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Polished.com (POL) - 2022 Q1 - Quarterly Report
Polished.com Polished.com (US:POL)2022-05-16 10:57

PART I FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's analysis of financial condition and results Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including core statements and detailed notes Condensed Consolidated Balance Sheets This section presents the Company's condensed consolidated balance sheets, detailing assets, liabilities, and equity at period-end Condensed Consolidated Balance Sheets (in thousands) | ASSETS/LIABILITIES & EQUITY | March 31, 2022 | December 31, 2021 | | :-------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $25,821 | $25,724 | | Restricted cash | $2,583 | $8,067 | | Receivables, net | $26,288 | $24,594 | | Merchandise inventory, net | $52,963 | $44,754 | | Total Current Assets | $134,010 | $121,318 | | Goodwill | $191,614 | $191,614 | | Intangible assets, net | $41,658 | $44,212 | | TOTAL ASSETS | $386,581 | $375,984 | | LIABILITIES | | | | Accounts payable & accrued expenses | $83,959 | $72,592 | | Customer deposits | $13,080 | $20,702 | | Total Current Liabilities | $109,111 | $105,341 | | TOTAL LIABILITIES | $175,037 | $170,381 | | STOCKHOLDERS' EQUITY | | | | TOTAL STOCKHOLDERS' EQUITY | $211,544 | $205,603 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $386,581 | $375,984 | Condensed Consolidated Statements of Operations This section presents the Company's condensed consolidated statements of operations, detailing revenues, expenses, and net income or loss Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Product sales, net | $152,752 | $13,697 | | Cost of goods sold | $116,883 | $11,069 | | Gross profit | $35,869 | $2,628 | | Total Operating Expenses | $25,802 | $5,909 | | INCOME (LOSS) FROM OPERATIONS | $10,067 | $(3,281) | | Total Other Income (Expenses) | $(762) | $(212) | | NET INCOME (LOSS) BEFORE INCOME TAXES | $9,305 | $(3,493) | | INCOME TAX EXPENSE | $(3,383) | $- | | NET INCOME (LOSS) | $5,922 | $(3,493) | | NET INCOME (LOSS) PER COMMON SHARE – BASIC AND DILUTED | $0.06 | $(0.57) | | WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED | 106,387,332 | 6,111,200 | Condensed Consolidated Statements of Stockholders' Equity (Deficit) This section presents changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity (Deficit) (in thousands) | Item | Balance at Dec 31, 2021 | Stock-based compensation | Net income (loss) | Balance at Mar 31, 2022 | | :-------------------------- | :---------------------- | :----------------------- | :---------------- | :---------------------- | | Common Stock Amount | $11 | $- | $- | $11 | | Additional Paid-in Capital | $224,648 | $19 | $- | $224,667 | | Accumulated Deficit | $(19,056) | $- | $5,922 | $(13,134) | | Stockholders' Equity | $205,603 | $19 | $5,922 | $211,544 | | Item | Balance at Dec 31, 2020 | Issuance of warrants with debt | Stock-based compensation | Net loss | Balance at Mar 31, 2021 | | :-------------------------- | :---------------------- | :----------------------------- | :----------------------- | :---------------- | :---------------------- | | Common Stock Amount | $1 | $- | $- | $- | $1 | | Additional Paid-in Capital | $13,409 | $1,340 | $125 | $- | $14,874 | | Accumulated Deficit | $(26,726) | $- | $- | $(3,493) | $(30,219) | | Stockholders' Equity (Deficit) | $(13,316) | $1,340 | $125 | $(3,493) | $(15,344) | Condensed Consolidated Statements of Cash Flows This section presents the Company's condensed consolidated statements of cash flows, categorizing cash movements by operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(3,747) | $(2,808) | | Net cash used in investing activities | $(6) | $(126) | | Net cash (used in) provided by financing activities | $(1,634) | $4,426 | | NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $(5,387) | $1,492 | | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD | $33,791 | $9,912 | | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD | $28,404 | $11,404 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes supporting the condensed consolidated financial statements, covering various accounting policies and disclosures NOTE 1—BASIS OF PRESENTATION The financial statements are unaudited, prepared in accordance with GAAP and SEC rules for interim reporting, and include normal recurring adjustments. They should be read with the 2021 Annual Report on Form 10-K, and interim results are not indicative of full-year performance - Unaudited condensed consolidated financial statements prepared in accordance with GAAP and SEC rules for interim financial reporting26 - Interim results for the three months ended March 31, 2022, are not necessarily indicative of the results for the full year ending December 31, 2022, or future periods26 NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS The Company has elected an extension for ASU 2016-13 (Credit Losses) until fiscal years beginning after December 15, 2022, and does not expect a material impact. Similarly, ASU 2021-08 (Business Combinations) is effective after December 15, 2022, and is not expected to have a material impact - The Company has elected an extension for ASU 2016-13 (Credit Losses) and the effective date will be for fiscal years beginning after December 15, 2022. No material impact is expected28 - ASU 2021-08 (Business Combinations) is effective for public entities for fiscal years beginning after December 15, 2022. No material impact is expected29 NOTE 3—LIQUIDITY AND GOING CONCERN ASSESSMENT Management believes the Company has sufficient funds from operations to fund its activities and service debt for one year from the filing date, despite the ongoing impact of COVID-19. The financial statements are prepared on a going concern basis, anticipating improved operations Liquidity and Financial Position (in millions) | Metric | March 31, 2022 | | :---------------------- | :------------- | | Cash and cash equivalents | $25.8 | | Restricted cash | $2.6 | | Operating income | $10.1 | | Cash flows used in operations | $(3.7) | | Working capital | $24.9 | - Management believes sufficient funds will be generated from operations to fund activities and service debt obligations for one year from the filing date33 - The Company's financial statements are prepared on a going concern basis, with management forecasting improved operations34 NOTE 4—REVENUES The Company generates revenue from selling household appliances, furniture, and other home goods. Revenue is recognized upon transfer of goods, with each customer order typically representing a single performance obligation. Appliance sales significantly increased due to the Appliances Connection Acquisition - Revenue is recognized upon the transfer of goods or services to customers, with each order generally containing one performance obligation36 Disaggregated Revenue by Product Type (in thousands) | Product Type | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------- | :-------------------------------- | :-------------------------------- | | Appliance sales | $140,975 | $10,273 | | Furniture sales | $4,155 | $2,328 | | Other sales | $7,622 | $1,096 | | Total | $152,752 | $13,697 | NOTE 5—SUPPLEMENTAL FINANCIAL STATEMENT DISCLOSURES This note provides detailed breakdowns of receivables, merchandise inventory, property and equipment, and intangible assets, as well as accounts payable and accrued expenses. Intangible assets, primarily customer relationships and tradename, are amortized over 5 years Receivables, net (in thousands) | Receivables | March 31, 2022 | December 31, 2021 | | :---------------------- | :------------- | :---------------- | | Trade accounts receivable | $15,295 | $10,694 | | Vendor rebates receivable | $9,125 | $11,633 | | Other receivables | $2,261 | $2,660 | | Total receivables, net | $26,288 | $24,594 | Merchandise Inventory, net (in thousands) | Inventory Type | March 31, 2022 | December 31, 2021 | | :---------------------- | :------------- | :---------------- | | Appliances | $50,856 | $41,922 | | Furniture | $986 | $1,166 | | Other | $1,964 | $2,439 | | Total merchandise inventory, net | $52,963 | $44,754 | Intangible Assets, net (in thousands) | Intangible Asset | March 31, 2022 | December 31, 2021 | | :---------------------- | :------------- | :---------------- | | Customer relationships | $24,148 | $24,148 | | Marketing related - tradename | $26,935 | $26,935 | | Total intangible assets | $51,083 | $51,083 | | Accumulated amortization | $(9,425) | $(6,871) | | Intangible assets, net | $41,658 | $44,212 | - Intangible assets are amortized on a straight-line basis over a weighted average estimated useful life of 5.0 years41 Accounts Payable and Accrued Expenses (in thousands) | Accounts Payable & Accrued Expenses | March 31, 2022 | December 31, 2021 | | :---------------------------------- | :------------- | :---------------- | | Trade accounts payable | $51,660 | $41,166 | | Accrued sales tax | $24,812 | $23,628 | | Accrued payroll liabilities | $1,707 | $984 | | Accrued income taxes | $1,933 | $334 | | Total accounts payable and accrued expenses | $83,959 | $72,592 | NOTE 6—LEASES The Company entered into a new operating lease for office space in Brooklyn, NY, with an initial ROU asset and liability of $1.1 million. Operating lease right-of-use assets totaled $15.3 million as of March 31, 2022, with total operating lease liabilities of $16.6 million. Finance lease liabilities were $0.4 million - Entered into a new operating lease for office space in Brooklyn, NY, commencing March 1, 2022, with an initial ROU asset and liability of $1.1 million44 Operating Lease Information (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------ | :------------- | :---------------- | | Operating lease right-of-use assets | $15,262 | $14,937 | | Total operating lease liabilities | $16,631 | $16,367 | | Weighted-average remaining lease term (months) | 73 | 77 | | Weighted average discount rate | 3.90% | 4.00% | Operating Lease Expense (in thousands) | Period | Operating Lease Expense | | :------------------------------ | :---------------------- | | Three months ended March 31, 2022 | $1.0 million | | Three months ended December 31, 2021 | $0.2 million | - Outstanding balance of finance leases was $0.4 million as of March 31, 202249 NOTE 7—RELATED PARTIES The Company has ongoing related party transactions, including a management services agreement with 1847 Partners LLC, purchases from DMI (an appliance purchasing cooperative where the CEO is a director), and lease agreements with entities owned by the CEO and COO - Expensed management fees of $0.1 million for the three months ended March 31, 2022 and 2021, to 1847 Partners LLC, a company owned by the Company's chairman53 - Purchased $73.4 million of finished goods from DMI, an appliance purchasing cooperative in which the Company owns a 5% interest and its CEO is on the board, during the three months ended March 31, 202255 - Total rent expense under related party leases was $0.5 million for the three months ended March 31, 2022, with entities owned by the CEO and COO56 NOTE 8—STOCKHOLDERS' EQUITY The Company's authorized common stock increased to 250,000,000 shares. Stock options decreased due to forfeitures from employee terminations, while warrants outstanding remained unchanged - Authorized common stock increased from 200,000,000 to 250,000,000 shares as of December 21, 202157 Stock Options Activity (Three Months Ended March 31, 2022) | Item | Options | Weighted-Average Exercise Price | | :-------------------------- | :-------- | :------------------------------ | | Outstanding at Dec 31, 2021 | 312,960 | $6.17 | | Forfeited | (132,960) | $9.00 | | Outstanding at Mar 31, 2022 | 180,000 | $4.08 | | Exercisable at Mar 31, 2022 | 30,000 | $9.00 | - Stock-based compensation expense was $0.02 million for the three months ended March 31, 2022, down from $0.1 million in the prior year61 Warrants Activity (Three Months Ended March 31, 2022) | Item | Warrants | Weighted-Average Exercise Price | | :-------------------------- | :--------- | :------------------------------ | | Outstanding at Dec 31, 2021 | 92,514,423 | $2.30 | | Outstanding at Mar 31, 2022 | 92,514,423 | $2.30 | | Exercisable at Mar 31, 2022 | 92,514,423 | $2.30 | NOTE 9—BUSINESS COMBINATIONS The Company completed the Appliances Connection Acquisition in June 2021 for $224.7 million and the AC Gallery Acquisition in July 2021 for $1.4 million. Pro forma results show significant increases in net sales and net income for the three months ended March 31, 2022, compared to 2021, reflecting the impact of these acquisitions - Appliances Connection Acquisition completed on June 2, 2021, for an aggregate purchase price of $224.7 million6364 - AC Gallery Acquisition completed on July 29, 2021, for a purchase price of $1.4 million6869 Unaudited Pro Forma Results (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $152,752 | $123,711 | | Net income | $5,922 | $10,899 | | Basic and Diluted EPS | $0.06 | $1.78 | NOTE 10—NOTES PAYABLE The Company had a $60.0 million M&T Term Loan with a carrying value of $53.9 million as of March 31, 2022, which was subsequently paid in full on May 9, 2022, as part of a refinancing with a new credit agreement - As of March 31, 2022, the carrying value of the M&T Term Loan was $53.9 million, with $7.5 million classified as a current liability73 - The M&T Term Loan was repaid in quarterly installments of $1.5 million, with the remaining unpaid principal due on June 2, 202676 - The M&T Loan was paid in full on May 9, 2022, as disclosed in subsequent events80 NOTE 11—EARNINGS (LOSS) PER SHARE Basic and diluted earnings per share for the three months ended March 31, 2022, was $0.06, a significant improvement from a loss of $0.57 in the prior year, driven by net income and a higher weighted average common shares outstanding Basic and Diluted Earnings (Loss) Per Share (in thousands, except per share amounts) | Metric | March 31, 2022 | March 31, 2021 | | :-------------------------------------- | :------------- | :------------- | | Net income (loss) | $5,922 | $(3,493) | | Weighted average common shares outstanding | 106,387,332 | 6,111,200 | | Basic and diluted earnings (loss) per share | $0.06 | $(0.57) | - 92,694,423 potential common share equivalents from stock options and warrants were excluded from diluted EPS calculations for March 31, 2022, as their effect was anti-dilutive82 NOTE 12—COMMITMENTS AND CONTINGENCIES The Company is involved in legal proceedings concerning a stockholder-approved amendment to increase authorized common stock. Three beneficial owners questioned the vote tabulation, leading the Company to seek validation from the Delaware Court of Chancery, which has been consolidated with a class action lawsuit alleging improper tabulation and breach of fiduciary duties - Stockholders approved an amendment to increase authorized common stock by 50,000,000 shares on December 21, 202184 - Three beneficial owners raised concerns about the vote tabulation for the Share Increase Proposal, leading the Company to file a Section 205 Petition with the Delaware Court of Chancery to validate the amendment85 - A class action lawsuit (Scot T. Boden v. 1847 Goedeker Inc., et al.) was filed, alleging improper vote tabulation and breach of fiduciary duties, which has been consolidated with the 205 Petition87 NOTE 13—SUBSEQUENT EVENTS On May 9, 2022, the Company entered into a new $140 million senior secured credit facility with Bank of America, N.A., consisting of a $100 million term loan and a $40 million revolving credit facility. The proceeds from the new term loan were used to fully prepay and terminate the existing M&T Credit Agreement - On May 9, 2022, the Company entered into a new Credit Agreement for $140 million senior secured credit facilities, including a $100 million New Term Loan and a $40 million New Revolving Loan88 - The proceeds from the New Term Loan were used to prepay and terminate the existing M&T Credit Agreement in full on May 9, 202289 NOTE 14—SUPPLIER CONCENTRATION For the three months ended March 31, 2022, the Company purchased 77% of its finished goods from DMI, a significant supplier. However, the Company believes alternative suppliers are available if needed - The Company purchased 77% of finished goods from DMI for the three months ended March 31, 202291 - The Company believes numerous other suppliers could be substituted if DMI becomes unavailable or non-competitive91 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition, operating results, liquidity, and cash flows, highlighting acquisition impacts and challenges Overview The Company operates as a content-driven, technology-enabled shopping destination for appliances, furniture, and home goods, offering a wide range of national, global, and luxury brands through warehouse fulfillment centers and showrooms - Operates a content-driven and technology-enabled shopping destination for appliances, furniture, and home goods95 - Offers national, global, and luxury brands, including Bosch, Miele, Thermador, and Viking, across various product categories95 Recent Developments Recent developments include securing a new $140 million credit facility, transitioning corporate headquarters to Brooklyn, NY, and approving a $25.0 million share repurchase program, though no shares have been repurchased as of March 31, 2022 - Entered into a new $140 million senior secured credit facility on May 9, 2022, comprising a $100 million term loan and a $40 million revolving credit facility96 - Transitioned corporate headquarters to Brooklyn, New York, and expanded office space with a new lease agreement98 - Approved a new share repurchase program of up to $25.0 million of common stock on December 17, 2021; no shares repurchased as of March 31, 202299100 Ongoing Impact of Coronavirus Pandemic The COVID-19 pandemic continues to impact the Company's business, particularly through supply chain delays and disruptions, increased freight costs, and potential negative effects on consumer spending due to macroeconomic conditions like inflation and decreased confidence - COVID-19 pandemic continues to cause supply chain delays and disruptions, negatively impacting product sourcing and potentially increasing costs101 - Global economic deterioration, including rising unemployment, increased inflation, and decreased consumer confidence, could negatively impact discretionary consumer spending102 Trends and Principal Factors Affecting Our Financial Performance Key factors affecting financial performance include the ability to acquire and retain customers, competitive pricing, product offerings, industry demand, market position, and successful integration of acquisitions. Freight costs have increased significantly as a proportion of sales due to the pandemic and fuel costs, impacting gross margins - Freight costs as a percentage of sales increased by 220 basis points from Q1 2021 on a consolidated proforma basis, putting downward pressure on gross margins104 - Management believes increased freight costs are temporary and margins will improve as supply chain stabilizes and fuel costs normalize104 - Supply chain constraints have amplified order cancellations and refunds105 Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations The comparability of financial results is significantly affected by recent acquisitions, particularly the Appliances Connection Acquisition and AC Gallery Acquisition, which introduce materially different characteristics and economics compared to historical operations - The Appliances Connection Acquisition (June 2, 2021) and AC Gallery Acquisition (July 29, 2021) significantly impact the comparability of current and future financial results to historical periods106110 - Future acquisitions may further impact comparability due to potentially different economic characteristics106 Results of Operations The Company experienced substantial growth in product sales and gross profit for the three months ended March 31, 2022, primarily due to the Appliances Connection Acquisition. This led to a significant increase in net income compared to a net loss in the prior year, despite higher operating expenses Product sales, net Net product sales significantly increased, primarily driven by the Appliances Connection Acquisition Product Sales, Net (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Product sales, net | $152,752 | $13,697 | $139,055 | 1,015.2% | - Increase primarily due to the impact of the Appliances Connection Acquisition111 Product Sales, Net by Type (in thousands) | Product Type | March 31, 2022 ($) | March 31, 2022 (%) | March 31, 2021 ($) | March 31, 2021 (%) | | :-------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Appliance sales | $140,975 | 92.3% | $10,273 | 75.0% | | Furniture sales | $4,155 | 2.7% | $2,328 | 17.0% | | Other sales | $7,622 | 5.0% | $1,096 | 8.0% | | Total | $152,752 | 100.0% | $13,697 | 100.0% | Cost of goods sold Cost of goods sold increased substantially, primarily due to the Appliances Connection Acquisition Cost of Goods Sold (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Cost of goods sold | $116,883 | $11,069 | $105,814 | 956.0% | - Increase driven by the impact of the Appliances Connection Acquisition113 Cost of Goods Sold by Type (in thousands) | Cost Type | March 31, 2022 ($) | March 31, 2022 (% of Net Sales) | March 31, 2021 ($) | March 31, 2021 (% of Net Sales) | | :---------------------------- | :----------------- | :------------------------------ | :----------------- | :------------------------------ | | Product costs, net of vendor rebates | $102,293 | 67.0% | $9,193 | 67.1% | | Freight costs | $14,590 | 9.6% | $1,876 | 13.7% | | Total | $116,883 | 76.5% | $11,069 | 80.8% | Gross profit and gross margin Gross profit and gross margin significantly improved, primarily due to the Appliances Connection Acquisition Gross Profit and Gross Margin (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Gross profit | $35,869 | $2,628 | $33,241 | 1,264.6% | | Gross margin | 23.5% | 19.2% | 4.3 pp | | - Increases primarily due to the impact of the Appliances Connection Acquisition115 Personnel expenses Personnel expenses increased due to the Appliances Connection Acquisition, but decreased as a percentage of net sales Personnel Expenses (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Personnel expenses | $7,046 | $1,931 | $5,115 | 264.9% |\ | % of net sales | 4.6% | 14.1% | -9.5 pp | | - Changes primarily due to the impact of the Appliances Connection Acquisition116 Advertising expenses Advertising expenses increased due to the Appliances Connection Acquisition, but decreased as a percentage of net sales Advertising Expenses (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :----------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Advertising expenses | $4,288 | $1,083 | $3,205 | 295.9% |\ | % of net sales | 2.8% | 7.9% | -5.1 pp | | - Changes primarily due to the impact of the Appliances Connection Acquisition117 Bank and credit card fees Bank and credit card fees increased significantly, driven by higher customer orders from the Appliances Connection Acquisition Bank and Credit Card Fees (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :---------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Bank and credit card fees | $6,167 | $533 | $5,634 | 1,057.0% |\ | % of net sales | 4.0% | 3.9% | 0.1 pp | | - Increase largely due to the increase in customer orders associated with the Appliances Connection Acquisition118 Depreciation and amortization Depreciation and amortization expenses increased substantially due to intangible assets acquired in the Appliances Connection Acquisition Depreciation and Amortization (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :-------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Depreciation and amortization | $2,734 | $122 | $2,612 | 2,141.0% |\ | % of net sales | 1.8% | 0.9% | 0.9 pp | | - Increase is the result of amortizing intangible assets acquired in the Appliances Connection Acquisition119 General and administrative expenses General and administrative expenses increased due to the Appliances Connection Acquisition, but decreased as a percentage of net sales General and Administrative Expenses (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | General and administrative expenses | $5,567 | $2,240 | $3,327 | 148.5% |\ | % of net sales | 3.6% | 16.4% | -12.8 pp | | - Changes primarily due to the impact of the Appliances Connection Acquisition120 Total other income (expense) Total other expense increased, primarily due to higher interest and financing costs Total Other Income (Expense) (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | | :-------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Total other expense, net | $(762) | $(212) | $(550) | - Primarily consisted of interest expense of $0.7 million and financing costs of $0.2 million in 2022122 Income tax benefit (expense) The Company recorded an income tax expense due to its profitability, primarily driven by the Appliances Connection Acquisition Income Tax Benefit (Expense) (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | | :---------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Income tax net expense | $(3,383) | $- | $(3,383) | - Change due to the Company's profitability, primarily driven by the Appliances Connection Acquisition123 Net income (loss) The Company reported a significant net income, a substantial improvement from a net loss in the prior year Net Income (Loss) (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net income (loss) | $5,922 | $(3,493) | $9,415 | 270.0% | Liquidity and Capital Resources As of March 31, 2022, the Company had $25.8 million in cash and equivalents and $24.9 million in working capital. A new $140 million credit facility was secured in May 2022, with proceeds used to repay previous debt. Management believes current and projected cash flows, along with available credit, will be sufficient to fund operations and debt obligations for the next twelve months Liquidity Metrics (in millions) | Metric | March 31, 2022 | December 31, 2021 | | :---------------------- | :------------- | :---------------- | | Cash and cash equivalents | $25.8 | $25.7 | | Restricted cash | $2.6 | $8.1 | | Operating income | $10.1 | N/A | | Cash flows used in operations | $(3.7) | N/A | | Working capital | $24.9 | $16.0 | - On May 9, 2022, the Company secured a new $140 million credit facility, using $55.9 million to pay off the M&T Credit Agreement126 - Management believes adequate cash flow from operations, external bank lines of credit, and proceeds from future debt/equity issuances will fund operations and service debt for at least the next twelve months127 Summary of Cash Flow Net cash used in operating activities increased to $3.7 million for the three months ended March 31, 2022, primarily due to increases in receivables, inventories, and customer deposit refunds related to the Appliances Connection Acquisition and supply chain issues. Net cash used in investing activities remained minimal, while financing activities shifted from a net cash provided to a net cash used, mainly due to higher debt repayments Summary of Cash Flow (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(3,747) | $(2,808) | | Net cash used in investing activities | $(6) | $(126) | | Net cash (used in) provided by financing activities | $(1,634) | $4,426 | | Net change in cash, cash equivalents, and restricted cash | $(5,387) | $1,492 | - Operating cash flow was negatively impacted by increases in receivables ($1.7M used), inventories ($8.2M used), and customer deposits ($7.6M used) due to sales growth from the Appliances Connection Acquisition and supply chain delays135 - Financing activities shifted to net cash used due to $1.6 million in notes payable repayments in 2022, compared to $4.6 million in proceeds from notes payable in 2021135 Debt The Company refinanced its M&T Credit Agreement with a new $140 million senior secured credit facility from Bank of America, N.A., on May 9, 2022. This new facility includes a $100 million term loan and a $40 million revolving credit facility, maturing on May 9, 2027, with quarterly principal repayments commencing September 30, 2022. Other debt includes a Northpoint inventory loan and vehicle loans New Credit Agreement The Company secured a new $140 million senior secured credit facility, including a term loan and revolving credit, maturing in May 2027 - On May 9, 2022, the Company entered into a new $140 million senior secured credit facility with Bank of America, N.A., consisting of a $100 million term loan and a $40 million revolving credit facility136 - The New Term Loan proceeds were used to fully prepay and terminate the M&T Credit Agreement137 - New Loans mature on May 9, 2027, with quarterly principal repayments for the term loan starting September 30, 2022138139 M&T Credit Agreement - Refinanced The previous M&T Credit Agreement, with a $53.9 million carrying value, was fully repaid and terminated as part of the new credit facility - The M&T Credit Agreement, totaling $70.0 million ($60.0 million term loan, $10.0 million revolving credit), was entered into on June 2, 2021146 - As of March 31, 2022, the M&T Term Loan had a carrying value of $53.9 million147 - The M&T Credit Agreement was fully prepaid and terminated on May 9, 2022, as part of the new credit facility153 Northpoint Loan The Company maintains a $2.0 million inventory financing loan with Northpoint Commercial Finance LLC, with $0.3 million outstanding - The Company has a loan and security agreement with Northpoint Commercial Finance LLC for inventory financing, with a credit limit of $2.0 million154 - As of March 31, 2022, $0.3 million was owed under the Northpoint loan154 Vehicle Loans Outstanding vehicle loans totaled $1.2 million, with five-year terms and interest rates ranging from 3.59% to 5.74% - Outstanding balance of vehicle loans was $1.2 million as of March 31, 2022, with five-year terms and interest rates from 3.59% to 5.74%156 Management Services Agreement The Company has a management services agreement with 1847 Partners LLC, incurring quarterly management fees of $62,500 - The Company has a management services agreement with 1847 Partners LLC, paying a quarterly management fee of $62,500157 - Management fees expensed were $0.1 million for each of the three months ended March 31, 2022 and 2021159 Leases The Company holds various lease agreements for office, warehouse, and showroom spaces, including new facilities in Brooklyn and Somerset - The Company has various lease agreements for office, warehouse, and showroom spaces, including related party leases163164169 - A new office lease in Brooklyn, NY, commenced March 1, 2022, with a monthly rate of $22,000 for the first year169 - A warehouse agreement for a new facility in Somerset, New Jersey, commenced October 1, 2021, with a monthly storage fee of $136,274 for the first year168 Critical Accounting Policies and Estimates This section refers to the Company's Annual Report on Form 10-K for the year ended December 31, 2021, for information regarding critical accounting policies and estimates - Information on Critical Accounting Policies and Estimates is available in the Company's Annual Report on Form 10-K for the year ended December 31, 2021170 Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, 1847 Goedeker Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to disclose information under this item171 Item 4. Controls and Procedures The Company's disclosure controls and procedures were deemed ineffective as of March 31, 2022, due to material weaknesses in internal control over financial reporting. These weaknesses stem from inadequate control design, risk assessment, and control activities. Management is actively implementing remediation plans, including enhancing reporting structure, increasing qualified resources, and establishing formal risk assessment procedures Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were deemed ineffective due to identified material weaknesses in internal control over financial reporting - Disclosure controls and procedures were determined to be ineffective as of March 31, 2022, due to material weaknesses in internal control over financial reporting173 Material Weaknesses in Internal Control over Financial Reporting Material weaknesses include inadequate control design, insufficient resources, and ineffective risk assessment and control activities - Material weaknesses identified include lack of structure and responsibility, insufficient qualified resources, inadequate oversight, ineffective assessment of risk changes, and inadequate selection and development of effective control activities175 Management's Remediation Plans Management is implementing remediation plans to enhance reporting, increase qualified resources, and establish formal risk assessment procedures - Remediation plans include enhancing reporting structure, increasing qualified resources, establishing formal risk assessment procedures, and developing/documenting policies and procedures176 - Remediation will be considered complete only after controls operate for a sufficient period and are tested for effectiveness176 Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred, apart from identified weaknesses and ongoing remediation efforts - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022, other than those related to the identified material weaknesses and remediation efforts177 PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other required disclosures and exhibits Item 1. Legal Proceedings The Company is involved in legal proceedings regarding a stockholder-approved amendment to increase authorized common stock. This includes a Section 205 Petition filed by the Company to validate the amendment and a consolidated class action lawsuit alleging improper vote tabulation and breach of fiduciary duties by the Board of Directors - Stockholders approved an amendment to increase authorized common stock by 50,000,000 shares on December 21, 2021180 - The Company filed a Section 205 Petition with the Delaware Court of Chancery to validate the Certificate of Amendment after concerns were raised about vote tabulation181 - A class action lawsuit (Scot T. Boden v. 1847 Goedeker Inc., et al.) was filed, alleging improper vote tabulation and breach of fiduciary duties, which has been consolidated with the 205 Petition182 Item 1A. Risk Factors The Company highlights new risk factors, including the negative impact of increasing tensions between the United States and Russia and the conflict in Ukraine on commodity pricing, supply chains, and consumer demand. Additionally, various economic factors such as inflation, exposure to the U.S. housing industry, and potential decreases in consumer spending pose significant risks - Increasing tensions between the United States and Russia and the conflict in Ukraine could negatively impact business through higher fuel/energy costs, supply chain disruptions, and reduced consumer demand186 - Numerous economic factors, including inflation, weakness in the U.S. housing industry, and decreased consumer discretionary spending, could adversely affect financial performance187 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not sell any previously undisclosed unregistered equity securities or repurchase any shares of common stock during the three months ended March 31, 2022 - No unregistered equity securities were sold during the three months ended March 31, 2022, that were not previously disclosed188 - No shares of common stock were repurchased during the three months ended March 31, 2022189 Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities190 Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable190 Item 5. Other Information No other information is reported under this item - None191 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, recent credit agreements, security and pledge agreements, and certifications required by the Sarbanes-Oxley Act - Includes Amended and Restated Certificate of Incorporation and its amendment, Bylaws and its amendment192 - Lists the Lease Agreement dated March 15, 2022, the Credit Agreement dated May 9, 2022, and the Security and Pledge Agreement dated May 9, 2022192 - Contains Certifications of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002192