FSB ECHG Loan and the FSB DGSE Loan, as well as the financing for the Avail Transaction through borrowings represented by the Avail Installment Note. 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 the FSB Facility, which is 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 September 30, 2022.
From time to time, we have adjusted and may further buildoutadjust 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 flagship locationdemand for additional working capital will help our customersincrease due to a related need to stock additional jewelry inventory, increases in wholesale accounts receivable and the purchasing of recycled material. Historically we have a better experience shopping with us at our main location.funded these activities through operations. If additional working capital is required, we will seek additional loans from other commercial banks.
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.
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The COVID-19 pandemic, surging inflation, supply chain interruptions 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 prices. Although we are continuing to monitor and assess the effects of the foregoing, 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.
We feel that all funding requirements will come from operational cash flow for the next twelve months. From time to time, we have adjusted our inventory levels to meet seasonal demand or in order to meet working capital requirements. Management believes that if additional working capital is required, additional loans can be obtained from individuals or from commercial banks. If necessary, inventory levels may be adjusted in order to meet unforeseen working-capital requirements.
On July 19, 2012, we entered into the Loan Agreement with NTR, an affiliate of DGSE’s majority stockholder Elemetal, pursuant to which NTR, agreed to provide us with a guidance line of revolving credit in an amount up to $7,500,000. The Loan Agreement anticipated termination–at which point all amounts outstanding thereunder would be due and payable (such amounts, the “Obligations”)–upon the earlier of: (i) August 1, 2014; (ii) the date that is twelve months after we receive notice from NTR demanding the repayment of the Obligations; (iii) the date the Obligations are accelerated in accordance with the terms of the Loan Agreement; or (iv) the date on which the commitment terminates under the Loan Agreement. In connection with the Loan Agreement, we granted a security interest in the respective personal property of eachCompany leases certain of its subsidiaries. The loan carries an interest rate of two percent (2%) per annum for all funds borrowed pursuant tofacilities under operating leases. For more information on the Loan Agreement. Proceeds received by us pursuant to the terms of the Loan Agreement were used for repayment of all outstanding financial obligations incurred in connection with that certain Loan Agreement, datedminimum rental commitments under non-cancellable operating leases as of December 22, 2005, between DGSE and Texas Capital Bank, and additional proceeds have been used as working capital in the ordinary course of business. We incurred debt-issuance costs associated with the Loan Agreement totaling $56,150. The debt issuance costs are included in other assets in the accompanying consolidated balance sheet and were amortized to interest expense on a straight-line basis over two years, and have been completely amortized. On February 25, 2014, we entered into a one-year extension of the Loan Agreement with NTR, extending the termination date to August 1, 2015, and on February 4, 2015, we entered into an additional two-year extension, extending the termination date to August 1, 2017, unless earlier terminated as described above. No debt issuance costs were incurred in relation to these extensions. All other terms of the agreement remain the same. As of September 30, 2017 and December 31, 2016, we had outstanding balances of $0 and $0, respectively, drawn on the NTR credit facility.2022, see Note 12 to our interim condensed consolidated financial statements.
On December 9, 2016, DGSE and NTR Metals closed on the transactions contemplated by the Elemetal Agreement whereby DGSE issued NTR 5,948,560 shares of common stock for $0.41 per share in exchange for the cancellation and forgiveness of indebtedness and accrued interest totaling $2,438,910.Off-Balance Sheet Arrangements
On July 15, 2014, we received final notice from the Texas Comptroller of its consent to a payment agreement to pay amounts due by us under the Texas Comptroller’s decision (the “Decision”) in connection with the 2010 Sales Tax Audit (the “Payment Agreement”). As more fully discussed in the Legal Proceeding section of our Fiscal 2015 10-K, pursuant to the terms of the Payment Agreement, we agreed to pay approximately $1.1 million in taxes, penalties and interest. Pursuant to the terms of the Payment Agreement, we were to pay the agreed amount provided in the Decision over an 18-month period, which began with an initial payment of $325,000 in June 2014, followed by monthly payments of $47,000 until all agreed tax amounts, penalty and accrued interest are paid. This expense was fully accrued in Fiscal 2014, but based on the terms of the Payment Agreement, DGSE made payments of $47,000 per month through all of 2015. The final payment of $47,000 was submitted to the Texas Comptroller in January 2016 to fully satisfy the indebtedness associated with the 2010 Sale Tax Audit.
The Texas Comptroller conducted a second sales and use tax audit of our operations in Texas with respect to the period December 1, 2009 through June 30, 2013 and subsequently sent us a final assessment in November 2016 asserting that we owed an amount of $220,007 plus penalties and interest of $66,645 for a total payment of $286,652. On February 21, 2017, a Compromise and Settlement Agreement was reached between DGSE and the Comptroller’s Office to pay a lump sum payment of $261,490 on or before March 23, 2017. We paid the negotiated amount on March 2, 2017.
In March 2017, we received notice from the Texas Comptroller’s Office that we would have a sales and use tax audit for the time period of July 1, 2013 through December 31, 2016. We expect the process to take all of 2017 and at this time, we are unable to determine if the Company has any sales tax exposure, therefore, we will not reserve for the quarterly report.
Off Balance-Sheet Arrangements
We do not have no off balance-sheetany 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.
Update on Proposed Acquisitions and DivestituresITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company continues to evaluate the acquisition of certain tangible personal-property assets of Elemetal Recycling, LLC as mentioned in the Company’s February 16, April 19 and July 6, 2017 press releases. The Company has been unable to obtain satisfactory financing to date but continues to pursue sources of financing and other matters with respect to the acquisition. The transaction is not expected to close in 2017. There can be no assurance that the Company will complete the acquisition.
The Company is no longer pursuing the acquisition of the equity interests in National Pawn, Inc. and related affiliates (mentioned in the Company’s July 6, 2017 press release) because satisfactory third-party financing was not available.
The Company divested its wholesale watch division on September 22, 2017 (discussed in the Company’s July 6, 2017 press release) as part of its effort to streamline operations and focus its fine-watch business in the retail sector.
Because we are a “smaller reporting company,” we are not required to disclose the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b)Our management, with the participation of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and our principal financial officer, conducted an evaluation, as ofevaluated the end of the period covered by the Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management has concluded thatprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2017, the Company’s2022. We maintain disclosure controls and procedures were effective, at athat are designed to provide reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis,that information required to be disclosed by us in that theour reports that we filefiled or submitsubmitted under the Exchange Act is recorded, processed, summarized and are effective in ensuring thatreported within the information required to be disclosed by ustime periods specified in the reportsSEC’s rules and forms and that we file or submit under the Exchange Actsuch information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance of the foregoing.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance of achieving their objectives, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
As required by Rule-13a-15(d) and Rule 15d-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and our principal financial officer concluded that thereThere were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims, lawsuits and pending actions against the Company arising in the normal course of the Company’s business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flow. Management is not aware of any legal proceedings contemplated by government agencies of which the outcome is reasonable likely to have a material adverse effect on the Company’s financial condition, results of operations or cash flow.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in the Company’s 2021 Annual Report and the Company’s quarterly report on Form 10-Q for the period ended March 31, 2022, filed with the SEC on May 11, 2022.
For additional information on contingencies, see Note 17 to our interim condensed consolidated financial statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
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In addition to what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, in March we received notice from the Texas Comptroller that we would have a sales and use tax audit for the time period of July 1, 2013 through December 31, 2016. We expect the process to take all of 2017 and at this time, we are unable to determine if the Company has any sales tax exposure, therefore, we will not reserve for the quarterly report.ITEM 6. EXHIBITS