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 onJanuary 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 onDecember 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 onMarch 30, 2021 , and then began to rebound throughout the remainder of the year closing at$1,820 onDecember 31, 2021 , as determined by the London AM Fix. During fiscal year 2021, gold prices receded 4% fromDecember 31, 2020 . According to theWorld Gold Council's press release datedJanuary 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 sophisticatedJames 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. 20 Table of Contents PART II Item 7 The pandemic seems to continue to affect the recommerce business in unpredictable ways. Although there are variants of COVID-19 affecting the health ofthe 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 ofJanuary 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. 21 Table of Contents PART II Item 7 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 ofDecember 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: InMay 2014 , theFinancial 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 theDallas/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. 22 Table of Contents PART II Item 7
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 endedDecember 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 ofDecember 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 endingDecember 31, 2021 and 2020. ECHG has allowance for doubtful accounts balance of$1,583 and$0 for the years endedDecember 31, 2021 and 2020. 23 Table of Contents PART II Item 7
Note Receivable: ECHG entered into an agreement with CExchange onFebruary 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 onFebruary 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. OnNovember 7, 2020 , ECHG entered into an amended agreement to increase the loan from$1.5 to$2.1 million . OnApril 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. OnJune 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 datedFebruary 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 ofSeptember 30, 2021 . Subsequent to reserving the note of$900,000 , as ofSeptember 30, 2021 , a partial payment was received of$61,353 , reducing the amount of the reserve to$838,647 , as ofDecember 31, 2021 . ECHG entered into an agreement withCommitted Agency, LLC ("Committed Agency ") onFebruary 4, 2021 , pursuant to which it agreed (the "CA Facility Agreement") to provideCommitted 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 withCommitted Agency beginningFebruary 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 onJuly 30, 2021 . Under the terms of the agreement, the borrower could not borrow any additional funds, under this facility, afterMay 31, 2021 .Committed Agency paid back all principal and accrued interest as ofDecember 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. 24 Table of Contents PART II Item 7 Results of Operations
Year Ended
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$3,194,486 during Fiscal 2020. The resale gross profit increased during Fiscal 2021 as compared to Fiscal 2020 primarily due to a 68% increase in resale revenue even though the margin percentage decreased from 49.0% during Fiscal 2020 to 44.8% during Fiscal 2021. The recycled gross profit increased during Fiscal 2021 as compared to Fiscal 2020 primarily due to a 32% increase in recycled revenue even though the margin percentage decreased from 36.0% during Fiscal 2020 to 34.5% during Fiscal 2021. 25 Table of Contents PART II Item 7
The following table represents our historical operating revenue and gross profit results by category:
For the Years Ended December 31, 2021 December 31, 2020 Revenues Gross Profit Margin Revenues Gross Profit Margin DGSE Resale$ 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 newLewisville andGrapevine 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 onJune 9, 2021 andOctober 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 . 26 Table of Contents 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 endedDecember 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 endedDecember 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. 27 Table of Contents 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 byTexas Bank & Trust for a retail building inFrisco, Texas , totaling$1,772,000 . Offset by principal payments made against the two related party notes payable fromMr. 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 byTexas Bank & Trust for the corporate office building inIrving, Texas and the retail building inGrapevine, Texas , both totaling$3,456,000 , a loan made byTruist Bank (f/k/aBB&T Bank ) for the retail building located inLewisville, 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 fromMr. 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 . OnMay 17, 2019 , the Company secured a 12 month line of credit fromTexas Bank and Trust for$1,000,000 . The line of credit was renewed for an additional 24 months and increased to$3,500,000 onMay 17, 2020 . OnNovember 23, 2021 , the Company secured a 36 month line of credit fromFarmers State Bank of Oakley Kansas for$3,500,000 at 3.1% annual interest rate. The line of credit withTexas 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 ofDecember 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.
OnMay 20, 2019 , we entered into two loan agreements withJohn 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 onMay 20, 2019 . The promissory note was a five-year note amortized over 20 years at 6% annual interest rate. OnNovember 23, 2021 , both notes were refinanced byFarmers 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. 28 Table of Contents 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 ofDecember 31, 2021 are as follows: Operating Leases Total 2022 2023 2024 2025 Thereafter
DGSE
ECHG 5,903,940 1,321,353 1,357,381 1,396,129
1,321,297 507,780
Total
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 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.
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