Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-11048
ENVELA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada
88-0097334
(STATE OF INCORPORATION)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
1901 Gateway Drive, Suite 100, Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(972) 587-4049
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Exchange on which Registered
Common Stock, par value $0.01 per share
ELA
NYSE American
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☒
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 4, 2024 the registrant had 25,995,847 shares of common stock outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1.
Financial Statements
4
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2024 (Unaudited) and December 31, 2023
5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
6
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2024 and 2023 (Unaudited)
7
Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2024 and 2023 (Unaudited)
8
Notes to Condensed Consolidated Financial Statements (Unaudited)
9
Note 1 – Basis of Presentation
Note 2 – Principles of Consolidation and Nature of Operations
Note 3 – Accounting Policies and Estimates
10
Note 4 – Changes in Business
16
Note 5 – Inventories
18
Note 6 – Goodwill
Note 7 – Property and Equipment, Net
19
Note 8 – Intangible Assets, Net
20
Note 9 – Accrued Expenses
21
Note 10 – Segment Information
22
Note 11 – Revenue
24
Note 12 – Leases
26
Note 13 – Basic and Diluted Average Shares
27
Note 14 – Debt
29
Note 15 – Stock-Based Compensation
31
Note 16 – Related Party Transactions
Note 17 – Contingencies
Note 18 – Subsequent Events
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
52
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
2
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
53
Signature
54
3
ITEM 1: FINANCIAL STATEMENTS
ENVELA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30,
Nine Months Ended September 30,
(Unaudited)
2024
2023
Sales
$
46,899,559
36,876,486
132,054,341
137,781,895
Cost of goods sold
35,435,320
27,142,204
98,879,961
105,875,664
Gross margin
11,464,239
9,734,282
33,174,380
31,906,231
Expenses:
Selling, general and administrative
9,028,988
7,446,380
25,784,012
23,714,237
Depreciation and amortization
414,779
337,713
1,120,611
1,028,238
Total operating expenses
9,443,767
7,784,093
26,904,623
24,742,475
Operating income
2,020,472
1,950,189
6,269,757
7,163,756
Other income (expense):
Other income
340,351
192,437
804,296
556,868
Interest expense
(106,139)
(117,166)
(336,134)
(348,918)
Income before income taxes
2,254,684
2,025,460
6,737,919
7,371,706
Income tax expense
(569,645)
(317,967)
(1,581,162)
(1,534,187)
Net income
1,685,039
1,707,493
5,156,757
5,837,519
Basic earnings per share:
0.06
0.20
0.22
Diluted earnings per share:
Weighted average shares outstanding:
Basic
26,061,748
26,809,778
26,242,452
26,884,221
Diluted
26,076,748
26,824,778
26,257,452
26,899,221
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
December 31,
Assets
Current assets:
Cash and cash equivalents
17,752,199
17,853,853
Accounts receivable, net of allowances
3,881,479
7,811,159
Notes receivable
3,000
4,700
Inventories
29,073,234
23,146,177
Prepaid expenses
750,412
1,082,425
Other current assets
75,590
—
Total current assets
51,535,914
49,898,314
Property and equipment, net
13,266,943
10,764,224
Right-of-use assets from operating leases
4,448,956
4,189,621
Goodwill
3,621,453
3,921,453
Intangible assets, net
4,283,558
4,499,170
Other assets
234,744
201,447
Total assets
77,391,568
73,474,229
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
2,591,213
3,126,743
Notes payable
971,603
1,361,443
Operating lease liabilities
2,020,122
1,807,729
Accrued expenses
2,315,745
2,486,423
Other current liabilities
2,924,060
211,651
Total current liabilities
10,822,743
8,993,989
Deferred tax liability
34,187
38,668
Notes payable, less current portion
12,870,182
13,572,048
Operating lease liabilities, less current portion
2,547,841
2,560,671
Total liabilities
26,274,953
25,165,376
Contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.01 par value; 60,000,000 shares authorized; 26,924,631 shares issued and 26,008,034 shares outstanding as of September 30, 2024; 26,924,631 shares issued and 26,508,658 shares outstanding as of December 31, 2023
269,246
Treasury stock at cost, 916,597 and 415,973 shares, as of September 30, 2024 and December 31, 2023, respectively
(4,504,044)
(2,155,049)
Additional paid-in capital
40,173,000
Retained earnings
15,178,413
10,021,656
Total stockholders’ equity
51,116,615
48,308,853
Total liabilities and stockholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operations
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses
260,898
400,493
Deferred taxes
(4,481)
1,385,651
Non-cash lease expense
1,525,870
1,418,928
Changes in operating assets and liabilities:
Accounts receivable
3,668,782
(1,385,580)
(5,927,057)
(4,295,072)
332,013
165,863
(104,188)
(55,600)
(535,530)
162,899
(170,678)
(56,828)
Operating leases
(1,585,642)
(1,420,605)
Other liabilities
2,712,409
284,085
Net cash provided by operations
6,449,764
3,469,991
Investing
Purchase of property and equipment
(2,955,024)
(1,563,612)
Purchase of intangible assets
(302,693)
Investment in notes receivable
(3,000)
578,250
Acquisition, Kretchmer Transaction
(100,000)
Net cash (used in) investing
(3,260,717)
(1,085,362)
Financing
Payments on notes payable
(941,706)
(930,858)
Purchase of treasury stock
(2,348,995)
(1,318,351)
Net cash (used in) financing
(3,290,701)
(2,249,209)
Net change in cash and cash equivalents
(101,654)
135,420
Cash and cash equivalents, beginning of period
17,169,969
Cash and cash equivalents, end of period
17,305,389
Supplemental disclosures
Cash paid during the period for:
Interest
385,285
349,747
Income taxes
1,862,525
196,165
Noncash investing and financing activities
Kretchmer Transaction measurement period adjustment, addition to intangible assets, reduction to goodwill
27,500
Kretchmer Transaction measurement period adjustment, addition to property and equipment, reduction to goodwill
122,500
Kretchmer Transaction measurement period adjustment, reduction to notes payable, reduction to goodwill
150,000
Kretchmer Transaction, addition to notes payable, addition to goodwill
200,000
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional
Total
Common Stock
Treasury Stock
Preferred Stock
Paid-in
Retained
Stockholders’
Shares
Amount
Capital
Earnings
Equity
Three Months Ended September 30, 2023
Balance as of July 1, 2023
26,924,631
(27,421)
(194,820)
7,004,230
47,251,656
Net Income
Shares repurchased
(197,210)
(1,123,531)
Balance as of September 30, 2023
(224,631)
8,711,723
47,835,618
Three Months Ended September 30, 2024
Balance as of July 1, 2024
(769,402)
(3,775,534)
13,493,374
50,160,086
(147,195)
(728,510)
Balance as of September 30, 2024
(916,597)
Nine Months Ended September 30, 2023
Balance as of January 1, 2023
2,874,204
43,316,450
Nine Months Ended September 30, 2024
Balance as of January 1, 2024
(415,973)
(500,624)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — BASIS OF PRESENTATION
These unaudited interim condensed consolidated financial statements of Envela Corporation, a Nevada corporation, and its subsidiaries (together with its subsidiaries, the “Company” or “Envela”), included herein have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States (“U.S.”) for interim financial information and with the instructions to Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X prescribed by the Securities and Exchange Commission (the “SEC”). Pursuant to the SEC’s rules and regulations, Quarterly Reports do not include all of the information and notes required by U.S. GAAP. In the opinion of management, all adjustments, which are of a normal and recurring nature except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”), necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2024 (“Fiscal 2024”). Management suggests these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“Fiscal 2023”) filed with the SEC on March 21, 2024 (“2023 Annual Report”).
The Company does not have any variable interest entities requiring consolidation. The Company’s operations are located within the contiguous U.S. and its functional and reporting currency is the U.S. dollar. All intercompany transactions and balances have been eliminated.
Envela files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other information with the SEC. Such information and amendments to reports previously filed or furnished are available on the Company’s corporate website, www.envela.com, as soon as reasonably practicable after such materials are filed with or furnished to the SEC. The SEC also maintains an internet site at www.sec.gov that contains the Company’s filings.
NOTE 2 — PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
Throughout this document, Envela Corporation is referred to as “we,” “us,” “our,” “Envela,” or the “Company.”
Envela serves as a holding company, conducting its operations via subsidiaries engaged in various businesses and activities within the re-commerce and recycling sectors. The products and services we offer are delivered by our subsidiaries under their distinct brands, rather than directly by Envela itself. Our operations are organized into two operating and reporting segments: consumer and commercial, which additionally are the Company’s reporting units.
Consumer Segment
Our consumer segment operates in the jewelry industry, specializing in the online and brick-and-mortar sale of authenticated high-end luxury goods, fine jewelry, watches, and bullion. Our diamonds and gemstones are recycled, meaning they were previously set and then unset to become a new design – allowing for a truly low-carbon, ethical origin. The company focuses on buying and selling pre-owned luxury items, ethically sourced diamonds, gemstones, and precious metals, catering to consumers seeking environmentally responsible options for engagement rings, wedding bands, and other fine jewelry. Our profound commitment to extending the lifespan of luxury goods stems from our understanding that well-crafted items have an enduring quality, enabling them to maintain their beauty and value as they are passed from one owner to another.
Commercial Segment
Our commercial segment specializes in the de-manufacturing of end-of-life electronic assets to reclaim commodities and other materials, while also engaging in the information technology (“IT”) asset disposition (“ITAD”) industry. The separated commodities, including metals, plastics, and glass, are sold to downstream processors where they are further processed and reintroduced into new products. ITAD services maximize the residual value of retired IT assets by adhering to a reuse-first philosophy and ensuring equipment is refurbished and re-marketed after data sanitization. The company
focuses on offering services that manage the entire lifecycle of technology products to ensure data security, regulatory compliance, and environmental sustainability. We are proud of our role to support a circular economy through responsible reuse and recycling of electronic devices.
NOTE 3 — ACCOUNTING POLICIES AND ESTIMATES
Financial Instruments
The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities approximate fair value because of the immediate or short-term nature of these financial instruments. Notes payable approximate fair value due to the market interest rate charged.
Use of Estimates
The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include revenue recognition, determining the nature and timing of satisfaction of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; the fair value of and/or potential impairment of goodwill and intangible assets for the reporting units; useful lives of our tangible and intangible assets; allowances for credit losses; the market value of, and demand for, our inventory and the potential outcome of uncertain tax positions that have been recognized on our consolidated financial statements or tax returns. Actual results could differ from those estimates and assumptions.
Revenue Recognition
Accounting Standards Codification (“ASC”) 606, Revenue Recognition provides guidance to identify performance obligations for revenue-generating transactions. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the corresponding performance obligation is satisfied.
For the consumer segment, revenue from monetary transactions (i.e., cash and accounts receivable) with wholesale customers is recognized when the merchandise is delivered or at the point of sale for retail customers, and consideration for the transaction has been made either by immediate payment or through a receivable obligation. For e-commerce, revenue is recognized when the customer has fulfilled their obligation to pay or promise to pay and goods have been shipped.
Revenue on precious metals requiring an assay is recognized upon transfer of title, based on the determination of the underlying weight and price of the associated metals.
The Company offers third-party financing for retail customers. Revenue is recognized upon transfer of title, with the promise of the third-party financing company to pay.
The commercial segment recognizes revenue at an amount that reflects the consideration to which we expect to be entitled to in exchange for transferring goods or services to the customer.
The commercial segment 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. The initial invoice is recognized in full when our performance obligation is satisfied. Under the guidance of ASC 606, an estimate of the variable consideration that we are expected to be entitled to 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 once
the underlying weight and any precious metal spot price movement is resolved, which is usually around six weeks. Any adjustment from the resolution of the underlying uncertainty is netted with the settlement due from the original contract.
The commercial segment also provides recycling services according to a Scope of Work (“SOW”). Revenue from recycling services is recognized upon completion of the SOW at a predetermined amount based on the number of units processed and a preset price per unit or weight measurement.
The commercial segment provides freight arrangement services related to inbound asset or material movements to our facilities. Revenue from freight arrangement services is recognized at settlement with our inbound customers which occurs when the SOW has been completed. Under the guidance of ASC 606, the Company is deemed to be a principal and as such records freight arrangement services as a component of revenue, and the associated expense is recorded as a component of cost of goods sold.
The commercial segment recognizes revenue on outright sales when terms and transaction price are agreed to, product is shipped, and title is transferred.
See Note 10 – Revenue for further details.
Sales Returns and Allowances
Sales are recorded, net of expected returns. In some cases, the consumer and commercial segment’s customers may return a product purchased within 30 days of receipt. Our allowance for estimated returns is based on our review of historical returns experience and reduces our reported revenues accordingly.
As of September 30, 2024, and December 31, 2023, the consumer segment’s allowance for returns was $69,372 and $28,402, respectively.
As of September 30, 2024, and December 31, 2023, the commercial segment’s allowance for returns was $55,501 and $0, respectively.
Concentrations and Credit Risk
The Company is potentially subject to concentrations of counterparty credit risk. The concentrations described herein pertain to certain domestic precious metals transactions requiring an assay which are of short duration and settled on comparable terms. Overall customer concentrations as a percentage of sales may vary as a result of the mix of product being sold within each comparative period. Individual customer concentrations are also impacted by each customer’s production schedule and as such the Company identifies the most appropriate sales outlet to ensure a timely transaction settlement.
For the nine months ended September 30, 2024, two customers aggregated 40.0% of our sales and represented 0.0% of our accounts receivable balance.
For the nine months ended September 30, 2023, three customers aggregated 38.5% of our sales and represented 0.0% of our accounts receivable balance.
The Company believes that no single customer is critical to its business as a result of having diverse revenue streams and the optionality of sales outlets primarily associated with base and precious metals.
Shipping and Handling Costs
Within the consumer and commercial segments, outbound shipping and handling costs are accounted for as fulfillment costs within cost of goods sold.
For the three months ended September 30, 2024 and 2023, the consumer segment’s outbound shipping and handling costs were $17,223 and $3,846, respectively. For the three months ended September 30, 2024 and 2023, the commercial segment’s outbound shipping and handling costs were $1,128,553 and $1,096,423, respectively.
11
For the nine months ended September 30, 2024 and 2023, the consumer segment’s outbound shipping and handling costs were $67,013 and $9,083, respectively. For the nine months ended September 30, 2024 and 2023, the commercial segment’s outbound shipping and handling costs were $3,716,832 and $4,308,906, respectively.
Advertising Costs
The consumer and commercial segment’s advertising costs are expensed as incurred.
For the three months ended September 30, 2024 and 2023, the consumer segment’s advertising costs were $357,151 and $162,713, respectively. For the three months ended September 30, 2024 and 2023, the commercial segment’s advertising costs were $59,714 and $10,803, respectively.
For the nine months ended September 30, 2024 and 2023, the consumer segment’s advertising costs were $930,132 and $713,840, respectively. For the nine months ended September 30, 2024 and 2023, the commercial segment’s advertising costs were $192,691 and $32,042, respectively.
Leases
We determine if an arrangement is a lease at inception. We do not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component. Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs.
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842, Leases requires us to use the interest rate that a lessee would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. If we cannot readily determine the discount rate implicit in lease agreements, we utilize our incremental borrowing rate. For leases one-year or less the Company has elected not to record lease liabilities and right-of use assets and instead recognize the expense associated with the lease payments using the straight-line basis.
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 consolidated 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 be applicable 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.
Valuation of Deferred Tax Assets
The Company’s deferred tax assets include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company reviews the likelihood that the benefit of the deferred tax assets will be realized and the need for valuation allowances on a quarterly basis, or more frequently if events indicate that a review is required. We have not taken a tax position that, if challenged, would have a material effect on the consolidated financial statements or the effective tax rate for the three and nine months ended September 30, 2024 and 2023. The Company did not have a deferred tax asset as of September 30, 2024, or December 31, 2023, and as such, there was no valuation allowance.
As of September 30, 2024, the Company had a deferred tax liability of $34,187. As of December 31, 2023, the Company had a deferred tax liability of $38,668.
12
Segment Information
The accounting standards for reporting information about operating segments define an operating segment as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses for which discrete financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance.
The Company allocates its corporate expenses to its operating segments, including selling, general and administrative expenses, depreciation and amortization, other income, interest expense, and income tax expense.
See Note 2 – Principles of Consolidation and Nature of Operations for further details.
Earnings Per Share
Basic earnings per share of our common stock, par value $0.01 per share (our “Common Stock”), is computed by dividing net earnings available to holders of the Company’s Common Stock by the weighted average number of shares of Common Stock outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts requiring the Company to issue Common Stock were exercised or converted into Common Stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants outstanding determined using the treasury stock method.
Stock-Based Compensation
The Company accounts for stock-based compensation by measuring the cost of employee services received in exchange for an award of equity instruments, including grants of stock options, based on the fair value of the award at the date of the grant. In addition, to the extent that the Company receives an excess tax benefit upon exercise of an award, such benefit is reflected as cash flow from financing activities in the consolidated statement of cash flows.
See Note 15 – Stock-Based Compensation for further details.
Taxes Collected from Customers
The Company’s policy is to present taxes collected from customers and remitted to governmental authorities on a net basis. The Company records the amounts collected as a current liability and relieves such liability upon remittance to the taxing authority without impacting revenue or expenses.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying amounts reported in the condensed consolidated balance sheets approximate fair value.
Accounts Receivable, Net of Allowances
Accounts receivable represent amounts primarily due from customers on products and services. Our allowance for credit losses is primarily determined by an analysis of our accounts receivable aging, using the expected losses methodology. The allowance for credit losses is determined based on the historical experience of collecting past due amounts, based on the degree of their aging. In addition, specific accounts that are considered and expected to be uncollectable are included in the allowance for credit losses. Accounts receivables are considered delinquent when payment has not been made within contract terms. Accounts receivables are written off when all efforts to collect have been exhausted and the potential for recovery is considered remote.
As of September 30, 2024, and December 31, 2023, the consumer segment’s allowance for credit losses was $0 and $0, respectively.
As of September 30, 2024, and December 31, 2023, the commercial segment’s allowance for credit losses was $415,593 and $260,858, respectively.
13
The consumer segment values inventory at the lower of cost or net realizable value. We acquire inventory 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 the current market demand for the items being purchased. 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, we monitor these fluctuations for any adverse impact on the carrying value of our inventory.
Our inventory primarily includes processed and unprocessed base metals, electronic scrap materials, as well as technology assets being held for resale. The processed and unprocessed base metals and electronic scrap materials are valued utilizing the average cost method. Our technology assets are valued utilizing the retail cost method.
See Note 5 – Inventories for further details.
Goodwill is not amortized but evaluated for impairment on an annual basis during the fourth quarter of our fiscal year, or earlier if events or circumstances indicate the carrying value may be impaired. There were no triggering events identified during the nine months ended September 30, 2024, requiring an interim goodwill impairment test, and the Company did not record a goodwill impairment charge in any of the periods presented.
See Note 6 – Goodwill for further details.
Property and Equipment, Net
Property and equipment are carried at cost less accumulated depreciation and are depreciated on a straight-line basis over the estimated useful lives of the assets; except for construction in progress which has not yet been placed into service. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Expenditures for repairs and maintenance are expensed as incurred; betterments that increase the value or materially extend the life of the related assets are capitalized.
See Note 7 – Property and Equipment, Net for further details.
Intangible Assets, Net
Finite-lived intangible assets are carried at cost less accumulated amortization and are amortized on a straight-line basis over the estimated useful lives of the assets; except for assets under development which have not yet been placed into service. Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
See Note 8 – Intangible Assets, Net for further details.
Correction of Immaterial Error
The Company’s commercial segment previously reported revenue from freight arrangement services as a component of cost of goods sold. The Company has further evaluated the nature and scope of its service offering and has determined that it meets the definition of a principal in accordance with ASC 606 and as such be reported within revenue.
14
The following table summarizes the correction of immaterial error:
Three Months Ended
March 31,
June 30,
48,389,040
50,303,527
36,266,271
36,715,250
171,674,088
Correction of immaterial error
1,420,492
792,350
610,215
766,681
3,589,738
Sales adjusted
49,809,532
51,095,877
37,481,931
175,263,826
36,979,138
39,541,480
26,531,989
26,964,951
130,017,558
Cost of goods sold adjusted
38,399,630
40,333,830
27,731,632
133,607,296
11,409,902
10,762,047
9,750,299
41,656,530
The error had no impact on gross margin, operating income, net income, and basic and diluted earnings per share nor any other financial statement amount. Further these errors had no impact on the consolidated balance sheets, statements of stockholders’ equity, and statements of cash flows. These corrections do not affect any of the metrics used to calculate and evaluate management’s compensation and have no impact on bonuses, commissions, stock-based compensation, or any other employee renumeration. Historical amounts have been corrected and are presented on a comparable basis.
See Note 11 – Revenue for further details.
Changes in Disclosure
The Company has elected to discontinue the reporting of disaggregated of inventory and revenue by resale and recycle. The Company’s business operations continue to evolve and include fee-for-service revenue that does not always correlate to these categories and underlying inventory positions; further, our inventory positions within these disaggregated presentations can vary at any point in time as they are a diverse mix of technology assets, base and precious metals and luxury hard assets. The Company believes that its disclosure of the nature of its operations, the type of inventory held at each segment and associated risk factors provides a sufficient understanding of its impact on our business.
See Note 5 – Inventories and Note 11 – Revenue for further details.
Reclassifications
For the Company’s 2023 Annual Report, the presentation of the operations section within its consolidated statements of cash flows was updated to present “non-cash lease expense” as a separate line item, previously included within “changes in operating assets and liabilities – operating leases.” The Company has elected to reclassify $1,418,928 from operating leases to non-cash lease expense in the condensed consolidated statements of cash flows for the nine months ended September 30, 2023.
See the condensed consolidated statements of cash flows for further details.
The Company has elected to reclassify $200 thousand in noncash activities associated with the acquisition of Steven Kretchmer, Inc. which were presented in the Company’s Form 10-Q for the quarterly period ended September 30, 2023, as an investing cash outflow of $300 thousand for “Acquisition of Steven Kretchmer, Inc.,” and a financing cash inflow of $200 thousand for “Proceeds from note payable, Steven Kretchmer, Inc. acquisition.” The investing outflow for the
15
acquisition of Steven Kretchmer, Inc. was $100 thousand. The reclassification had no impact on gross margin, operating income, net income, and basic and diluted earnings per share nor any other financial statement amount.
See the condensed consolidated statements of cash flows and Note 4 – Changes in Business for further details.
For the Company’s 2023 Annual Report, the amount reported for other current assets within the consolidated balance sheets is related entirely to notes receivables. The Company has elected to present notes receivable as its own line item and has reclassified the historical presentation of the aforementioned as of December 31, 2023.
See the condensed consolidated balance sheets for further details.
The Company previously did not disclose construction in progress and intangible assets under development. The Company has determined that providing this information further enhances the understanding of the nature of our capital expenditures. The Company has elected to reclassify the historical presentation of the aforementioned as of December 31, 2023.
The Company previously reported the development of its enterprise resource planning system within property and equipment, net. The Company has further evaluated the nature of this asset under ASC 350, Intangibles – Goodwill and Other, and has determined that it is a nonmonetary asset without physical substance and was acquired separately from hardware and as such be reported within intangible assets, net. The Company has elected to reclassify the historical presentation of the aforementioned as of December 31, 2023.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which will require the Company to disclose segment expenses that are significant and regularly provided to the CODM. In addition, ASU 2023-07 will require the Company to disclose the title and position of its CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-07 will be effective for fiscal years beginning January 1, 2024, Form 10-K, and interim periods within fiscal years beginning on January 1, 2025. The standard will be adopted beginning January 1, 2024, for the fiscal year and adopted for the interim periods beginning January 1, 2025, by using a modified retrospective transition approach. The Company does not expect adoption to have a material impact on its consolidated financial statements.
In December 2023, the FASB issued Accounting Standards Update 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvement to Income Tax Disclosures, amending income tax disclosure requirements for the effective tax rate reconciliation and income taxes paid. The amendments in ASU 2023-09 will be effective for fiscal years beginning January 1, 2025. The standard will be adopted beginning January 1, 2025, for the fiscal year on a prospective basis. Early adoption and retrospective application of the amendments are permitted. The Company does not expect adoption to have a material impact on its consolidated financial statements.
No other recently issued or effective ASUs had, or are expected to have, a material impact on our financial position and results of operations.
NOTE 4 — CHANGES IN BUSINESS
On September 12, 2024, the consumer segment entered into a purchase agreement relating to the acquisition of the assets of Steven Kretchmer, Inc. (the “Kretchmer Transaction”), which amended, restated, and replaced the original terms and conditions of the stock purchase agreement entered into on September 12, 2023. The Kretchmer Transaction qualified as a business combination for accounting purposes, which involves the application of the acquisition method described in ASC 805, Business Combinations. The new asset purchase agreement was entered into by Steven Kretchmer, LLC a 100% owned subsidiary of the Company. Along with a change in the nature of the acquisition, the purchase price was amended
from $300 thousand to $150 thousand. The purchase consideration transferred for the Kretchmer Transaction was $100 thousand in cash, paid on September 12, 2023, and the remaining $50 thousand through a note payable obligation.
See Note 14 – Debt for further details.
The primary purpose of the Kretchmer Transaction was to broaden customer offerings with a complimentary brand and provide another outlet for the reuse of ethically sourced precious metals and gemstones in the manufacturing of new products.
The results of operations relating to the Kretchmer Transaction have been reflected in the Company’s consolidated financial statements from the initial date of acquisition. The Kretchmer Transaction was not material to the Company’s consolidated financial statements, and therefore, pro forma operating results and other disclosures for the Kretchmer Transaction are not presented except as referenced below.
As part of the Kretchmer Transaction, on September 12, 2023 the consumer segment recorded goodwill of $300 thousand as part of the initial purchase price allocation. During the three months ended September 30, 2024, with the finalization of the terms of the Kretchmer Transaction, the Company made certain measurement period adjustments to the preliminary purchase price allocation, which resulted in a $300 thousand decrease to goodwill, a $150 thousand decrease due to the amendment of the purchase price, and a $150 thousand decrease due to the recognition of the assets acquired as part of the acquisition. As of September 30, 2024, the accounting for the Kretchmer Transaction is complete.
In accordance with ASC 805, Business Combinations, the table presented below represents the final allocation of purchase price consideration.
The following table summarizes the fair values that were allocated to the Kretchmer Transaction:
Fair Value
127,000
23,000
The impacts of the measurement period adjustments to the Kretchmer Transaction as it pertains to the condensed consolidated statements of income were to depreciation and amortization expense, and are immaterial to the financial statements.
17
NOTE 5 — INVENTORIES
The following table summarizes the details of the Company’s inventories:
Consumer
Trade inventories
27,866,050
21,905,055
Sub-total
Commercial
1,207,184
1,241,122
NOTE 6 — GOODWILL
The following table summarizes the details of the Company’s changes in goodwill:
Opening balance
300,000
Additions (reductions) (1)
(300,000)
Additions (reductions)
(1)
The decrease in goodwill of $300 thousand for the nine months ended September 30, 2024, related to measurement period adjustments pertaining to the Kretchmer Transaction.
NOTE 7 — PROPERTY AND EQUIPMENT, NET
The following table summarizes the details of the Company’s property and equipment, net:
Adjusted
Reclassification
Land
1,824,892
Building and improvements
5,981,222
4,126,507
(1,443,207)
2,683,300
Leasehold improvements
1,514,780
1,450,695
Furniture and fixtures
935,414
802,058
(101,226)
700,832
Machinery and equipment
1,454,304
1,224,783
(3,215)
1,221,568
Vehicles
22,859
Construction in progress (1)
500,018
1,547,648
12,233,489
9,451,794
Less: accumulated depreciation
(3,238,534)
(2,946,727)
8,994,955
6,505,067
151,647
145,950
1,179,366
1,142,731
(48,979)
1,093,752
222,232
Construction in progress (2)
-
48,979
1,699,195
1,662,560
(968,891)
(819,389)
730,304
843,171
Corporate
1,106,664
2,688,523
2,505,716
(3,500)
2,502,216
28,627
Enterprise resource planning system (3)
191,075
(191,075)
Construction in progress (4)
3,500
3,823,814
3,832,082
3,641,007
(282,130)
(225,021)
3,541,684
3,607,061
3,415,986
10,955,299
NOTE 8 — INTANGIBLE ASSETS, NET
The following table summarizes the details of the Company’s intangible assets, net:
Technology
409,896
371,352
Customer lists
13,000
Assets under development (2)
7,551
430,447
Less: accumulated amortization
(377,562)
(365,852)
52,885
5,500
Trademarks/tradenames
2,869,000
Customer contracts
1,873,000
Customer relationships
1,809,000
6,551,000
(2,720,491)
(2,248,405)
3,830,509
4,302,595
439,473
Assets under development (1)(2)
22,700
462,173
(62,009)
400,164
4,308,095
The following table depicts the Company’s estimated future amortization expense related to intangible assets as of September 30, 2024:
3,606
157,362
22,204
183,172
2025
8,928
629,448
88,815
727,191
2026
2027
2028
8,050
726,313
Thereafter
6,894
1,155,355
1,162,249
45,334
377,464
4,253,307
NOTE 9 — ACCRUED EXPENSES
The following table summarizes the details of the Company’s accrued expenses:
Accrued interest
8,302
11,904
Payroll
161,579
226,435
Taxes
260,051
125,130
Other
24,271
454,203
363,469
6,697
7,903
236,239
375,663
8,554
Unvouchered inventory payments
1,337,673
1,041,188
14,520
96,422
1,603,683
1,521,176
6,759
7,227
19,237
24,543
134,672
404,357
Professional fees
82,404
165,651
14,787
257,859
601,778
NOTE 10 — SEGMENT INFORMATION
The following table depicts the Company’s disaggregated condensed consolidated statements of income for the three months ended September 30, 2024 and 2023:
% of Sales(1)
33,756,600
72.0
%
26,881,202
72.9
13,142,959
28.0
9,995,284
27.1
100.0
29,840,285
63.6
23,291,939
63.2
5,595,035
11.9
3,850,265
10.4
75.6
73.6
24.4
26.4
3,925,981
8.4
2,588,628
7.0
5,103,007
10.9
4,857,752
13.2
19.3
20.2
150,657
0.3
75,842
0.2
264,122
0.6
261,871
0.7
0.9
20.1
21.1
4.3
5.3
62,502
0.1
22,851
277,849
169,586
0.5
(51,486)
(0.1)
(59,631)
(0.2)
(54,653)
(57,535)
(0.3)
4.8
5.5
Income tax (expense) benefit:
122,464
(120,637)
(692,109)
(1.5)
(197,330)
(0.5)
(1.2)
(0.9)
3.6
4.6
The following table depicts the Company’s disaggregated condensed consolidated statements of income for the nine months ended September 30, 2024 and 2023:
93,972,645
71.2
103,227,033
74.9
38,081,696
28.8
34,554,862
25.1
82,485,812
62.5
91,558,160
66.5
16,394,149
12.4
14,317,504
76.8
23.2
11,186,939
8.5
7,457,628
5.4
14,597,073
11.1
16,256,609
11.8
19.5
17.2
356,851
253,385
763,760
774,853
0.8
20.4
18.0
4.7
5.2
78,510
70,315
725,786
486,553
0.4
(171,584)
(177,458)
(164,550)
(171,460)
5.1
33,706
0.0
(778,150)
(0.6)
(1,614,868)
(756,037)
(1.1)
3.9
4.2
23
The following table depicts the Company’s total assets:
As of
September 30, 2024
December 31, 2023
41,453,365
35,839,361
31,049,489
33,777,041
4,888,714
3,857,827
NOTE 11 — REVENUE
The following table depicts the Company’s disaggregation of total sales and gross margin for the three months ended September 30, 2024 and 2023
Gross Margin
Margin
3,916,315
11.6
3,589,263
13.4
7,547,924
65.5
9,385,069
6,145,019
Correction of immaterial error (1)
Commercial adjusted
57.4
61.5
The following table depicts the Company’s disaggregation of total sales and gross margin for the nine months ended September 30, 2024 and 2023:
11,486,833
12.2
11,668,873
11.3
21,687,547
57.0
31,731,805
20,237,358
63.8
2,823,057
58.6
The following table lists the opening and closing balances of our contract assets and liabilities:
Accounts
Contract
Receivable
Liabilities
Opening Balance - 1/1/2023
839,239
282,481
Closing Balance - 9/30/2023
406,959
516,567
7,110,536
8,527,903
Opening Balance - 1/1/2024
3,411,501
185,348
Closing Balance - 9/30/2024
366,612
2,921,982
4,399,658
3,514,867
The Company has no contract assets, and the contract liabilities are customer deposits and gift cards, which are reported within other liabilities in the condensed consolidated balance sheets.
25
NOTE 12 — LEASES
The following table depicts the Company’s future minimum lease payments as of September 30, 2024:
Operating
189,715
756,159
745,690
440,662
279,090
209,632
Total minimum lease payments
2,620,948
Less: imputed interest
(161,050)
2,459,898
349,822
1,321,299
474,320
33,454
2,178,894
(70,829)
2,108,065
4,567,963
Less: current portion
All of the Company’s leased facilities as of September 30, 2024, are non-cancellable. The leases are a combination of triple net leases, for which the Company pays its proportionate share of common area maintenance, property taxes, and property insurance, and modified gross leases, for which the Company directly pays for common area maintenance and property insurance. Lease costs are comprised of a combination of minimum lease payments and variable lease costs.
Lease costs for the three months ended September 30, 2024 and 2023 were $846,602 and $686,354, respectively. Lease costs for the nine months ended September 30, 2024 and 2023 were $2,399,239 and $2,048,238, respectively.
As of September 30, 2024, the weighted average remaining lease term and weighted average discount rate for operating leases were 2.8 years and 3.7%. As of September 30, 2023, the weighted average remaining lease term and weighted average discount rate for operating leases were 2.3 years and 4.4%.
NOTE 13 — BASIC AND DILUTED AVERAGE SHARES
The following table is a reconciliation of the Company’s basic and diluted weighted average common shares for the three months ended September 30, 2024 and 2023:
Basic weighted average shares
Effect of potential dilutive securities
15,000
Diluted weighted average shares
The following table is a reconciliation of the Company’s basic and diluted weighted average common shares for the nine months ended September 30, 2024 and 2023:
Nine Months Ended
For three and nine months ended September 30, 2024 and 2023, there was a total of 15 thousand common stock options unexercised. For the three and nine months ended September 30, 2024 and 2023, there were no anti-dilutive shares.
On March 14, 2023, a stock repurchase program was unanimously approved by the Company’s Board of Directors (the “Board”), which gave management authorization to purchase up to one million shares of the Company’s stock, at a per-share price not to exceed $9.00, on the open market. The plan expires on March 31, 2026.
The following table lists the repurchase of Company shares for the three and nine months ended September 30, 2024:
Total Number of
Average Price
Total Price
Shares Available
Fiscal Period
Shares Purchased
Paid per Share
Paid
to Purchase
415,973
5.18
2,155,049
584,027
January 1 - 31, 2024
59,417
4.52
268,569
524,610
February 1 - 29, 2024
56,343
4.53
255,195
468,267
March 1 - 31, 2024
85,580
4.46
381,382
382,687
Balance as of March 31, 2024
617,313
4.96
3,060,195
April 1 - 30, 2024
30,891
4.66
143,840
351,796
May 1 - 31, 2024
37,672
4.65
175,257
314,124
June 1 - 30, 2024
83,526
4.74
396,242
230,598
Balance as of June 30, 2024
769,402
4.91
3,775,534
July 1 - 31, 2024
75,326
4.87
367,144
155,272
August 1 - 31, 2024
51,353
4.98
255,633
103,919
September 1 - 30, 2024
20,516
5.15
105,733
83,403
916,597
4,504,044
For the three months ended September 30, 2024, the Company repurchased 147,195 shares for $728,510, for an average price of $4.95.
For the nine months ended September 30, 2024, the Company repurchased 500,624 shares for $2,348,995, for an average price of $4.69.
28
NOTE 14 — DEBT
The following table summarizes the details of the Company’s long-term debt obligations:
Outstanding Balance
Note payable, FSB (1)
2,483,853
2,563,108
Note payable, Truist Bank (3)
810,659
838,430
Notes payable, TBT (4,5)
2,001,435
2,064,928
Note payable, Kretchmer Transaction (6)
50,000
5,345,947
5,666,466
Note payable, FSB (2)
5,632,161
5,815,381
Note payable, Avail Transaction (7)
333,333
833,333
5,965,494
6,648,714
Line of credit, FSB (8)
Note payable, TBT (9)
2,530,344
2,618,311
13,841,785
14,933,491
(971,603)
(1,361,443)
The following table depicts the Company’s future principal payments on long-term debt obligations as of September 30, 2024:
29,235
112,154
2,342,464
9,485
38,745
40,203
41,716
43,216
637,294
21,705
487,261
71,359
74,081
76,767
1,270,262
6,250
25,000
18,750
66,675
663,160
2,472,776
115,797
119,983
1,907,556
62,990
254,466
5,314,705
166,666
166,667
229,656
421,133
Line of Credit, FSB (8)
29,953
2,500,391
326,284
3,584,684
7,787,481
30
The Company was in compliance with all of its debt obligation covenants for the three and nine months ended September 30, 2024 and 2023.
The following table depicts the Company’s future scheduled aggregate principal payments and maturities as of September 30, 2024:
Scheduled
Principal
Loan
Scheduled Principal Payments and Maturities by Year
Payments
Maturities
792,282
2,792,402
476,241
7,311,240
297,332
1,610,224
2,127,919
11,713,866
NOTE 15 — STOCK-BASED COMPENSATION
There was no stock-based compensation expense for the three and nine months ended September 30, 2024 and 2023.
NOTE 16 — RELATED PARTY TRANSACTIONS
The Company has a corporate policy governing the identification, review, consideration, and approval or ratification of transactions with related persons. Under this policy, all related party transactions are identified and approved prior to consummation of the transaction to ensure they are consistent with the Company’s best interests and the best interests of its shareholders. There are no related party transactions subject to reporting for the three and nine months ended September 30, 2024 and 2023.
NOTE 17 — CONTINGENCIES
We review the need to accrue for any loss contingency and establish a liability when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. We do not believe that the resolution of any currently pending lawsuits, claims, and proceedings, either individually or in the aggregate, will have a material adverse effect on financial position, results of operations, or liquidity. However, the outcomes of any currently pending lawsuits, claims, and proceedings cannot be predicted, and therefore, there can be no assurance that this will be the case. There are no loss contingencies subject to reporting for the three and nine months ended September 30, 2024 and 2023.
NOTE 18 — SUBSEQUENT EVENTS
On October 30, 2024, the Company received a commitment from FSB to renew its line of credit. The renewal increases our line of credit from $3.500 million to $3.800 million, extends the maturity to November 23, 2027 with borrowings bearing interest at our rate of deposit plus 1.0%. The Company intends to renew its line of the credit with FSB.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise for one of our specific operating segments, references to “we,” “us,” “our,” the “Company” and “Envela” refer to the consolidated business operations of Envela Corporation, and all of its direct and indirect subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 (this “Form 10-Q”), including but not limited to: (i) the section of this Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” (ii) information concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items; and (iii) our strategies, plans and objectives, together with other statements that are not historical facts, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate”, “potential,” “continue,” “deploy” or “believe.” We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements other than statements of historical information provided herein are forward-looking based on current expectations regarding important risk factors. Many of these risks and uncertainties are beyond our ability to control, and, in many cases, we cannot predict all of the risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements, and readers should not regard those statements as a representation by us or any other person that the results expressed in the statements will be achieved. Important risk factors that could cause results or events to differ from current expectations are described under the section entitled “Risk Factors” in the Company’s 2023 Annual Report and any material updates are described under the section of this Form 10-Q entitled “Risk Factors” and elsewhere in this Form 10-Q. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date thereon, including without limitation, changes in our business strategy or planned capital expenditures, or store growth plans, or to reflect the occurrence of unanticipated events.
Introduction
This section includes a discussion of our operations for the three and nine months ended September 30, 2024 and 2023. The following discussion and analysis provide information that management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the Company’s 2023 Annual Report, the unaudited condensed consolidated financial statements, and the related Notes thereto included in Part I, Item 1 of this report.
Use of Non-U.S. GAAP Financial Measures
Within this management discussion and analysis, we use supplemental measures of our performance, which are derived from our interim condensed consolidated financial information, but which are not presented in our interim condensed consolidated financial statements prepared in accordance with U.S. GAAP. We believe that providing these non-GAAP financial measures adds a meaningful presentation of our operating and financial performance, liquidity, and leverage.
Our non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable GAAP measures. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
See Non-U.S. GAAP Financial Measures for further details.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies and estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s 2023 Annual Report.
Economic Conditions
The U.S. and other world economies are currently experiencing high interest rates and high levels of inflation, coupled with commodity price risk, mainly associated with the market price of precious metals and diamonds which have the potential to impact consumer discretionary spending behavior. Furthermore, adverse macroeconomic conditions can also impact demand for resale technology assets.
As to counterbalance economic cycles that impact market selling prices and/or underlying operating costs we adjust the inbound purchase price of commodity-based products, luxury hard assets, and resale technology.
We continuously monitor our inventory positions and associated working capital to respond to market conditions and to meet seasonal business cycles and expansionary plans. These economic cycles may from time to time require the business to utilize its line of credit or seek additional capital.
There can be no assurance that the measures we have adopted will be successful in mitigating the aforementioned risks.
General
Envela serves as a holding company, conducting its operations via subsidiaries engaged in various businesses and activities within the re-commerce and recycling sectors. The products and services we offer are delivered by our subsidiaries under their distinct brands, rather than directly by Envela itself. Our operations are organized into two operating and reportable segments: commercial and consumer.
Our commercial segment specializes in the de-manufacturing of end-of-life electronic assets to reclaim commodities and other materials, while also engaging in the (“IT”) asset disposition (“ITAD”) industry. The separated commodities, including metals, plastics, and glass, are sold to downstream processors where they are further processed and reintroduced into new products. ITAD services maximize the residual value of retired IT assets by adhering to a reuse-first philosophy and ensuring equipment is refurbished and re-marketed after data sanitization. The company focuses on offering services that manage the entire lifecycle of technology products to ensure data security, regulatory compliance, and environmental sustainability. We are proud of our role to support a circular economy through responsible reuse and recycling of electronic devices.
Segment Activities
The Company believes it is well positioned to take advantage of its overall capital structure.
33
Our strategy is to expand the number of locations we operate by opening new locations throughout the U.S. Likewise, we continue to evaluate opportunities related to complementary product and service offerings for our stores and online business.
Our strategy is to expand both organically and through acquisitions. The Company has taken considerable steps to bolster its management team and operating systems to position itself for growth. Our production facilities are capable of managing the expansion of existing relationships and consolidation of acquisition targets within relative geographic proximity to our existing facilities.
Change in Disclosure of Results of Operations
The Company previously disaggregated revenue and gross margin by resale and recycle for each segment within the results of operations. The Company’s revenue and gross margin are now comprised of more diverse revenue and gross margin streams associated with service offerings and as such to continue reporting under the prior disclosure methodology would be less representative of how the business operates. The Company believes that this change has no material impact on the interpretation of our results of operations.
See Note 3 - Accounting Policies and Estimates for further details.
Non-U.S. GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is defined as the sum of net income (loss) of the Company, adjusted for additions (deductions) of interest expense, other (income) expense, income tax expense (benefit), and depreciation and amortization. Adjusted EBITDA is a key performance measure that management uses to assess our operating performance. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure as an overall assessment of our performance, to evaluate the effectiveness of our strategies and for planning purposes.
The following table provides a reconciliation of net income to Adjusted EBITDA for the three months ended September 30, 2024 and 2023:
Consolidated
Adjusted EBITDA Reconciliation:
Net income (loss)
(26,843)
1,711,882
767,376
940,117
Addition (deduction):
(62,502)
(277,849)
(340,351)
(22,851)
(169,586)
(192,437)
51,486
54,653
106,139
59,631
57,535
117,166
Income tax expense (benefit)
(122,464)
692,109
569,645
120,637
197,330
317,967
(9,666)
2,444,917
2,435,251
1,000,635
1,287,267
2,287,902
34
The following table provides a reconciliation of net income to Adjusted EBITDA for the nine months ended September 30, 2024 and 2023:
(116,325)
5,273,082
3,072,567
2,764,952
(78,510)
(725,786)
(804,296)
(70,315)
(486,553)
(556,868)
171,584
164,550
336,134
177,458
171,460
348,918
(33,706)
1,614,868
1,581,162
778,150
756,037
1,534,187
299,894
7,090,474
7,390,368
4,211,245
3,980,749
8,191,994
Net Cash
Net Cash is defined as the difference between (i) cash and cash equivalents and (ii) the sum of debt obligations. We believe that presenting Net Cash is useful to investors as a measure of our liquidity and leverage profile, as cash and cash equivalents can be used, among other things, to repay indebtedness.
The following table depicts the Company’s Net Cash:
Total cash
Less: debt obligations
(13,841,785)
(14,933,491)
3,910,414
2,920,362
35
Results of Operations
Comparison of the Three Months Ended September 30, 2024 and 2023
The following table depicts our disaggregated condensed consolidated statements of income for the three months ended September 30, 2024 and 2023:
% of Sales (1)
4,076,638
5,367,129
2,664,470
5,119,623
Operating income (loss)
(160,323)
2,180,795
924,793
1,025,396
Income (loss) before income taxes
(149,307)
2,403,991
888,013
1,137,447
Income tax (expense) benefit
The individual segments reported the following for the three months ended September 30, 2024 and 2023:
Change
10,023,073
27.2
% of consolidated sales
6,875,398
25.6
% of consumer sales
3,147,675
31.5
% of commercial sales
Sales increased by $10,023,073, or 27.2%, during the three months ended September 30, 2024, to $46,899,559, as compared to $36,876,486 during the same period in Fiscal 2023.
36
Sales in the consumer segment increased by $6,875,398, or 25.6%, during the three months ended September 30, 2024, to $33,756,600, as compared to $26,881,202 during the same period in Fiscal 2023. The change was primarily attributed to an increase in revenue from our wholesale channel and incrementally from our stores and online business. Underlying the aforementioned results was the impact from historically high gold and silver prices. Albeit, the third quarter of Fiscal 2024 was favorable to the comparative period the consumer segment has also built inventory as to ensure our new Arizona and Texas stores were adequately stocked. Our Arizona stores were operating for the entire third quarter of Fiscal 2024, while one of our Texas stores soft opened in the later part of the third quarter of Fiscal 2024 and the other opened early in the fourth quarter of Fiscal 2024. It is anticipated that as our new stores ramp up our inventory position should normalize, and inventory will return to being relieved in the normal course of operations.
Sales in the commercial segment increased by $3,147,675, or 31.5%, during the three months ended September 30, 2024, to $13,142,959, as compared to $9,995,284 during the same period in Fiscal 2023. The change was primarily attributed to the strong performance of our ITAD business and incrementally from the sale of personal technology assets and shredded electronic scrap grades and associated recoveries. Our ITAD business was impacted by strong inbound volumes from a new client that we were able to recognize sales on during third quarter of Fiscal 2024.
Cost of Goods Sold
8,293,116
30.6
6,548,346
28.1
88.4
86.6
1,744,770
45.3
42.6
38.5
Cost of goods sold increased by $8,293,116, or 30.6%, during the three months ended September 30, 2024, to $35,435,320, as compared to $27,142,204 during the same period in Fiscal 2023.
Cost of goods sold in the consumer segment increased by $6,548,346, or 28.1%, during the three months ended September 30, 2024, to $29,840,285, as compared to $23,291,939 during the same period in Fiscal 2023. The change was primarily attributed to the relief of inventory on the lower margin scrap grade precious metals which were sold through our wholesale channel. The greater mix of lower margin scrap grade precious metals being relieved from inventory resulted in the higher cost of goods sold as a percent of sales.
Cost of goods sold in the commercial segment increased by $1,744,770, or 45.3%, during the three months ended September 30, 2024, to $5,595,035, as compared to $3,850,265 during the same period in Fiscal 2023. The change was primarily attributed to ITAD revenue sharing settlements and incrementally from the relief of inventory and settlements associated with lower margin shredded electronic scrap grades and from the relief of inventory associated with personal technology assets. The greater mix of lower margin shredded electronic scrap grades resulted in the higher cost of goods sold as a percent of sales.
37
1,729,957
17.8
327,052
9.1
1,402,905
22.8
Gross margin increased by $1,729,957, or 17.8%, during the three months ended September 30, 2024, to $11,464,239, as compared to $9,734,282 during the same period in Fiscal 2023.
Gross margin in the consumer segment increased by $327,052, or 9.1%, during the three months ended September 30, 2024, to $3,916,315, as compared to $3,589,263 during the same period in Fiscal 2023. The net impact of the aforementioned increase in sales of $6,875,398 and increase in cost of goods sold of $6,548,346 resulted in the $327,052 increase in gross margin.
Gross margin in the commercial segment increased by $1,402,905, or 22.8%, during the three months ended September 30, 2024, to $7,547,924, as compared to $6,145,019 during the same period in Fiscal 2023. The net impact of the aforementioned increase in sales of $3,147,675 and increase in cost of goods sold $1,744,770 resulted in the $1,402,905 increase in gross margin.
Selling, General and Administrative
1,582,608
21.3
1,337,353
51.7
9.6
245,255
5.0
38.8
48.6
Selling, general and administrative expense increased by $1,582,608, or 21.3%, during the three months ended September 30, 2024, to $9,028,988, as compared to $7,446,380 during the same period in Fiscal 2023.
Selling, general and administrative expense in the consumer segment increased by $1,337,353, or 51.7%, during the three months ended September 30, 2024, to $3,925,981, as compared to $2,588,628 during the same period in Fiscal 2023. The
38
change was primarily attributed to incurring operational cost structures from our new Arizona and Texas stores along with travel costs associated with preparing the new Texas stores for opening.
Selling, general and administrative expense in the commercial segment increased by $245,255, or 5.0%, during the three months ended September 30, 2024, to $5,103,007, as compared to $4,857,752 during the same period in Fiscal 2023. The change was primarily attributed to a marginal increase in labor costs associated with a new service-based client along with labor costs from increased processing volumes of shredded electronic scrap grades. In addition, the cost of supplies increased on higher processing and shipping volumes.
Depreciation and Amortization
77,066
74,815
98.6
2,251
2.0
2.6
Depreciation and amortization expense increased by $77,066, or 22.8%, during the three months ended September 30, 2024, to $414,779, as compared to $337,713 during the same period in Fiscal 2023.
Depreciation and amortization expense in the consumer segment increased by $74,815, or 98.6%, during the three months ended September 30, 2024, to $150,657, as compared to $75,842 during the same period in Fiscal 2023. The change was primarily attributed to our Arizona stores that were placed into service in the later part of the second quarter of Fiscal 2024 along with one of our new Texas stores that went into service in the later part of the third quarter of Fiscal 2024 as well as from the depreciation and amortization expense related to the assets acquired in the Kretchmer Transaction.
39
Depreciation and amortization expense in the commercial segment increased by $2,251, or 0.9%, during the three months ended September 30, 2024, to $264,122, as compared to $261,871 during the same period in Fiscal 2023. There was no material impact from assets capitalized or reaching maturity in each comparative period and as such no discussion point.
Other Income (Expense)
147,914
76.9
39,651
173.5
108,263
2.1
1.7
Other income increased by $147,914, or 76.9%, during the three months ended September 30, 2024, to $340,351, as compared to $192,437 during the same period in Fiscal 2023.
Other income in the consumer segment increased by $39,651, or 173.5%, during the three months ended September 30, 2024, to $62,502, as compared to $22,851 during the same period in Fiscal 2023. The change was primarily attributed to the proportional allocation of the proceeds from a settlement related to repairs to our corporate headquarters and to the consumer segment’s higher working capital requirements from the aforementioned launching of our Arizona and Texas stores which has decreased the excess cash flow available to sweep into an interest-bearing account. The impact on interest income is referenced below.
Interest income comprised $2 and $21,741 of other income during the three months ended September 30, 2024 and 2023, respectively.
Other income in the commercial segment increased by $108,263, or 63.8%, during the three months ended September 30, 2024, to $277,849, as compared to $169,586 during the same period in Fiscal 2023. The change was primarily attributed to the proportional allocation of the proceeds from a settlement related to repairs to our Company’s corporate headquarters and to the continued focus on reducing working capital which has increased the excess cash flow available to sweep into an interest bearing account. The impact on interest income is referenced below.
Interest income comprised $203,251 and $140,274 of other income during the three months ended September 30, 2024 and 2023, respectively.
40
Interest Expense
11,027
(9.4)
8,145
(13.7)
2,882
(5.0)
(0.4)
Interest expense decreased by $11,027, or 9.4%, during the three months ended September 30, 2024, to $106,139, as compared to $117,166 during the same period in Fiscal 2023.
Interest expense in the consumer segment decreased by $8,145, or 13.7%, during the three months ended September 30, 2024, to $51,486, as compared to $59,631 during the same period in Fiscal 2023. There was no material impact from debt additions or amortization in each comparative period and as such no discussion point.
Interest expense in the commercial segment decreased by $2,882, or 5.0%, during the three months ended September 30, 2024, to $54,653, as compared to $57,535 during the same period in Fiscal 2023. There was no material impact from amortization in each comparative period and as such no discussion point.
Income Tax (Expense) Benefit
(251,678)
79.2
243,101
NM
(494,779)
250.7
(5.3)
(2.0)
NM – Not Meaningful
Income tax expense increased by $251,678, or 79.2%, during the three months ended September 30, 2024, to $569,645, as compared to $317,967 during the same period in Fiscal 2023. Currently, the Company has a deferred tax liability reflecting a future obligation to pay taxes. The Company has a federal tax rate of approximately 21.0%, in addition to other state and local taxes, on net income. The effective income tax rate was 25.3% and 18.6% for the three months ended September 30, 2024 and 2023, respectively. Differences between our effective income tax rate and the U.S. federal statutory rate are the result of state taxes and non-deductible expenses, as was the Company’s case for the increase for the three months ended September 30, 2024, compared to the three months ended September 30, 2023.
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Net Income (Loss)
(22,454)
(1.3)
(794,219)
2.9
771,765
82.1
13.0
9.4
Net income decreased by $22,454, or 1.3%, during the three months ended September 30, 2024, to $1,685,039, as compared to $1,707,493 during the same period in Fiscal 2023. Refer to the aforementioned attributes discussed within the Comparison of the Three Months Ended September 30, 2024 and 2023 for further details.
Net income (loss) decreased in the consumer segment by $794,219, during the three months ended September 30, 2024, to a net loss of $26,843, as compared to net income of $767,376 during the same period in Fiscal 2023. Refer to the aforementioned attributes discussed within the Comparison of the Three Months Ended September 30, 2024 and 2023 for further details.
Net income increased in the commercial segment by $771,765, or 82.1%, during the three months ended September 30, 2024, to $1,711,882, as compared to $940,117 during the same period in Fiscal 2023. Refer to the aforementioned attributes discussed within the Comparison of the Three Months Ended September 30, 2024 and 2023 for further details.
The following table depicts the Company’s earnings per share:
Basic and diluted earnings per share attributable to holders of our Common Stock remained at $0.06 during the three months ended September 30, 2024, as compared to the same period in Fiscal 2023.
42
Comparison of the Nine Months Ended September 30, 2024 and 2023
The following table depicts our disaggregated condensed consolidated statements of income for the nine months ended September 30, 2024 and 2023:
11,543,790
15,360,833
20.3
7,711,013
17,031,462
(56,957)
6,326,714
3,957,860
3,205,896
(150,031)
6,887,950
3,850,717
3,520,989
The individual segments reported the following for the nine months ended September 30, 2024 and 2023:
(5,727,554)
(4.2)
(9,254,388)
(9.0)
3,526,834
10.2
Sales decreased by $5,727,554 or 4.2%, during the nine months ended September 30, 2024, to $132,054,341, as compared to $137,781,895 during the same period in Fiscal 2023.
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Sales in the consumer segment decreased by $9,254,388, or 9%, during the nine months ended September 30, 2024, to $93,972,645, as compared to $103,227,033 during the same period in Fiscal 2023. The change was primarily attributed to softness in the demand for bullion, tempered by the impact from historically high gold and silver prices, coupled with continued inventory carry associated with our Arizona and Texas stores which was incrementally offset in the third quarter of Fiscal 2024 by the relief of lower margin scrap grade precious metals inventory through our wholesale channel.
Sales in the commercial segment increased by $3,526,834, or 10.2%, during the nine months ended September 30, 2024, to $38,081,696, as compared to $34,554,862 during the same period in Fiscal 2023. The change was primarily attributed to continued favorable performance of the sale of personal technology assets, shredded electronic scrap grades and associated recoveries as well as from stronger growth in our ITAD business which was more pronounced in the third quarter of Fiscal 2024. We also experienced growth in our retail returns service business which is small but growing portion of our diversified revenue streams.
(6,995,703)
(6.6)
(9,072,348)
(9.9)
87.8
88.7
2,076,645
14.5
43.0
41.4
Cost of goods sold decreased by $6,995,703, or 6.6%, during the nine months ended September 30, 2024, to $98,879,961, as compared to $105,875,664 during the same period in Fiscal 2023.
Cost of goods sold in the consumer segment decreased by $9,072,348, or 9.9%, during the nine months ended September 30, 2024, to $82,485,812, as compared to $91,558,160 during the same period in Fiscal 2023. The change was primarily attributed to the aforementioned softness in the demand for bullion and continued inventory carry which resulted in less inventory costs to be recognized. In terms of cost of goods sold as a percent of sales it was primarily impacted by a greater mix of higher margin retail inventory being relieved during the first and second quarter of Fiscal 2024 and was tempered by lower margin scrap grade precious metals being relieved in the third quarter of Fiscal 2024.
Cost of goods sold in the commercial segment increased by $2,076,645, or 14.5%, during the nine months ended September 30, 2024, to $16,394,149, as compared to $14,317,504 during the same period in Fiscal 2023. The change was primarily attributed to the relief of inventory related to personal technology assets and lower margin shredded electronic scrap grades and associated revenue sharing and incrementally from ITAD settlements. ITAD settlements were more pronounced in the third quarter of Fiscal 2024. The greater mix of the sale of personal technology assets and lower margin shredded electronic scrap grades and associated settlements resulted in a higher cost of goods sold as a percent of sales.
44
1,268,149
4.0
(182,040)
(1.6)
1,450,189
7.2
Gross margin increased by $1,268,149, or 4.0%, during the nine months ended September 30, 2024, to $33,174,380, as compared to $31,906,231 during the same period in Fiscal 2023.
Gross margin in the consumer segment decreased by $182,040, or 1.6%, during the nine months ended September 30, 2024, to $11,486,833, as compared to $11,668,873 during the same period in Fiscal 2023. The net impact of the aforementioned decrease in sales of $9,254,388 and decrease in cost of goods sold of $9,072,348 resulted in the $182,040 decrease in gross margin.
Gross margin in the commercial segment increased by $1,450,189, or 7.2%, during the nine months ended September 30, 2024, to $21,687,547, as compared to $20,237,358 during the same period in Fiscal 2023. The net impact of the aforementioned increase in sales of $3,526,834 and increase in cost of goods sold of $2,076,645 resulted in the $1,450,189 increase in gross margin.
2,069,775
8.7
3,729,311
50.0
(1,659,536)
(10.2)
38.3
47.0
Selling, general and administrative expense increased by $2,069,775, or 8.7%, during the nine months ended September 30, 2024, to $25,784,012, as compared to $23,714,237 during the same period in Fiscal 2023.
Selling, general and administrative expense in the consumer segment increased by $3,729,311, or 50.0%, during the nine months ended September 30, 2024, to $11,186,939, as compared to $7,457,628 during the same period in Fiscal 2023. The change was primarily attributed to incurring operational cost structures from our new Arizona and Texas stores along with
45
travel costs associated with preparing the new Arizona and Texas stores for opening. Albeit, in the third quarter of Fiscal 2024 travel costs began to subside due to Arizona stores becoming fully operational and reduced travel associated with the opening of Texas based stores which are in relative geographic proximity to our headquarters.
Selling, general and administrative expense in the commercial segment decreased by $1,659,536, or 10.2%, during the nine months ended September 30, 2024, to $14,597,073, as compared to $16,256,609 during the same period in Fiscal 2023. The change was primarily attributed to the operational focus on human capital costs and processing efficiencies at our production facilities, however, the commercial segment has experienced a recent incremental increase in select human capital costs associated with a new retail returns client and from processing higher volumes of shredded electronic scrap grades.
92,373
9.0
103,466
40.8
(11,093)
(1.4)
2.2
Depreciation and amortization expense increased by $92,373, or 9.0%, during the nine months ended September 30, 2024, to $1,120,611, as compared to $1,028,238 during the same period in Fiscal 2023.
Depreciation and amortization expense in the consumer segment increased by $103,466, or 40.8%, during the nine months ended September 30, 2024, to $356,851, as compared to $253,385 during the same period in Fiscal 2023. The change was primarily attributed to our Arizona stores that were placed into service in the second quarter of Fiscal 2024 along with one of our new Texas stores that went into service in the third quarter of Fiscal 2024 as well as the depreciation and amortization expense related to the assets acquired in the Kretchmer Transaction.
Depreciation and amortization expense in the commercial segment decreased by $11,093, or 1.4%, during the nine months ended September 30, 2024, to $763,760, as compared to $774,853 during the same period in Fiscal 2023. There was no material impact from assets capitalized or reaching maturity in each comparative period and as such no discussion point.
46
247,428
44.4
8,195
11.7
239,233
49.2
1.9
1.4
Other income increased by $247,428, or 44.4%, during the nine months ended September 30, 2024, to $804,296, as compared to $556,868 during the same period in Fiscal 2023.
Other income in the consumer segment increased by $8,195, or 11.7%, during the nine months ended September 30, 2024, to $78,510, as compared to $70,315 during the same period in Fiscal 2023. The change was primarily attributed to the proportional allocation of the proceeds from a settlement related to repairs to our corporate headquarters and to the consumer segment’s higher working capital requirements from the aforementioned launching of our Arizona and Texas stores which has decreased the excess cash flow available to sweep into an interest-bearing account. The impact on interest income is referenced below.
Interest income comprised $10 and $65,853 of other income during the nine months ended September 30, 2024 and 2023, respectively.
Other income in the commercial segment increased by $239,233, or 49.2%, during the nine months ended September 30, 2024, to $725,786, as compared to $486,553 during the same period in Fiscal 2023. The change was primarily attributed to the proportional allocation of the proceeds from a settlement related to repairs to our Company’s corporate headquarters and to the continued focus on reducing working capital which has increased the excess cash flow available to sweep into an interest bearing account. The impact on interest income is referenced below.
Interest income comprised $599,774 and $296,526 of other income during the nine months ended September 30, 2024 and 2023, respectively.
12,784
(3.7)
5,874
(3.3)
6,910
(4.0)
47
Interest expense decreased by $12,784, or 3.7%, during the nine months ended September 30, 2024, to $336,134, as compared to $348,918 during the same period in Fiscal 2023.
Interest expense in the consumer segment decreased by $5,874, or 3.3%, during the nine months ended September 30, 2024, to $171,584, as compared to $177,458 during the same period in Fiscal 2023. There was no material impact from debt additions or amortization in each comparative period and as such no discussion point.
Interest expense in the commercial segment decreased by $6,910, or 4.0%, during the nine months ended September 30, 2024, to $164,550, as compared to $171,460 during the same period in Fiscal 2023. There was no material impact from amortization in each comparative period and as such no discussion point.
(46,975)
3.1
811,856
(0.8)
(858,831)
113.6
(2.2)
Income tax expense increased by $46,975, or 3.1%, during the nine months ended September 30, 2024, to $1,581,162, as compared to $1,534,187 during the same period in Fiscal 2023. Currently, the Company has a deferred tax liability reflecting a future obligation to pay taxes. The Company has a federal tax rate of approximately 21.0%, in addition to other state and local taxes, on net income. The effective income tax rate was 23.5% and 20.8% for the nine months ended September 30, 2024 and 2023, respectively. Differences between our effective income tax rate and the U.S. federal statutory rate are the result of state taxes and non-deductible expenses, as was the Company’s case for the increased for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.
48
(680,762)
(11.7)
(3,188,892)
3.0
2,508,130
90.7
13.8
8.0
Net income decreased by $680,762, or 11.7%, during the nine months ended September 30, 2024, to $5,156,757, as compared to $5,837,519 during the same period in Fiscal 2023.
Net income (loss) decreased in the consumer segment by $3,188,892, during the nine months ended September 30, 2024, to a net loss of $116,325, as compared to net income of $3,072,567 during the same period in Fiscal 2023. Refer to the aforementioned attributes discussed within the Comparison of the Nine Months Ended September 30, 2024 and 2023 for further details.
Net income increased in the commercial segment by $2,508,130, or 90.7%, during the nine months ended September 30, 2024, to $5,273,082, as compared to $2,764,952 during the same period in Fiscal 2023. Refer to the aforementioned attributes discussed within the Comparison of the Nine Months Ended September 30, 2024 and 2023 for further details.
(0.02)
(9.1)
Basic and diluted earnings per share attributable to holders of our Common Stock decreased by $0.02, or 9.1%, during the nine months ended September 30, 2024, to $0.20, as compared to $0.22 during the same period in Fiscal 2023.
49
Liquidity and Capital Resources
The following table summarizes the Company’s condensed consolidated statement of cash flows:
Net cash provided by (used in):
Operating activities
2,979,773
85.9
Investing activities
(2,175,355)
200.4
Financing activities
(1,041,492)
46.3
Net increase (decrease) in cash and cash equivalents
(237,074)
Operating Activities
Cash flows provided by operations increased by $2,979,773, or 85.9%, during the nine months ended September 30, 2024, to $6,449,764, as compared to $3,469,991 during the same period in Fiscal 2023. The increase in cash provided by operations for the nine months ended September 30, 2024 was primarily attributed to the impacts of a decrease in net income, a decrease in non-cash charges relating to deferred taxes, along with a reduction in accounts receivable associated with the settlement of a large SOW with a recurring customer, an increased inventory position associated with the expansion of the consumer business, and an increase in other liabilities associated with customer deposits and gift cards.
Investing Activities
Cash flows (used in) investing activities increased by $2,175,355, or 200.4%, during the nine months ended September 30, 2024, to $3,260,717, as compared to $1,085,362 during the same period in Fiscal 2023. The increase in cash (used in) investing activities during the nine months ended September 30, 2024 was primarily attributed to the purchase of property and equipment, including real estate associated with one of our Arizona stores, the build-out of our Arizona and Texas stores, the purchase of production assets within our commercial recycling business, and the continued development of intangible assets associated with our enterprise resource planning system, and no net cash inflows from investments in notes receivable.
Financing Activities
Cash flows (used in) financing activities increased by $1,041,492, or 46.3%, during the nine months ended September 30, 2024, to $3,290,701, as compared to $2,249,209 during the same period in Fiscal 2023. The increase in cash (used in) financing activities during the nine months ended September 30, 2024, was primarily due to our share buyback plan as principal payments on debt were in relative parity.
Capital Resources
Although the Company has access to a line of credit our primary source of liquidity and capital resources currently consist of cash generated from our operating activities. We do not anticipate the need to fund our operations via the line of credit and we do not have any amounts drawn as of September 30, 2024. 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.
Capital Expenditures
In Fiscal 2024, the Company is deploying capital for additional growth, maintenance activity and enhancements to our enterprise resource planning system. The Company continuously monitors the deployment of capital and primarily funds capital expenditures through cash flow from operating activities. Where appropriate the Company may use debt financing on select projects. When this occurs, the Company further evaluates future cash flows of the project as to ensure the debt tenure and pay-back period are in alignment as well as the appropriateness of the rate of return.
50
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because we are a “smaller reporting company,” we are not required to disclose the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2024. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2024, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance of the foregoing.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance of achieving their objectives, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims, lawsuits and pending actions against the Company arising in the normal course of the Company’s business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flow. Management is also not aware of any legal proceedings contemplated by government agencies of which the outcome is reasonably likely to have a material adverse effect on the Company’s financial condition, results of operations or cash flow.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in the Company’s 2023 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
Repurchases
The following lists the repurchase of Company shares for the three months ended September 30, 2024:
Maximum Number
as Part of Publicly
of Shares that May
Announced Plan
Yet be Purchased
or Program (1) (2)
Paid Per Share ($)
Under the Plans
The timing and amount of any common stock repurchased under the program will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
ExhibitNumber
Description
FiledHerein
Incorporatedby Reference
Form
Date Filedwith SEC
31.1
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
X
31.2
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John G. DeLuca
32.1
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John R. Loftus
32.2
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by John G. DeLuca
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Calculation Linkbase Document
101.DEF
XBRL Taxonomy Definition Linkbase Document
101.LAB
XBRL Taxonomy Label Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 5, 2024
/s/ JOHN G. DELUCA
John G. DeLuca
Chief Financial Officer(Principal Accounting Officer)