Polished.com (POL) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides Polished.com Inc.'s financial information, including unaudited condensed consolidated financial statements and management's discussion and analysis ITEM 1. FINANCIAL STATEMENTS Polished.com Inc. presents unaudited condensed consolidated financial statements, highlighting Q2 2023 net income despite decreased sales and addressing liquidity concerns Condensed Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change | | :-------------------------------- | :------------ | :---------------- | :----- | | Total Assets | $249,548 | $261,914 | -$12,366 | | Total Liabilities | $188,552 | $199,349 | -$10,797 | | Total Stockholders' Equity | $60,996 | $62,565 | -$1,569 | | Cash and cash equivalents | $8,977 | $19,549 | -$10,572 | | Restricted cash | $4,687 | $950 | +$3,737 | | Merchandise inventory, net | $39,448 | $41,766 | -$2,318 | Condensed Consolidated Statements of Operations Three Months Ended June 30 (in thousands) | Metric | 2023 | 2022 | Change (YoY) | | :----------------------------------------- | :----- | :------ | :----------- | | Product sales, net | $87,761 | $138,463 | -$50,702 (-36.6%) | | Gross profit | $19,580 | $23,025 | -$3,445 (-15.0%) | | Net income (loss) | $1,004 | $(4,292) | +$5,296 (+123.4%) | | Basic Income per common share | $0.01 | $(0.04) | +$0.05 | Six Months Ended June 30 (in thousands) | Metric | 2023 | 2022 | Change (YoY) | | :----------------------------------------- | :----- | :------ | :----------- | | Product sales, net | $183,200 | $287,144 | -$103,944 (-36.2%) | | Gross profit | $40,726 | $53,787 | -$13,061 (-24.3%) | | Net income (loss) | $(1,757) | $1,527 | -$3,284 (-215.1%) | | Basic Income per common share | $(0.02) | $0.01 | -$0.03 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity (in thousands) | Metric | June 30, 2023 | January 1, 2023 | | :-------------------------------- | :------------ | :-------------- | | Total Stockholders' Equity | $60,996 | $62,565 | | Net income for Q2 2023 | $1,004 | N/A | | Net loss for Q1 2023 | $(2,761) | N/A | Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2023 | 2022 | | :------------------------------------------ | :------- | :------- | | Net cash used in operating activities | $(3,928) | $(22,190) | | Net cash used in investing activities | $(134) | $(256) | | Net cash (used in) provided by financing activities | $(2,773) | $37,774 | | Net change in cash, cash equivalents, and restricted cash | $(6,835) | $15,328 | | Cash, cash equivalents, and restricted cash, end of period | $13,664 | $49,119 | Notes to Condensed Consolidated Financial Statements NOTE 1—BASIS OF PRESENTATION - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim reporting[26] - Interim results for the three and six months ended June 30, 2023, are not necessarily indicative of full-year or future period results[26] NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS - The Company adopted ASU 2016-13 (Credit Losses), ASU 2021-08 (Business Combinations), and ASU 2022-02 (Troubled Debt Restructurings) on January 1, 2023[27][28][29] - The adoption of these accounting updates did not have a material impact on the consolidated financial statements and related disclosures[27][28][29] NOTE 3—LIQUIDITY AND GOING CONCERN ASSESSMENT - As of June 30, 2023, the Company had $13.7 million in cash and cash equivalents (including restricted cash) and $22.9 million in working capital[33] - An initial assessment indicated substantial doubt about the Company's ability to continue as a going concern[34] - Management believes its implemented cash preservation initiatives and improved operations will provide adequate liquidity for at least the next 12 months[38][39] NOTE 4—DISAGGREGATION OF REVENUES Disaggregated Revenue by Product Type (in thousands) | Product Type | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :------------------------ | :------ | :------ | :------ | :------ | | Appliance sales | $77,505 | $128,242 | $164,177 | $266,791 | | Furniture and other sales | $10,256 | $10,221 | $19,023 | $20,353 | | Total | $87,761 | $138,463 | $183,200 | $287,144 | - The Company is shifting its sales focus to high-margin luxury products and negotiating improved terms with vendors[44] - New customer financing initiatives, including a store-branded credit card and leasing alternatives, are being implemented[44] NOTE 5—SUPPLEMENTAL FINANCIAL STATEMENT DISCLOSURES Receivables Receivables, Net (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Total receivables, net | $22,089 | $26,650 | | Trade accounts receivable | $13,325 | $13,691 | | Vendor rebates receivable | $8,046 | $8,514 | | Other receivables | $2,230 | $5,951 | Merchandise Inventory Merchandise Inventory, Net (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Total merchandise inventory, net | $39,448 | $41,766 | | Appliances | $37,625 | $39,702 | | Furniture and other | $3,112 | $3,853 | | Less reserve for obsolescence | $(1,289) | $(1,789) | Property and Equipment Property and Equipment, Net (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Property and equipment, net | $4,671 | $5,075 | | Total property and equipment | $6,992 | $6,764 | | Accumulated depreciation | $(2,321) | $(1,689) | | Depreciation expense (H1 2023) | $0.6 million | N/A | Intangible Assets Intangible Assets, Net (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Intangible assets, net | $8,789 | $10,296 | | Amortization expense (H1 2023) | $1.5 million | N/A | | Amortization expense (H1 2022) | $5.1 million | N/A | - The decrease in amortization expense for H1 2023 is a result of the 2022 impairment charge that reduced the amount of intangible assets to be amortized[52] Accounts Payable and Accrued Expenses Accounts Payable and Accrued Expenses (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Total accounts payable and accrued expenses | $78,176 | $81,537 | | Trade accounts payable | $38,945 | $34,345 | | Accrued sales tax | $30,397 | $36,196 | NOTE 6—OPERATING LEASES Operating Lease Information (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Operating lease right-of-use assets | $10,019 | $11,688 | | Total operating lease liabilities | $10,838 | $12,739 | | Weighted-average remaining lease term | 76 months | 73 months | | Weighted average discount rate | 3.9% | 3.9% | NOTE 7—RELATED PARTIES - The Company is in dispute with 8780 19th Ave LLC (owned by former officers) over $1.2 million in building improvements and rent obligations[62] - Purchases from DMI, an appliance purchasing cooperative, represented approximately 65% of total purchases for the six months ended June 30, 2023[64] - Total rent expense under related party leases was $0.8 million for the six months ended June 30, 2023[65] NOTE 8—NOTES PAYABLE - The Term Loan carrying value was $94.1 million as of June 30, 2023[70] - The Bank of America Revolving Loan commitment was reduced from $40.0 million to $10.0 million as of July 25, 2023, following an amendment that waived prior defaults[71][73] - The maturity date for the Term Facility and Revolving Facility is August 31, 2024, and the Company is seeking new financing to replace the existing credit agreement[73][77] NOTE 9—DERIVATIVE INSTRUMENTS (INTEREST RATE SWAP) - The Company entered into a $100 million notional interest rate swap to hedge against SOFR fluctuations, paying a fixed rate of 2.93%[82] - As of June 30, 2023, the fair value of the interest rate swap was $3.8 million (derivative asset), resulting in a $1.9 million gain for Q2 2023 and a $0.6 million gain for H1 2023[83] NOTE 10—STOCKHOLDERS' EQUITY - As of June 30, 2023, there were 105,469,878 common shares outstanding[85] - Stock options outstanding totaled 86,550, with 37,500 forfeited due to employee terminations during H1 2023[86][89] - Stock-based compensation expense for the six months ended June 30, 2023, was $0.2 million[90] - Warrants outstanding remained at 92,514,423 as of June 30, 2023[91] NOTE 11—EARNINGS (LOSS) PER SHARE Basic and Diluted Earnings (Loss) Per Share | Period | Basic EPS | Diluted EPS | | :-------------------------------- | :-------- | :---------- | | Three Months Ended June 30, 2023 | $0.01 | $0.01 | | Three Months Ended June 30, 2022 | $(0.04) | $(0.04) | | Six Months Ended June 30, 2023 | $(0.02) | $(0.02) | | Six Months Ended June 30, 2022 | $0.01 | $0.01 | - Potentially dilutive options and warrants (92,600,973 for Q2 2023 and 92,664,423 for Q2 2022) were excluded from diluted EPS calculations as their effect was anti-dilutive[92] NOTE 12—COMMITMENTS AND CONTINGENCIES - The Company paid $475,000 in attorneys' fees to resolve a dispute regarding a stock share increase proposal, leading to the dismissal of the action on June 13, 2023[96] - The Company is currently facing two putative shareholder class actions and derivative complaints related to alleged misstatements and omissions in IPO filings and breaches of fiduciary duty[97][99][100] - The Company filed an action against a former employee for conversion, with the defendant asserting counterclaims for breach of contract, implied contract, defamation, and tortious interference[186] NOTE 13—SUPPLIER CONCENTRATION - DMI accounted for approximately 65% of the Company's total purchases for the six months ended June 30, 2023[102] - The Company believes numerous other suppliers could be substituted if DMI becomes unavailable or non-competitive[102] NOTE 14—SUBSEQUENT EVENTS - The Company signed a letter of intent for a new warehouse sublease from DMI to consolidate two existing New Jersey warehouses, expected to finalize in Q4 2023 or Q1 2025[103] - On July 25, 2023, the Bank of America Credit Agreement was amended, waiving defaults, reducing the Revolving Loan to $10 million, and setting a new maturity date of August 31, 2024[104] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses Polished.com Inc.'s financial condition and operations, noting decreased sales, improved gross margin, credit agreement developments, and liquidity efforts Overview - Polished.com Inc. operates as a content-driven and technology-enabled shopping destination for appliances, furniture, and home goods[108] - The Company offers national and luxury brands and operates through warehouse fulfillment centers and showrooms in the Northeast, Midwest, Brooklyn, NY, and Largo, FL[108] Recent Developments - On July 25, 2023, the Company amended its Credit Agreement with Bank of America, waiving events of default and reducing the Revolving Loan to $10 million[109] - The maturity date for the Term Facility and Revolving Facility was set to August 31, 2024, with the applicable interest rate increasing to 4.00% plus Base Rate/Term SOFR[109][110] - The Company has initiated discussions with investment bankers to secure new financing to replace the existing credit agreement by August 31, 2024[113] Trends and Principal Factors Affecting Our Financial Performance - Key factors include the ability to acquire and retain customers, competitive product pricing, breadth of product offerings, industry demand, market conditions, and successful integration of Appliances Connection[114] Results of Operations Comparison of Three Months Ended June 30, 2023 and 2022 Key Financials (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change (YoY) | | :-------------------------------- | :----- | :------ | :----------- | | Product sales, net | $87,761 | $138,463 | -$50,702 (-36.6%) | | Gross profit | $19,580 | $23,025 | -$3,445 (-15.0%) | | Gross margin | 22.3% | 16.6% | +5.7 pp | | Net income (loss) | $1,004 | $(4,292) | +$5,296 (+123.4%) | | General and administrative expenses | $4,885 | $3,563 | +$1,322 (+37.1%) | - The improvement in gross margin is attributed to management's emphasis on profitability over revenue growth[118] - General and administrative expenses increased due to higher insurance premiums and professional fees, including costs for reauditing and restating 2021 financials[123] Comparison of the six months ended June 30, 2023 and 2022 Key Financials (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change (YoY) | | :-------------------------------- | :------- | :------- | :----------- | | Product sales, net | $183,200 | $287,144 | -$103,944 (-36.2%) | | Gross profit | $40,726 | $53,787 | -$13,061 (-24.3%) | | Gross margin | 22.2% | 18.7% | +3.5 pp | | Net income (loss) | $(1,757) | $1,527 | -$3,284 (-215.1%) | | General and administrative expenses | $9,872 | $7,818 | +$2,054 (+26.3%) | | Interest expense | $2,935 | $1,243 | +$1,692 (+136.1%) | - The decrease in sales is attributed to a general economic slowdown, inflation, increased interest rates, and a decline in the luxury remodeling market[128] - The increase in gross margin reflects management's strategic shift to emphasize profitability over revenue growth[131] Liquidity and Capital Resources - As of June 30, 2023, the Company had $13.7 million in cash and cash equivalents (including restricted cash) and $22.9 million in working capital[140] Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2023 | 2022 | | :------------------------------------------ | :------- | :------- | | Net cash used in operating activities | $(3,928) | $(22,190) | | Net cash (used in) provided by financing activities | $(2,773) | $37,774 | - The Bank of America Credit Agreement amendment on July 25, 2023, reduced the Revolving Loan to $10 million and set a maturity date of August 31, 2024, prompting the Company to seek new financing[153][157] Management Services Agreement - The Company pays a quarterly management fee of $62,500 to 1847 Partners LLC, an entity owned by its chairman, for management services[158] - Management fees expensed for the six months ended June 30, 2023, totaled $0.06 million[159] Leases - The Company has various lease agreements for office, warehouse, and showroom spaces, including related-party leases with entities owned by former officers[160][161][162][163][164][166][167] - An ongoing dispute exists with a related-party landlord (8780 19th Ave LLC) regarding payment for building improvements and rent obligations[168] - A new warehouse sublease from DMI is planned to consolidate two existing New Jersey warehouses, with an expected finalization in Q4 2023 or Q1 2025[103] Critical Accounting Policies and Estimates - Information regarding the Company's Critical Accounting Policies and Estimates is detailed in its Annual Report on Form 10-K for the year ended December 31, 2022[169] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Polished.com Inc. is not required to provide market risk disclosures in this quarterly report - The Company is not required to disclose information about market risk as a smaller reporting company[170] ITEM 4. CONTROLS AND PROCEDURES Management deemed disclosure controls ineffective due to material weaknesses in internal control, with remediation plans including enhanced structure, resources, and a new ERP system Evaluation of Disclosure Controls and Procedures - The Company's disclosure controls and procedures were determined to be not effective as of June 30, 2023[172] - This ineffectiveness is a result of material weaknesses in internal control over financial reporting[172] Material Weaknesses in Internal Control over Financial Reporting - Material weaknesses include a lack of structure and responsibility, insufficient qualified resources, and inadequate oversight over controls[173][176] - Ineffective assessment and identification of changes in risk, and inadequate selection and development of effective control activities and policies[173][176] - The Company also lacks an accounting system required for its size[173][176] Management's Remediation Plans - Remediation plans include enhancing reporting structure, increasing qualified resources, and establishing formal risk assessment procedures[174][176] - The Company is developing and documenting policies and procedures, assessing their effectiveness, and implementing a new ERP system[174][176] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, other than the identified material weaknesses[175] PART II OTHER INFORMATION This section covers Polished.com Inc.'s legal proceedings, risk factors, equity security sales, defaults, and other required disclosures ITEM 1. LEGAL PROCEEDINGS Polished.com Inc. is involved in legal proceedings, including resolved shareholder actions, ongoing class actions, and a lawsuit against a former employee Derivative Actions - The Company paid $475,000 in attorneys' fees to resolve a dispute over a stock share increase proposal, leading to the dismissal of the action on June 13, 2023[180] - Two putative shareholder class actions (Maschhof v. Polished.com Inc., et al.) and derivative complaints (Wong v. Moore et al., Gossett v. Moore, et al.) are ongoing, alleging misstatements in IPO filings and breaches of fiduciary duty[181][182][184] Action Against Former Employee - The Company filed an action against a former employee for conversion, who subsequently filed counterclaims for breach of contract, implied contract, defamation, and tortious interference[186] - The Company has moved to dismiss the amended counterclaims[186] ITEM 1A. RISK FACTORS This section refers to risk factors from the Annual Report on Form 10-K, noting no material changes as of this report's date - No material changes to the risk factors disclosed in the Annual Report on Form 10-K filed on July 31, 2023, have occurred[188] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Polished.com Inc. reported no unregistered equity security sales or common stock repurchases during the six months ended June 30, 2023 - No unregistered equity securities were sold during the six months ended June 30, 2023[189] - No shares of common stock were repurchased during the six months ended June 30, 2023[190] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company reported no defaults upon senior securities for the period - There were no defaults upon senior securities[190] ITEM 4. MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to Polished.com Inc.'s operations - Mine Safety Disclosures are not applicable to the Company[191] ITEM 5. OTHER INFORMATION No other information was reported under this item - No other information was reported[192] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including the Credit Agreement amendment and officer certifications - Exhibits include the First Amendment to Credit Agreement, dated July 25, 2023[194] - Certifications of the Principal Executive Officer and Principal Financial and Accounting Officer are filed/furnished[194] - Inline XBRL Instance Document and Taxonomy Extension Documents are included[194]