ITEM 1A. RISK FACTORS
Investment in our Company involves risk. You should carefully consider the risks described below and the other information in this Form 10-K and other filings we make from time to time with the SEC, including our consolidated financial statements and accompanying notes. Any of the following risks could materially and adversely affect our reputation, financial condition, results of operations, or liquidity. These risks are not the only risks we face. Our business, financial condition, results of operations, or liquidity could also be materially and adversely affected by additional factors that apply to all companies generally, or by risks not currently known to us or that we currently view as immaterial. We can provide no assurance and make no representation that any of our risk mitigation efforts, although we believe them to be reasonable, will be successful.
Risks Related to Budgeting and Forecasting
An inability to reasonably budget or forecast our commercial and operational performance and liquidity requirements may make it difficult to meaningfully compare our results of operations between periods.
Our financial condition and results of operations could vary significantly from quarter to quarter and from year to year due to a variety of factors, many of which are outside our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful or provide significant context. In addition to the risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:
Our ability to accurately forecast sales and appropriately plan our expenses, capital expenditures, and liquidity;
The timing and effectiveness of marketing campaigns;
Successful expansion into new markets or expanding relationships with business partners and customers;
The effectiveness of business partner and customer retention strategies;
Seasonality along with any associated weather disruptions;
Macroeconomic conditions; and
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Our ability to collect payments from customers on a timely basis.
Risks Related to Our Business Relationships
An inability to attract new customers, turn existing customers into repeat customers, maintain relationships with significant business partners, or renew contracts with them on favorable terms.
Our business partner and customer base may be unfavorably impacted by several factors, including, but not limited to:
Dissatisfaction with our services and the assortment, pricing, and quality of our products;
Intense competition in our markets;
Lack of market acceptance or familiarity with our brands, particularly in new geographies or targeted markets.
We expect to continue to expend capital on marketing efforts to acquire and retain business partners and customers, which, if unsuccessful in creating transactional relationships, may have a material adverse effect on our financial condition and results of operations.
Within our commercial segment, the business primarily depends on maintaining relationships and contractual arrangements with major business partners. If our key business partners terminate important transactional 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.
Risks Related 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, refining capacity, and governmental and private mint supply. The Company seeks to reduce its exposure to market volatility through disciplined inventory management procedures. As circumstances permit, the Company may use financial derivative instruments to minimize the impact of market volatility. If commodity markets underlying our bullion- or precious-metal-laden inventory are misjudged, or if our inventory management or hedging strategies are unsuccessful, our business could suffer material adverse consequences.
While jewelry manufacturing is a major driver of gold demand, management believes that gold costs are predominantly driven by investment transactions, which may result in significant cost fluctuations. The Company’s cost of merchandise and potential earnings may be adversely affected by investment market factors that cause gold prices to rise or fall significantly.
A significant portion of the consumer segment’s profits is generated by buying and selling pre-owned fine jewelry and 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 undervalued or the value is uncertain.
Any of the aforementioned risk factors may have a material adverse effect on our financial condition and results of operations.
An inability to increase retail prices to reflect higher commodity costs.
Historically, jewelry retailers have been able to increase prices over time to reflect changes in commodity costs. However, particularly sharp increases in commodity costs may result in a time lag before they 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
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may occur. Moreover, any sustained increases in commodity costs could require us to fund inventory purchases at higher prices or to adjust the merchandise we offer, 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 where we sell into, may result in 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.
The consumer wholesale and retail jewelry business is seasonal.
The consumer segment’s retail jewelry sales are seasonal by nature. The periods around Valentine’s Day and Mother’s Day, and the Holiday Months leading up to Christmas, are typically the main seasons for jewelry sales. The amounts of sales and operating income generated during these periods depend on general economic conditions and other factors beyond our control. Given the timing of the corresponding season, inclement weather can at times pose a substantial barrier to consumer retail activity and adversely affect store traffic. If inclement weather conditions were to occur during these peak sales periods, they could have a material adverse effect on our financial condition and results of operations.
Risks Related to Competition
Intense competition across all markets for our 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. Increases in these competitive influences could adversely affect our operations by reducing 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 and 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 established competitors, there could be fewer buyers or sellers, which could have a material adverse effect on our financial condition and results of operations.
Jewelry and watch retailing are 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, online retailers, 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, making it easier to compare prices with other retailers. If our consumer brands do not offer the same or equivalent items at competitive prices, consumers may purchase their jewelry from competitors, which could have a material adverse effect on our financial condition and results of operations.
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Risks Related to Demand
Demand for our products and services may decrease, and there can be no assurances that the Company will be able 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 business 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 our customers’ financial condition 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 significant changes in its business partners’ or customers' demand for, or regular access to, its products and services, our revenue could decrease significantly with a commensurate impact on our financial condition. Even if the Company makes adaptations, its business partners or customers may resist or reject services or products whose adaptations make them less attractive or less available. In any event, the effect of any change in services or products 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 may strain our operating cash flow and have other negative impacts on our business.
Consumer demand for the Company’s products can affect inventory levels. If consumer demand is lower than expected, inventory levels can rise, straining 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 could lead to unfulfilled orders, revenue loss, and adverse impacts on customer relationships. Volatility and uncertainty in macroeconomic factors also make it more difficult to forecast consumer demand across markets. Failure to properly judge consumer demand and effectively manage inventory could have a material adverse effect on the results of operations and financial condition.
Risks Related to the Luxury Hard Asset Market
Changing 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 due to their price point, trends toward sustainability, and greater understanding of their origin. Although we offer lab-grown diamond collections at lower price points, this may have a material adverse effect on our financial condition and results of operations.
Consumer acceptance of near-perfect counterfeit products may result in increased competition.
Technology has evolved to the point 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 increase competition in the luxury recommerce market, which could have a material adverse effect on our financial condition and results of operations.
The proliferation of near-perfect counterfeit products may erode consumer confidence.
While the company employs a team of authentication experts to ensure transactional confidence in both the buying and selling processes, the continued proliferation of near-perfect counterfeit goods may erode consumer confidence in the luxury recommerce market, which could have a material adverse effect on our financial condition and results of operations.
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Risks Related 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, 2025. 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, 2025. 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’s assets. This concentration of ownership may also delay, defer, or even prevent a change in control of the Company and may make certain 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.
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 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 and NYSE Texas-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, internal control, and reporting requirements.
Governments, including agencies at the federal, 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 may have a material adverse effect on the Company’s financial condition 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 rules and regulations subsequently adopted by the SEC, the Public Company Accounting Oversight Board, and the NYSE American and NYSE Texas. 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 condition and results of operations.
Risks Related 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 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
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compliance. Failure to comply with applicable AML regulations could result in regulatory enforcement actions, fines, reputational harm, or other adverse consequences that could impact our financial condition 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 that meet certain criteria were required to file reports with the SEC beginning in May 2014, disclosing their due diligence measures related to 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-mineral disclosure and reporting.
If the Company’s sourcing processes change, or if it is determined that the Company’s current practices should be covered by the conflict-minerals reporting and disclosure guidelines, significant additional measures would be required to comply with these rules. Management cannot be certain of the costs associated with such regulatory compliance. The final rules also cover tungsten, which is present in a small number of items 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 responses from parts of the Company’s supply chain to verification requests were adverse, it could harm our ability to obtain merchandise and increase compliance costs. In addition, Envela partners with refiners for a portion of its sales. These refiners are subject to increasingly stringent governmental regulations governing their refining operations, and any change or increase in such regulations in the U.S. or abroad could have a material adverse effect on our financial condition 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 commercial segment, are subject to greater federal, state, and local environmental regulations and compliance requirements. Increased requirements for licensing and permitting may require changes in our business service delivery models, capital expenditures, and compliance programs. While we acknowledge our commitment to our communities and stewardship of our properties, operating processes, and outcomes, increased regulation and compliance could have a material adverse effect on our financial condition and results of operations.
Changes to ESG regulations may impact our reputation and financial results.
The methodologies and standards for tracking and reporting on ESG matters are relatively new, remain unstandardized, and continue to evolve. As a result, our ESG-related disclosures may not be calculated in the same manner as, or be comparable to, similarly titled measures presented by us in other contexts, by other companies, or by third-party estimates. If our ESG-related disclosures are, or are perceived by government authorities, investors, or other 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 regularly monitors developments to ensure it has adequately assessed its strategy and capital requirements related to compliance.
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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 the reclamation of commodities from electronic waste. We are required to obtain environmental permits and approvals for some of our operations and must spend time and resources to ensure compliance. As noted above, we cannot guarantee the timely receipt of required permits or their renewals, or that such processes will proceed 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 usable goods from it. Such regulations tend to become more restrictive over time, and new regulations may be enacted that require material changes to our operations or otherwise result in a material adverse effect on our financial condition and results of operations.
Risks Related to Cyber Threats and Rapid Advancements in AI
The Company’s websites or portals 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 or portals may be vulnerable to computer viruses, break-ins, and other disruptive issues caused by internet users. These occurrences could result in liability for damages and could damage the Company’s reputation. Circumvention of security measures may result in the misappropriation of business partner and/or customer information or other confidential information, or attacks may render our websites inoperable or compromised with false information. Any such security breach could lead to interruptions, delays, and cessation of service to customers or business partners and could have a material adverse effect on our reputation, financial condition, and results of operations.
A failure of our information systems could prevent the Company from effectively managing and controlling operations and serving our business partners and customers.
The Company relies on information systems to manage and operate our businesses. These include our communications systems, websites, portals, point-of-sale application, enterprise resource planning system, and other underlying operating systems. Any disruption in the availability of our information systems could adversely affect the Company’s ability to service business partners and customers and could have a material adverse effect on our reputation, financial condition, and results of operations.
A failure to maintain the security of our business partners', customers', employees', or vendors' information, or to comply with privacy laws, could expose us to litigation, government enforcement actions, and costly response measures.
In connection with the buying and selling functions, providing services, and transacting with non-trade vendors, we transmit or receive credit and debit card information, payment instructions, and other data required to comply with Company and governmental requirements. We also have access to, collect, or maintain certain private data pertaining to employees and their dependents. In some instances, we may leverage third-party service providers to collect data. Additionally, we may share information with select vendors to assist us in conducting our business. While we have implemented procedures and technology intended to protect such information and require appropriate controls of our service providers, external attackers could compromise such controls and result in unauthorized disclosure of such information, as attacks are becoming increasingly sophisticated, may include attacks on our business partners, customers, employees, or vendors, and do not always or immediately produce detectable indicators of compromise. If attackers obtain information via our business or employee relationships, and if these impacted parties do not employ good online security practices (e.g., use the same password across different sites or do not use available multifactor authentication options), these passwords could be used to gain access to their information or accounts with us in certain situations.
Because we accept debit and credit cards for payment, we are subject to industry data protection standards and protocols, such as the Payment Card Industry Data Security Standards (“PCI DSS”), issued by the PCI DSS Council. Nonetheless, our applicable payment processing partner(s) may be vulnerable to, and unable to detect and appropriately respond to, cardholder data security breaches and data loss, including successful attacks on applications, systems, or networks.
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A significant security breach of any kind, which could be undetected for a period of time, or a significant failure by us with applicable privacy and information security laws, regulations, standards, and related reporting requirements could expose us to risks of data loss, litigation, government enforcement actions, fines or penalties, negative publicity and reputational harm, business disruption and costly response measures (e.g., providing notification to, and credit monitoring services for, affected individuals, as well as further upgrades to our security measures; procuring a replacement vendor if one of our current vendors is unable to fulfill its obligations to us due to a cyberattack or incident) which may not be covered by or may exceed the coverage limits of our insurance policies, and could materially our operations. Any resulting publicity could materially and affect our reputation, financial condition, and results of operations.
Challenges or failures in maintaining or updating our existing technology, or in implementing new technologies.
We depend on a variety of information technology systems, including systems owned and managed by third-party vendors, for the efficient functioning of our business, including, without limitation, transaction processing and the management of our employees, inventories, and customer-facing digital applications and operations. Such systems are subject to damage or interruption from power surges and outages, facility damage, physical theft, computer and telecommunications failures, inadequate or ineffective redundancy, malicious code (e.g., malware, ransomware, or similar), successful attacks (e.g., account compromise; phishing; denial of service; and application, network or system vulnerability exploitation), software upgrade failures or code , natural and human . A system or , design , to, or to these systems may require a significant investment to repair or replace, our operations and affect our ability to meet business and reporting requirements, may result in the or of data, and our reputation, all of which could materially and affect our financial condition and results of operations.
Our technology initiatives may not deliver desired results or may do so on a delayed schedule. We rely heavily on our information technology staff to execute our technology initiatives while maintaining existing systems, and on third parties to maintain, enhance, and periodically upgrade many of these systems and software programs so they can continue to support our business. The inability or failure of these third parties or us to continue to maintain, enhance and upgrade these systems and software programs or efficiently implement and integrate new systems could disrupt or reduce the efficiency of our operations or retain vulnerability exploitation risk if we were unable to convert to alternate systems in an efficient and timely manner and could expose us to risk of a attack. In addition, costs and for any reason associated with the implementation or upgrade of systems, software, and technology, or with maintenance or adequate support of existing systems, could or reduce the of our operations and affect our ability to meet business and reporting requirements and could materially and affect our financial condition 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 for practical applications that enhance processes and serve our business partners and customers. Its adoption may result in new or expanded risks and liabilities, including governmental and regulatory compliance, litigation, ethical concerns, confidentiality, or security risks that may have a material adverse effect on our reputation, financial condition, 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 business partners, equipment suppliers, customers, or operations are located could have a material adverse effect on our financial condition 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.
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We may incur losses due to unforeseen or catastrophic events, terrorist attacks, extreme weather, or natural disasters.
The occurrence of unforeseen or catastrophic events, terrorist attacks, extreme weather events, or natural disasters could create economic and financial disruptions and lead to operational difficulties (e.g., travel limitations and occupancy restrictions 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 condition and results of operations.
Risks Related to Inventory
The impact of inventory shrinkage.
A significant part of our business is tied to high-dollar stock-keeping units (“SKUs”), which are inherently higher-risk inventory. The Company seeks to mitigate these risks through robust policies and procedures, employee training, regular and random stock-takes, reporting, security monitoring of facilities and store locations, appropriate levels of insurance, and overall risk management strategies. Despite good-faith efforts to ensure our inventory remains in the Company's custody and, upon sale, reaches its destination, there can be no assurance that we will be successful in our overall mitigation strategies, which may have a material adverse effect on our reputation, financial condition, and results of operations.
We must carefully manage our inventory to prevent a negative impact on our operating cash flows, profitability, and financial condition.
Our inventory represented 36.5% and 33.0% of the total assets as of December 31, 2025 and 2024. Efficient inventory management is a key component of our business success and profitability. We must maintain sufficient inventory levels and a desirable product mix to meet customer demand without allowing those levels to rise to the point that holding costs increase the risk of inventory shrinkage and/or have a material adverse effect on our financial condition and results of operations.
The impact of inventory curation related to store expansion may increase our carrying costs, reduce our inventory turnover, and expose us to margin volatility.
A key factor in the success of a new store opening within the consumer segment is curating an inventory position that meets customer demand. As is inherent in the recommerce industry, we must purchase our inventory before a new store opens. Holding the curated inventory until the store opens may increase carrying costs, reduce our inventory turnover, and expose us to margin volatility if held for an extended period, which may have a material adverse effect on our financial condition and results of operations.
Risks Related to Legal and Regulatory Claims and Implementation of Accounting Standards
The failure to protect our reputation.
Our success depends, in part, on protecting the reputation of Envela and its brands and on delivering products and services successfully. While our operating standards and business models are predicated on trust and transparency and being a responsible operator and communicator, there can be no assurance that we will be able to prevent adverse media, reports,
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or comments related to the Company or its brands, or that our responses will be deemed to have mitigated the impact. Negative reputational incidents could have a material adverse effect on financial condition and results of operations.
Legal proceedings may cause us to incur unexpected liabilities.
Our business is subject to litigation or other legal proceedings. The outcome of these matters may be difficult to assess or quantify. Plaintiffs may seek to recover large or indeterminate amounts, and the magnitude of the potential loss may remain unknown for lengthy periods. In addition, certain matters, if decided adversely to us or settled by us and not covered by insurance, may result in the incurrence of a liability that could have a material adverse effect on our reputation, financial condition, and results of operations.
Asserting our rights to ownership of our tradenames, trademarks, and other intellectual property may result in unexpected costs, and failure to protect these rights may harm our ability to compete effectively.
Our commercial success depends on protecting our tradenames, trademarks, and intellectual property, which create brand awareness and allow us to maintain competitive advantages. Competitors may adopt tradenames and trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. If we are unable to protect our trade names and trademarks and establish name recognition, we may not be able to compete effectively, which could have a material adverse effect on our financial condition and results of operations.
The impact of implementing accounting standards, rules, and regulations established by the SEC, NYSE American and Texas could increase our operating costs and result in changes to our financial statements.
The implementation of accounting standards may require certain systems, internal processes and controls, and other changes that could increase our operating costs and affect our consolidated financial statements. U.S. GAAP and related pronouncements, implementation guidelines, and interpretations regarding a wide range of matters relevant to our business involve many subjective assumptions, estimates, and judgments that could significantly affect our reported or expected financial performance. The outcome of such changes could include litigation or regulatory actions, which could materially and adversely affect our financial condition and results of operations.
Risks Related to Liquidity Management Strategies
Changes in liquidity and the ability to secure capital at reasonably economic terms could hinder our ability to operate and expand our business.
A significant reduction in cash flow from operations, or the inability to secure capital on reasonable economic terms, 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, it could hinder the ability to acquire new stores or to operate those profitably. Credit and equity markets remain sensitive to world events, pandemics, foreign and domestic conflicts, macroeconomic developments, and investor sentiment. Therefore, costs associated with borrowing or raising capital may increase, making it more difficult to obtain financing for operations or expansion, or to refinance long-term obligations as they come due. 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 such as 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. While the Company seeks to operate with financial discipline, we can make no assurances that our ability to obtain capital through the debt or equity markets will be at reasonably economic terms or be at all. A significant increase in the cost of capital or an to access debt or equity markets may have a material effect on our financial condition and results of operations.
Sustained high interest rates have increased the cost of borrowing for the Company.
We are currently experiencing a sustained high-interest-rate environment, which may increase our borrowing costs associated with accessing our line of credit, taking on new or refinancing debt obligations, or make it difficult or impossible to secure financing.
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Risks Related to Our Employees
The Company’s expansion into new geographic regions may increase the difficulty of hiring and retaining employees across a geographically diverse workforce.
The Company has portions of its business located outside 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.
The Company’s success depends on its 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 unable to attract or retain qualified personnel. There is a limited number of people with knowledge and experience within our business verticals. The Company does not have employment agreements with its employees and does not maintain life insurance policies for any of its 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 it will continue to retain key management and skilled personnel, or that it will be able to attract, assimilate, and retain other highly qualified personnel in the future.
Legal or regulatory changes, including, but not limited to, minimum wage increases or changes in salary levels for certain overtime-exempt positions, may increase the Company’s labor costs.
Many of our entry-level employees are paid at rates in line with applicable state minimum wages, and, consequently, in certain situations, increases to those wage rates have increased our labor costs. If wage rates/salary levels were to further increase significantly and/or rapidly, compliance with such increases could adversely affect our earnings. Our ability to pass along labor and other related costs to our customers may be constrained if we are not able to increase sales volumes with commensurate margins and/or if we are not able to offset such increased costs elsewhere in our business, which may have a material adverse impact on our financial condition and results of operations.
Risks Related to Our Strategies
Our business depends significantly on strategies, initiatives, and investments designed to increase sales and profitability, improve operational efficiency, and contain costs.
We have strategies, initiatives, and investments (e.g., such as those relating to merchandising, identifying locations and for new store development, store formats and concepts, digital marketing, inventory management, technology, margin expansion, and cost containment) in various stages of testing, evaluation, and implementation, which are designed to improve of financial condition and results of operations. The effectiveness of these initiatives is inherently uncertain, even when tested successfully, and depends on the consistency of training and execution, workforce stability, ease of execution, scalability, and customer acceptance. The Company cannot guarantee that our strategies, initiatives, and investments will meet their intended objectives, which may have a material adverse impact on our financial condition and results of operations.
The Company may assume additional liabilities in connection with acquisitions or may be unable 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 liabilities;
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Not realizing the anticipated financial benefit from the acquired companies;
Diversion of management’s attention;
Negative effects on existing business partner and customer 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 condition and results of operations.
The success of our online merchandising initiatives for the sale of bullion and luxury hard assets is not assured.
The cost of marketing products online is substantial and is inherently impacted by the multitude of SKUs in a recommerce business. Unlike other retailers with fixed product lines, our SKUs vary based on the inventory we receive. Therefore, maintaining an online marketplace requires significant investment in technology and devoted personnel to ensure a quality customer experience. Not all of our SKUs are marketed online. While our consumer segment continues to evaluate technologies and approaches for expanding our sales channels, the Company cannot guarantee that these initiatives will be successful. If the Company is not successful with its initiatives, it may adversely affect brand awareness and have a material adverse effect on our financial condition and results of operations.
Our ability to procure real estate on reasonably economic terms, the timeliness of new store openings, and the risks associated with store placement may be limiting factors in the expansion of our business.
Our ability to expand our consumer segment is largely predicated on geographic store expansion. Securing a lease or purchasing real estate on reasonably favorable terms may cause delays or outright halt our expansionary efforts in a given market. Further, upon securing a lease or purchasing real estate, delays may be caused by unmet construction and permitting deadlines or by delays in obtaining a certificate of occupancy or operating licenses, which are largely outside the Company's control. We also face further risks associated with store placement, including, but not limited to:
Strategically picking new geographies;
Selection and availability of store locations in easily accessible and high-visibility locations;
Misjudging market dynamics;
Effectiveness of marketing campaigns; and
Selection of inventory that is in line with the demographics of the new market.
The Company cannot guarantee it will be successful in mitigating these risks, which may have a material adverse effect on financial condition and results of operations if we incur further costs to open the associated store(s) or delays in the intended revenue streams.
Risks Related to Product and Service Offerings
Our electronic device and harvested parts business is subject to the risk of declines in value related to changes in consumer preferences, foreign trade risks, export compliance, and the length of time inventory is held.
The value of the electronic devices that we collect and refurbish, or the value of harvested parts, may fall below the prices we have paid, which could adversely affect our profitability. These devices and technology in which we harvested parts from 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 consumer demand, including due to changes in consumer preferences, changes in business partner promotions and seasonality; and supply chain constraints. The value and availability of devices or parts may also be affected by adverse foreign trade relations and escalating trade tensions, including trade policies, treaties, government relations, tariffs, and other trade restrictions or compliance requirements. If the value of or availability
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of devices or parts is significantly reduced, it could have a material adverse effect on our financial condition 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 the disposal of electronic devices, including cleansing storage devices from customer equipment and either recycling them for resale or disposing of them in an environmentally compliant manner. If the Company fails to meet its contractual and regulatory obligations, it could be subject to contractual damages, penalties, and reputational damage. Also, the Company’s or its subcontractors’ failure to comply with applicable laws and regulations governing the disposal of the equipment could result in environmental liabilities. Such environmental liabilities may be joint and several, meaning the Company could be held responsible for more than its share of the liability. 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 condition, and results of operations.
Risks Related to Changes in Tax Rules
We may incur higher 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 condition and results of operations.
Various states may assert that the Company is liable for sales and use, commerce, or similar taxes.
We ship products to retail customers throughout the U.S. In South Dakota v. Wayfair, Inc., the U.S. Supreme Court ruled that states may tax purchases made from out-of-state sellers, even if the seller has no physical presence in the taxing state. The effect of the ruling was to uphold economic nexus principles in determining sales and use tax nexus. As a result of the decision, most states have adopted laws that require an out-of-state retailer to register and collect sales and use, or other non-income-type, taxes upon meeting certain economic nexus standards, regardless of whether the company has a physical presence in the state. Although the Company believes it is complying with the applicable legislative requirements and collecting tax where obligated to do so, our interpretation and application of the legislation may differ from those of the states, which could result in the states' attempts to impose additional tax liabilities, including potential penalties and interest. Furthermore, state, or local government requirements that out-of-state sellers collect sales and use taxes could deter future sales, which could have a material adverse impact on our financial condition and results of operations.
Risks Related to Insurance Coverage
We may incur increased costs or loss of certain insurance coverages.
We procure third-party insurance policies to cover various operating-related risks, including employment practices liability, workers’ compensation, property and casualty, cybersecurity, directors’ and officers' liability, species, and general business liabilities. Should these providers discontinue or increase the cost of coverage or change terms and conditions of our policies in a manner not favorable to us, our insurance costs could increase, and if we are not able to offset these costs elsewhere in our business, it may have a material adverse effect on our financial condition and results of operation.
