Envela (ELA) - 2022 Q4 - Annual Report

PART I Item 1. Business Envela operates as a re-commerce company through Commercial Services (ECHG) and Direct-to-Consumer (DGSE) segments, extending product lifecycles - Envela's mission is to empower buyers and sellers to extend the useful lives of manufactured goods through re-commerce, contributing to a circular economy by reselling, reusing components, or recycling materials[19][20] - The company operates through two segments: Commercial Services (ECHG, LLC) for asset disposition solutions to businesses and government agencies, and Direct-to-Consumer (DGSE, LLC) for buying and reselling luxury hard assets like jewelry, precious metals, and rare coins[21][22][33] - Envela's commercial services include IT equipment disposition, repair, refurbishment, and recycling, offering custom ITAD programs with secure logistics and data sanitization, experiencing seasonal fluctuations based on new device releases and promotional programs[25][26][27][28] - The direct-to-consumer segment, DGSE, has over 50 years of experience in luxury goods, providing a marketplace for jewelry, diamonds, fine watches, rare coins, and precious metals, observing supply and demand seasonality with increased supply in Q3/Q4 and increased demand in Q4, leading to higher operating expenses in the last four months of the year[33][34][35][37] - Envela incorporated in 1965 and underwent significant transformation under new management starting in 2016, achieving six consecutive years of profitability and rebranding to Envela Corporation in 2019 to reflect its diversified re-commerce portfolio[40][42][43] - The company emphasizes its commitment to sustainability by promoting recirculation and reuse of goods and fostering a diverse and inclusive workforce of 257 full-time equivalent employees as of December 31, 2022[52][53][54][55] Item 1A. Risk Factors Envela faces risks from shareholder control, key personnel, acquisitions, liquidity, interest rates, deferred tax assets, regulatory compliance, cybersecurity, market competition, economic conditions, and precious metals volatility - The Company's voting power is substantially controlled by a small number of shareholders, with CEO John R. Loftus controlling 47.6% through N10TR, LLC and 23.6% through Eduro Holdings, LLC, allowing significant influence over shareholder votes and potential control changes[62][63][64] - Acquisitions pose risks such as integration difficulties, unanticipated costs, failure to realize anticipated financial benefits, diversion of management attention, negative effects on existing relationships, and potential loss of key employees[67][71] - The Company's financial condition is sensitive to liquidity and capital requirements, with potential adverse effects from reduced cash flows or credit availability, and interest rate fluctuations, particularly the significant rises in 2022, could increase borrowing costs and hinder financing[68][72] - Realization of deferred tax assets, approximately $1.5 million as of December 31, 2022, depends on generating future taxable income before carryovers expire, and changes in corporate tax rates could materially affect their value[69][70] - The market for precious metals is inherently unpredictable, with prices influenced by global supply/demand, U.S. Federal Reserve policies, inflation, and economic uncertainty, where misjudging these markets or significant price fluctuations (especially downward) can negatively impact profitability and the ability to purchase inventory[94][95][99] - Adverse economic conditions, including declines in consumer confidence and spending due to factors like employment levels, inflation, and global events (e.g., COVID-19, geopolitical conflicts), could materially affect the Company's operating results, particularly for discretionary items like jewelry[91][92][103][105] Item 1B. Unresolved Staff Comments No unresolved staff comments were reported - No unresolved staff comments were reported[106] Item 2. Properties Envela operates various leased and owned properties across three markets, continuously evaluating them for profitability and long-term sustainability - The Company operates nine leased and owned properties across three markets: DFW (9), Mount Pleasant, SC (1), and Chandler, AZ (1)[108] - DGSE owns three retail locations in DFW and leases four others with expiration dates from 2025 to 2027, with renewal rights for three properties[108] - ECHG leases all three of its locations (two in DFW, one in Chandler, AZ) with leases expiring from 2025 to 2027, with one renewal right[108] - The principal corporate office building is owned by the Company and located at 1901 Gateway Drive, Irving, Texas[108] Item 3. Legal Proceedings Management believes the ultimate resolution of current legal proceedings will not materially affect the Company's financial condition, results of operations, or cash flows - Management believes that the ultimate resolution of current legal proceedings will not have a material effect on the Company's financial condition, results of operations, or cash flows[111] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[113] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Envela's Common Stock trades on the NYSE American under "ELA," with 268 record holders as of March 10, 2023, and the company retains earnings for future growth without declaring dividends - Envela's Common Stock is traded on the NYSE American under the symbol "ELA"[3] - As of March 10, 2023, there were 268 record holders of Common Stock[116] - The Company has not declared dividends on Common Stock and intends to retain all current earnings to finance future growth[118] - No purchases of equity securities were made by the issuer or affiliated purchasers during the years ended December 31, 2022, and December 31, 2021[123] Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 15,000 | $2.17 | 1,100,000 | | Equity compensation plans not approved by security holders | N/A | N/A | N/A | | Total | 15,000 | $2.17 | 1,100,000 | Item 6. [Reserved] This item is reserved and contains no information - Item 6 is reserved[124] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Envela's financial condition and operational results for the fiscal year ended December 31, 2022, compared to 2021, highlighting revenue growth, expense changes, liquidity, and critical accounting policies Cautionary Statement Regarding Risks and Uncertainties The discussion contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - The discussion contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially[126] - Readers should review 'Item 1A. Risk Factors' for important risk factors[126] Overview Envela is