Envela Corp 10-Q

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 March 31, 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 months ended March 31, 2024 and March 31, 2023. The following discussion and analysis provides information for which 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, and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report. 24 Table of Contents 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 consolidated financial information, but which are not presented in our interim consolidated financial statements prepared in accordance with U.S. GAAP. We believe that providing these non-U.S. GAAP financial measures adds a meaningful presentation of our operating and financial performance. See the reconciliation of net income to Adjusted EBITDA and Net Cash, in Non-U.S. GAAP Financial Measures below. 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. We believe that the accounting estimates discussed below relate to the more significant areas involving management’s judgments and estimates. 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 variations in 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 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. 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. 25 Table of Contents 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. Segment Activities The Company believes it is well positioned to take advantage of its overall capital structure. Consumer Segment Our strategy is to expand the number of locations we operate through 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. Commercial Segment Our strategy is to expand both organically and through acquisitions. The Company has taken considerable steps to bolster its management team and operating systems as to position itself for growth. Our production facilities are capable of managing the expansion of existing relationships and consolidation of acquisition targets within a relative 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 is 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. Recent Accounting Pronouncements See Note 3 - Accounting Policies and Estimates, to these interim condensed consolidated financial statements for recently adopted accounting pronouncements. Non-U.S. GAAP Financial Measures Adjusted EBITDA 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. Adjusted EBITDA may not be comparable to similarly titled metrics of other companies. Adjusted EBITDA means earnings before interest expense, other (income) expense, net, income tax expense, and depreciation and amortization. Adjusted EBITDA is a non-U.S. GAAP measure and should not be considered as an alternative to the presentation of net income or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. 26 Table of Contents The following table provides a reconciliation of net income to Adjusted EBITDA for the three months ended March 31, 2024 and 2023: For the Three Months Ended March 31, 2024 2023 Consumer Commercial Consolidated Consumer Commercial Consolidated Adjusted EBITDA Reconciliation: Net Income $ 88,476 $ 1,819,063 $ 1,907,539 $ 1,136,884 $ 1,389,433 $ 2,526,317 Add (deduct): Depreciation and amortization 93,676 249,889 343,565 98,134 256,217 354,351 Other income (8,005 ) (230,523 ) (238,528 ) (23,534 ) (187,245 ) (210,779 ) Interest expense 64,401 56,453 120,854 59,618 57,446 117,064 Income tax expense 59,151 491,127 550,278 317,841 399,805 717,646 Adjusted EBITDA $ 297,699 $ 2,386,009 $ 2,683,708 $ 1,588,943 $ 1,915,656 $ 3,504,599 Net Cash Net Cash is the difference between (i) cash and cash equivalents and (ii) the sum of debt obligations. We believe that presenting net of cash is useful to investors as a measure of our leverage, as cash and cash equivalents can be used, among other things, to repay indebtedness. The following table depicts the Company’s net cash: March 31, December 31, 2024 2023 Total cash $ 19,783,867 $ 17,853,853 Less: debt obligations (14,621,722 ) (14,933,491 ) Net cash $ 5,162,145 $ 2,920,362 The Company had a net cash position of $5,162,145 for the period ended March 31, 2024, as compared to a net cash position of $2,920,362 for the period ended December 31, 2023. Results of Operations The following table depicts our disaggregated statements of income for the three months ended March 31, 2024 and 2023: For the Three Months Ended March 31, 2024 2023 Consumer Commercial Consolidated % of Sales (1) Consumer Commercial Consolidated % of Sales (1) Sales $ 28,226,017 $ 11,631,763 $ 39,857,780 100.0 % $ 36,704,397 $ 13,105,135 $ 49,809,532 100.0 % Cost of goods sold 24,676,828 4,860,268 29,537,096 74.1 % 32,719,429 5,680,201 38,399,630 77.1 % Gross margin 3,549,189 6,771,495 10,320,684 25.9 % 3,984,968 7,424,934 11,409,902 22.9 % Expenses: Selling, general and administrative 3,251,490 4,385,486 7,636,976 19.2 % 2,396,025 5,509,278 7,905,303 15.9 % Depreciation and amortization 93,676 249,889 343,565 0.8 % 98,134 256,217 354,351 0.7 % Total operating expenses 3,345,166 4,635,375 7,980,541 20.0 % 2,494,159 5,765,495 8,259,654 16.6 % Operating income 204,023 2,136,120 2,340,143 5.9 % 1,490,809 1,659,439 3,150,248 6.3 % Other income/(expense): Other income 8,005 230,523 238,528 0.6 % 23,534 187,245 210,779 0.4 % Interest expense (64,401 ) (56,453 ) (120,854 ) -0.3 % (59,618 ) (57,446 ) (117,064 ) -0.2 % Income before income taxes 147,627 2,310,190 2,457,817 6.2 % 1,454,725 1,789,238 3,243,963 6.5 % Income tax expense (59,151 ) (491,127 ) (550,278 ) -1.4 % (317,841 ) (399,805 ) (717,646 ) -1.5 % Net income $ 88,476 $ 1,819,063 $ 1,907,539 4.8 % $ 1,136,884 $ 1,389,433 $ 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. 27 Table of Contents Comparison of Three Months Ended March 31, 2024 and 2023 The individual segments reported the following: Sales Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 39,857,780 $ 49,809,532 $ (9,951,752 ) -20.0 % % of consolidated sales 100.0 % 100.0 % Consumer $ 28,226,017 $ 36,704,397 $ (8,478,380 ) -23.1 % % of consumer sales 100.0 % 100.0 % Commercial $ 11,631,763 $ 13,105,135 $ (1,473,372 ) -11.2 % % of commercial sales 100.0 % 100.0 % Consolidated Sales decreased by $9,951,752, or 20.0%, during the three months ended March 31, 2024 to $39,857,780, as compared to $49,809,532 during the same period in 2023. Consumer Segment Sales in the consumer segment decreased by $8,478,380, or 23.1%, during the three months ended March 31, 2024 to $28,226,017, as compared to $36,704,397 during the same period in 2023. The change was primarily attributed to building an inventory position in advance of opening our Arizona stores and as such the business had to allocate inventory to these stores that would have relieved in a normal operating cycle. Commercial Segment Sales in the commercial segment decreased by $1,473,372, or 11.2%, during the three months ended March 31, 2024 to $11,631,763, as compared to $13,105,135 during the same period in 2023. The change was primarily attributed to lower revenue from softened demand for reuse hard drives, but was offset by stronger sales from the resale of personal technology assets. We had a strong supply of personal technology assets from our retail trade in partners who destocked in late Fiscal 2023. Cost of Goods Sold Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 29,537,096 $ 38,399,630 $ (8,862,534 ) -23.1 % % of consolidated sales 74.1 % 77.1 % Consumer $ 24,676,828 $ 32,719,429 $ (8,042,601 ) -24.6 % % of consumer sales 87.4 % 89.1 % Commercial $ 4,860,268 $ 5,680,201 $ (819,933 ) -14.4 % % of commercial sales 41.8 % 43.3 % Consolidated Cost of goods sold decreased by $8,862,534, or 23.1%, during the three months ended March 31, 2024 to $29,537,096, as compared to $38,399,630 during the same period in 2023. Consumer Segment Cost of goods sold in the consumer segment decreased by $8,042,601, or 24.6%, during the three months ended March 31, 2024 to $24,676,828, as compared to $32,719,429 during the same period in 2023. The change was primarily attributed to the aforementioned inventory build and by a mix of higher margin assets relieved from inventory which correspondingly had favorable impact on cost of goods sold as a % of sales. 28 Table of Contents Commercial Segment Cost of goods sold in the commercial segment decreased by $819,933, or 14.4%, during the three months ended March 31, 2024 to $4,860,268, as compared to $5,680,201 during the same period in 2023. The change was primarily attributed overall lower volumes and by a mix of higher margin assets relieved from inventory which correspondingly had a favorable impact on cost of goods sold as a % of sales. Gross Margin Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 10,320,684 $ 11,409,902 $ (1,089,218 ) -9.5 % % of consolidated sales 25.9 % 22.9 % Consumer $ 3,549,189 $ 3,984,968 $ (435,779 ) -10.9 % % of consumer sales 12.6 % 10.9 % Commercial $ 6,771,495 $ 7,424,934 $ (653,439 ) -8.8 % % of commercial sales 58.2 % 56.7 % Consolidated Gross margin decreased by $1,089,218, or 9.5%, during the three months ended March 31, 2024 to $10,320,684, as compared to $11,409,902 during the same period in 2023. Consumer Segment Gross margin in the consumer segment decreased by $435,779, or 10.9%, during the three months ended March 31, 2024 to $3,549,189, as compared to $3,984,968 during the same period in 2023. The net impact of the aforementioned resulted in sales contributing $(8,478,380) and cost of goods sold contributing $8,042,601 to the net decrease in gross margin of $435,779. Commercial Segment Gross margin in the commercial segment decreased by $653,439, or 8.8%, during the three months ended March 31, 2024 to $6,771,495, as compared to $7,424,934 during the same period in 2023. The net impact of the aforementioned resulted in sales contributing $(1,473,372) and cost of goods sold contributing $819,933 to the net decrease in gross margin of $653,439. Selling, General and Administrative Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 7,636,976 $ 7,905,303 $ (268,327 ) -3.4 % % of consolidated sales 19.2 % 15.9 % Consumer $ 3,251,490 $ 2,396,025 $ 855,465 35.7 % % of consumer sales 11.5 % 6.5 % Commercial $ 4,385,486 $ 5,509,278 $ (1,123,792 ) -20.4 % % of commercial sales 37.7 % 42.0 % Consolidated Selling, general and administrative expense decreased by $268,327, or 3.4%, during the three months ended March 31, 2024 to $7,636,976, as compared to $7,905,303 during the same period in 2023. 29 Table of Contents Consumer Segment Selling, general and administrative expense in the consumer segment increased by $855,465, or 35.7%, during the three months ended March 31, 2024 to $3,251,490, as compared to $2,396,025 during the same period in 2023. The change was primarily attributed to the onboarding of human capital, training and travel costs associated with our Arizona stores opening. As the Arizona stores open and sales are generated, our selling, general and administrative expense is expected to realign as a % of sales. Commercial Segment Selling, general and administrative expense in the commercial segment decreased by $1,123,792, or 20.4%, during the three months ended March 31, 2024 to $4,385,486, as compared to $5,509,278 during the same period in 2023. The change was primarily attributed to operational focus on human capital costs and processing efficiencies at our production facilities as they continue to align costs with our business model and margin achievement. Depreciation and Amortization Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 343,565 $ 354,351 $ (10,786 ) -3.0 % % of consolidated sales 0.8 % 0.7 % Consumer $ 93,676 $ 98,134 $ (4,458 ) -4.5 % % of consumer sales 0.3 % 0.3 % Commercial $ 249,889 $ 256,217 $ (6,328 ) -2.5 % % of commercial sales 2.1 % 2.0 % Consolidated Depreciation and amortization expense decreased by $10,786, or 3.0%, during the three months ended March 31, 2024 to $343,565, as compared to $354,351 during the same period in 2023. Consumer Segment Depreciation and amortization expense in the consumer segment decreased by $4,458, or 4.5%, during the three months ended March 31, 2024 to $93,676, as compared to $98,134 during the same period in 2023. There was no material impact from assets capitalized or reaching maturity in the comparative periods and as such no discussion point. Commercial Segment Depreciation and amortization expense in the commercial segment decreased by $6,328, or 2.5%, during the three months ended March 31, 2024 to $249,889, as compared to $256,217 during the same period in 2023. There was no material impact from assets capitalized or reaching maturity in the comparative periods and as such no discussion point. 30 Table of Contents Other Income/(Expense) Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 238,528 $ 210,779 $ 27,749 13.2 % % of consolidated sales 0.6 % 0.4 % Consumer $ 8,005 $ 23,534 $ (15,529 ) -66.0 % % of consumer sales 0.0 % 0.1 % Commercial $ 230,523 $ 187,245 $ 43,278 23.1 % % of commercial sales 2.0 % 1.4 % Consolidated Other income increased by $27,749, or 13.2%, during the three months ended March 31, 2024 to $238,528, as compared to $210,779 during the same period in 2023. Consumer Segment Other income in the consumer segment decreased by $15,529, or 66.0%, during the three months ended March 31, 2024 to $8,005, as compared to $23,534 during the same period in 2023. The change was primarily attributed to higher working capital requirements as the Company is carrying a higher inventory position from the aforementioned costs of launching our Arizona stores and as such there was less excess cashflow available to sweep to their interest-bearing cash account. Interest income comprised $6 and $21,564 of other income during the three months ended March 31, 2024 and March 31, 2023, respectively. Commercial Segment Other income in the commercial segment increased by $43,278, or 23.1%, during the three months ended March 31, 2024 to $230,523, as compared to $187,245 during the same period in 2023. The change was primarily attributed to a reduction in accounts receivable from the completion of a large SOW with a recurring customer in which excess cashflow above working capital requirements was swept to their interest-bearing cash account. Interest income comprised $196,562 and $61,378 of other income during the three months ended March 31, 2024 and March 31, 2023, respectively. Interest Expense Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ (120,854 ) $ (117,064 ) $ (3,790 ) 3.2 % % of consolidated sales -0.3 % -0.2 % Consumer $ (64,401 ) $ (59,618 ) $ (4,783 ) 8.0 % % of consumer sales -0.2 % -0.2 % Commercial $ (56,453 ) $ (57,446 ) $ 993 -1.7 % % of commercial sales -0.5 % -0.4 % Consolidated Interest expense increased by $3,790, or 3.2%, during the three months ended March 31, 2024 to $120,854, as compared to $117,064 during the same period in 2023. Consumer Segment Interest expense in the consumer segment increased by $4,783, or 8.0%, during the three months ended March 31, 2024 to $64,401, as compared to $59,618 during the same period in 2023. There was no material impact from additions or amortization in the comparative periods and as such no discussion point. 31 Table of Contents Commercial Segment Interest expense in the commercial segment decreased by $993, or 1.7%, during the three months ended March 31, 2024 to $56,453, as compared to $57,446 during the same period in 2023. There was no material impact from amortization in the comparative periods and as such no discussion point. Income Tax Expense Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ (550,278 ) $ (717,646 ) $ 167,368 -23.3 % % of consolidated sales -1.4 % -1.5 % Consumer $ (59,151 ) $ (317,841 ) $ 258,690 -81.4 % % of consumer sales -0.2 % -0.9 % Commercial $ (491,127 ) $ (399,805 ) $ (91,322 ) 22.8 % % of commercial sales -4.2 % -3.1 % Consolidated Income tax expense, for both segments, for the three months ended March 31, 2024, was $550,278, a decrease of $167,368, as compared to income tax expense of $717,646 for the three months ended March 31, 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 22.4% and 22.1% for the three months ended March 31, 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 March 31, 2024, compared to the three months ended March 31, 2023. Net Income Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 1,907,539 $ 2,526,317 $ (618,778 ) -24.5 % % of consolidated sales 4.8 % 5.1 % Consumer $ 88,476 $ 1,136,884 $ (1,048,408 ) -92.2 % % of consumer sales 0.3 % 3.1 % Commercial $ 1,819,063 $ 1,389,433 $ 429,630 30.9 % % of commercial sales 15.6 % 10.6 % Consolidated Net income decreased by $618,778, or 24.5%, during the three months ended March 31, 2024 to $1,907,539, as compared to $2,526,317 during the same period in 2023. Consumer Segment Net income decreased in the consumer segment by $1,048,408, or 92.2%, during the three months ended March 31, 2024 to $88,476, as compared to $1,136,884 during the same period in 2023. Refer to the aforementioned attributes discussed within the Comparison of Three Months Ended March 31, 2024 and 2023 for further details. 32 Table of Contents Commercial Segment Net income increased in the commercial segment by $429,630, or 30.9%, during the three months ended March 31, 2024 to $1,819,063, as compared to $1,389,433 during the same period in 2023. Refer to the aforementioned attributes discussed within the Comparison of Three Months Ended March 31, 2024 and 2023 for further details. Earnings Per Share The following table depicts the Company’s earnings per share: Three Months Ended March 31, Change 2024 2023 Amount % Consolidated $ 0.07 $ 0.09 $ (0.02 ) -22.2 % Consolidated Earnings per share, for the three months ended March 31, 2024, for net income per basic and diluted shares attributable to holders of our Common Stock was $0.07, compared to $0.09 per basic and diluted shares attributable to holders of our Common Stock for the three months ended March 31, 2023. Liquidity and Capital Resources The following table summarizes the Company’s Consolidated Statement of Cashflows: Three Months Ended March 31, Change 2024 2023 Amount % Net cash provided by (used in): Operating activities $ 3,791,721 $ 2,924,025 $ 867,696 29.7 % Investing activities (644,792 ) 569,522 $ (1,214,314 ) -213.2 % Financing activities (1,216,915 ) (310,807 ) (906,108 ) 291.5 % Net increase in cash and cash equivalents $ 1,930,014 $ 3,182,740 $ (1,252,726 ) -39.4 % Operating Activities During the three months ended March 31, 2024, cash flows provided by operations totaled $3,791,721, and during the three months ended March 31, 2023, cash flows provided by operations totaled $2,924,025, a change of $867,696. The increase in cash provided by operations for the three months ended March 31, 2024 was driven primarily by an increase in cash generated from a settlement of a large SOW with a recurring customer. Investing Activities During the three months ended March 31, 2024 and 2023, cash flows (used in) provided by investing activities totaled $(644,792) and $569,522, respectively, a change of $(1,214,314). The increase in cash used in investing activities during the three months ended March 31, 2024 was primarily attributed to an increase in capital expenditures related to our enterprise resource planning system, improvements to our corporate headquarters and leaseholds for our planned Arizona stores. The prior comparative period included a favorable $569,522 movement, which primarily consisted of payments received from notes receivable of $578,250, offset by the purchase of property and equipment of $8,728, which further contributed to the variance. Financing Activities During the three months ended March 31, 2024 and 2023, cash flows (used in) financing activities totaled $(1,216,915) and $(310,807), respectively, a change of $(906,108). The increase in cash used in financing activities during the three months ended March 31, 2024 was primarily due to our share buyback plan as principal payments on debt were in relative parity. 33 Table of Contents 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 March 31, 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 cashflows 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. 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.