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Polished.com (POL) - 2023 Q3 - Quarterly Report
Polished.com Polished.com (US:POL)2023-11-20 22:00

PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The company presents its unaudited condensed consolidated financial statements for the period ended September 30, 2023 Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and stockholders' equity from December 31, 2022, to September 30, 2023 Balance Sheet Summary | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Cash and cash equivalents | $9,811 | $19,549 | $(9,738) | -49.8% | | Restricted cash | $5,391 | $950 | $4,441 | 467.5% | | Receivables, net | $19,864 | $26,650 | $(6,786) | -25.5% | | Vendor deposits | $30,828 | $25,022 | $5,806 | 23.2% | | Merchandise inventory, net | $30,093 | $41,766 | $(11,673) | -27.9% | | Total Current Assets | $107,513 | $125,154 | $(17,641) | -14.1% | | Total Assets | $238,817 | $261,914 | $(23,097) | -8.8% | | Total Current Liabilities | $90,968 | $99,295 | $(8,327) | -8.4% | | Total Liabilities | $184,451 | $199,349 | $(14,898) | -7.5% | | Total Stockholders' Equity | $54,366 | $62,565 | $(8,199) | -13.1% | Condensed Consolidated Statements of Operations The company experienced significant declines in product sales but improved gross margin, with net loss increasing for both periods Three Months Ended September 30, 2023 vs 2022 | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | Product sales, net | $77,818 | $143,566 | $(65,748) | -45.8% | | Cost of goods sold | $62,513 | $122,431 | $(59,918) | -48.9% | | Gross profit | $15,305 | $21,135 | $(5,830) | -27.6% | | Gross margin | 19.7% | 14.7% | 5.0 pp | | | Total Operating Expenses | $21,300 | $31,956 | $(10,656) | -33.3% | | LOSS FROM OPERATIONS | $(5,995) | $(10,821) | $4,826 | -44.6% | | Interest expense | $(1,886) | $(1,351) | $(535) | 39.6% | | NET LOSS | $(6,634) | $(5,184) | $(1,450) | 28.0% | | Basic EPS | $(3.14) | $(2.46) | $(0.68) | 27.6% | Nine Months Ended September 30, 2023 vs 2022 | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | Product sales, net | $261,018 | $430,710 | $(169,692) | -39.4% | | Cost of goods sold | $204,987 | $355,788 | $(150,801) | -42.4% | | Gross profit | $56,031 | $74,922 | $(18,891) | -25.2% | | Gross margin | 21.5% | 17.4% | 4.1 pp | | | Total Operating Expenses | $61,826 | $79,658 | $(17,832) | -22.4% | | LOSS FROM OPERATIONS | $(5,795) | $(4,736) | $(1,059) | 22.4% | | Interest expense | $(4,821) | $(2,594) | $(2,227) | 85.8% | | NET LOSS | $(8,391) | $(3,657) | $(4,734) | 129.5% | | Basic EPS | $(3.98) | $(1.73) | $(2.25) | 130.1% | Condensed Consolidated Statement of Stockholders' Equity Stockholders' equity decreased primarily due to net losses incurred during the period, partially offset by minor stock issuances | Metric (in thousands) | Jan 1, 2023 | Sep 30, 2023 | | :-------------------- | :---------- | :----------- | | Total Stockholders' Equity | $62,565 | $54,366 | | Net loss (9 months) | | $(8,391) | | Stock compensation expense | | $10 | - Total stockholders' equity decreased by $8.199 million from January 1, 2023, to September 30, 2023, primarily due to accumulated deficit from net losses21 Condensed Consolidated Statements of Cash Flows Cash used in operating activities was significantly reduced, but increased use of cash in financing activities led to a net decrease in cash Nine Months Ended September 30, 2023 vs 2022 | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | Net cash used in operating activities | $(390) | $(38,693) | $38,303 | -99.0% | | Net cash used in investing activities | $(140) | $(1,318) | $1,178 | -89.4% | | Net cash (used in) provided by financing activities | $(4,767) | $36,386 | $(41,153) | -113.1% | | NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $(5,297) | $(3,625) | $(1,672) | 46.1% | | Cash, cash equivalents, and restricted cash, END OF PERIOD | $15,202 | $30,166 | $(14,964) | -49.6% | - Significant changes in operating activities for 9M 2023 include cash provided by receivables ($7.0M) and inventory ($12.9M), and cash used by vendor deposits ($5.8M), accounts payable ($4.9M), and customer deposits ($2.8M)148 - Financing activities for 9M 2023 primarily involved repayments of notes payable ($4.7M), contrasting with 9M 2022 which saw $43.0M cash received from notes payable and $2.0M in stock repurchases149 Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, liquidity issues, revenue disaggregation, debt agreements, and other key financial disclosures NOTE 1—BASIS OF PRESENTATION - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim financial reporting, reflecting normal recurring adjustments28 - Interim results for the three and nine months ended September 30, 2023, are not necessarily indicative of full-year or future period results28 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, 2023293031 - The adoption of these accounting updates did not have a material impact on the consolidated financial statements and related disclosures293031 NOTE 3—LIQUIDITY AND GOING CONCERN ASSESSMENT | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $9,800 | $19,600 | | Restricted cash | $5,400 | $1,000 | | Vendor deposits | $30,800 | $25,000 | | Operating loss (9 months/full year) | $5,800 | $134,400 | | Cash flows used in operations (9 months/full year) | $400 | $46,700 | | Working capital | $15,900 | $25,900 | - Substantial doubt exists regarding the Company's ability to continue as a going concern based on initial assessment37 - Management's plans to mitigate going concern uncertainty include: loan amendment with Bank of America, headcount reductions, warehouse consolidation, improving digital advertising, implementing new customer financing initiatives, and shifting sales focus to higher-margin luxury products383945 NOTE 4—DISAGGREGATION OF REVENUES Disaggregated Revenue by Product Type (in thousands) | Product Type | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Appliance sales | $70,620 | $136,044 | $234,797 | $402,835 | | Furniture and other sales | $7,198 | $7,522 | $26,221 | $27,875 | | Total | $77,818 | $141,566 | $261,018 | $430,710 | - Appliance sales decreased by 48.1% for the three months and 41.7% for the nine months ended September 30, 2023, compared to the same periods in 202245 NOTE 5—SUPPLEMENTAL FINANCIAL STATEMENT DISCLOSURES Receivables | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Trade accounts receivable | $15,050 | $13,691 | | Vendor rebates receivable | $5,459 | $8,514 | | Other receivables | $637 | $5,951 | | Total receivables, net | $19,864 | $26,650 | - Total receivables, net, decreased by $6.786 million (25.5%) from December 31, 2022, to September 30, 2023, primarily due to a decrease in vendor rebates and other receivables47 Merchandise Inventory | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Appliances | $28,240 | $39,702 | | Furniture and other | $2,442 | $3,853 | | Total merchandise inventory, net | $30,093 | $41,766 | - Total merchandise inventory, net, decreased by $11.673 million (27.9%) from December 31, 2022, to September 30, 2023, with appliances accounting for the majority of the reduction48 Property and Equipment | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total property and equipment | $5,903 | $6,764 | | Accumulated depreciation | $(2,628) | $(1,689) | | Property and equipment, net | $3,275 | $5,075 | - Property and equipment, net, decreased by $1.8 million (35.5%) from December 31, 2022, to September 30, 202349 Depreciation Expense (in thousands) | Period | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Three Months | $0.3 | $0.9 | | Nine Months | $0.9 | $2.9 | Intangible Assets | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total intangible assets | $10,296 | $10,296 | | Accumulated amortization | $(2,260) | $0 | | Intangible assets, net | $8,036 | $10,296 | Amortization Expense (in thousands) | Period | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Three Months | $0.8 | $2.6 | | Nine Months | $2.3 | $7.7 | Estimated Annual Amortization Expense (in thousands) | Year ending December 31, | Amount | | :----------------------- | :----- | | 2023 (Remainder of year) | $754 | | 2024 | $3,013 | | 2025 | $3,013 | | 2026 | $1,256 | | 2027 | $0 | | Total | $8,036 | Accounts Payable and Accrued Expenses | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Trade accounts payable | $38,002 | $34,345 | | Accrued sales tax | $32,039 | $36,196 | | Accrued payroll liabilities | $1,110 | $680 | | Accrued liability for sales returns | $1,916 | $3,916 | | Other accrued liabilities | $3,303 | $5,151 | | Total accounts payable and accrued expenses | $76,524 | $81,537 | - Total accounts payable and accrued expenses decreased by $5.013 million (6.1%) from December 31, 2022, to September 30, 2023, mainly due to reductions in accrued sales tax and sales returns liability55 NOTE 6—OPERATING LEASES | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Operating lease right-of-use assets | $9,172 | $11,688 | | Lease liabilities, current portion | $1,945 | $3,726 | | Lease liabilities, long-term | $7,919 | $9,013 | | Total operating lease liabilities | $9,864 | $12,739 | - Operating lease right-of-use assets decreased by $2.516 million (21.5%) and total operating lease liabilities decreased by $2.875 million (22.6%) from December 31, 2022, to September 30, 202357 Operating Lease Expense (in thousands) | Period | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Three Months | $1.3 | $3.2 | | Nine Months | $3.2 | $8.6 | Maturities of Operating Lease Liabilities (in thousands) | Years Ending December 31, | Amount | | :------------------------ | :----- | | 2023 (Remainder of year) | $948 | | 2024 | $1,808 | | 2025 | $1,489 | | 2026 | $1,532 | | 2027 | $1,284 | | Thereafter | $4,158 | | Total | $11,219 | | Less: imputed interest | $(1,355) | | Total operating lease liabilities | $9,864 | NOTE 7—RELATED PARTIES - The Company terminated a lease agreement with 8780 19 Ave LLC (an entity owned by former officers) on August 23, 2023, agreeing to pay $100,000 and terminating claims for reimbursement of building improvements61 - The Company is a member of DMI, an appliance purchasing cooperative, and approximately 65% of total purchases during the nine months ended September 30, 2023, were from DMI, with vendor deposits totaling $30.8 million626396 - Total rent expense under related party leases was $0.8 million for the nine months ended September 30, 202364 NOTE 8—NOTES PAYABLE - The Bank of America Credit Agreement includes a $100.0 million Term Loan and a $40.0 million Revolving Loan (frozen due to non-compliance), with the Term Loan's carrying value at $92.3 million as of September 30, 2023666869 - The Second Amendment (November 20, 2023) waived events of default, deferred a principal installment, and set a new maturity date of November 30, 2024, while increasing the applicable interest rate to 4.00%707172 - The Company is discussing with investment bankers to replace the existing credit agreement by August 31, 2024, due to the reduced term76 Maturities of Notes Payable (in thousands) | For the years ended December 31, | Amount | | :------------------------------- | :----- | | 2023 (Remainder of year) | $1,033 | | 2024 | $92,531 | | 2025 | $201 | | 2026 | $29 | | 2027 | $21 | | Thereafter | $0 | | Total | $93,815 | | Less: Loan costs | $(796) | | Total | $93,019 | | Amount classified as a current liability | $7,859 | | Amount classified as long-term liability | $85,160 | NOTE 9—DERIVATIVE INSTRUMENTS (INTEREST RATE SWAP) - The Company entered into an interest rate swap agreement with a notional amount of $100 million to reduce exposure to floating SOFR rates, paying a fixed rate of 2.93%79 Gain on Change in Fair Value of Derivative Instruments (in thousands) | Period | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Three Months | $446 | $4,476 | | Nine Months | $1,020 | $3,540 | - As of September 30, 2023, the fair value of the interest rate swap was $4.2 million, classified as a derivative asset80 NOTE 10—STOCKHOLDERS' EQUITY | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----- | :----------- | :----------- | | Common stock outstanding | 2,109,398 | 2,104,558 | Stock Options Activity (9 months ended Sep 30, 2023) | Activity | Options | Weighted Average Exercise Price | | :------- | :------ | :------------------------------ | | Outstanding at Dec 31, 2022 | 750 | $155.00 | | Granted | 1,731 | $28.89 | | Forfeited | (750) | $155.00 | | Outstanding at Sep 30, 2023 | 1,731 | $28.89 | | Exercisable at Sep 30, 2023 | 0 | $0 | - Stock-based compensation expense for the nine months ended September 30, 2023, was $0.2 million, with $0.03 million remaining unrecognized compensation cost84 Warrants Outstanding (9 months ended Sep 30, 2023) | Activity | Warrants | Weighted Average Exercise Price | | :------- | :---------- | :------------------------------ | | Outstanding at Dec 31, 2022 | 1,871,333 | $114.85 | | Outstanding at Sep 30, 2023 | 1,871,333 | $114.85 | | Exercisable at Sep 30, 2023 | 1,871,333 | $114.85 | NOTE 11—EARNINGS (LOSS) PER SHARE Basic and Diluted EPS (Three Months Ended Sep 30) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Net income (loss) | $(6,634) | $(5,184) | | Basic weighted average common shares outstanding | 2,109,398 | 2,104,558 | | Basic earnings (loss) per share | $(3.14) | $(2.46) | | Diluted earnings (loss) per share | $(3.14) | $(2.46) | Basic and Diluted EPS (Nine Months Ended Sep 30) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Net income (loss) | $(8,391) | $(3,657) | | Basic weighted average common shares outstanding | 2,108,811 | 2,115,846 | | Basic earnings (loss) per share | $(3.98) | $(1.73) | | Diluted earnings (loss) per share | $(3.98) | $(1.73) | - Potentially dilutive options and warrants (1,852,015 for 2023 and 1,871,333 for 2022) were excluded from diluted EPS calculations as their effect was anti-dilutive87 NOTE 12—COMMITMENTS AND CONTINGENCIES - The Company resolved a legal action (205 Petition) regarding a share increase proposal, agreeing to pay $475,000 for attorneys' fees to stockholders' counsel on June 28, 202391 - A putative shareholder class action (Maschhof v. Polished.com Inc.) was filed on October 31, 2022, alleging misstatements in SEC filings related to the 2020 IPO92 - Two derivative stockholder complaints were filed in early 2023, alleging breaches of fiduciary duty and other claims related to IPO filings; these actions are currently stayed or awaiting consolidation9495 NOTE 13—SUPPLIER CONCENTRATION - Approximately 65% of the Company's purchases for the nine months ended September 30, 2023, were made from DMI, an appliance purchasing cooperative96 - The Company believes numerous other suppliers could be substituted if DMI became unavailable or non-competitive96 NOTE 14—SUBSEQUENT EVENTS - The Company signed a letter of intent for a new warehouse sublease from DMI, aiming to consolidate operations into one new 232,640 sq ft facility for seven years97 - The Second Amendment to the Bank of America Credit Agreement (Nov 20, 2023) waived events of default, deferred a principal installment, and set a new maturity date of November 30, 20249899 - A 1-for-50 reverse stock split became effective on October 20, 2023, approved by shareholders on October 19, 2023100 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management provides its perspective on the company's financial condition, results of operations, liquidity, and capital resources Overview - Polished.com Inc. operates as a content-driven and technology-enabled shopping destination for appliances, furniture, and home goods103 - The Company offers a wide range of national, global, and luxury brands, as well as commercial appliances, through warehouse fulfillment centers and showrooms103 Recent Developments Recent developments include significant amendments to the Bank of America Credit Agreement and the implementation of a 1-for-50 reverse stock split Amendment of Bank of America Credit Agreement - The First Amendment (July 25, 2023) required the Company to maintain $8.0 million in liquidity, including cash and qualifying receivables104 - The Second Amendment (November 20, 2023) waived events of default, deferred a principal installment of $937,500 until January 31, 2024, and set a new maturity date of November 30, 2024105 - The applicable interest rate for the Term Loan and Revolving Loan increased to 4.00%, with an additional 2% increase following an event of default106 - The Company entered into an interest rate swap agreement, capping its interest rate at 2.9% plus applicable margins107 Reverse Stock Split - A 1-for-50 reverse stock split became effective on October 20, 2023, converting every 50 shares of common stock into one share110 - Proportionate adjustments were made to the exercise price and number of shares for outstanding stock options, warrants, and convertible securities110 Trends and Principal Factors Affecting Our Financial Performance - Key factors affecting financial performance include customer acquisition, competitive pricing, product offerings, industry demand, market conditions, and integration of Appliances Connection operations112 Results of Operations The company experienced significant revenue declines due to economic slowdown and a strategic shift, but gross margin improved Comparison of Three Months Ended September 30, 2023 and 2022 Key Financials (Three Months Ended Sep 30, in thousands) | Metric | 2023 Amount | 2023 % of Sales | 2022 Amount | 2022 % of Sales | Change (Amount) | Change (%) | | :-------------------------- | :---------- | :-------------- | :---------- | :-------------- | :-------------- | :--------- | | Product sales, net | $77,818 | 100.0% | $143,566 | 100.0% | $(65,748) | -45.8% | | Cost of goods sold | $62,513 | 80.3% | $122,431 | 85.3% | $(59,918) | -48.9% | | Gross profit | $15,305 | 19.7% | $21,135 | 14.7% | $(5,830) | -27.6% | | Personnel | $5,874 | 7.5% | $8,348 | 5.8% | $(2,474) | -29.6% | | Advertising | $5,061 | 6.5% | $7,534 | 5.2% | $(2,473) | -32.8% | | Bank and credit card fees | $2,557 | 3.3% | $5,932 | 4.1% | $(3,375) | -56.9% | | Depreciation and amortization | $1,061 | 1.4% | $2,882 | 2.0% | $(1,821) | -63.2% | | General and administrative | $6,747 | 8.7% | $7,260 | 5.1% | $(513) | -7.1% | | LOSS FROM OPERATIONS | $(5,995) | -7.7% | $(10,821) | -7.5% | $4,826 | -44.6% | | Total Other Income (Expenses) | $(806) | -1.0% | $3,249 | 2.3% | $(4,055) | -124.8% | | NET LOSS | $(6,634) | -8.5% | $(5,184) | -3.6% | $(1,450) | 28.0% | - The decrease in sales is attributed to a general economic slowdown, inflation, increased interest rates, and a strategic shift to emphasize higher-margin sales114 - Gross margin improved from 14.7% to 19.7% due to management's emphasis on profitability116 - Personnel expenses decreased by $2.5 million due to a reduction in force, including $0.2 million in severance costs117 - Depreciation and amortization decreased due to a 2022 impairment charge that reduced the amount of intangible assets to be amortized120 - General and administrative expenses decreased due to lower insurance premiums and professional fees, partially offset by a write-off of fixed assets121 Comparison of the Nine Months ended September 30, 2023 and 2022 Key Financials (Nine Months Ended Sep 30, in thousands) | Metric | 2023 Amount | 2023 % of Sales | 2022 Amount | 2022 % of Sales | Change (Amount) | Change (%) | | :-------------------------- | :---------- | :-------------- | :---------- | :-------------- | :-------------- | :--------- | | Product sales, net | $261,018 | 100.0% | $430,710 | 100.0% | $(169,692) | -39.4% | | Cost of goods sold | $204,987 | 78.5% | $355,788 | 82.6% | $(150,801) | -42.4% | | Gross profit | $56,031 | 21.5% | $74,922 | 17.4% | $(18,891) | -25.2% | | Personnel | $18,379 | 7.0% | $22,396 | 5.2% | $(4,017) | -17.9% | | Advertising | $14,694 | 5.6% | $18,475 | 4.3% | $(3,781) | -20.5% | | Bank and credit card fees | $8,935 | 3.4% | $15,121 | 3.5% | $(6,186) | -40.9% | | Depreciation and amortization | $3,199 | 1.2% | $8,588 | 2.0% | $(5,389) | -62.7% | | General and administrative | $16,619 | 6.4% | $15,078 | 3.5% | $1,541 | 10.2% | | LOSS FROM OPERATIONS | $(5,795) | -2.2% | $(4,736) | -1.1% | $(1,059) | 22.4% | | Total Other Income (Expenses) | $(2,331) | -0.9% | $(2,155) | -0.5% | $(176) | 8.2% | | NET LOSS | $(8,391) | -3.2% | $(3,657) | -0.8% | $(4,734) | 129.5% | - Product sales decreased by $169.7 million, or 39.4%, due to a general economic slowdown, inflation, increased interest rates, and a focus on higher-margin sales126 - Gross margin improved from 17.4% to 21.5% due to management's emphasis on profitability129 - Personnel expenses decreased by $4.0 million, including $0.3 million in severance costs from a reduction in force130131 - General and administrative expenses increased by $1.5 million, or 10.2%, due to higher insurance premiums and a write-off of fixed assets135 Liquidity and Capital Resources The company faces liquidity challenges, with substantial doubt about its ability to continue as a going concern | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $15,200 | $20,500 | | Operating loss (9 months/full year) | $8,400 | $128,300 | | Cash used in operations (9 months/full year) | $400 | $46,700 | | Working capital | $15,900 | $25,900 | - Management believes its forecasts indicate improved operations and sufficient funds to continue as a going concern for one year from the filing date141142 Summary of Cash Flow Net Cash Flow (Nine Months Ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :------- | :--- | :--- | | Net cash used in operating activities | $(390) | $(38,693) | | Net cash used in investing activities | $(140) | $(1,318) | | Net cash (used in) provided by financing activities | $(4,767) | $36,386 | | Net change in cash, cash equivalents, and restricted cash | $(5,297) | $(3,625) | - Operating cash flow improved significantly, with a reduction in cash used from $38.7 million in 2022 to $0.4 million in 2023145148 - Financing activities shifted from providing $36.4 million in 2022 to using $4.8 million in 2023 due to notes payable repayments147149 Credit Facilities - The Company has a $140.0 million senior secured credit facility with Bank of America, though the $40.0 million Revolving Loan was frozen due to covenant non-compliance150152 - Amendments to the Credit Agreement required maintaining $8.0 million in liquidity, waived events of default, and set a new maturity date of November 30, 2024153154 - The applicable interest rate increased to 4.00%, with an additional 2% penalty rate upon default155 - The Company is seeking new financing to replace the existing credit agreement by August 31, 2024157 Management Services Agreement - The Company has a management services agreement with 1847 Partners LLC for a quarterly management fee of $62,500158 Management Fees Expensed (in millions) | Period | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Three Months | $0.06 | $0.18 | | Nine Months | $0.18 | $0.54 | Leases - The Company holds various lease agreements for office, warehouse, and showroom spaces, including related party leases161162163164165166167 - A lease for additional office space with a related party was terminated on August 23, 2023, with the Company agreeing to pay $100,000168 Critical Accounting Policies and Estimates - Information regarding the Company's Critical Accounting Policies and Estimates is referenced in the Annual Report on Form 10-K for the year ended December 31, 2022169 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, the company is not required to provide these disclosures - The Company is not required to disclose information about market risk as it qualifies as a smaller reporting company170 ITEM 4. CONTROLS AND PROCEDURES Management concluded disclosure controls were not effective due to material weaknesses, and remediation plans are underway Evaluation of Disclosure Controls and Procedures - As of September 30, 2023, the Company's disclosure controls and procedures were determined to be not effective due to material weaknesses in internal control over financial reporting172 Material Weaknesses in Internal Control over Financial Reporting - Material weaknesses include lack of structure, insufficient qualified resources, inadequate oversight, ineffective risk assessment, inadequate control activities, and the lack of an appropriate accounting system173176 Management's Remediation Plans - Remediation plans include enhancing reporting structure, increasing qualified resources, establishing formal risk assessment procedures, documenting policies, and implementing a new ERP system174176 - Remediation will not be considered complete until controls operate for a sufficient period and are tested for effectiveness174 Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023, other than those related to the identified material weaknesses175 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is involved in several legal proceedings, including derivative actions and actions against former employees Derivative Actions - The Company resolved a Section 205 Petition action regarding a share increase proposal, agreeing to pay $475,000 in attorneys' fees, and the action was dismissed on June 13, 2023180 - A putative shareholder class action was filed on October 31, 2022, alleging violations of the Securities Act of 1933 and Securities Exchange Act of 1934 related to IPO filings181 - Two derivative stockholder complaints were filed in early 2023, asserting claims for breach of fiduciary duty related to IPO filings; these actions are currently stayed or awaiting consolidation182184 Action Against Former Employee - The Company filed an action against a former employee for conversion, with the court dismissing all counterclaims except for breach of implied contract186 - Another action was filed against a former employee and related entities for fraud and misappropriation of Company inventory187 ITEM 1A. RISK FACTORS The company refers to its Annual Report on Form 10-K for risk factors, with no material changes noted - Risk factors are detailed in the Company's Annual Report on Form 10-K filed on July 31, 2023189 - As of the date of this report, there have been no material changes to the disclosed risk factors189 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No unregistered sales of equity securities or share repurchases occurred during the period - No unregistered sales of equity securities occurred during the nine months ended September 30, 2023190 - The Company did not repurchase any shares of its common stock during the nine months ended September 30, 2023191 ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities191 ITEM 4. MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable192 ITEM 5. OTHER INFORMATION No other information is reported under this item - No other information to disclose193 ITEM 6. EXHIBITS This section lists all exhibits filed, including amendments, agreements, and officer certifications - Exhibits include the Certificate of Amendment for the reverse stock split, First and Second Amendments to the Credit Agreement, a Settlement and Termination Agreement, and officer certifications195