Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
Risks Related to Our Business Relationships
An inability to maintain relationships with significant clients or renew contracts with them on favorable terms.
The success of our commercial segment’s business primarily depends on maintaining relationships and contractual arrangements with significant clients. If our key clients terminate important business arrangements with us or renew contracts on terms less favorable to us, there could be a material adverse effect on our financial condition and results of operations.
Risk Factors Relating to Commodity Volatility, Changing Economic Conditions and Seasonality
The market for precious metals is inherently unpredictable.
Bullion, crafted precious metals, and other precious metal products are purchased and sold based on current market pricing. Bullion and precious metal-laden inventories are subject to market-value changes created by their underlying commodity markets. Several national and international factors are beyond management’s control but may affect margins, customer demand, and transactional volumes. These factors include but are not limited to, the policies of the U.S. Federal Reserve, inflation rates, global economic uncertainty, and governmental and private mint supply. If commodity markets underlying our bullion or precious metal-laden inventory are misjudged, our business could suffer material adverse consequences.
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While jewelry manufacturing is a major driver of demand for gold, management believes that the cost of gold is predominantly driven by investment transactions, which may result in significant changes in cost. The Company’s cost of merchandise and potential earnings may be adversely impacted by investment-market considerations that cause the price of gold to significantly increase or decrease.
A significant portion of the consumer segment’s profit is generated from buying and selling pre-owned fine jewelry or other precious metal-laden products. Significant price fluctuations in precious metals, especially downward, could have a severe impact on this part of our business, as people are less likely to sell these products to the Company if they believe their merchandise is being undervalued, or if they believe the value is uncertain.
An inability to increase retail prices to reflect higher commodity costs.
Historically, jewelry retailers have been able, over time, to increase prices to reflect changes in commodity costs. However, in general, particularly sharp increases in commodity costs may result in a time lag before increased commodity costs are fully reflected in retail prices. There is no certainty that such price increases will be sustainable, so downward pressure on gross margin and earnings may occur. Moreover, any sustained increases in the cost of commodities could result in the need to fund the purchase of inventory at higher values or to make changes in the merchandise available, which could have a material adverse effect on our financial condition and results of operations.
Adverse economic conditions in the U.S. or in other key markets we sell into, and resulting declines in consumer confidence and spending.
The Company’s operating results are dependent on several factors impacting consumer confidence and discretionary spending, including, but not limited to, the following: general economic and business conditions; wages and employment levels; volatility in the stock market; home values; inflation; consumer-debt levels; availability and cost of consumer credit; economic uncertainty; solvency concerns of major financial institutions; fluctuations in foreign currency exchange rates; fuel and energy costs and/or shortages; tax issues; and general political conditions, both domestic and abroad. Fluctuations in any of these factors could adversely affect consumer confidence and discretionary spending and could have a material adverse effect on our financial condition and results of operations.
Consumer wholesale and retail jewelry business is seasonal, with sales traditionally greater during certain holiday seasons.
The consumer segment’s retail jewelry sales are seasonal by nature. The periods around Valentine’s Day, Mother’s Day, and Christmas are typically the main seasons for jewelry sales. Sales are traditionally greater during significant holidays that occur in early spring, late fall, and winter. The amount of sales and operating income generated during these seasons depends upon the general economic conditions and other factors beyond our control. Given the timing of the seasonality, inclement weather can at times pose a substantial barrier to consumer retail activity and may have an unfavorable impact on store traffic. If inclement weather conditions were to occur during such holiday seasons, they could have a material adverse effect on our financial condition and results of operations.
Risk Factors Relating to Competition
Intense competition across all markets for Envela’s products and services.
The markets in which Envela operates are highly competitive, and the Company competes with numerous other companies, several of which are larger and have significantly greater financial, distribution, advertising, and marketing resources. A significant portion of Envela’s products are evaluated by consumers based on the attractiveness of brands, assortment of products, and price competitiveness. Significant increases in these competitive influences could adversely affect our operations through a decrease in the number and total value of sales transactions.
Many competitors attract customers with their reputation and industry connections. Additionally, companies may decide to enter our markets to compete with us, which may have greater name recognition and greater financial and marketing resources than Envela. If these new companies are successful in entering our markets, or if customers choose to go to other
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established competitors, there could be fewer buyers or sellers, and could have a material adverse effect on our financial condition and results of operations.
Jewelry and watch retailing is highly fragmented and competitive. The consumer segment competes for jewelry and watch sales primarily against specialty jewelers and other retailers that sell jewelry and watches, including department stores, internet retail, and recommerce platforms. Participants in the jewelry and watch category compete for a share of customers’ disposable income with other consumer sectors such as electronics, clothing, furniture, travel, and restaurants. The competition for consumer discretionary spending is particularly relevant to gift giving, and somewhat to bridal jewelry (e.g. engagement, wedding, and anniversary).
Consumers are increasingly shopping for jewelry or starting their jewelry-buying experience online, which makes it easier for them to compare prices with other jewelry retailers. If our consumer brands do not offer the same or similar items at the lowest prices, consumers may purchase their jewelry from competitors, which could have a material adverse effect on our financial condition and results of operations.
Risk Factors Relating to Demand
A decrease in demand for the Company’s products and services and the failure of the Company to adapt to such decreases.
Although the Company actively manages its product and service offerings to ensure that such offerings meet the needs and preferences of its customer base and partners, the demand for a particular product or service may decrease due to a variety of factors, including many that the Company may not be able to control, anticipate or respond to promptly, such as the availability and pricing of competing products or technology, changes in customers’ financial conditions as a result of changes in unemployment levels, declines in consumer spending habits related to general economic conditions, inflation, weather events, public health and safety issues, fuel prices, interest rates, government-sponsored economic stimulus programs, social welfare or benefit programs, real or perceived loss of consumer confidence or regulatory restrictions that increase or reduce customer access to particular products.
Should the Company fail to adapt to a significant change in its customers’ demand for, or regular access to, its products, the Company’s revenue could decrease significantly. Even if the Company makes adaptations, its customers or merchants may resist or reject products or services whose adaptations make them less attractive or less available. In any event, the effect of any product or service change on the results of the Company’s business may not be fully ascertainable until the change has been in effect for some time.
Misjudging consumer demand.
Consumer demand for the Company’s products can affect inventory levels. If consumer demand is lower than expected, inventory levels can rise, causing a strain on operating cash flow. If inventory cannot be sold through our retail outlets or wholesale channels, write-downs or write-offs to earnings could be necessary. Conversely, if consumer demand is higher than expected, insufficient inventory levels could result in unfulfilled orders, loss of revenue, and an unfavorable impact on customer relationships. In particular, volatility and uncertainty related to macroeconomic factors make it more difficult to forecast consumer demand in various markets. Failure to properly judge consumer demand and properly manage inventory could have a material adverse effect on profitability and liquidity.
Risk Factors Specific to the Luxury Hard Asset Market
Adapting to consumer buying preferences toward lab-grown diamonds.
While the Company regularly assesses consumer buying preferences to provide our customers with an array of attractive buying options, consumers have become more accepting of lab-grown diamonds as a result of their price point and trends
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toward sustainability and understanding source origin. Although we offer lab-grown diamond collections, these are at lower price points, which may have a material adverse effect on our financial condition and results of operation.
Consumer acceptance of near-perfect counterfeit products.
Technology has evolved to where manufacturers can produce near-perfect counterfeits of luxury retail brands. While our business model is value-driven, consumer acceptance of near-perfect counterfeit goods may result in increased competition against the luxury recommerce market, which may have a material adverse effect on our financial condition and results of operation.
The proliferation of near-perfect counterfeit products.
While the company employs a team of authentication experts to ensure transactional confidence in both the buying and selling process, the continued proliferation of near-perfect counterfeit goods may erode consumer confidence in the luxury recommerce market, which may have a material adverse effect on our financial condition and results of operation.
Risk Factors Relating to Corporate Structure and Governance
The voting power in the Company is substantially controlled by a small number of shareholders, which may, among other things, impede the removal of incumbent directors or a takeover attempt, even if such events may be beneficial to shareholders.
N10TR, LLC (“N10TR”) is the Company’s largest shareholder, owning 12,814,727 shares of Common Stock, representing 49.3% of the total outstanding shares of Common Stock, as of December 31, 2024. Eduro Holdings, LLC (“Eduro”) owns 6,365,460 shares of Common Stock, representing 24.5% of the total outstanding shares of Common Stock, as of December 31, 2024. Both N10TR and Eduro are under the common control of John R. Loftus, the Company’s CEO, President, and Chairman of the Board. Consequently, Mr. Loftus is in a position to significantly influence any matters that are brought to a vote of the shareholders, including, but not limited to, the election of members of the Company’s board and any action requiring the approval of shareholders, including any amendments to the governing documents, mergers or sales of all or substantially all of the Company assets. This concentration of ownership also may delay, defer, or even prevent a change in control of the Company and make some transactions more difficult or impossible without the support of Mr. Loftus. These transactions might include proxy contests, tender offers, mergers, or other purchases of Common Stock that could allow shareholders to realize a premium over the then-prevailing market price for shares of Common Stock.
Our status as a "controlled company" could make our Common Stock less attractive to some investors or otherwise harm our stock price.
Because we qualify as a "controlled company" under the corporate governance rules for New York Stock Exchange (“NYSE”) American-listed companies, we are not required to have a majority of our Board of Directors (the “Board”) be independent, nor are we required to have a compensation committee or an independent nominating function. In the future, we could elect not to have a majority of our Board be independent or not to have a compensation committee or an independent nominating function. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for NYSE American-listed companies. Our status as a controlled company could make our Common Stock less attractive to some investors or otherwise harm our stock price.
The Company is, and will be, subject to new and existing corporate-governance and internal-control demands and reporting requirements.
Governments, including agencies at the national, state, and local levels, may seek to enforce or impose new laws, regulatory restrictions, or licensing requirements. They may also interpret or enforce existing requirements in new ways that could restrict the Company’s ability to continue its current methods of operation or to expand operations, impose significant additional compliance costs, and could have a material adverse effect on the Company’s financial condition
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and results of operations. In 2014, the Company agreed to a series of corporate governance reforms with the SEC. Additionally, the Company faces corporate-governance requirements under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the ”Dodd-Frank Act”), as well as new rules and regulations subsequently adopted by the SEC, the Public Company Accounting Oversight Board and the NYSE American (the “Exchange”). These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. If the Company does not comply with the corporate governance reforms, the Company could face enforcement actions by the SEC or other governmental or regulatory bodies, as well as shareholder lawsuits, all of which could have a material adverse effect on our financial position and results of operations.
Risk Factors Relating to Compliance
The Company is subject to maintaining an AML compliance program, and the failure to comply could adversely affect the Company’s reputation and ability to obtain merchandise.
The Company is subject to the provisions of the USA PATRIOT Act, which requires certain businesses to maintain an AML compliance program. The Company’s AML compliance program is isolated to our retail buying program within our consumer segment, as opposed to the Company as a whole. We do not buy from international sources nor are our sales subject to AML compliance. Failure to comply with applicable AML regulations could result in regulatory enforcement actions, fines, reputational harm, or other adverse consequences impacting our financial position and results of operations.
The conflict-mineral diligence process, the results from that process, and the related reporting obligations could increase costs, adversely affecting the Company’s reputation and our ability to obtain merchandise.
In August 2012, the SEC, pursuant to the Dodd-Frank Act, issued final rules that require annual disclosure and reporting on the source and use of certain minerals, including gold, from the Democratic Republic of Congo and adjoining countries. The gold supply chain is complex, and while management believes that the rules only cover less than 1% of annual worldwide gold production based upon current estimates, the final rules require certain jewelry retailers and manufacturers that file with the SEC to exercise reasonable due diligence in determining the country of origin of the statutorily designated minerals that are used in kinds of products the Company sells. Jewelry retailers or manufacturers who meet certain criteria were required to file certain reports with the SEC beginning in May 2014, disclosing their due diligence measures related to the country of origin, the results of those activities, and related determinations. In conjunction with legal counsel, we have determined that we do not have sufficient control over the manufacturing of any of our products to be included in the group of companies required to provide conflict-minerals disclosure and reporting.
If the Company’s sourcing processes should change, or if there is a determination that the Company’s current practices should be covered by the conflict-minerals reporting and disclosure guidelines, there would be a need to implement significant additional measures to comply with these rules. Management cannot be certain of the costs that might be associated with such regulatory compliance. The final rules also cover tungsten, which is contained in a small portion of items that we sell. Other minerals, such as diamonds, could be added to those currently covered by these rules. The Company may incur reputational risks with customers and other shareholders if, due to the complexity of the global supply chain, management is unable to sufficiently verify the origin of the relevant metals. Also, if the responses of parts of the Company’s supply chain to verification requests were adverse, it could harm our ability to obtain merchandise and add to compliance costs. In addition, Envela partners with refiners for a portion of its sales. These refiners are subject to increasingly stringent governmental regulation in their refining operations, and a change or increase in such regulations in the United States or abroad could have a material adverse effect on our financial position and results of operations.
Governments may refuse to renew or grant licenses and permits, thus restricting our ability to operate.
Certain aspects of our business, namely our electronics recycling business within our consumer segment are subject to greater regulation and compliance at federal, state, and local levels. Increased requirements for licensing and permitting may require changes in our business service delivery, capital expenditures, and compliance programs. While we acknowledge our commitment to stewardship of our properties, operating processes, and outcomes, increased regulation and compliance could have a material adverse effect on our financial position and results of operations.
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Changes to ESG regulations may impact our reputation and financial results.
In recent years, ESG matters have come to the forefront of corporate governance, resulting in the SEC issuing its final ruling on climate-related disclosures, on March 6, 2024. Less than one month after their adoption, the SEC chose to stay its adopted disclosure rules, pending judicial review, creating a period of stasis which has impacted corporate governance strategies related to ESG. While the Company remains steadfast in its business practices and messaging to its stakeholders related to its sustainability value proposition, commitment to inclusivity, and the positive impact of our businesses in the communities we operate in, this period of uncertainty creates risk associated with the nature and extent of adoption of ESG practices.
The methodologies and standards for tracking and reporting on ESG matters are relatively new, have not been standardized, and continue to evolve. As a result, our ESG-related disclosures may not necessarily be calculated in the same manner or comparable to similarly titled measures presented by us in other contexts, or by other companies or third-party estimates. If our ESG-related disclosures are or are perceived by government authorities, investors, or stakeholders to be inadequate, inaccurate, or non-compliant with applicable standards or regulations, or if we discover material inaccuracies therein, our reputation could be negatively impacted, and we could be exposed to litigation and other regulatory actions.
The Company is regularly monitoring developments pertaining to the judicial review, to ensure it has adequately assessed its strategy and capital requirements related to compliance.
U.S. governmental regulation and environmental, health and safety requirements may adversely affect our business .
Our operations are subject to federal, state and local environmental, health and safety laws applicable to reclamation of commodities from electronic waste. We are required to obtain environmental permits and approvals for some of our operations and must expend time and resources to ensure compliance with those permits and approvals. As noted above, we cannot guarantee receipt of required permits or renewals of such permits in a timely manner or without unforeseen limitations on our operations. We are also subject to environmental, transportation, and health and safety laws that govern the management of electronic waste and the reclamation of useful goods therefrom. Such regulations tend to become more restrictive over time, and it is possible that new regulations will be passed that require material changes to our operations or could otherwise result in a material adverse effect on our financial position.
Risks Related to Cyber Threats and Rapid Advancements in AI
The Company’s websites may be vulnerable to security breaches and similar threats, which could result in liability for damages and harm to the Company’s reputation.
Despite the implementation of network security measures, Company websites are vulnerable to computer viruses, break-ins, and similar disruptive problems caused by internet users. These occurrences could result in liability for damages, and the Company’s reputation could suffer. Circumvention of security measures may result in the misappropriation of customer or other confidential information. Any such security breach could lead to interruptions, delays, and cessation of service to customers and could have a material adverse effect on our reputation, financial position, and results of operations.
A failure of the information systems could prevent the Company from effectively managing and controlling operations and serving customers.
The Company relies on information systems to manage and operate our businesses. These include our communications systems, website, point-of-sale application, enterprise resource planning system, and other supporting systems. Any disruption in the availability of our information systems could adversely affect the Company’s ability to service customers and could have a material adverse effect on our reputation, financial position, and results of operations.
The Company may be subject to business, compliance, and reputational risks associated with AI.
The Company continues to evaluate opportunities for AI and machine learning in terms of their use in practical applications to enhance processes and serve customers. Its adoption may result in new or expanded risks and liabilities, including
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governmental and regulatory compliance, litigation, ethical concerns, confidentiality, or security risks that may have a material adverse effect on our reputation, financial position, and results of operations.
Risks Related to Global Health Crises, Disasters and Geopolitics Impacting Supply and Demand
Outbreaks of epidemics, pandemics, or other public health emergencies have disrupted, and could in the future, disrupt our operations.
Our operations are exposed to risks associated with epidemics, pandemics, or other public health emergencies. Such events could lead to restrictions and mandates, which could be applied differently across jurisdictions, and there could be global impacts resulting directly or indirectly from such an event including labor shortages, logistical challenges, supply chain disruptions, and increases in costs for certain goods and services. Any or all of the foregoing in jurisdictions where we or our customers, suppliers, or operations are located could have a material adverse effect on our financial position and results of operations. In addition, fluctuations in demand and other implications associated with public health emergencies have resulted in, and could in the future result in, certain supply chain constraints and challenges.
We may incur losses because of unforeseen or catastrophic events, terrorist attacks, extreme weather events or other natural disasters.
The occurrence of unforeseen or catastrophic events, terrorist attacks, extreme weather events, or other natural disasters, could create economic and financial disruptions and could lead to operational difficulties (e.g., travel limitations and limitations on occupancy in our facilities) that could impair our ability to manage our businesses.
Geopolitical conflicts, military action, and civil unrest could result in global supply chain disruptions and uncertain economic conditions.
The broader consequences of geopolitical conflicts, military action, and civil unrest could lead to economic instability and sustained inflation and result in changes in consumer behavior impacting discretionary spending. Any of these factors could have a material adverse effect on our financial position and results of operations.
Risks Related to Liquidity Management Strategies
Changes in liquidity and capital requirements and the ability to secure financing and credit could materially and adversely affect the Company’s financial condition and results of operations.
A significant reduction in cash flows from operations or the availability of credit could materially and adversely affect our ability to fund growth initiatives and provide working capital. Similarly, if actual costs to acquire and build out new retail stores significantly exceed planned costs, could hinder the ability to acquire new stores or to operate those profitably. Credit and equity markets remain sensitive to world events and macroeconomic developments. Therefore, the cost of borrowing may increase, and it may be more difficult to obtain financing for operations or to refinance long-term obligations as they become payable. Additionally, borrowing costs can be affected by independent rating agencies’ short- and long-term debt ratings which are based largely on performance as measured by credit metrics including interest coverage and leverage ratios. A decrease in these ratings would likely increase the Company’s borrowing costs and make it more difficult to obtain financing. A significant increase in costs to finance operations may have a material adverse effect on our financial position and the results of operations.
The impact of sustained high interest rates.
We are currently experiencing a sustained high-interest rate environment which may increase our borrowing costs associated with new or refinancing debt obligations or could make it difficult or impossible to secure financing.
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Risk Factors Relating to Our Employees
The Company’s success depends on the ability to attract, retain, and motivate qualified directors, management, and other skilled employees.
Envela’s future success and growth depend on the continued services of directors, key management, and employees. Losing services from any of these individuals could materially affect the Company’s operations. The Company’s future success also depends on management’s ability to identify, attract, and retain additional qualified personnel. Competition for employees is intense, and the Company may be unsuccessful in attracting or retaining qualified personnel. There are a limited number of people with knowledge and experience within our industries. The Company does not have employment agreements with employees and does not maintain life insurance policies on any of the key personnel. The loss of key personnel, especially without advance notice, or the inability to hire or retain qualified people, could have a material adverse effect on all facets of our business. The Company cannot guarantee that we will continue to retain key management and skilled personnel, or will be able to attract, assimilate and retain other highly qualified personnel in the future.
The Company’s expansion into new geographical regions.
Both of the Company’s segments have portions of their business located in areas outside of its base of operations in Dallas-Fort Worth. The ability to manage operations in multiple geographical regions is vital to sustaining success. It is not guaranteed that the Company will have the same success in finding, training, and supervising geographically dispersed employees.
Risk Factors Relating to Our Strategies
The Company may take on additional liabilities in connection with acquisitions, or it may not be able to successfully integrate such acquisitions.
As part of the company’s history and growth strategy, it has acquired other businesses. Acquisitions involve numerous risks, including the following:
● effectively combining the acquired operations, technologies, or product offerings;
● unanticipated costs or assumed liabilities;
● not realizing the anticipated financial benefit from the acquired companies;
● diversion of management’s attention;
● negative effects on existing customer and supplier relationships; and
● potential loss of key employees, especially those of the acquired companies.
Further, the Company has made and may continue to make acquisitions of, or investments in, new services, businesses, or technologies to expand its current service offerings and product lines. Some of these may involve risks that may differ from those traditionally associated with the Company’s core business. If the Company is not successful in mitigating or insuring against such risks, it may have a material adverse effect on our financial position and results of operations.
Risks Related to Product and Service Offerings
Our electronic device business is subject to the risk of declines in the value and availability of devices in our inventory and to foreign trade risks and export compliance.
The value of the electronic devices that we collect and refurbish may fall below the prices we have paid, which could adversely affect our profitability. These devices are subject to the risk that the value, including selling price, will be adversely affected by technological changes affecting the usefulness or desirability of the devices and parts; physical problems resulting from faulty design or manufacturing; increased competition; decreased customer demand, including due to changes in customer preferences, changes in client promotions and seasonality; supply chain constraints; and growing industry emphasis on cost containment. The value and availability of devices or parts may also be impacted by
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adverse foreign trade relationships and an escalation in trade tensions, including concerning trade policies, treaties, government relations, tariffs, and other trade restrictions or compliance. If the value or availability of devices or parts is significantly reduced, it could have a material adverse effect on our financial position and results of operations.
We may incur losses because of a failure to manage and protect our client’s assets throughout the ITAD process.
The Company’s commercial segment provides services related to electronic devices being disposed of by business customers, including cleansing storage devices from customer equipment and either recycling them through resale or disposing of them in an environmentally compliant manner. If the Company does not meet its contractual and regulatory obligations, it could be subject to contractual damages, penalties, and damage to reputation. Also, the Company’s or its subcontractors’ failure to comply with applicable laws and regulations in disposing of the equipment could result in environmental liabilities. Such environmental liabilities may be joint and several, meaning that the company could be held responsible for more than its share of the liability involved. To the extent that the Company fails to comply with its obligations and such failure is not covered by insurance, it could have a material adverse effect on our reputation, financial position, and results of operations.
Risks Related to Changes in Tax Rules
We may incur an increase in taxes as a result of changes in tax rules.
As a company conducting business throughout the U.S. with physical operations in multiple states, we are exposed to the effects of changes in U.S., state, and local tax rules. Governments seeking to increase their corporate tax base may have a material adverse effect on our financial position and results of operations.