ENVELA CORPORATION CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
Please see the section of this Form 10-K entitled "Note About Forward-Looking Statements" on page 3.
The following discussion of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information included in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in the section titled "Risk Factors." Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview
We are enabling a better world through the circular economy; by empowering buyers and sellers to extend the useful lives of specialty and durable goods; and by seizing retail, recycling, and reverse-logistics supply-chain opportunities.Envela is a diverse re-commerce company that manages its business through two segments. Its commercial-services segment is led by subsidiary ECHG, and its direct-to-consumer segment is led by subsidiary DGSE.Envela reports its revenue and operating expenses based on these two operating segments, with revenue for each operating segment, being presented as resale and recycle. We also include segment information in the notes to our financial statements. For more information, see "Item 1. Business-Operating Segments" above. A list of the company's significant subsidiaries is presented in Exhibit 21.1.
Key Economic Factors and Trends Affecting the Markets in Which We Operate
ECHG Business Drivers and Impacts
ECHG owns and operates Echo,ITAD USA , CEX, Avail and Teladvance, 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 operate as value-added resellers by providing offerings and services to companies looking to either upgrade capabilities or dispose of equipment. Like DGSE, ECHG also maintains relationships with refiners or recyclers to which it sells extracted valuable materials from electronics and IT equipment that are not appropriate for resale or reuse. The electronic disposition and recycling industry is fragmented inthe United States . Certain parts of ECHG's business comes from a limited number of partners. The used electronics processing business is subject to cyclical fluctuations based upon product availability, promotions, seasonality, and supply chain constraints. In our ECHG segment, we compete primarily on price and on the services, we provide to clients. The price offered for devices is the principle competitive factor in acquiring material from generators. Generators of material may also consider factors other than price, such as logistics costs, timely removal, customized reports, the ability to service multiple locations, insurance coverage, and the buyer's financial strength. For additional information regarding ECHG, see "Item 1. Business-Operating Segments-ECHG Segment" and See "Item 1A. Risk Factors-unable to maintain relationships with significant clients".
DGSE Precious Metals Pricing and Business Impact
The Company is 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. The Company does not currently
use derivatives to hedge these risks. As a significant portion of our inventory
and sales involve gold and jewelry, financial results can be influenced by the
market price of gold and diamonds. The retail sales and gross margin could be
materially impacted if prices of diamonds, platinum, gold, or silver rise so
significantly that consumer behavior changes or if price increases cannot be
passed onto 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
relating to gold as it represents a significant portion of the precious-metal in
which DGSE trades. Such fluctuations, particularly with respect to gold, which
accounts for a majority of DGSE's merchandise costs, can have a significant
impact on earnings and cash availability.
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Items 7
Impact of COVID-19 and Macroeconomic Conditions on Our Business
The ongoing impact of the COVID-19 pandemic continues to affect our business and results of operations, although to a lesser extent than the prior years. Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our customers. Macroeconomic uncertainty and inflationary pressure may drive lower demand for the end consumer and increase operating costs and costs of borrowing.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withUnited States generally accepted accounting ("U.S. GAAP") principles. The preparation of these financial statements requires our management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material.
While our significant accounting policies are more fully described in Note 1-Summary of Significant Accounting Policies, we believe that the accounting estimates discussed below relate to the more significant areas involving management's judgments and estimates.
Inventories
DGSE inventory is valued at the lower of cost or net realizable value ("NRV").
We acquire a majority of our inventory from individual customers, including
pre-owned jewelry, watches, bullion, rare coins and monetary collectibles. We
acquire these items based on our own internal estimate of the fair value of the
items at the time of purchase. We consider factors such as the current spot
market price of precious metals and current market demand for the items being
purchased. DGSE supplements these purchases from individual customers with
inventory purchased from wholesale vendors. These wholesale purchases can take
the form of full asset purchases, or consigned inventory. Consigned inventory is
accounted for on our balance sheet with a fully offsetting contra account so
that consigned inventory has a net zero balance. The majority of our inventory
has some component of its value that is based on the spot market price of
precious metals. Because the overall market value for precious metals regularly
fluctuates, these fluctuations could have either a positive or negative impact
on the value of our inventory and could positively or negatively impact our
profitability. We monitor these fluctuations to evaluate any necessary
impairment to inventory.
The Echo inventory principally includes processed and unprocessed electronic
scrap materials. The value of the material is derived from recycling the
precious and other scrap metals included in the scrap. The processed and
unprocessed materials are carried at the lower of the average cost of the
material during the month of purchase or NRV. The in-transit material is carried
at lower of cost or NRV using the retail method. Under the retail method the
valuation of the inventory at cost and the resulting gross margins are
calculated by applying a cost to retail ratio to the retail value of the
inventory.
For the year ended December 31, 2022 , we have not identified critical accounting
estimates that involve a significant level of estimation uncertainty and would
have a material impact on our results. Refer to our significant accounting
policies are more fully described in Note 1-Summary of Significant Accounting
Policies.
Recent Accounting Pronouncements
See Note 1, "Accounting Policies and Nature of Operations" to our financial statements included this Annual Report on Form 10-K for recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.
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Use of Non-
In this management's discussion and analysis, we use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance withU.S. GAAP. We believe that providing these Non-U.S. GAAP financial measures adds a meaningful presentation of our operating and financial performance. See the reconciliation of net income to EBITDA, in Non-U.S. GAAP Financial Measures below.
Non-
EBITDA is a key performance measure that our management uses to assess our operating performance. Because EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure as an overall assessment of our performance, to evaluate the effectiveness of our business strategies and for business planning purposes. EBITDA may not be comparable to similarly titled metrics of other companies. EBITDA means earnings before interest expense, other (income) expense, net, income tax expense, and depreciation and amortization. EBITDA is a non-U.S. GAAP measure and should not be considered as an alternative to the presentation of net income or any other measure of financial performance calculated and presented in accordance withU.S. GAAP. The following table provides a reconciliation of net income to EBITDA: For the Years Ended December 31, 2022 2021 DGSE ECHG Consolidated DGSE ECHG Consolidated EBITA Reconciliation: Net Income$ 8,305,429 $ 7,383,704 $ 15,689,133 $ 5,170,517 $ 4,878,358 $ 10,048,875 Add (deduct): Depreciation and amortization 410,759 1,041,075 1,451,834 389,703 536,392 926,095 Other income from loan forgiveness - - - (675,210 ) (992,990 ) (1,668,200 ) Other (income)
expense (61,686 ) (857,005 ) (918,691 ) (238,585 ) 538,020 299,435 Interest expense 244,202 239,491 483,693 288,236 415,815 704,051 Income tax expense (benefit) (1,426,697 ) 117,091 (1,309,606 ) 45,124 67,684 112,808 EBITDA$ 7,472,007 $ 7,924,356 $ 15,396,363 $ 4,979,785 $ 5,443,279 $ 10,423,064 19 Table of Contents PART II Items 7 Results of Operations The results of operations presented below should be reviewed in conjunction with the financial statements and notes included elsewhere in the Annual Report. Prior year comparisons for 2022 and 2021, are included in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal years endedDecember 31, 2022 and 2021. Year-over-year discussion and analysis of the line-item revenue and expenses within the consolidated income statement are included below for 2022 and 2021. The following tables set forth our results of operations and such data as a percentage of revenue and gross profit for the periods presented: For the Years Ended December 31, 2022 December 31, 2021 Revenues Gross Profit Margin Revenues Gross Profit Margin DGSE Resale$ 122,468,154 14,240,795 11.6 %$ 89,146,783 11,022,162 12.4 % Recycled 8,639,279 1,993,644 23.1 % 7,572,476 1,586,000 20.9 % Subtotal 131,107,433 16,234,439 12.4 % 96,719,259
12,608,162 13.0 %
ECHG
Resale 39,747,631 22,119,853 55.7 % 32,540,366
14,570,092 44.8 %
Recycled 11,830,790 6,472,794 54.7 % 11,706,453 4,042,905 34.5 %
Subtotal 51,578,421 28,592,647 55.4 % 44,246,819
18,612,997 42.1 %
$ 182,685,854 $ 44,827,086 24.5 % $ 140,966,078 $ 31,221,159 22.1 %
Comparison of 2022 and 2021
Resale Revenue
Year Ended December 31, Change
2022 2021 Amount %
Resale Revenue
DGSE $ 122,468,154 $ 89,146,783 $ 33,321,371 37 %
ECHG $ 39,747,631 $ 32,540,366 $ 7,207,265 22 %
Resale revenue related to DGSE increased by $33,321,371 , or 37% in Fiscal 2022
compared to Fiscal 2021. Resale revenue, such as bullion, jewelry, watches, and
rare coins, increased primarily due to increased traction in DGSE's new retail
locations added to increased consumer demand with increased foot traffic from an
increase in advertising. Resale revenue related to ECHG increased by $7,207,265 ,
or 22%, in Fiscal 2022 compared to Fiscal 2021. Resale revenue increased
primarily due to the economy beginning to stabilize during Fiscal 2022 from
the
COVID-19 pandemic.
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Items 7
Recycled-Material Revenue
Year Ended December 31, Change
2022 2021 Amount %
Recycled Revenue
DGSE $ 8,639,279 $ 7,572,476 $ 1,066,803 14 %
ECHG $ 11,830,790 $ 11,706,453 $ 124,337 1 %
Recycled-material revenue related to DGSE increased by $1,066,803 , or 14% in
Fiscal 2022 compared to Fiscal 2021. The increase in recycled-material revenue
is primarily due to DGSE's retail locations purchasing additional inventory over
the counter from increased foot traffic. Recycled-material revenue related to
ECHG increased by $124,337 , or 1% in Fiscal 2022 compared to Fiscal 2021. The
increase in recycled-material revenue is primarily due to the increase of
down-stream recycling activity beginning to come back from the COVID-19
pandemic.
Resale Gross Profit
Year Ended December 31, Change
2022 2021 Amount %
Gross Margin - Resale
DGSE $ 14,240,795 $ 11,022,162 $ 3,218,633 29 %
ECHG $ 22,119,853 $ 14,570,092 $ 7,549,761 52 %
Resale gross profit related to DGSE, increased by $3,218,633 , or 29% in Fiscal
2022 compared to Fiscal 2021. The increase in resale gross profit is primarily
due to the 37% increase in resale revenue even though the margin percentage
decreased from 12.4% during Fiscal 2021 to 11.6% during Fiscal 2022. The resale
gross profit related to ECHG, increased $7,549,761 , or 52% in Fiscal 2022
compared to Fiscal 2021. The resale gross profit increase is primarily due to a
22% increase in resale revenue and the margin percentage increasing from 44.8%
during Fiscal 2021 to 55.7% during Fiscal 2022.
Recycled-Material Gross Profit
Year Ended December 31, Change
2022 2021 Amount %
Gross Margin - Recycled
DGSE $ 1,993,644 $ 1,586,000 $ 407,644 26 %
ECHG $ 6,472,794 $ 4,042,905 $ 2,429,889 60 %
Recycled-material gross profit related to DGSE, increased by $407,644 , or 26% in
Fiscal 2022 compared to Fiscal 2021. The recycled-material gross profit increase
is primarily due to a 14% increase in recycled revenue and a margin percentage
increase from 20.9% during Fiscal 2021 to 23.1% during Fiscal 2022.
Recycled-material gross profit related to ECHG, increased by $2,429,889 , or 60%
in Fiscal 2022 compared to Fiscal 2021. The recycled-material gross profit
increase is primarily due to a slight increase in recycled-material revenue and
the margin percentage increasing from 34.5% during Fiscal 2021 to 54.7% during
Fiscal 2022
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Items 7
For the Years Ended
December 31, 2022 December 31, 2021
DGSE ECHG Consolidated DGSE ECHG Consolidated
Revenue:
Sales $ 131,107,433 $ 51,578,421 $ 182,685,854 $ 96,719,259 $ 44,246,819 $ 140,966,078
Cost of goods
sold 114,872,994 22,985,774 137,858,768 84,111,097 25,633,822 109,744,919
Gross profit 16,234,439 28,592,647 44,827,086 12,608,162 18,612,997 31,221,159
Expenses:
Selling,
general and
administrative
expenses 8,762,432 20,668,291 29,430,723 7,628,377 13,169,718 20,798,095
Depreciation
and
amortization 410,759 1,041,075 1,451,834 389,703 536,392 926,095
9,173,191 21,709,366 30,882,557 8,018,080 13,706,110 21,724,190
Operating
income 7,061,248 6,883,281 13,944,529 4,590,082 4,906,887 9,496,969
Other
income/expense
:
Other income
from loan
forgiveness - - - 675,210 992,990 1,668,200
Other income
(expense) 61,686 857,005 918,691 238,585 (538,020 ) (299,435 )
Interest
expense 244,202 239,491 483,693 288,236 415,815 704,051
Income before income taxes 6,878,732 7,500,795 14,379,527 5,215,641 4,946,042 10,161,683
Income tax expense (benefit) (1,426,697 ) 117,091 (1,309,606 ) 45,124 67,684 112,808 Income from continuing operations$ 8,305,429 $ 7,383,704 $ 15,689,133 $ 5,170,517 $ 4,878,358 $ 10,048,875
Selling, General and Administrative
Year Ended December 31, Change
2022 2021 Amount %
Selling, General and Administrative
DGSE $ 8,762,432 $ 7,628,377 $ 1,134,055 15 %
ECHG $ 20,668,292 $ 13,169,718 $ 7,498,574 57 %
Selling, general and administrative expenses for DGSE increased$1,134,055 , or 15% in Fiscal 2022 compared to Fiscal 2021. The increase in SG&A was primarily due to an increase in advertising of approximately$312,000 , and payroll and payroll related expenses of approximately$900,000 . Selling, general and administrative expenses for ECHG increased by$7,498,574 , or 57% in Fiscal 2022 compared to Fiscal 2021. The CExchange Transaction and the Avail Transaction closed in June andOctober 2021 , respectively. The added companies are primarily the reason for the increase in selling, general and administrative expenses. 22 Table of Contents PART II Items 7
Depreciation and Amortization
Year Ended December 31, Change
2022 2021 Amount %
Depreciation and Amortization
DGSE $ 410,759 $ 389,703 $ 21,056 5 %
ECHG $ 1,041,075 $ 536,392 $ 504,683 94 %
Depreciation and amortization for DGSE increased by $21,056 , or 5% in Fiscal
2022 compared to Fiscal 2021. The increase is primarily due to the added
depreciation from additional furniture and fixtures, new equipment and building
improvements added during Fiscal 2022. Depreciation and Amortization expense for
ECHG increased by $504,683 , or 94% in Fiscal 2022 compared to Fiscal 2021. The
CExchange Transaction and the Avail Transaction closed in June and October 2021 ,
respectively. Added amortization expense from new intangible assets produced by
the two transactions is primarily the increase in depreciation and amortization
expense for ECHG.
Other Income from Loan Forgiveness
Year Ended December 31, Change
2022 2021 Amount %
Other Income from Loan Forgiveness
DGSE $ - $ 675,210 $ (675,210 ) -100 %
ECHG $ - $ 992,990 $ (992,990 ) -100 %
Other income from loan forgiveness, in Fiscal 2021, is due from the Federal Loan being forgiven and allocated to both segments in accordance with the use of the funds. The total amount forgiven of$1,668,200 was allocated to DGSE in the amount of$675,210 , and$992,990 was allocated to ECHG. Other Income/Expense Year Ended December 31, Change 2022 2021 Amount % Other Income/(Expense) DGSE$ 61,686 $ 238,585 $ (176,899 ) -74 % ECHG$ 857,005 $ (538,020 ) $ 1,395,025 259 %
Other income for DGSE decreased by$176,899 , or 74% in Fiscal 2022 compared to Fiscal 2021. During Fiscal 2022, other income consists of$48,000 of DGSE's portion of the rental income generated from the Company's corporate headquarters and approximately$13,700 of other miscellaneous income. During Fiscal 2021, other income of$238,585 , consisted primarily of DGSE's portion of the net rental income in excess of the SG&A expenses from space leased at the Company's corporate headquarters of$230,364 . Other income for ECHG increased by$1,395,025 in Fiscal 2022, or 259%, to other income, net of$857,005 , as compared to other expense, net of$538,020 during Fiscal 2021. Other income, net during Fiscal 2022, of$857,005 consists primarily of reducing the notes receivable reserve from$838,647 to$0 , and bank account interest income of$11,720 . Other expense during Fiscal 2021, of$538,020 , consists primarily of interest income from notes receivables of$113,606 , net rental income in excess of the SG&A expenses from the space leased at the Company's corporate headquarters of$230,364 , offset by the write-off of the CExchange notes receivable accrued interest of$49,174 and the reserve set for the CExchange notes receivable of$838,647 . 23 Table of Contents PART II Items 7 Interest Expense Year Ended December 31, Change 2022 2021 Amount % Interest Expense DGSE$ 244,202 $ 288,236 $ (44,034 ) -15 % ECHG$ 239,491 $ 415,815 $ (176,324 ) -42 % Interest expense for DGSE decreased by$44,034 or 15%, in Fiscal 2022 compared to Fiscal 2021. The decrease is primarily due to Farmers State Banks ofOakley Kansas ("FSB") refinancing of a DGSE loan onNovember 23, 2021 . The refinancing reduced the interest rate from 6.0% to 3.1% annualized. The interest expense for ECHG decreased by$176,324 or 42%, in Fiscal 2022 compared to Fiscal 2021. The decrease is primarily due to FSB refinancing an ECHG loan onNovember 23, 2021 . The refinancing reduced the interest rate from 6.0% to 3.1% annualized. Income Tax Expense Year Ended December 31, Change 2022 2021 Amount % Income Tax Expense (Benefit) DGSE$ (1,426,697 ) $ 45,124 $ (1,471,821 ) -3262 % ECHG$ 117,091 $ 67,684 $ 49,407 73 %
Income tax benefit for Fiscal 2022 totaled
Net Income
Year Ended December 31 , Change
2022 2021 Amount %
Net Income
DGSE $ 8,305,429 $ 5,170,517 $ 3,134,912 61 %
ECHG $ 7,383,704 $ 4,878,358 $ 2,505,346 51 %
The Company recorded an increase in net income of $5,640,258 , or 56% in Fiscal
2022 compared to Fiscal 2021. The increase in net income is due primarily to an
increase of revenue of approximately $41.7 million , the reduction of the reserve
against the notes receivable of $838,647 during Fiscal 2022 and the valuation
allowance reduction of $1,488,258 against the deferred tax benefit during Fiscal
2022.
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PART II
Items 7, 7A
Earnings Per Share
Year Ended December 31, Change
2022 2021 Amount %
Earnings Per Share $ 0.58 $ 0.37 $ 0.21 57 %
Our net income per basic and diluted shares attributable to holders of our Common Stock increased by$0.21 per share, or 57% in Fiscal 2022 compared to Fiscal 2021. The increase is due primarily from the revenue increase of approximately$41.7 million from Fiscal 2021 to Fiscal 2022, the removal of the reserve against the notes receivable of$838,647 during Fiscal 2022 and the valuation allowance reduction of$1,488,258 against the deferred tax benefit, during Fiscal 2022.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the periods indicated. Prior
year comparisons are included in "Part II, Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our Annual Report
on Form 10-K for Fiscal 2022.
Year Ended December 31,
2022 2021
Net cash (used in) provided by:
Operating activities $ 10,019,885 $ 2,805,063
Investing activities (229,339 ) (4,875,356 )
Financing activities (2,758,725 ) 2,990,405
Net increase in cash and cash equivalents
During Fiscal 2022, cash provided by operations totaled$10,019,885 , which was primarily driven by net income of$15,689,133 , reduction from non-cash charges, net of$801,653 , the increase in accounts payable and accrued expenses of$1,367,713 and a decrease in other assets of$985,509 . In addition, the foregoing was further offset by the increase of trade receivables of$856,660 , the increase in inventories of$4,707,349 , the increase in prepaid expenses of$792,778 and the reduction of customer deposits and other liabilities of$896,742 .
During Fiscal 2022, cash used in investing totaled
During Fiscal 2022, cash used in financing totaled
OnNovember 23, 2021 , the Company secured a 36-month line of credit from FSB for$3,500,000 at 3.1% annual interest rate. A line of credit of up to$3,500,000 withTexas Bank and Trust was immediately closed with a$0 outstanding balance. Our line of credit with FSB is to fund any cash shortfalls that the Company may have from time-to-time during the life of the line of credit. Also, from time-to-time, inventory levels have been adjusted to meet seasonal demand or in order to meet working capital requirements. Management believes there are enough capital resources to meet working capital requirements. If additional working capital is required, additional loans can be obtained from individuals or from other commercial banks. 25 Table of Contents PART II Items 7, 7A
Management expects our capital expenditures to total approximately$750,000 during the next 12 months. These expenditures will be largely driven by the purchase of equipment, the build-out of corporate office space in the Company headquarters and the potential purchase and build-out of any additional DGSE retail buildings. As ofDecember 31, 2022 , there were no commitments outstanding for capital expenditures. In the event of significant growth in retail and wholesale jewelry sales and recycling demand, whether purchases or services, the demand for additional working capital will increase due to a related need to stock additional jewelry inventory, increases in wholesale accounts receivable and the purchasing of recycled material. Historically, operations has funded these activities. The Company has historically renewed, extended, or replaced short-term debt as it matures, and management believes that we will be able to continue to do
so in the near future. The Company leases certain of its facilities under operating leases. The minimum rental commitments under non-cancellable operating leases as ofDecember 31, 2022 are as follows: Operating Leases Total 2023 2024 2025 2026 Thereafter DGSE$ 1,911,781 $ 541,984 $ 552,414 $ 412,269 $ 355,000 $ 50,114 ECHG 4,582,587 1,357,381 1,396,129 1,321,297 474,326 33,454 Total$ 6,494,368 $ 1,899,365 $ 1,948,543 $ 1,733,566 $ 829,326 $ 83,568
Off-Balance Sheet Arrangements
There are no 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 shareholders.
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the consolidated financial
statements and related information that are presented in this report. The
consolidated financial statements, which include amounts based on management's
estimates and judgments, have been prepared in conformity with accounting
principles generally accepted in
The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities and careful selection and training of qualified personnel. The Company engagedWhitley Penn LLP , an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements in accordance with the standards of the Public Accounting Oversight Board (United States ). Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of theSEC that permit the company to provide only management's report in this annual report. The Board, through its Audit Committee, consisting solely of independent directors of the Company, meets periodically with management and our independent registered public accounting firm to ensure that the Company is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting.Whitley Penn LLP and our management team each have full and free access to the Audit Committee. 26 Table of Contents PART II Items 7, 7A
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