ENVELA CORPORATION

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08/03ENVELA CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
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08/03Envela Corporation Reports Earnings Results for the Second Quarter and Six Months Ended June 30, 2022
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08/03ENVELA : Reports Second Quarter 2022 Financial Results
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ENVELA CORP (form 10-K)

03/16/2022 | 04:26pm EDT

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

                                 OF OPERATIONS



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 2.




The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global
economic business conditions. Future sales on products like ours could decline,
and the ultimate impact is uncertain and subject to change. We took steps during
Fiscal 2020 to have as many employees work from home as possible. We also
followed governmental directives to wear masks and adopt the social distance
guidelines where possible. The duration of this pandemic and the impact, either
direct or indirect cannot be predicted. The Company believed additional
liquidity was necessary to support ongoing operations during this period of
uncertainty. We applied for and received approximately $1.67 million, 1%
interest, federally backed loan to pay employees and cover certain rent and
utility-related costs during the COVID-19 pandemic. The Federal Loan was
forgivable to the extent that certain criteria were met. We applied for the
forgiveness of the Federal Loan during Fiscal 2020, and received notification
during Fiscal 2021 that the loan had been forgiven. The forgiveness of the
Federal Loan is included in Other income from loan forgiveness on our
consolidated income statements.



Changes in Financial Presentation During Fiscal Year 2020

During the first quarter of fiscal year 2020, we revised the way we review and
report our financial information to align more closely with the Company's
strategy to engage in diverse recommerce activities through two principle
business segments-DGSE and ECHG. Envela continues to report its revenue and
operating expenses based on its DGSE and ECHG operating segments, and beginning
in fiscal year 2020, disaggregated its revenue, within the operating segments,
based on its resale and recycle presentation basis. For more information, see
"Item 1. Business-Operating Segments" above.



DGSE Precious Metals Pricing and Business Impact

Because DGSE buys and resells precious metals, it is impacted by changes in
precious metal pricing which rises and falls based upon global supply and demand
dynamics, with the greatest impact on us relating to gold as it represents a
significant portion of the precious metal in which we trade. Gold prices surged
during the beginnings of the COVID-19 pandemic, starting at $1,523 an ounce, as
determined by the London AM Fix on January 1, 2020, and rose strongly during the
first half of 2020 peaking at $2,060 an ounce during August. However, gold
prices dipped from the peak to close at $1,891 an ounce, as determined by the
London PM Fix on December 31, 2020. Although gold dipped during the second half
of Fiscal 2020, it still registered a 24% increase during Fiscal 2020. Gold
prices continued to dip to a low of $1,683 an ounce on March 30, 2021, and then
began to rebound throughout the remainder of the year closing at $1,820 on
December 31, 2021, as determined by the London AM Fix. During fiscal year 2021,
gold prices receded 4% from December 31, 2020.



According to the World Gold Council's press release dated January 28, 2022, the
use of gold in the technology sector in 2021 increased 9% to reach a three year
high. While technology demand is comparatively smaller than other sectors, its
uses are far reaching and prevalent in a variety of electronics, from mobile
devices to the sophisticated James Webb telescope recently put into orbit.



According to the same press release, gold is expected to face similar dynamics
in 2022 to those seen last year, with competing forces supporting and curtailing
its performance. Near term, the gold price will likely react to real rates,
which in turn will respond to the speed at which global central banks tighten
monetary supply and their effectiveness in controlling inflation.




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The pandemic seems to continue to affect the recommerce business in
unpredictable ways. Although there are variants of COVID-19 affecting the health
of the United States, the employment figures through 2021 suggest people were
heading back to work during 2021. The unemployment rate has gone from over six
percent (6%), in January of 2021, to four percent (4%), as of January 2022. This
is the opposite of what one might expect during a pandemic that is still
considered a threat and when a social phenomenon labeled as the Great
Resignation threatens the country's ability to retain workers. Government
stimulus checks, eviction moratoriums, forbearances on mortgages and student
loans have all been stopped or curtailed during 2021. During these uncertain
times, DGSE has shown our continuing devotion to provide our customers what
they
need.


When prices rise for gold or other precious metals, DGSE has observed that
individual sellers tend to be more likely to sell their unwanted
crafted-precious-metal items and at the same time retail customers tend to buy
bullion and other gold products so as not to miss out on potential market gains.
Tracking the decrease in gold prices during 2021, DGSE's crafted-precious-metal
purchases decreased slightly by 5% in fiscal year 2021. In fiscal year 2020,
DGSE experienced a decrease in crafted-precious-metal purchases by 21%. The
Company attributes the slight decrease to the impact of COVID-19, which impacted
foot traffic and its retail locations. While the precious-metals industry has
stabalized, our focus will be to continue to grow our jewelry, diamond and fine
watch business, as well as maintain our business of purchasing
crafted-precious-metal items, a diversified strategy which we believe will
continue to grow and be a profit engine in the future.



For additional information regarding DGSE, see "Item 1. Business-Operating Segments-DGSE Segment."

ECHG Business Drivers and Impacts




ECHG owns and operates Echo, ITAD USA, CEX, Avail DE 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 DE 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.



For additional information regarding ECHG, see "Item 1. Business-Operating Segments-ECHG Segment."

Critical Accounting Policies and Estimates




Our significant accounting policies are disclosed in Note 1 of our consolidated
financial statements. The following discussion addresses our most critical
accounting policies, which are those that are both important to the portrayal of
our financial condition and results of operations and that require significant
judgment or use of complex estimates. References to fiscal years below are
denoted with the word "Fiscal" and the associated year.



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.




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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.



Impairment of Long-Lived and Amortized Intangible Assets: We perform impairment
evaluations of our long-lived assets, including property, plant and equipment
and intangible assets with finite lives whenever business conditions or events
indicate that those assets may be impaired. When the estimated future
undiscounted cash flows to be generated by the assets are less than the carrying
value of the long-lived assets, the assets are written down to fair market value
and a charge is recorded to current operations. Based on our evaluations, no
impairment was required as of December 31, 2021 or 2020.



Business Combinations: Assets acquired and liabilities assumed as part of a
business acquisition are generally recorded at their fair value at the date of
acquisition. The excess of purchase price over the fair value of assets acquired
and liabilities assumed is recorded as goodwill. Determining fair value of
identifiable assets, particularly intangibles, and liabilities acquired also
requires management to make estimates, which are based on all available
information and in some cases assumptions with respect to the timing and amount
of future revenues and expenses associated with an asset. Accounting for
business acquisitions requires management to make judgments as to whether a
purchase transaction is a multiple element contract, meaning that it includes
other transaction components such as a settlement of a preexisting relationship.
This judgment and determination affects the amount of consideration paid that is
allocable to assets and liabilities acquired in the business purchase
transaction.



Revenue Recognition: In May 2014, the Financial Accounting Standards Board
(FASB) issued Accounting Standards update (ASU) No. 2014-09, Revenue from
Contracts with Customers (Topic 606), which superseded revenue recognition
requirements in Topic 605, Revenue Recognition. The ASU is based on the
principle that revenue is recognized to depict the transfer of goods or services
to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The ASU also
requires additional disclosure about the nature, amount, timing, and uncertainty
of revenue and cash flows arising from customer contracts, including significant
judgements and changes in judgements and assets recognized from cost incurred to
obtain or fulfill a contract.



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 repair ticket. Secondly, to
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 of ASC 606 is to recognize revenue as each performance obligation
is satisfied.


Our over-the-counter sales with the retail public and wholesale dealers are
recognized when the 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 Accounting Standards Codification ("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.




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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 years ended December 31, 2021 and 2020 sales, which
is based on our review of historical returns experience and reduces our reported
revenues and cost of sales accordingly. As of December 31, 2021 and 2020, our
allowance for returns remained the same at approximately $28,000 for both years.



The ECHG entities have 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. The Echo Entities have fulfilled their performance

        obligation with an agreed upon transaction price, payment terms and
        shipping the product.

    ·   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 an Invoice

within five working days upon the receipt of the Ocean Bill of Lading

issued by the Ocean Carrier. Our initial Invoice is recognized in full

when our performance obligation is satisfied, as stated in the first

sentence. 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 (6) 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 ECHG 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.

· The Echo Entities also provide recycling services according to a Scope of

Work and services are recognized when promised services are rendered. We

have recycling services conducted at the Echo facility and another type of

service is conducted at the 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 using a
percentage of past due invoices by categories for DGSE and Avail DE. ECHG,
excluding Avail DE, uses a different analysis process 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 for the years ending December 31, 2021
and 2020. ECHG has allowance for doubtful accounts balance of $1,583 and $0 for
the years ended December 31, 2021 and 2020.




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Note Receivable: ECHG entered into an agreement with CExchange on February 15,
2020, to lend $1.5 million bearing interest at eight and one-half percent (8.5%)
per annum with interest only payments due quarterly. The loan was set to mature
on February 20, 2023. The parties also agreed to warrant and call-option
agreements to acquire all of CExchange's equity interests upon the occurrence of
certain events and on certain conditions. On November 7, 2020, ECHG entered into
an amended agreement to increase the loan from $1.5 to $2.1 million.  On April
14, 2021, ECHG entered into a second agreement with CExchange to lend an
additional $300,000 bearing interest at four percent (4%) per annum with
interest only payments due quarterly, to be repaid, principal and accrued
interest, upon the occurrence of certain events or upon demand by ECHG. On June
9, 2021, ECHG, through CEX, exercised their rights under the warrant and
call-option agreements and purchased substantially all of the assets and certain
liabilities of CExchange in exchange for ECHG's cancellation and forgiveness of
$1.5 million of the outstanding principal amount under the loan agreement
originally dated February 15, 2020 and accrued and unpaid interest thereunder of
$55,892. We subsequently performed impairment evaluations on the two remaining
notes after management learned that the two notes may not be recoverable. Using
the guidance provided, management reserved the full amount of the outstanding
and unpaid notes receivable of $900,000, and write-off the outstanding and
unpaid accrued interest associated with the notes receivable totaling $49,174.
The notes receivable of $900,000 and $49,174 of accrued interest receivable were
charged to other expense, as of September 30, 2021. Subsequent to reserving the
note of $900,000, as of September 30, 2021, a partial payment was received of
$61,353, reducing the amount of the reserve to $838,647, as of December 31,
2021.



ECHG entered into an agreement with Committed Agency, LLC ("Committed Agency")
on February 4, 2021, pursuant to which it agreed (the "CA Facility Agreement")
to provide Committed Agency a line-of-credit not to exceed $1,000,000 (the "CA
Facility"). Committed Agency intended to, directly or indirectly, sell or
dispose of electronic devices previously owned by major electronic carriers. In
addition to the CA Facility Agreement, ECHG contracted with Committed Agency
beginning February 4, 2021 to exclusively facilitate their sales through the
Company's warehousing and cleaning of electronic devices, wiping of existing
data, and inspecting, packaging and shipping of devices to purchasers, in
exchange for which ECHG received a per unit service fee (the "CA Service
Agreement"). The CA Service Agreement terminated and the CA Facility matured on
July 30, 2021. Under the terms of the agreement, the borrower could not borrow
any additional funds, under this facility, after May 31, 2021. Committed Agency
paid back all principal and accrued interest as of December 31, 2021. Amounts
borrowed under the CA Facility bore an interest rate of 6% per annum.



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 have not taken a tax position that, if challenged, would have
a material effect on the financial statements or the effective tax rate during
Fiscal 2021 and Fiscal 2020, respectively.




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Results of Operations


Year Ended December 31, 2021 Compared to Year Ended December 31, 2020




Revenue. Revenue related to DGSE's continuing operations increased by
$11,057,868, or 13%, during Fiscal 2021, to $96,719,259, as compared to
$85,661,391 during Fiscal 2020. Resale revenue, such as bullion, jewelry,
watches and rare coins, increased by $9,356,364, in Fiscal 2021, or 12%, to
$89,146,783 as compared to $79,790,419 during Fiscal 2020. Recycled-material
revenue increased 29% to $7,572,476 for Fiscal 2021, as compared to $5,870,972
for Fiscal 2020, an increase of $1,701,504. Revenue increased for resale items
for Fiscal 2021, compared to Fiscal 2020 primarily due to the apparent increase
in consumer demand following the lifting of governmental orders to refrain from
selling non-essential items in our retail stores due to the COVID-19 pandemic
during Fiscal 2020 and the increased retail locations for DGSE during Fiscal
2021, whereas, the new locations were only operating for a part of Fiscal 2020.
The increase in recycled-materials revenue, for Fiscal 2021, as compared to
Fiscal 2020, is primarily due to the additional retail locations purchasing
inventory over the counter. Increased purchasing from over the counter customers
increased our gold and silver pieces that did not make the level of quality for
retail display and was therefore recycled.



Revenue related to ECHG continuing operations increased by $15,986,195, or 57%,
during Fiscal 2021, to $44,246,819, as compared to $28,260,624 during Fiscal
2020. Resale revenue increased by $13,144,532, or 68%, during Fiscal 2021, to
$32,540,366, as compared to $19,395,834 during Fiscal 2020. Recycled revenue
increased by $2,841,663, or 32%, during Fiscal 2021, to $11,706,453, as compared
to $8,864,790 during Fiscal 2020. The increase in both resale and recycled
revenue, for Fiscal 2021 as compared to Fiscal 2020 is primarily due to the
opening-up of the economy and COVID-19 vaccines approved and administered during
Fiscal year 2021, as compared to Fiscal year 2020 when COVID-19 began and
governmental measures were issued forcing many businesses to close in-person
commerce and for employees to stay at home.



Gross Margin: Gross profit related to DGSE, increased in Fiscal 2021 by
$2,238,292 to $12,608,162, or 22%, as compared to $10,369,870 during Fiscal
2020. The gross profit for resale revenue increased by $1,806,668, or 20%,
during Fiscal 2021, to $11,022,162, as compared to $9,215,494 during Fiscal
2020. The gross profit for recycled sales increased by $431,624, or 37%, during
Fiscal 2021 to $1,586,000, as compared to $1,154,376 during Fiscal 2020. The
resale gross profit increased during Fiscal 2021 as compared to Fiscal 2020
primarily due to a 12% increase in resale revenue and a margin percentage
increase from 11.5% during Fiscal 2020 to 12.4% during Fiscal 2021. The recycled
gross profit increased during Fiscal 2021 as compared to Fiscal 2020 primarily
due to a 29% increase in recycled revenue and a margin percentage increase from
19.7% during Fiscal 2020 to 20.9% during Fiscal 2021.



The gross profit related to ECHG, increased in Fiscal 2021 by $5,913,904 to
$18,612,997, or 47%, as compared to $12,699,093 during Fiscal 2020. The gross
profit for resale revenue increased by $5,065,485, or 53%, during Fiscal 2021,
to $14,570,092, as compared to $9,504,607 during Fiscal 2020. The gross profit
for recycled sales increased by $848,419, or 27%, during Fiscal 2021 to
$4,042,905, as compared to $3,194,486 during Fiscal 2020. The resale gross
profit increased during Fiscal 2021 as compared to Fiscal 2020 primarily due to
a 68% increase in resale revenue even though the margin percentage decreased
from 49.0% during Fiscal 2020 to 44.8% during Fiscal 2021. The recycled gross
profit increased during Fiscal 2021 as compared to Fiscal 2020 primarily due to
a 32% increase in recycled revenue even though the margin percentage decreased
from 36.0% during Fiscal 2020 to 34.5% during Fiscal 2021.




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The following table represents our historical operating revenue and gross profit results by category:



                                                  For the Years Ended
                           December 31, 2021                               December 31, 2020
                Revenues        Gross Profit      Margin        Revenues        Gross Profit      Margin
DGSE
Resale        $  89,146,783        11,022,162        12.4 %   $  79,790,419         9,215,494        11.5 %
Recycled          7,572,476         1,586,000        20.9 %       5,870,972
        1,154,376        19.7 %

   Subtotal      96,719,259        12,608,162        13.0 %      85,661,391        10,369,870        12.1 %

ECHG

Resale           32,540,366        14,570,092        44.8 %      19,395,834         9,504,607        49.0 %
Recycled         11,706,453         4,042,905        34.5 %       8,864,790
        3,194,486        36.0 %

   Subtotal      44,246,819        18,612,997        42.1 %      28,260,624        12,699,093        44.9 %

              $ 140,966,078     $  31,221,159        22.1 %   $ 113,922,015     $  23,068,963        20.2 %




Selling, General and Administrative: Selling, general and administrative
expenses for DGSE increased $695,118, or 10% in Fiscal 2021, to $7,628,377, as
compared to $6,933,259 during Fiscal 2020. The increase in SG&A was primarily
due to the additional expenses of the new Lewisville and Grapevine retail
locations during all of Fiscal 2021 as compared to only a portion of Fiscal
2020.



Selling, general and administrative expenses for ECHG increased by $4,549,703,
or 53% during Fiscal 2021, to $13,169,718, as compared to $8,620,015 during
Fiscal 2020. Fiscal 2021 expenses consist primarily of payroll, payroll taxes
and employee benefits of $7,936,190, rent and variable rent costs, net of sublet
income, of $1,397,869, warehouse and office supplies of $307,176, travel
expenses of $72,548, professional fees of $202,680, Utilities of $355,279 and
overhead administrative expenses of $1,177,037. The assets from the CExchange
Transaction and the Avail Transaction were acquired on June 9, 2021 and October
29, 2021, respectively; therefore, Fiscal 2021 is not comparable to Fiscal 2020.



Depreciation and Amortization: Depreciation and amortization for DGSE increased
by $67,870, or 21%, during Fiscal 2021, to $389,703 as compared to $321,833
during Fiscal 2020. The increase is primarily due to the added depreciation from
two buildings purchased, associated build-out costs and added building
furnishings that were placed into service during the fourth quarter of Fiscal
2020.



Depreciation and Amortization expense for ECHG increased by $129,599, or 32%,
during Fiscal 2021, to $536,392 as compared to $406,793 during Fiscal 2020. The
increase is primarily due to added equipment to Echo's warehouse during Fiscal
2021 and the additional depreciation of fixed assets and the amortization of
added intangible assets from the CExchange Transaction and the Avail
Transaction.



Other income from loan forgiveness: Other income from loan forgiveness is due
from the Federal Loan being forgiven during Fiscal 2021 and allocated to both
segments in accordance to 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), net: Other income for DGSE increased by $124,611 in
Fiscal 2021, to $238,585, as compared to $113,974 during Fiscal 2020.  During
Fiscal 2021, other income of $238,585, consists 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. Fiscal 2020, other income of
$113,974, was primarily the combination of writing off old vendor checks of
approximately $45,000 and half of the rent income allocated from tenants at the
new Company headquarters' of $67,632.




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                                    PART II

                                     Item 7



Other expense for ECHG increased by $731,043 during Fiscal 2021, to $538,020, as
compared to other income of $193,023 during Fiscal 2020. 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 note receivable accrued interest of $49,174 and
the reserve set for the CExchange note receivable of $838,647. Other income
during Fiscal 2020, of $193,024 is primarily a combination of interest income
from note receivable of $114,297 and half of the rent income allocated from
tenants at the new Company headquarters' of $67,632.



Interest Expense: Interest expense for DGSE increased by $78,941 or 38%, in
Fiscal 2021, to $288,236 as compared to $209,295 in Fiscal 2020. The increase
consists primarily of two additional DGSE notes payable and half the Company's
corporate headquarters' notes payable interest for all of Fiscal 2021 as
compared to only a portion of Fiscal 2020.



The interest expense for ECHG increased by $4,610 during Fiscal 2021, to
$415,814 as compared to $411,204 during Fiscal 2020. The increase is primarily
related to the revolving line of credit interest of $6,005 during Fiscal 2021 as
compared to $0 interest for the revolving line of credit during Fiscal 2020.



Income Tax Expense: Income tax expense for the Company increased by $23,190, or
26%, in Fiscal 2021, to $112,808 as compared to $89,618 in Fiscal 2020. See
Note
15 for Federal Income Taxes.



Net Income: The Company recorded a net income of $10,048,875 in Fiscal 2021, as
compared to net income of $6,383,943 in Fiscal 2020. An increase in net income
of $3,664,932 is due primarily to an increase of revenue of approximately $27.0
million and the forgiveness of the Federal Loan of approximately $1.67 million.



Earnings Per Share: Our net income per basic and diluted shares attributable to
holders of our Common Stock was $0.37, during Fiscal 2021, as compared to $0.24
per basic and diluted shares during Fiscal 2020, an increase of $0.13 per
share.  The increase is due primarily from the revenue increase of approximately
$27.0 million from Fiscal 2020 to Fiscal 2021 and the forgiveness of the Federal
Loan of approximately $1.67 million.



Liquidity and Capital Resources: During Fiscal 2021, cash provided by operations
totaled $2,805,063, as compared to cash provided by operations totaling
$6,897,091 in Fiscal 2020, a decrease in cash provided by operations of
$4,092,028. Cash provided by operating activities for the year ended December
31, 2021, was primarily driven by the increase in accounts payable and accrued
expenses of $752,379, an increase in customer deposits and other liabilities of
$357,548 and net income, adding depreciation and amortization, bad debt expense,
Other income from forgiveness of the Federal Loan and write off of note
receivables accrued interest and to reserve the notes receivable of $10,277,594.
Offset by the increase of trade receivables of $3,969,701, the increase of
inventories of $3,554,802, and the increase in other assets of $1,024,234. Cash
provided by operating activities for the year ended December 31, 2020, was
primarily driven by the increase in trade accounts receivable of $151,124, an
increase in customer deposits and other liabilities of $263,572 and net income,
adding depreciation, amortization and stock based compensation to employees of
$7,112,894. Offset by the increase of inventories of $497,444, the increase of
prepaid expenses of $108,884 and the reduction of accounts payable and accrued
accounts payable of $29,332.



During Fiscal 2021 and Fiscal 2020, cash used in investing totaled $4,875,356
and $7,964,588, respectively, a decrease of $3,089,232. Cash used in investing
during Fiscal 2021 was primarily due to investing in a note receivable of
$300,000, purchasing a new building for DGSE's retail operations totaling
$2,352,075 and associated build out costs, of which $526,169 were cash payments
applied against the purchase of the retail location and the remainder of the
balance of the purchase was financed through notes payable, the acquisition of
the assets from the CExchange Transaction and the Avail Transaction, net of cash
acquired, in the amount of $1,497,994 and equipment purchases totaling $786,640,
offset by payments from note receivable of $61,353. The cash used in investing
during Fiscal 2020 was a combination of investing in a note receivable of
$2,100,000 to CExchange, purchasing two new retail locations for DGSE totaling
$1,815,000 and associated build out costs, of which $363,000 was cash payments
applied against the purchases of the retail locations and the remainder of the
balance from the purchases was financed through notes payable, and the purchase
of our corporate headquarters totaling $3,521,021, of which $561,021 was cash
payments applied against the office building and the remainder of the balance
from the purchase was financed through notes payable.




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                                    PART II

                                     Item 7



During Fiscal 2021 and Fiscal 2020, cash provided by financing totaled
$2,990,405 and $5,774,873, respectively, a decrease of $2,784,468. Cash provided
by financing during Fiscal 2021 is primarily due to the proceeds from the
Company's line of credit of $1,700,000 and funds provided by a loan made by
Texas Bank & Trust for a retail building in Frisco, Texas, totaling $1,772,000.
Offset by principal payments made against the two related party notes payable
from Mr. Loftus in the amount of $268,793 and principal payments made against
the notes payable loans issued for the corporate and DGSE's retail buildings of
$212,802. Cash provided by financing during Fiscal 2020 is primarily due to
funds provided by loans made by Texas Bank & Trust for the corporate office
building in Irving, Texas and the retail building in Grapevine, Texas, both
totaling $3,456,000, a loan made by Truist Bank (f/k/a BB&T Bank) for the retail
building located in Lewisville, Texas for $956,000 and the proceeds from the
Federal Loan of $1,668,200. Offset by principal payments made against the two
related party notes from Mr. Loftus in the amount of $279,210 and principal
payments made against the notes payable loans issued for the corporate and
DGSE's retail buildings of approximately $26,000.



On May 17, 2019, the Company secured a 12 month line of credit from Texas Bank
and Trust for $1,000,000. The line of credit was renewed for an additional 24
months and increased to $3,500,000 on May 17, 2020. On November 23, 2021, the
Company secured a 36 month line of credit from Farmers State Bank of Oakley
Kansas for $3,500,000 at 3.1% annual interest rate. The line of credit with
Texas Bank and Trust was immediately closed with a $0 outstanding balance. Our
line of credit is to fund any cash shortfalls that we may have from time-to-time
during the life of the line of credit. Also, from time-to-time, we have adjusted
our inventory levels to meet seasonal demand or in order to meet working capital
requirements. Management believes we have 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.



We expect our capital expenditures to total approximately $300,000 during the
next 12 months. These expenditures will be largely driven by the purchase of
equipment, build-out of corporate space in our office building for tenants and
the potential purchase and build-out of any additional DGSE retail buildings. As
of December 31, 2021, 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, our demand for additional
working capital will increase due to a related need to stock additional jewelry
inventory, increases in wholesale accounts receivable and the purchasing of
recycled material. Historically we have funded these activities through
operations.



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.




On May 20, 2019, we entered into two loan agreements with John R. Loftus, the
Company's CEO, President and Chairman of the Board. The first note of
$6,925,979, pursuant to the Echo Legacy Entities asset purchase agreement, was a
five-year promissory note amortized over 20 years at 6% annual interest rate.
The second note of $3,074,021 paid off the accounts payable - related party
balance to a former Related Party on May 20, 2019. The promissory note was a
five-year note amortized over 20 years at 6% annual interest rate. On November
23, 2021, both notes were refinanced by Farmers State Bank of Oakley Kansas. The
first note was refinanced for the remaining and unpaid balance of $6,309,962, is
a five-year promissory note amortized over 20 years at 3.1% annual interest
rate. The second note was refinanced for the remaining and unpaid balance of
$2,781,087, is a five-year promissory note amortized over 20 years at 3.1%
annual interest rate. Both notes are being serviced by operational cash flow.



The coronavirus disease 2019 (COVID-19) pandemic has adversely affected global
economic business conditions. Future sales on products like ours could decline,
and the ultimate impact is uncertain and subject to change. The duration of this
pandemic and the impact, either direct or indirect cannot be predicted. The
Company believed additional liquidity was necessary to support ongoing
operations during this period of uncertainty. We applied for and received
approximately $1.67 million, 1% interest, Federal Loan to pay employees and
cover certain rent and utility-related costs during the COVID-19 pandemic. The
loan was forgivable to the extent that certain criteria were met.  We applied
for forgiveness during Fiscal 2020 and received notification of forgiveness of
the Federal Loan during Fiscal 2021. The forgiveness of the Federal Loan is
included in Other income from loan forgiveness on our consolidated income
statements.




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                                    PART II

                                   Item 7, 7A



The Company leases certain of its facilities under operating leases. The minimum
rental commitments under non-cancellable operating leases as of December 31,
2021 are as follows:



Operating
Leases         Total           2022            2023            2024            2025          Thereafter

DGSE $ 2,221,237 $ 516,456 $ 499,984 $ 507,414 $ 364,269 $ 333,114

ECHG 5,903,940 1,321,353 1,357,381 1,396,129

1,321,297 507,780

Total $ 8,125,177 $ 1,837,809 $ 1,857,365 $ 1,903,543 $ 1,685,566 $ 840,894

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 stockholders.



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 United States of America.




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 engaged Whitley 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 the SEC 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.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2022 181 M - -
Net income 2022 13,9 M - -
Net Debt 2022 - - -
P/E ratio 2022 15,6x
Yield 2022 -
Capitalization 217 M 217 M -
Capi. / Sales 2022 1,20x
Capi. / Sales 2023 1,06x
Nbr of Employees 256
Free-Float 28,0%
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Managers and Directors
John R. Loftus Chairman, President & Chief Executive Officer
Bret A. Pedersen CFO & Principal Accounting Officer
Jim R. Ruth Independent Director
Alexandra C. Griffin Independent Director
Richard D. Schepp Independent Director