Envela Corp 10-Q

ITEM 1: FINANCIAL STATEMENTS ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, (Unaudited) 2024 2023 Sales $ 39,857,780 $ 49,809,532 Cost of goods sold 29,537,096 38,399,630 Gross margin 10,320,684 11,409,902 Expenses: Selling, general and administrative 7,636,976 7,905,303 Depreciation and amortization 343,565 354,351 Total operating expenses 7,980,541 8,259,654 Operating income 2,340,143 3,150,248 Other income/(expense): Other income 238,528 210,779 Interest expense ( 120,854 ) ( 117,064 ) Income before income taxes 2,457,817 3,243,963 Income tax expense ( 550,278 ) ( 717,646 ) Net income $ 1,907,539 $ 2,526,317 Basic earnings per share: Net income $ 0.07 $ 0.09 Diluted earnings per share: Net income $ 0.07 $ 0.09 Weighted average shares outstanding: Basic 26,419,039 26,924,631 Diluted 26,434,039 26,939,631 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 2024 2023 Assets (Unaudited) Current assets: Cash and cash equivalents $ 19,783,867 $ 17,853,853 Accounts receivable, net of allowances 4,597,054 7,811,159 Notes receivable 3,383 4,700 Inventories 25,622,436 23,146,177 Prepaid expenses 1,296,667 1,082,425 Total current assets 51,303,407 49,898,314 Property and equipment, net 11,048,221 10,764,224 Right-of-use assets from operating leases 3,757,873 4,189,621 Goodwill 3,921,453 3,921,453 Intangible assets, net 4,513,017 4,499,170 Other assets 201,447 201,447 Total assets $ 74,745,418 $ 73,474,229 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 3,747,804 $ 3,126,743 Notes payable 1,475,625 1,361,443 Operating lease liabilities 1,840,082 1,807,729 Accrued expenses 2,375,661 2,486,423 Other liabilities 741,808 211,651 Total current liabilities 10,180,980 8,993,989 Deferred tax liability 21,177 38,668 Notes payable, less current portion 13,146,097 13,572,048 Operating lease liabilities, less current portion 2,085,918 2,560,671 Total liabilities $ 25,434,172 $ 25,165,376 Contingencies (Note 16) 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 26,307,318 shares outstanding as of March 31, 2024; 26,924,631 shares issued and 26,508,658 shares outstanding as of December 31, 2023 269,246 269,246 Treasury stock at cost, 617,313 and 415,973 shares, as of March 31, 2024 and December 31, 2023, respectively ( 3,060,195 ) ( 2,155,049 ) Additional paid-in capital 40,173,000 40,173,000 Retained earnings 11,929,195 10,021,656 Total stockholders’ equity 49,311,246 48,308,853 Total liabilities and stockholders’ equity $ 74,745,418 $ 73,474,229 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (Unaudited) 2024 2023 Operations Net income $ 1,907,539 $ 2,526,317 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 343,565 354,351 Provision for credit losses 45,869 ( 13,091 ) Deferred taxes ( 17,491 ) 348,256 Non-cash lease expense 462,882 473,881 Changes in operating assets and liabilities: Accounts receivable 3,168,236 ( 328,487 ) Inventories ( 2,476,259 ) ( 350,053 ) Prepaid expenses ( 214,242 ) ( 47,847 ) Other assets 4,700 ( 228,959 ) Accounts payable 621,060 ( 612,651 ) Accrued expenses ( 110,762 ) ( 208,762 ) Operating leases ( 473,535 ) ( 473,535 ) Other liabilities 530,159 1,484,605 Net cash provided by operations 3,791,721 2,924,025 Investing Purchase of property and equipment ( 448,242 ) ( 8,728 ) Purchase of intangible assets ( 193,167 ) - Investment in notes receivable ( 3,383 ) 578,250 Net cash (used in) provided by investing ( 644,792 ) 569,522 Financing Payments on notes payable ( 311,769 ) ( 310,807 ) Purchase of treasury stock ( 905,146 ) - Net cash (used in) financing ( 1,216,915 ) ( 310,807 ) Net change in cash and cash equivalents 1,930,014 3,182,740 Cash and cash equivalents, beginning of period 17,853,853 17,169,969 Cash and cash equivalents, end of period $ 19,783,867 $ 20,352,709 Supplemental disclosures Cash paid during the period for: Interest $ 178,674 $ 116,061 Income taxes $ - $ - The accompanying notes are an integral part of these condensed consolidated financial statements. 5 ENVELA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Three Months Ended March 31, 2023 Common Stock Treasury Stock Preferred Stock Additional Paid-in Retained Total Stockholders' (Unaudited) Shares Amount Shares Amount Shares Amount Capital Earnings Equity Balance as of January 1, 2023 26,924,631 $ 269,246 - $ - - $ - $ 40,173,000 $ 2,874,204 $ 43,316,450 Net Income 2,526,317 2,526,317 Balance as of March 31, 2023 26,924,631 $ 269,246 - $ - - $ - $ 40,173,000 $ 5,400,521 $ 45,842,767 For the Three Months Ended March 31, 2024 Common Stock Treasury Stock Preferred Stock Additional Paid-in Retained Total Stockholders' (Unaudited) Shares Amount Shares Amount Shares Amount Capital Earnings Equity Balance as of January 1, 2024 26,924,631 $ 269,246 ( 415,973 ) $ ( 2,155,049 ) - $ - $ 40,173,000 $ 10,021,656 $ 48,308,853 Net Income 1,907,539 1,907,539 Shares repurchased - - ( 201,340 ) ( 905,146 ) - - ( 905,146 ) Balance as of March 31, 2024 26,924,631 $ 269,246 ( 617,313 ) $ ( 3,060,195 ) - $ - $ 40,173,000 $ 11,929,195 $ 49,311,246 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 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 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, they do not include all of the information and notes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. 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. Operating results presented for these interim periods are not necessarily indicative of the results that may be expected for the fiscal year ending 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 preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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 these subsidiaries under their distinct brands, rather than directly by Envela Corporation itself. Our operations are organized into two operating and reportable segments: commercial and consumer, 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 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. 7 For additional information on the consumer and commercial segments, see “Item 1. Business – How We Organize Our Business” in the Company’s 2023 Annual Report. The interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. NOTE 3 — ACCOUNTING POLICIES AND ESTIMATES Financial Instruments The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivables, prepaid expenses, other current assets, accounts payable, accrued expenses, and other 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 the 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 and outcomes may differ from management’s estimates and assumptions. Revenue Recognition Accounting Standards Codification (“ASC”) 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. Consumer Segment For the consumer segment, revenue for monetary transactions (i.e., cash and receivables) with wholesale customers are recognized when the merchandise is delivered or at point of sale for retail customers, and payment has been made either by immediate payment or through a receivable obligation. For e-commerce, revenue is recognized upon 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 are recognized upon transfer of title, based on the determination of the underlying weight and price of the associated metals. The Company offers the option of third-party financing for customers wishing to borrow money for the purchase. Revenue is recognized from the sale upon transfer of title, with the promise of the third-party financing company to pay. Commercial Segment The commercial segment recognizes revenue at an amount that reflects the consideration to which the entities expect to be entitled in exchange for transferring goods or services to the customer. 8 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, as stated in the first sentence. Under the guidance of ASC 606, an estimate of the variable consideration that are expected to be entitled is included in the transaction price stated at the current precious metal spot price and weight of the precious metal. An adjustment to revenue is made in the period once the underlying weight and any precious metal spot price movement is resolved, which is usually around six (6) weeks. Any adjustment from the resolution of the underlying uncertainty is netted with the settlement due from the original contract. Historically, these amounts have been insignificant. The commercial segment also provides recycling services according to a Scope of Work (“SOW”). Recycling services are primarily recognized based on the number of units processed by a preset price per unit or weight measurements, and revenue is recognized upon completion of the SOW. The commercial segment provides freight arrangement services related to inbound asset or material movements to our facilities. Freight arrangement services are 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 detail. 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 and cost of sales accordingly. For the three months ended March 31, 2024 and March 31, 2023, the consumer segment’s allowance for returns was $ 28,402 and $ 0 , respectively. For the three months ended March 31, 2024 and March 31, 2023, the commercial segment’s allowance for returns was $ 6,578 and $ 0 , respectively. Concentrations and Credit Risk The Company is potentially subject to concentrations of credit risk in its accounts receivable. A significant amount of revenue stems from one precious metals partner, which accounted for 6 % of our sales for the period ended March 31, 2024, and 6 % of our sales for the period ended March 31, 2023. However, the Company believes that the products it sells are marketable to numerous sources at competitive prices. Shipping and Handling Costs Within the consumer and commercial segments shipping and handling costs are accounted for as fulfillment costs within costs of goods sold. For the three months ended March 31, 2024 and March 31, 2023, the consumer segment’s shipping and handling costs were $ 439 and $ 0 , respectively. For the three months ended March 31, 2024 and March 31, 2023, the commercial segment’s shipping and handling costs were $ 1,394,077 and $ 1,689,941 , respectively. Advertising Costs The consumer and commercial segment’s advertising costs are expensed as incurred. For the three months ended March 31, 2024 and March 31, 2023, the consumer segment’s advertising costs were $ 247,903 and $ 206,075 , respectively. For the three months ended March 31, 2024 and March 31, 2023, the commercial segment’s advertising costs were $ 71,095 and $ 14,553 , respectively. 9 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 months ended March 31, 2024. For the period ended March 31, 2024, the Company had a deferred tax liability of $ 21,177 . For the period ended December 31, 2023, the Company had a deferred tax liability of $ 38,668 . The Company did not have a valuation allowance for the period ended March 31, 2024 and December 31, 2023. Segment Information The accounting standards for reporting information about operating segments defines 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’s financial performance is based on the following segments: consumer and commercial. The Company allocates its corporate expenses 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 detail. 10 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 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 14 – Stock-Based Compensation for further detail. 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 consolidated balance sheets approximate fair value. Accounts Receivable, Net of Allowances Accounts receivable represent amounts primarily due from customers on product and other sales. Our allowance for credit losses is primarily determined by an analysis of our trade receivables aging, using the expected losses methodology. The allowance for credit losses is determined based on 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. Trade receivables are considered delinquent when payment has not been made within contract terms. Trade receivables are charged off when there is certainty as to their being uncollectible. For the three months ended March 31, 2024 and March 31, 2023, the consumer segment’s allowance for credit losses was $ 0 and $ 0 , respectively. For the three months ended March 31, 2024 and March 31, 2023, the commercial segment’s allowance for credit losses was $ 306,727 and $ 0 , respectively. Inventories Consumer Segment 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 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. Commercial Segment Our inventory primarily includes processed and unprocessed, base metals, electronic scrap materials containing precious metals 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 4 – Inventories for further detail. 11 Goodwill 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 first three months of fiscal 2024 requiring an interim goodwill impairment test, and the Company did not record a goodwill impairment charge in any of the periods presented. There have been no other adjustments to goodwill in any of the periods presented. See Note 5 – Goodwill for further detail. Property and Equipment, Net Property and equipment is carried at cost less accumulated depreciation and is 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 maintenance and repairs are charged against income as incurred; betterments that increase the value or materially extend the life of the related assets are capitalized. See Note 6 – Property and equipment, net for further detail. 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 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 7 – Intangibles, net for further detail. Correction of Immaterial Error The Company’s consumer 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. As a result of the correction, for the three months ended March 31,2023 revenue and cost of goods sold increased by $ 1,420,492 . The error had no impact on operating income, net income, and net income per share nor any other financial statement amount. Further these errors had no impact on the consolidated balance sheets, statements of stockholders’ equity, and statement of cash flows. These corrections do not affect any of the metrics used to calculate and evaluate management’s compensation and had 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 10 – Revenue for further detail. Changes in Disclosure The Company has elected to discontinue reporting the disaggregation of inventory and revenue by resale and recycle. The Company’s business operations continue to evolve and includes 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, precious and base metals and luxury hard assets. The Company believes that its disclosure of the nature of its operations, the inventory held at each segment and associated risk factors provides a sufficient understanding of its impact on our business. See Note 4 – Inventories and Note 10 – Revenue, for further detail. 12 Reclassifications For the Company’s 2023 Annual Report, the presentation of the operations section within its Consolidated Cash Flow Statements 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 $ 473,881 from operating leases to non-cash lease expenses in the Consolidated Cash Flow Statement for the period ending March 31, 2023. See the Condensed Consolidated Statements of Cash Flows for further detail. For the Company’s 2023 Annual Report, the amount reported for other current assets within the Consolidated Balance Sheets 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 for the period ended December 31, 2023. See the Condensed Consolidated Balance Sheets for further detail. 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 for the period ended December 31, 2023. See Note 6 – Property and equipment, net for further detail. 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 intangibles, net. The Company has elected to reclassify the historical presentation of the aforementioned for the period ended December 31, 2023. See Note 7 – Intangibles, net for further detail. 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 are effective beginning in the Company’s fiscal 2025 and are applied prospectively. 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 ASU’s had, or are expected to have, a material impact on the Company’s results of operations, financial condition or liquidity. 13 NOTE 4 — INVENTORIES The following table summarizes the details of the Company’s inventories: March 31, December 31, 2024 2023 Consumer Trade inventories $ 24,128,255 $ 21,905,055 Sub-total 24,128,255 21,905,055 Commercial Trade inventories 1,494,181 1,241,122 Sub-total 1,494,181 1,241,122 $ 25,622,436 $ 23,146,177 NOTE 5 — GOODWILL The following table summarizes the details of the Company’s changes in goodwill: March 31, December 31, 2024 2023 Consumer Opening balance $ 300,000 $ - Additions/(reductions) (1) - 300,000 Sub-total 300,000 300,000 Commercial Opening balance 3,621,453 3,621,453 Additions/(reductions) - - Sub-total 3,621,453 3,621,453 $ 3,921,453 $ 3,921,453 (1) The increase in goodwill of $ 300 thousand for the year ended December 31, 2023 relates to the Company’s acquisition of Steven Kretchmer, Inc. on September 12, 2023 (“Kretchmer Transaction”). The Kretchmer Transaction remains within the measurement period of ASC 805, Business Combinations. The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination. 14 NOTE 6 — PROPERTY AND EQUIPMENT, NET The following table summarizes the details of the Company’s property and equipment, net: Adjusted March 31, December 31, December 31, 2024 2023 Reclassification 2023 Consumer Land $ 1,824,892 $ 1,824,892 $ - $ 1,824,892 Building and improvements 3,039,823 4,126,507 ( 1,443,207 ) 2,683,300 Leasehold improvements 1,444,814 1,450,695 - 1,450,695 Furniture and fixtures 793,646 802,058 ( 101,226 ) 700,832 Machinery and equipment 1,150,137 1,224,783 ( 3,215 ) 1,221,568 Vehicles 22,859 22,859 - 22,859 Construction in progress (1) 1,392,786 - 1,547,648 1,547,648 9,668,957 9,451,794 - 9,451,794 Less: accumulated depreciation ( 3,019,183 ) ( 2,946,727 ) - ( 2,946,727 ) Sub-total 6,649,774 6,505,067 - 6,505,067 Commercial Leasehold improvements 151,647 151,647 - 151,647 Furniture and fixtures 145,950 145,950 - 145,950 Machinery and equipment 1,095,917 1,142,731 ( 48,979 ) 1,093,752 Vehicles 222,232 222,232 - 222,232 Construction in progress (2) 96,257 - 48,979 48,979 1,712,003 1,662,560 - 1,662,560 Less: accumulated depreciation ( 893,459 ) ( 819,389 ) - ( 819,389 ) Sub-total 818,544 843,171 - 843,171 Corporate Land 1,106,664 1,106,664 - 1,106,664 Building and improvements 2,490,879 2,505,716 ( 3,500 ) 2,502,216 Machinery and equipment 45,234 28,627 - 28,627 Enterprise resource planning system (3) - 191,075 ( 191,075 ) - Construction in progress (4) 179,849 - 3,500 3,500 3,822,626 3,832,082 ( 191,075 ) 3,641,007 Less: accumulated depreciation ( 242,723 ) ( 225,021 ) - ( 225,021 ) Sub-total 3,579,903 3,607,061 ( 191,075 ) 3,415,986 $ 11,048,221 $ 10,955,299 $ ( 191,075 ) $ 10,764,224 (1) Construction in progress relates to the build-out of production equipment. (2) Construction in progress relates to the build-out of our Arizona retail stores. (3) Reclassified amount to intangibles, net. See Note 7 – Intangible, Net for further details. (4) Construction in progress pertains to improvements to our corporate headquarters. 15 NOTE 7 — INTANGIBLES, NET The following table summarizes the details of the Company’s intangible assets, net: Adjusted March 31, December 31, December 31, 2024 2023 Reclassification 2023 Consumer Domain names $ 41,352 $ 41,352 $ - $ 41,352 Point of sale system 330,000 330,000 - 330,000 371,352 371,352 - 371,352 Less: accumulated amortization ( 368,598 ) ( 365,852 ) - ( 365,852 ) Sub-total 2,754 5,500 - 5,500 Commercial Trademarks/tradenames 2,869,000 2,869,000 - 2,869,000 Customer contracts 1,873,000 1,873,000 - 1,873,000 Customer relationships 1,809,000 1,809,000 - 1,809,000 6,551,000 6,551,000 - 6,551,000 Less: accumulated amortization ( 2,405,767 ) ( 2,248,405 ) - ( 2,248,405 ) Sub-total 4,145,233 4,302,595 - 4,302,595 Corporate Enterprise resource planning system 384,242 - - Assets under development (1) - - 191,075 191,075 384,242 - 191,075 191,075 Less: accumulated amortization ( 19,212 ) - - - Sub-total 365,030 - 191,075 191,075 $ 4,513,017 $ 4,308,095 $ - $ 4,499,170 (1) Assets under development relate to the development of our enterprise resource planning system. The following table depicts the Company’s estimated future amortization expense related to intangible assets as of March 31, 2024: Consumer Commercial Corporate Total 2024 2,754 491,325 57,638 551,717 2025 - 655,100 76,848 731,948 2026 - 655,100 76,848 731,948 2027 - 655,100 76,848 731,948 2028 - 655,100 76,848 731,948 Thereafter - 1,033,508 - 1,033,508 $ 2,754 $ 4,145,233 $ 365,030 $ 4,513,017 16 NOTE 8 — ACCRUED EXPENSES The following table summarizes the details of the Company’s accrued expenses: March 31, December 31, 2024 2023 Consumer Accrued interest $ 14,970 $ 11,904 Payroll 637 226,435 Taxes 122,186 125,130 Other 2 - Sub-total 137,795 363,469 Commercial Accrued interest 8,308 7,903 Payroll - 375,663 Taxes 8,367 - Unvouchered inventory payments 1,137,801 1,041,188 Other 45,111 96,422 Sub-total 1,199,587 1,521,176 Corporate Accrued interest 7,148 7,227 Payroll - 24,543 Taxes 908,219 404,357 Professional fees 122,821 165,651 Other 91 - Sub-total 1,038,279 601,778 $ 2,375,661 $ 2,486,423 17 NOTE 9 — SEGMENT INFORMATION The following table depicts the Company’s disaggregated statements of income: Three Months Ended March 31, 2024 % of Sales (1) 2023 % of Sales (1) Consumer $ 28,226,017 70.8 % $ 36,704,397 73.7 % Commercial 11,631,763 29.2 % 13,105,135 26.3 % Sales 39,857,780 100.0 % 49,809,532 100.0 % Consumer 24,676,828 61.9 % 32,719,429 65.7 % Commercial 4,860,268 12.2 % 5,680,201 11.4 % Cost of goods sold 29,537,096 74.1 % 38,399,630 77.1 % Gross margin 10,320,684 25.9 % 11,409,902 22.9 % Consumer 3,251,490 8.2 % 2,396,025 4.8 % Commercial 4,385,486 11.0 % 5,509,278 11.1 % Selling, general and administrative 7,636,976 19.2 % 7,905,303 15.9 % Consumer 93,676 0.2 % 98,134 0.2 % Commercial 249,889 0.6 % 256,217 0.5 % Depreciation and amortization 343,565 0.8 % 354,351 0.7 % Total operating expenses 7,980,541 20.0 % 8,259,654 16.6 % Operating income 2,340,143 5.9 % 3,150,248 6.3 % Other income/(expense): Consumer 8,005 0.0 % 23,534 0.0 % Commercial 230,523 0.6 % 187,245 0.4 % Other income 238,528 0.6 % 210,779 0.4 % Consumer ( 64,401 ) ( 0.2 )% ( 59,618 ) ( 0.1 )% Commercial ( 56,453 ) ( 0.1 )% ( 57,446 ) ( 0.1 )% Interest expense ( 120,854 ) ( 0.3 )% ( 117,064 ) ( 0.2 )% Income before income taxes 2,457,817 6.2 % 3,243,963 6.5 % Consumer ( 59,151 ) ( 0.1 )% ( 317,841 ) ( 0.6 )% Commercial ( 491,127 ) ( 1.3 )% ( 399,805 ) ( 0.9 )% Income tax expense ( 550,278 ) ( 1.4 )% ( 717,646 ) ( 1.5 )% Net income $ 1,907,539 4.8 % $ 2,526,317 5.1 % (1) The "% of Sales" figures present the proportion of each line item to the total consolidated sales for the respective period, which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The following chart depicts the Company’s total assets: As of March 31, 2024 December 31, 2023 Consumer $ 34,993,787 $ 35,839,361 Commercial 35,682,400 33,777,041 Corporate 4,069,231 3,857,827 $ 74,745,418 $ 73,474,229 18 NOTE 10 — REVENUE The following table depicts the Company’s disaggregation of total sales and gross margin: For the Three Months Ended March 31, 2024 2023 Sales Gross Margin Margin Sales Gross Margin Margin Consumer $ 28,226,017 $ 3,549,189 12.6 % $ 36,704,397 $ 3,984,968 10.9 % Commercial 11,631,763 6,771,495 58.2 % 11,684,643 7,424,934 63.5 % Correction of immaterial error (1) 1,420,492 - - Commercial adjusted 13,105,135 7,424,934 56.7 % $ 39,857,780 $ 10,320,684 25.9 % $ 49,809,532 $ 11,409,902 22.9 % (1) Correction of Immaterial Error relating to freight arrangement services, see Note 3 - ACCOUNTING POLICIES AND ESTIMATES for further detail. The following table lists the opening and closing balances of our contract assets and liabilities: Accounts Contract Contract Receivable Assets Liabilities Consumer Opening Balance - 1/1/2023 839,239 - 196,382 Closing Balance - 3/31/2023 443,223 - 153,379 Commercial Opening Balance - 1/1/2023 7,110,536 - - Closing Balance - 3/31/2023 7,848,131 - - Accounts Contract Contract Receivable Assets Liabilities Consumer Opening Balance - 1/1/2024 3,411,501 - 58,728 Closing Balance - 3/31/2024 244,914 - 96,485 Commercial Opening Balance - 1/1/2024 4,399,658 - - Closing Balance - 3/31/2024 4,352,140 - - The Company has no contract assets, and the only contract liability is customer deposits, which is reported within other liabilities in the Unaudited Condensed Consolidated Balance Sheets. 19 NOTE 11 — LEASES The following table depicts the Company’s future annual minimum leases payments as of March 31, 2024: Operating Leases Consumer 2024 $ 415,526 2025 412,271 2026 354,998 2027 50,114 2028 - Thereafter - Total minimum lease payments 1,232,909 Less imputed interest ( 65,819 ) Sub-total 1,167,090 Commercial 2024 1,048,490 2025 1,321,298 2026 474,320 2027 33,454 2028 - Thereafter - Total minimum lease payments 2,877,562 Less imputed interest ( 118,652 ) Sub-total 2,758,910 Total 3,926,000 Current portion 1,840,082 $ 2,085,918 All of the Company’s facilities leases as of March 31, 2024 are non-cancellable and triple net, for which it pays its proportionate share of common area maintenance, property taxes and property insurance. Leasing costs for the three months ended March 31, 2024 and 2023 were $ 784,735 and $ 659,616 , respectively, comprised of a combination of minimum lease payments and variable lease costs. As of March 31, 2024, the weighted average remaining lease term and weighted average discount rate for operating leases were 2.3 years and 4.3 %. As of March 31, 2023, the weighted average remaining lease term and weighted average discount rate for operating leases were 3.3 years and 4.4 %. 20 NOTE 12 — 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 March 31, 2024 2023 Basic weighted average shares 26,419,039 26,924,631 Effect of potential dilutive securities 15,000 15,000 Diluted weighted average shares 26,434,039 26,939,631 For the three months ended March 31, 2024 and 2023, there was a total of 15,000 common stock options, warrants, and Restricted Stock Units (“RSUs”) unexercised. For the three months ended March 31, 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”), that gave management authorization to purchase up to one million ( 1,000,000 ) 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 as of March 31, 2024: Total Number Average Price Shares Fiscal Period of Shares Purchased Paid per Share Total Price Paid Available to Purchase Balance as of January 1, 2024 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 $ 3,060,195 382,687 21 NOTE 13 — DEBT The following table summarizes the details of the Company’s long-term debt obligations: Outstanding Balance March 31, December 31, 2024 2023 Consumer Note payable, FSB (1) $ 2,537,700 $ 2,563,108 Note payable, Truist Bank (3) 829,204 838,430 Notes payable, TBT (4,5) 2,043,823 2,064,928 Note payable, Kretchmer Transaction (6) 200,000 200,000 Sub-total 5,610,727 5,666,466 Commercial Note payable, FSB (2) 5,754,790 5,815,381 Note payable, Avail Transaction (7) 666,667 833,333 Sub-total 6,421,457 6,648,714 Corporate Line of credit, FSB (8) - - Note payable, TBT (9) 2,589,538 2,618,311 Sub-total 2,589,538 2,618,311 Sub-total 14,621,722 14,933,491 Current portion ( 1,475,625 ) ( 1,361,443 ) $ 13,146,097 $ 13,572,048 The following table depicts the Company’s future principal payments on long-term debt obligations as of March 31, 2024: 2024 2025 2026 2027 2028 Thereafter Consumer Note payable, FSB (1) 81,564 112,106 2,344,030 - - - Note payable, Truist Bank (3) 28,029 38,745 40,203 42,077 43,639 636,511 Notes payable, TBT (4,5) 70,158 495,231 78,985 80,973 83,696 1,234,780 Note payable, Kretchmer Transaction (6) 200,000 - - - - - Sub-total 379,751 646,082 2,463,218 123,050 127,335 1,871,291 Commercial Note payable, FSB (2) 186,131 254,483 5,314,176 - - - Note payable, Avail Transaction (7) 500,000 166,667 - - - - Sub-total 686,131 421,150 5,314,176 - - - Corporate Line of Credit, FSB (8) - - - - - - Note payable, TBT (9) 87,761 2,501,777 - - - - Sub-total 87,761 2,501,777 - - - - $ 1,153,643 $ 3,569,009 $ 7,777,394 $ 123,050 $ 127,335 $ 1,871,291 (1) On November 23, 2021, the consumer segment entered into a $ 2.781 million secured amortizing note payable with Farmer’s State Bank of Oakley, Kansas (“FSB”). The note payable bears interest at 3.10 % and matures on November 15, 2026. (2) On November 23, 2021, the commercial segment entered into a $ 6.309 million secured amortizing note payable with FSB. The note payable bears interest at 3.10 % and matures on November 15, 2026. (3) On July 9, 2020, the consumer segment entered into a $ 1.195 million secured amortizing note payable with Truist Bank. The note payable bears interest at 3.65 % and matures on July 9, 2030. (4) On September 14, 2020, the consumer segment entered into a $ 620 thousand secured amortizing note payable with Texas Bank & Trust (“TBT”). The note payable bears interest at 3.75 % and matures on September 14, 2025. (5) On July 30, 2021, the consumer segment entered into a $ 2.215 million secured amortizing note payable with TBT. The note payable bears interest at 3.75 % and matures on July 30, 2031. (6) On September 12, 2023, the consumer segment entered into a $300 thousand secured amortizing note payable in relation to the Kretchmer Transaction. The note payable’s imputed interest is 3.10% and matures on October 1, 2025 . The consumer segment is restructuring the Kretchmer Transaction and the aforementioned terms and conditions and as such is electing to record the note payable in current liabilities. (7) On October 29, 2021, the consumer segment entered into a $4.500 million secured amortizing note payable in relation to the acquisition of Avail Recovery Solutions, LLC on October 29, 2021 (“Avail Transaction"). The note payable’s imputed interest is 3.10% and matures on April 1, 2025 . (8) On November 23, 2021, the Company entered into a $ 3.500 million secured line of credit with FSB. The line of credit bears interest at 3.10 % and matures on November 15, 2024. This note was previously presented within our commercial segment and is now presented within corporate as the line of credit provides borrowing capacity for all segments. (9) On November 4, 2020, a wholly owned subsidiary of Envela entered into a $ 2.960 million secured amortizing note payable with TBT. The note payable bears interest at 3.25 % and matures on November 4, 2025. 22 The Company was in compliance with all of its debt obligation covenants for the periods ended March 31, 2024 and March 31, 2023. The following table depicts the Company’s future scheduled aggregate principal payments and maturities as of March 31, 2024: Scheduled Principal Loan Scheduled Principal Payments and Maturities by Year: Payments Maturities Total 2024 953,643 200,000 1,153,643 2025 773,845 2,795,164 3,569,009 2026 465,087 7,312,307 7,777,394 2027 123,050 - 123,050 2028 127,335 - 127,335 Thereafter 301,908 1,569,383 1,871,291 Total $ 2,744,868 $ 11,876,854 $ 14,621,722 NOTE 14 — STOCK-BASED COMPENSATION There was no stock-based compensation expense for the three months ended March 31, 2024 and March 31, 2023. NOTE 15 — 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 as of March 31, 2024 and March 31, 2023. NOTE 16 — 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. 23