UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2022June 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 001-39418
| (Exact name of registrant as specified in its charter) |
| Delaware | 83-3713938 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 1870 Bath Avenue, Brooklyn, NY | 11214 | |
| (Address of principal executive offices) | (Zip code) |
| 800-299-9470 |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | NYSE American LLC | |||
| Warrants to Purchase Common Stock | NYSE American LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 12, 2022,August 10, 2023, there were 106,387,332105,469,878 shares of the registrant’s common stock issued and outstanding.
1847 GOEDEKER INC.Polished.com Inc.
Quarterly Report on Form 10-Q
Period Ended March 31, 2022June 30, 2023
TABLE OF CONTENTS
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | cybersecurity or data security breaches such as the |
| ● | our ability to acquire new customers and sustain and/or manage our growth; |
| ● | the effect of supply chain delays and disruptions on our operations and financial condition; |
| ● | our goals and strategies; |
| ● | the identification of material weaknesses in our internal control over financial reporting and disclosure controls and procedures that, if not corrected, could affect the reliability of our unaudited condensed consolidated financial statements and have other adverse consequences such as a failure to meet reporting obligations; |
| ● | our future business development, financial condition and results of operations; |
| ● | expected changes in our revenue, costs or expenditures; |
| ● | growth of and competition trends in our industry; |
| ● | our expectations regarding demand for, and market acceptance of, our products; |
| ● | our expectations regarding our relationships with investors, institutional funding partners and other parties we collaborate with; |
| ● | fluctuations in general economic and business conditions in the markets in which we operate; and |
| ● | relevant government policies and regulations relating to our industry. |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 and elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
ii
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
1847 GOEDEKERPOLISHED.COM INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1847 GOEDEKERPOLISHED.COM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| March 31, | December 31, | June 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 25,821 | $ | 25,724 | $ | 8,977 | $ | 19,549 | ||||||||
| Restricted cash | 2,583 | 8,067 | 4,687 | 950 | ||||||||||||
| Receivables, net | 26,288 | 24,594 | 22,089 | 26,650 | ||||||||||||
| Vendor deposits | 18,064 | 12,199 | 30,452 | 25,022 | ||||||||||||
| Merchandise inventory, net | 52,963 | 44,754 | 39,448 | 41,766 | ||||||||||||
| Prepaid expenses and other current assets | 8,291 | 5,980 | 10,141 | 11,217 | ||||||||||||
| Total Current Assets | 134,010 | 121,318 | 115,794 | 125,154 | ||||||||||||
| Property and equipment, net | 3,688 | 3,554 | 4,671 | 5,075 | ||||||||||||
| Operating lease right-of-use assets | 15,262 | 14,937 | 10,019 | 11,688 | ||||||||||||
| Derivative instruments | 3,752 | 3,178 | ||||||||||||||
| Goodwill | 191,614 | 191,614 | 106,173 | 106,173 | ||||||||||||
| Intangible assets, net | 41,658 | 44,212 | 8,789 | 10,296 | ||||||||||||
| Deferred tax asset | - | 1 | ||||||||||||||
| Other long-term assets | 349 | 349 | 350 | 349 | ||||||||||||
| TOTAL ASSETS | $ | 386,581 | $ | 375,984 | $ | 249,548 | $ | 261,914 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 83,959 | $ | 72,592 | $ | 78,176 | $ | 81,537 | ||||||||
| Customer deposits | 13,080 | 20,702 | 4,041 | 7,292 | ||||||||||||
| Current portion of notes payable, net | 7,907 | 7,910 | 7,866 | 6,628 | ||||||||||||
| Current portion of finance lease liabilities | 120 | 65 | 111 | 112 | ||||||||||||
| Current portion of operating lease liabilities | 3,845 | 3,874 | 2,730 | 3,726 | ||||||||||||
| Contingent note payable | 200 | 198 | ||||||||||||||
| Total Current Liabilities | 109,111 | 105,341 | 92,924 | 99,295 | ||||||||||||
| Notes payable, net of current portion | 47,181 | 48,559 | 87,065 | 90,816 | ||||||||||||
| Finance lease liabilities, net of current portion | 306 | 121 | 169 | 225 | ||||||||||||
| Operating lease liabilities, net of current portion | 12,787 | 12,493 | 8,108 | 9,013 | ||||||||||||
| Deferred tax liability, net | 5,652 | 3,867 | ||||||||||||||
| Deferred tax liability | 286 | - | ||||||||||||||
| TOTAL LIABILITIES | 175,037 | 170,381 | 188,552 | 199,349 | ||||||||||||
| Stockholders’ Equity | ||||||||||||||||
| Preferred stock, $0.0001 par value, 20,000,000 shares authorized; none issued and outstanding as of March 31, 2022 and December 31, 2021 | - | - | ||||||||||||||
| Common stock, $0.0001 par value, 250,000,000 shares authorized; 106,387,332 shares issued and outstanding as of March 31, 2022 and December 31, 2021 | 11 | 11 | ||||||||||||||
| Preferred stock, $0.0001 par value, 20,000,000 shares authorized; none issued and outstanding as of June 30, 2023 and December 31, 2022 | - | - | ||||||||||||||
| Common stock, $0.0001 par value, 200,000,000 shares authorized; 105,469,878 and 105,227,876 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | 11 | 11 | ||||||||||||||
| Additional paid-in capital | 224,667 | 224,648 | 223,015 | 222,827 | ||||||||||||
| Accumulated deficit | (13,134 | ) | (19,056 | ) | (162,030 | ) | (160,273 | ) | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 211,544 | 205,603 | 60,996 | 62,565 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 386,581 | $ | 375,984 | $ | 249,548 | $ | 261,914 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
1847 GOEDEKER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Product sales, net | $ | 152,752 | $ | 13,697 | ||||
| Cost of goods sold | 116,883 | 11,069 | ||||||
| Gross profit | 35,869 | 2,628 | ||||||
| Operating Expenses | ||||||||
| Personnel | 7,046 | 1,931 | ||||||
| Advertising | 4,288 | 1,083 | ||||||
| Bank and credit card fees | 6,167 | 533 | ||||||
| Depreciation and amortization | 2,734 | 122 | ||||||
| General and administrative | 5,567 | 2,240 | ||||||
| Total Operating Expenses | 25,802 | 5,909 | ||||||
| INCOME (LOSS) FROM OPERATIONS | 10,067 | (3,281 | ) | |||||
| Other Income (Expenses) | ||||||||
| Interest income | 41 | 10 | ||||||
| Adjustment in value of contingency | (2 | ) | - | |||||
| Interest expense | (936 | ) | (232 | ) | ||||
| Other income | 135 | 10 | ||||||
| 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 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
1847 GOEDEKER INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(in thousands, except share and per share data)
For the Three Months Ended March 31, 2022
| Common Stock | Additional Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance at December 31, 2021 | 106,387,332 | $ | 11 | $ | 224,648 | $ | (19,056 | ) | $ | 205,603 | ||||||||||
| Stock-based compensation | - | - | 19 | - | 19 | |||||||||||||||
| Net income for the three months ended March 31, 2022 | - | - | - | 5,922 | 5,922 | |||||||||||||||
| Balance at March 31, 2022 | 106,387,332 | $ | 11 | $ | 224,667 | $ | (13,134 | ) | $ | 211,544 | ||||||||||
For the Three Months Ended March 31, 2021
| Common Stock | Additional Paid-in | Accumulated | Stockholders’ Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance at December 31, 2020 | 6,111,200 | $ | 1 | $ | 13,409 | $ | (26,726 | ) | $ | (13,316 | ) | |||||||||
| Issuance of warrants with debt | - | - | 1,340 | - | 1,340 | |||||||||||||||
| Stock-based compensation | - | - | 125 | - | 125 | |||||||||||||||
| Net loss for the three months ended March 31, 2021 | - | - | - | (3,493 | ) | (3,493 | ) | |||||||||||||
| Balance at March 31, 2021 | 6,111,200 | $ | 1 | $ | 14,874 | $ | (30,219 | ) | $ | (15,344 | ) | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
1847 GOEDEKERPOLISHED.COM INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
(UNAUDITED)(in thousands, except share and per share data)
(in thousands)(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Product sales, net | $ | 87,761 | $ | 138,463 | $ | 183,200 | $ | 287,144 | ||||||||
| Cost of goods sold | 68,181 | 115,438 | 142,474 | 233,357 | ||||||||||||
| Gross profit | 19,580 | 23,025 | 40,726 | 53,787 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Personnel | 6,021 | 7,402 | 12,505 | 14,048 | ||||||||||||
| Advertising | 4,512 | 5,363 | 9,633 | 10,941 | ||||||||||||
| Bank and credit card fees | 3,005 | 4,600 | 6,378 | 9,189 | ||||||||||||
| Depreciation and amortization | 1,068 | 2,887 | 2,138 | 5,706 | ||||||||||||
| General and administrative | 4,885 | 3,563 | 9,872 | 7,818 | ||||||||||||
| Total Operating Expenses | 19,491 | 23,815 | 40,526 | 47,702 | ||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 89 | (790 | ) | 200 | 6,085 | |||||||||||
| Other Income (Expenses) | ||||||||||||||||
| Interest income | 375 | 64 | 732 | 108 | ||||||||||||
| Adjustment in value of contingency | - | - | (2 | ) | ||||||||||||
| Interest expense | (1,053 | ) | (302 | ) | (2,935 | ) | (1,243 | ) | ||||||||
| Gain (loss) on change in fair value of derivative instruments | 1,899 | (936 | ) | 574 | (936 | ) | ||||||||||
| Loss on settlement of debt | - | (3,241 | ) | - | (3,241 | ) | ||||||||||
| Other income (expense) | 22 | (41 | ) | 104 | (90 | ) | ||||||||||
| Total Other Income (Expenses) | 1,243 | (4,456 | ) | (1,525 | ) | (5,404 | ) | |||||||||
| NET INCOME (LOSS) BEFORE INCOME TAXES | 1,332 | (5,246 | ) | (1,325 | ) | 681 | ||||||||||
| INCOME TAX (EXPENSE) BENEFIT | (328 | ) | 954 | (432 | ) | 846 | ||||||||||
| NET INCOME (LOSS) | $ | 1,004 | $ | (4,292 | ) | $ | (1,757 | ) | $ | 1,527 | ||||||
| Income per common share | ||||||||||||||||
| Basic | $ | 0.01 | $ | (0.04 | ) | $ | (0.02 | ) | $ | 0.01 | ||||||
| Diluted | $ | 0.01 | $ | (0.04 | ) | $ | (0.02 | ) | $ | 0.01 | ||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | 105,469,878 | 105,774,197 | 105,425,640 | 106,080,764 | ||||||||||||
| Diluted | 105,469,878 | 105,774,197 | 105,425,640 | 106,080,764 | ||||||||||||
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) Adjustments to reconcile net income (loss) to net cash | $ | 5,922 | $ | (3,493 | ) | |||
| used in by operating activities: | ||||||||
| Depreciation and amortization | 2,734 | 128 | ||||||
| Amortization of debt discount | 185 | 98 | ||||||
| Stock-based compensation | 19 | 125 | ||||||
| Adjustment in value of contingency | 2 | - | ||||||
| Deferred tax (liability) asset | 1,785 | - | ||||||
| Non-cash lease expense | 819 | 127 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (1,694 | ) | 1,049 | |||||
| Vendor deposits | (5,864 | ) | (195 | ) | ||||
| Merchandise inventory | (8,209 | ) | (736 | ) | ||||
| Prepaid expenses and other assets | (2,312 | ) | 109 | |||||
| Accounts payable and accrued expenses | 11,368 | (345 | ) | |||||
| Customer deposits | (7,622 | ) | 390 | |||||
| Operating lease liabilities | (880 | ) | (65 | ) | ||||
| Net cash used in operating activities | (3,747 | ) | (2,808 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | (6 | ) | (126 | ) | ||||
| Net cash used in investing activities | (6 | ) | (126 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from notes payable | - | 4,590 | ||||||
| Repayments of notes payable | (1,615 | ) | (164 | ) | ||||
| Repayments of finance lease liabilities | (19 | ) | - | |||||
| 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 | ||||
| Cash, cash equivalents, and restricted cash consist of the following: | ||||||||
| End of the period | ||||||||
| Cash and cash equivalents | $ | 25,821 | $ | 1,309 | ||||
| Restricted cash | 2,583 | 10,095 | ||||||
| $ | 28,404 | $ | 11,404 | |||||
| Cash, cash equivalents, and restricted cash consist of the following: | ||||||||
| Beginning of the period | ||||||||
| Cash and cash equivalents | $ | 25,724 | $ | 935 | ||||
| Restricted cash | 8,067 | 8,977 | ||||||
| $ | 33,791 | $ | 9,912 | |||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | 639 | $ | 29 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Operating lease right-of-use assets and liabilities assumed | $ | 1,145 | $ | 1,954 | ||||
| Financed purchases of property and equipment | $ | 308 | $ | - | ||||
| Debt discount on notes payable from OID | $ | - | $ | 910 | ||||
| Debt discount on notes payable from warrants | $ | - | $ | 1,340 | ||||
1847 GOEDEKERPOLISHED.COM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share and per share data)
For the Three and Six Months Ended June 30, 2023
| Additional | Treasury | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stock | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | At Cost | Equity | |||||||||||||||||||
| Balance January 1, 2023 | 105,227,876 | 11 | 222,827 | (160,273 | ) | - | 62,565 | |||||||||||||||||
| Issuance of common stock through equity incentive awards | 83,011 | - | 60 | - | - | 60 | ||||||||||||||||||
| Issuance of common stock in connection with employment agreements | 158,991 | - | 120 | - | - | 120 | ||||||||||||||||||
| Stock compensation expense | - | - | 8 | - | - | 8 | ||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | - | - | - | (2,761 | ) | - | (2,761 | ) | ||||||||||||||||
| Balance March 31, 2023 (unaudited) | 105,469,878 | 11 | 223,015 | (163,034 | ) | - | 59,992 | |||||||||||||||||
| Net income for the three months ended June 30, 2023 | - | - | - | 1,004 | - | 1,004 | ||||||||||||||||||
| Balance June 30, 2023 (Unaudited) | 105,227,876 | 11 | 223,015 | (162,030 | ) | - | 60,996 | |||||||||||||||||
For the Three and Six Months Ended June 30, 2022
| Additional | Treasury | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stock | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | At Cost | Equity | |||||||||||||||||||
| Balance January 1, 2022 | 106,387,332 | $ | 11 | $ | 224,648 | $ | (34,308 | ) | - | $ | 190,351 | |||||||||||||
| Issuance of common stock through equity incentive awards | 69,766 | - | 120 | - | - | 120 | ||||||||||||||||||
| Stock compensation expense for the three months ended March 31, 2022 | - | - | 33 | - | - | 33 | ||||||||||||||||||
| Net income for the three months ended March 31, 2022 | - | - | - | 5,819 | - | 5,819 | ||||||||||||||||||
| Balance March 31, 2022 (Unaudited) | 106,457,098 | 11 | 224,801 | (28,489 | ) | 196,323 | ||||||||||||||||||
| Purchase of treasury stock | (1,229,222 | ) | - | - | - | (2,000 | ) | (2,000 | ) | |||||||||||||||
| Stock compensation expense for the three months ended June 30, 2022 | - | - | 20 | - | - | 20 | ||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | - | - | - | (4,292 | ) | - | (4,292 | ) | ||||||||||||||||
| Balance June 30, 2022 (Unaudited) | 105,227,876 | $ | 11 | $ | 224,821 | $ | (32,781 | ) | $ | (2,000 | ) | $ | 190,051 | |||||||||||
POLISHED.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | June 30, | |||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (1,757 | ) | $ | 1,527 | |||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 2,138 | 5,706 | ||||||
| Amortization of debt discount | 109 | 406 | ||||||
| Loss on settlement of debt | - | 3,241 | ||||||
| Stock-based compensation | 68 | 173 | ||||||
| Adjustment to contingent liability | - | 2 | ||||||
| Inventory reserve | (500 | ) | 157 | |||||
| Loss (Gain) on change in fair value of derivative instruments | (574 | ) | 936 | |||||
| Bad debt expense | 5 | 175 | ||||||
Deferred tax expense (benefit) | 287 | (938 | ) | |||||
| Non-cash lease expense | 1,670 | 1,610 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 4,555 | (2,301 | ) | |||||
| Deposits with vendors | (5,430 | ) | (5,931 | ) | ||||
| Inventory | 2,818 | (4,513 | ) | |||||
| Prepaid expenses and other current assets | 1,075 | (355 | ) | |||||
| Accounts payable and accrued liabilities | (3,240 | ) | (10,652 | ) | ||||
| Due to related party | - | 2,413 | ||||||
| Customer deposits | (3,251 | ) | (12,065 | ) | ||||
| Operating lease liabilities | (1,901 | ) | (1,781 | ) | ||||
| Net cash (used in) provided operating activities | (3,928 | ) | (22,190 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | (134 | ) | (256 | ) | ||||
| Net cash used in investing activities | (134 | ) | (256 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Cash received from notes payable | - | 43,045 | ||||||
| Repayment of notes payable | (2,716 | ) | (3,223 | ) | ||||
| Repayments of financing lease liabilities | (57 | ) | (48 | ) | ||||
| Purchase of treasury stock at cost | - | (2,000 | ) | |||||
| 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, BEGINNING OF PERIOD | 20,499 | 33,791 | ||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD | $ | 13,664 | $ | 49,119 | ||||
| Cash, cash equivalents, and restricted cash consist of the following: | ||||||||
| End of the period | ||||||||
| Cash and cash equivalents | $ | 8,977 | $ | 47,386 | ||||
| Restricted cash | 4,687 | 1,733 | ||||||
| $ | 13,664 | $ | 49,119 | |||||
| Cash, cash equivalents, and restricted cash consist of the following: | ||||||||
| Beginning of the period | ||||||||
| Cash and cash equivalents | $ | 19,549 | $ | 25,724 | ||||
| Restricted cash | 950 | 8,067 | ||||||
| $ | 20,499 | $ | 33,791 | |||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | 2,494 | $ | 1,531 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Common stock issued in vesting of RSUs | $ | - | $ | - | ||||
| Financed purchases of property and equipment | $ | 94 | $ | 308 | ||||
| Common stock issued in connection with employment agreements | $ | 121 | $ | - | ||||
| Debt discount on notes payable | $ | - | $ | 1,104 | ||||
| Settlement of notes payable and interest through the issuance of a new note | $ | - | $ | 55,851 | ||||
POLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,June 30, 2023 and 2022 AND 2021(UNAUDITED)
NOTE 1—BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of 1847 GoedekerPolished.com Inc. (the “Company,” “1847 Goedeker,“Polished.com Inc.,” “we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting and reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of the interim periods presented. Certain information and note disclosures normally included in the audited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The information included in the Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.2022. Furthermore, interim results for the three and six months ended March 31, 2022June 30, 2023 are not necessarily indicative of the results that may be expected for the full year ending December 31, 20222023 or future periods.
Certain reclassifications within property and equipment have been made to the prior period’s financial statements to conform to the current period financial statement presentation (see Note 6). There is no impact in total net property and equipment, results of operations, and cash flows in all periods presented.
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date for entities that qualify as a small reporting company. The Company has elected this extension and the effective date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. The Company hasadopted this guidance on January 1, 2023. The Company’s adoption of this update did not completed its assessment of the standard but does not expect the adoption to have a material impact on our unaudited condensedthe consolidated financial statements.statements and related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in business combinations. The ASU is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has not completed its assessment of the standard but does not expect the adoption to have a material impactadopted this guidance on our unaudited condensed consolidated financial statements.
January 1, 2023. The Company has evaluated all other recent accounting pronouncements and determined that theCompany’s adoption of pronouncements applicable to the Company hasthis update did not had or is not expected to have a material impact on the Company's consolidated financial position, resultsstatements and related disclosures.
In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures (Topic 326): Financial Instruments – Credit Losses. This amended guidance will eliminate the accounting designation of operations or cash flows.a loan modification as a TDR, including eliminating the measurement guidance for TDRs. The amendments also enhance existing disclosure requirements and introduce new requirements related to modifications of receivables made to borrowers experiencing financial difficulty. Additionally, this guidance requires entities to disclose gross write-offs by year of origination for financing receivables, such as loans and interest receivable. The ASU is effective January 1, 2023, and is required to be applied prospectively, except for the recognition and measurement of TDRs which can be applied on a modified retrospective basis. The Company adopted this guidance on January 1, 2023. The Company’s adoption of this update did not have a material impact on the consolidated financial statements and related disclosures.
POLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023 and 2022 (UNAUDITED)
NOTE 3—LIQUIDITY AND GOING CONCERN ASSESSMENT
Management assesses liquidity and going concern uncertainty in the Company’s condensed consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period.
As of March 31, 2022,June 30, 2023, we had cash and cash equivalents of $25.8$13.7 million andincluding restricted cash of $2.6$4.7 million and vendor deposits of $30.5 million. For the threesix months ended March 31, 2022, the Company incurredJune 30, 2023, we had operating income of approximately $10.1$0.2 million, cash flows used in operations of $3.7$3.9 million and working capital of $24.9$22.9 million. As of and for the year ended December 31, 2022, we had an operating loss of $128.3 million (including a non-cash impairment charge of $109.1 million), cash used in operations of $46.7 million, cash and cash equivalents of $20.5 million including restricted cash of $0.95 million and working capital of $25.9 million.
The Company performed an assessment to determine whether there were conditions or events that, considered in the aggregate, raised substantial doubt about the Company’s ability to continue as a going concern within one year after the filing date of this report, when the accompanying financial statements are being issued. Initially, this assessment did not consider the potential mitigating effect of management’s plans that had not been fully implemented.
Based on the initial assessment, substantial doubt exists regarding our ability to continue as a going concern. Management then assessed the mitigating effect of its plans to determine if it is probable that the plans (1) would be effectively implemented within one year after the filing date of this report, when the accompanying financial statements are being issued and (2) when implemented, would mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
1847 GOEDEKERPOLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,June 30, 2023 and 2022 AND 2021(UNAUDITED)
As discussed below, the Company has implemented plans which encompass short-term cash preservation initiatives to provide the Company with adequate liquidity to meet its obligations for at least the 12-month period following the date its financial statements are issued, in addition to creating sustained cash flow generation thereafter. The Company has either taken or intends to take, the following actions, among others, to improve its liquidity position and to address uncertainty about its ability to continue as a going concern:
| ● | As described in Note 8, the Company entered into a loan amendment of their term loan and revolver loan agreement with Bank of America, in which Bank of America waived specific technical defaults and re-established a revolver loan commitment balance of $10 million. |
| ● | We are taking concrete steps to improve efficiency and profitability through headcount reductions and consolidation of operations including the imminent consolidation of two existing New Jersey warehouses into one new warehouse. |
| ● | We hired an internationally recognized firm of digital advertising consultants to help us improve our return on advertising spend, which we believe when completed will result in more sales per dollar of advertising expense. |
| ● | We are implementing new financing initiatives for our customers, including a new store-branded credit card and a leasing alternative for customers who do not qualify for conventional credit, and we have added a new payment processor which will provide additional liquidity compared to our incumbent processor. |
| ● | We have changed our sales focus to emphasizing the sale of high-margin luxury products, as opposed to mass-market appliances, began becoming dealers for higher-margin small appliances and promoting them on our website, and have begun actively negotiating improved terms with several of our largest appliance vendors. |
Management has prepared estimates of operations for fiscal years 20222023 and 20232024 and believes that sufficient funds will be generated from operations to fund its operations, and to service its debt obligations for one year from the date of the filing of these unaudited condensed consolidated financial statements. The impact of COVID-19 onstatements in the Company’s business has been considered in these assumptions; however, with new COVID variants still in place it might be too early to know the full impact of COVID-19 or its timing on a return to more normal operations.
10-Q. The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business. Management believes that based on relevant conditions and events that are known and reasonably knowable that its forecasts, for one year from the date of the filing of these unaudited condensed consolidated financial statements, indicate improved operations and the Company’s ability to continue operations as a going concern.
NOTE 4—DISAGGREGATION OF REVENUES
The Company sells a vast assortment of household appliances, including refrigerators, ranges, ovens, dishwashers, microwaves, freezers, washers and dryers. In addition to appliances, we also offer a broad assortment of products in the furniture, décor, bed & bath, lighting, outdoor living, electronics categories, fitness equipment, plumbing fixtures, air conditioners, fireplaces, fans, dehumidifiers, humidifiers, air purifiers and televisions.
Revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Each customer order generally contains only one performance obligation based on the merchandise sale to be delivered, at which time revenue is recognized.
The Company disaggregates revenue from contracts with customers by product type, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s disaggregated revenue by product type is as follows (in thousands):
| For the Three Months Ended | ||||||||||||||||||||||||
| March 31, | March 31, | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||
| 2022 | 2021 | June 30 | June 30 | June 30 | June 30 | |||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||
| Appliance sales | $ | 140,975 | $ | 10,273 | $ | 77,505 | $ | 128,242 | $ | 164,177 | $ | 266,791 | ||||||||||||
| Furniture sales | 4,155 | 2,328 | ||||||||||||||||||||||
| Other sales | 7,622 | 1,096 | ||||||||||||||||||||||
| Furniture and other sales | 10,256 | 10,221 | 19,023 | 20,353 | ||||||||||||||||||||
| Total | $ | 152,752 | $ | 13,697 | $ | 87,761 | $ | 138,463 | $ | 183,200 | $ | 287,144 | ||||||||||||
1847 GOEDEKERPOLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,June 30, 2023 and 2022 AND 2021(UNAUDITED)
NOTE 5—SUPPLEMENTAL FINANCIAL STATEMENT DISCLOSURES
Recivables
Receivables at March 31, 2022June 30, 2023 and December 31, 2021,2022, consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Trade accounts receivable | $ | 15,295 | $ | 10,694 | ||||
| Vendor rebates receivable | 9,125 | 11,633 | ||||||
| Other receivables | 2,261 | 2,660 | ||||||
| Total receivables | 26,681 | 24,987 | ||||||
| Less allowance for doubtful accounts | (393 | ) | (393 | ) | ||||
| Total receivables, net | $ | 26,288 | $ | 24,594 | ||||
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Trade accounts receivable | $ | 13,325 | $ | 13,691 | ||||
| Vendor rebates receivable | 8,046 | 8,514 | ||||||
| Other receivables | 2,230 | 5,951 | ||||||
| Total receivables | 23,601 | 28,156 | ||||||
| Less allowance for doubtful accounts | (1,512 | ) | (1,506 | ) | ||||
| Total receivables, net | $ | 22,089 | $ | 26,650 | ||||
Merchandise Inventory
Inventory as March 31, 2022June 30, 2023 and December 31, 2021,2022, consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Appliances | $ | 50,856 | $ | 41,922 | ||||
| Furniture | 986 | 1,166 | ||||||
| Other | 1,964 | 2,439 | ||||||
| Total merchandize inventory | 53,806 | 45,597 | ||||||
| Less reserve for obsolescence | (843 | ) | (843 | ) | ||||
| Total merchandize inventory, net | $ | 52,963 | $ | 44,754 | ||||
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Appliances | $ | 37,625 | $ | 39,702 | ||||
| Furniture and other | 3,112 | 3,853 | ||||||
| Total merchandise inventory | 40,737 | 43,555 | ||||||
| Less reserve for obsolescence | (1,289 | ) | (1,789 | ) | ||||
| Total merchandise inventory, net | $ | 39,448 | $ | 41,766 | ||||
Property and Equipment
Property and equipment at March 31, 2022June 30, 2023 and December 31, 2021,2022, consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warehouse equipment | $ | 291 | $ | 291 | ||||
| Financed warehouse | 515 | 515 | ||||||
| Furniture and fixtures | 332 | 324 | ||||||
| Transportation equipment | 1,566 | 1,466 | ||||||
| Leasehold improvements | 3,251 | 3,131 | ||||||
| Showroom inventory | 1,037 | 1,037 | ||||||
| Total property and equipment | 6,992 | 6,764 | ||||||
| Less: accumulated depreciation | (2,321 | ) | (1,689 | ) | ||||
| Property and equipment, net | $ | 4,671 | $ | 5,075 | ||||
Depreciation expense for the three and six months ended June 30, 2023 and 2022, was $0.3 million and $0.6 million, respectively.
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Equipment | $ | 209 | $ | 203 | ||||
| Warehouse equipment | 546 | 546 | ||||||
| Furniture and fixtures | 23 | 23 | ||||||
| Transportation equipment | 1,232 | 1,183 | ||||||
| Financed assets | 494 | 235 | ||||||
| Leasehold improvements | 217 | 217 | ||||||
| Construction in progress | 1,597 | 1,597 | ||||||
| Total property and equipment | 4,318 | 4,004 | ||||||
| Less: accumulated depreciation | (630 | ) | (450 | ) | ||||
| Property and equipment, net | $ | 3,688 | $ | 3,554 | ||||
POLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023 and 2022 (UNAUDITED)
Intangible Assets
The following table provides a breakdown of identifiable intangible assets as of March 31, 2022June 30, 2023 and December 31, 20212022 (in thousands):
| June 30, | December 31, | |||||||||||||||
| March 31, 2022 | December 31, 2021 | 2023 | 2022 | |||||||||||||
| Customer relationships | $ | 24,148 | $ | 24,148 | $ | 3,461 | $ | 3,461 | ||||||||
| Marketing related - tradename | 26,935 | 26,935 | 6,835 | 6,835 | ||||||||||||
| Total intangible assets | 51,083 | 51,083 | 10,296 | 10,296 | ||||||||||||
| Accumulated amortization | (9,425 | ) | (6,871 | ) | (1,507 | ) | (- | ) | ||||||||
| Intangible assets, net | $ | 41,658 | $ | 44,212 | $ | 8,789 | $ | 10,296 | ||||||||
Amortization expense for the three and six months ended June 30, 2023, was $0.8 million and $1.5 million, respectively. In comparison, amortization expense for the three and six months ended June 30, 2022, was $2.6 million and $5.1 million, respectively.
These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 5.02.9 years.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 AND 2021
(UNAUDITED)
At March 31, 2022,June 30, 2023, estimated annual amortization expense for each of the next five years is as follows (in thousands):
| 2022 (remainder of year) | $ | 7,662 | |||||||
| 2023 | 10,217 | ||||||||
| Year ending December 31, | Amount | ||||||||
| 2023 (Remainder of year) | $ | 1,507 | |||||||
| 2024 | 9,905 | 3,013 | |||||||
| 2025 | 9,793 | 3,013 | |||||||
| 2026 | 4,081 | 1,256 | |||||||
| Total | $ | 41,658 | $ | 8,789 | |||||
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, 2022June 30, 2023 and December 31, 2021,2022, consisted of the following (in thousands):
| March 31, | December 31, | June 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| Trade accounts payable | $ | 51,660 | $ | 41,166 | $ | 38,945 | $ | 34,345 | ||||||||
| Accrued sales tax | 24,812 | 23,628 | 30,397 | 36,196 | ||||||||||||
| Accrued payroll liabilities | 1,707 | 984 | 697 | 680 | ||||||||||||
| Accrued interest | 648 | 794 | 19 | 37 | ||||||||||||
| Accrued income taxes | 1,933 | 334 | ||||||||||||||
| Accrued liability for sales returns | 3,916 | 3,916 | ||||||||||||||
| Credit cards payable | 1,447 | 1,004 | 81 | 32 | ||||||||||||
| Accrued severance | 390 | 496 | ||||||||||||||
| Accrued insurance | - | 1,180 | ||||||||||||||
| Other accrued liabilities | 1,362 | 4,186 | 4,121 | 5,151 | ||||||||||||
| Total accounts payable and accrued expenses | $ | 83,959 | $ | 72,592 | $ | 78,176 | $ | 81,537 | ||||||||
NOTE 6—LEASES
Operating Leases
On March 15, 2022, the Company entered into a lease agreement by and between the Company and 8780 19th Ave LLC, a New York limited liability company and related party (the “Office Lease”), for the lease of a new office building located in Brooklyn, New York. The Office Lease commenced on March 1, 2022 and shall expire on December 31, 2026. The Company has the option to extend the term of the Office Lease for one additional term of five years. The premises of the Office Lease contain approximately 5,835 rentable square feet. Under the terms of the Office Lease, the Company will lease the premises at the monthly rate of $22,000 for the first year, with scheduled annual increases. The Company received a four-month rent concession so that its first rental payment shall become due on or before July 1, 2022. The lease agreement contains customary events of default, representations, warranties, and covenants. The initial ROU asset and liability associated with this operating lease is $1.1 million.
1847 GOEDEKERPOLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,June 30, 2023 and 2022 AND 2021(UNAUDITED)
NOTE 6—OPERATING LEASES
The following was included in our unaudited condensed consolidated balance sheet at March 31, 2022June 30, 2023 and December 31, 20212022 (in thousands):
| March 31, | December 31, | June 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| Operating lease right-of-use assets | $ | 15,262 | $ | 14,937 | $ | 10,019 | $ | 11,688 | ||||||||
| Lease liabilities, current portion | 3,844 | 3,874 | 2,730 | 3,726 | ||||||||||||
| Lease liabilities, long-term | 12,787 | 12,493 | 8,108 | 9,013 | ||||||||||||
| Total operating lease liabilities | $ | 16,631 | $ | 16,367 | $ | 10,838 | $ | 12,739 | ||||||||
| Weighted-average remaining lease term (months) | 73 | 77 | 76 | 73 | ||||||||||||
| Weighted average discount rate | 3.90 | % | 4.00 | % | 3.9 | % | 3.9 | % | ||||||||
Operating lease expense was $1.0 million and $0.2 million for the three and six months ended March 31,June 30, 2023 and 2022, was $0.9 million and December 31, 2021,$1.9 million, respectively.
As of March 31, 2022,June 30, 2023, maturities of operating lease liabilities were as follows, in thousands:
| Years Ending December 31, | Amount | Amount | |||||||
| 2022 – remaining | $ | 3,314 | |||||||
| 2023 | 4,446 | ||||||||
| 2023 – Remainder of year | $ | 2,029 | |||||||
| 2024 | 2,086 | 1,808 | |||||||
| 2025 | 1,776 | 1,489 | |||||||
| 2026 | 1,827 | 1,532 | |||||||
| 2027 | 1,284 | ||||||||
| Thereafter | 7,544 | 4,159 | |||||||
| Total | 20,993 | 12,301 | |||||||
| Less: imputed interest | (4,362 | ) | (1,463 | ) | |||||
| Total operating lease liabilities | $ | 16,631 | $ | 10,838 | |||||
Finance Leases
DuringThe Company has three finance leases. At June 30, 2023, the period ending March 31, 2022, the Company entered in an equipment financing lease to purchase eight forklifts totalingtotal amount due on these leases was $0.3 million, maturing in February 2026.
At March 31, 2022, the outstanding balance of our finance leases is $0.4 million.
NOTE 7—RELATED PARTIES
Management Services Agreement
On April 5, 2019, the Company entered into a management services agreement with 1847 Partners LLC (the “Manager”), a company owned and controlled by the Company’s chairman and prior significant stockholder, which was amended effective on August 4, 2020. Pursuant to the offsetting management services agreement, as amended, the Company appointed the Manager to provide certain services to it for a quarterly management fee equal to $62,500; provided, however, that under certain circumstances specified in the management services agreement, the quarterly fee may be reduced if similar fees payable to the Manager by subsidiaries of the Company’s former parent company, 1847 Holdings LLC, exceed a threshold amount.
1847 GOEDEKERPOLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,June 30, 2023 and 2022 AND 2021(UNAUDITED)
NOTE 7—RELATED PARTIES
On March 15, 2022, the Company entered into a lease for additional office space with 8780 19th Ave LLC (“Landlord”), an entity owned by Albert and Elie Fouerti, the Company’s former Chief Executive and Chief Operating Officer, respectively. The Company shallcontends that the lease required the Landlord do certain work at Landlord’s expense to improve the building at a cost of approximately $1.2 million. Landlord has refused to pay for this work, contending that this expense was the Company’s responsibility. In addition, the total remaining amount due on the lease at June 30, 2023 is also reimburseapproximately $1.2 million. Landlord contends that the Manager for all costs and expensesCompany is in default of the Company which are specifically approved by the board of directors of the Company, including all out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of the Company in connection with performing services under the management services agreement.lease for failing to pay rent. The Company did notdisagrees that its rent obligations have been triggered and further contends that Landlord has violated the lease by failing to pay any expenses for the three months ended March 31, 2022 and 2021.
work. The Company expensed management fees of $0.1 million forand the three months ended March 31, 2022 and 2021.Landlord remain in dispute over these issues.
DMI
The Company is a member of DMI, an appliance purchasing cooperative. DMI purchases consumer electronics and appliances at wholesale prices from various vendors, and then makes such products available to its members, including the Company, who sell such products to end consumers. DMI’s purchasing group arrangement provides its members, including the Company, with leverage and purchasing power with appliance vendors, and increases the Company’s ability to compete with competitors, including big box appliance and electronics retailers. The Company owns an approximate 5%1.6% interest in DMI. Additionally, the Company’s Chief Executive Officer, and director, is on the board of DMI. As such, DMI is deemed to be a related party.
During the threesix months ended March 31, 2022,June 30, 2023, total purchases from DMI netrepresented approximately 65% of holdbacks, were $73.4 million,total purchases. At June 30, 2023 vendor deposits at DMI totaled $18.1 million and the vendor rebate due from DMI was $3.1$30.5 million.
Lease Agreements
The Company has lease agreements with 1870 Bath Ave. LLC, 812 and 5th Ave Realty LLC, 54 Glen Cove Realty, LLC, and 8780 19th Ave LLC respectively. Each of theseLLC. These two entities isare owned by the Company’s former Chief Executive Officer and Chief Operating Officer. In addition, the Company has a sublease agreement with DMI. The total rent expense under these related party leases was $0.5$0.8 million for the threesix months ended March 31, 2022.June 30, 2023.
NOTE 8—STOCKHOLDERS' EQUITY
POLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023 and 2022 (UNAUDITED)
NOTE 8—NOTES PAYABLE
Credit Facilities
AsBank of March 31,America Credit Agreement
On May 9, 2022, the Company was authorizedentered into a Credit Agreement (the “Credit Agreement”) with the lenders identified therein (the “Lenders”) and Bank of America, N.A., as administrative agent, swingline lender and letter of credit issuer (the “Agent”), pursuant to issue 250,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of “blank check” preferred stock, 0.0001 par value per share. On December 17 2021,which the board of directors approved an increaseLenders agreed to make available to the numberBorrowers senior secured credit facilities in the aggregate initial amount of shares$140.0 million, including (i) a $100.0 million term loan (the “Term Loan”) and (ii) a $40.0 million revolving credit facility (the “Revolving Loan”), which revolving credit facility included a $2.00 million swingline sublimit (the “Swing Line Loan” and together with the Term Loan and the Revolving Loan, the “Loans”) and, separately, a $10.0 million letter of common stock thatcredit commitment, in each case, on the terms and conditions contained in the Credit Agreement.
On May 9, 2022, the Company is authorized to issue from 200,000,000 to 250,000,000 shares. Such increase was approved byborrowed the Company’s stockholders effective as of December 21, 2021. See Note 12, “Commitments and Contingencies” for additional discussionentire amount of the Share Increase Proposal (as defined below). To date,Term Loan in the Company has not designated or issuedaggregate principal amount of $100.0 million. A portion of the proceeds of the Term Loan were to repay and terminate the M&T Credit Agreement. Commencing on September 30, 2022, through and including June 30, 2023, the Borrowers repaid the principal amount of the Term Loan in quarterly installments of $1,250,000 each, payable on the last business day of each March, June, September and December.
As of June 30, 2023, the carrying value of the Term Loan was $94.1 million, comprised of principal of $95.0 million, net of unamortized loan costs of $0.9 million. Loan costs before amortization included $1.1 million of lender and other fees.
As a result of our technical non-compliance with specified loan covenants for both the Bank of America Term Loan and Revolving Loan, based in part due to our failure to timely deliver financial statements, Bank of America froze the $40.0 million Revolving Loan before any shares of preferred stock.borrowings had been made against the facility.
Stock Options
Below is a table summarizing the changes in stock options outstanding during the three months ended March 31, 2022:
| Weighted -Average | ||||||||
| Options | Exercise Price | |||||||
| Outstanding at December 31, 2021 | 312,960 | $ | 6.17 | |||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Forfeited | (132,960 | ) | 9.00 | |||||
| Outstanding at March 31, 2022 | 180,000 | $ | 4.08 | |||||
| Exercisable at March 31, 2022 | 30,000 | $ | 9.00 | |||||
1847 GOEDEKERPOLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,June 30, 2023 and 2022 AND 2021(UNAUDITED)
During the three months ended March 31, 2022, 132,960 stock options were forfeited, as a result of employee terminations.
Stock-based compensation expense of $0.02 million and $0.1 million was recorded during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the remaining unrecognized compensation cost related to non-vested stock options is $0.3 million and is expected to be recognized over 3.33 years. The outstanding stock options have a weighted average remaining contractual life of 7.79 years and a total intrinsic value of $nil.
Warrants
Below is a table summarizing the changes in warrants outstanding during the three months ended March 31, 2022:
| Weighted- Average | ||||||||
| Warrants | Exercise Price | |||||||
| Outstanding at December 31, 2021 | 92,514,423 | $ | 2.30 | |||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Forfeited | - | - | ||||||
| Outstanding at March 31, 2022 | 92,514,423 | $ | 2.30 | |||||
| Exercisable at March 31, 2022 | 92,514,423 | $ | 2.30 | |||||
As of March 31, 2022, the outstanding warrants have a weighted average remaining contractual life of 4.17 years and a total intrinsic value of $nil.
NOTE 9—BUSINESS COMBINATIONS
Appliances Connection
On October 20, 2020, the Company entered into a securities purchase agreement, which was amended on December 8, 2020 and April 6, 2021 (as amended, the “AC Purchase Agreement”), with ACI, Appliances Connection and the sellers (the “Sellers”), pursuant to which ACI agreed to acquire all of the issued and outstanding capital stock or other equity securities of Appliances Connection from the Sellers (the “Appliances Connection Acquisition”). The Appliances Connection Acquisition was completed on June 2, 2021.
The aggregate purchase price was $224.7 million, consisting of (i) $180.0 million in cash, (ii) 5,895,973 shares of the Company’s common stock valued at $12.3 million, and (iii) $32.4 million as a result of the post-closing net working capital adjustment provision. The Company recorded $0.9 million in acquisition related expenses.
The Company accounted for the Appliances Connection Acquisition using the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations”. In accordance with ASC 805, the Company assigned fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
We are amortizing the customer relationship and tradename intangible assets acquired over 5 years. Goodwill and intangibles recognized for this transaction are not deductible for tax purposes.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 AND 2021
(UNAUDITED)
Appliance Gallery
On July 6, 2021, AC Gallery entered into an asset purchase agreement, which was amended on July 21, 2021 and July 29, 2021 (as amended, the “AG Purchase Agreement”), with Appliance Gallery, pursuant to which AC Gallery agreed to acquire substantially all the assets and assumed substantially all the liabilities of Appliance Gallery (the “AC Gallery Acquisition”). The AC Gallery Acquisition was completed on July 29, 2021.
Pursuant to the AG Purchase Agreement, the purchase price paid at closing was $1.4 million.
The Company accounted for the Gallery Acquisition using the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations”. In accordance with ASC 805, the Company assigned fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
Goodwill recognized for this transaction is deductible for tax purposes.
Pro Forma Information
The following unaudited pro forma results presented below (in thousands) include the effects of the Appliances Connection and AC Gallery Acquisitions as if they had been consummated as of January 1, 2021, with adjustments to give effect to pro forma events that are directly attributable to the acquisitions.
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| 2022 | 2021 | |||||||
| Net sales | $ | 152,752 | $ | 123,711 | ||||
| Net income | 5,922 | 10,899 | ||||||
| Earnings (loss) per share: | ||||||||
| Basic and Diluted | $ | 0.06 | $ | 1.78 | ||||
These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been if the acquisitions had occurred at the beginning of the period presented, nor are they indicative of future results of operations. The amortization of the identified intangible assets acquired in the Appliances Connection Acquisition included in 2021 Net income was $2.5 million.
NOTE 10—NOTES PAYABLE
M&T Credit Facilities
On June 2, 2021,July 25, 2023, the Company and ACI,Bank of America amended the Credit Agreement (the “Amendment”), in part, to waive events of defaults on its existing credit agreement. The Amendment requires the Company to pay the existing Term Facility and Revolving Facility by August 31, 2024 (the “Maturity Date”). The Revolving Loan decreased to $10,000,000 from and after July 25, 2023. The Letter of Credit commitments decreased to $2,000,000 and the Swing Line Loan was eliminated. The Amendment also establishes a new EBITDA covenant and requires the Company to maintain minimum liquidity of $8.0 million including restricted cash and $3.0 million excluding restricted cash. Liquidity as borrowers, entered into a credit and guaranty agreement (the “M&T Credit Agreement”) with Appliances Connectiondefined in the Amendment includes Cash and certain other subsidiaries of the Company party thereto from time to time as guarantors, the financial institutions party thereto from time to time (“M&T Lenders”),qualifying customer and Manufacturers and Traders Trust Company, as sole lead arranger, sole book runner, administrative agent and collateral agent (“M&T”), pursuant to which the M&T Lenders have agreed to make available to the Company and ACI senior secured credit facilities in the aggregate initial amount of $70.0 million, including (i) a $60.0 million term loan (the “M&T Term Loan”) and (ii) a $10.0 million revolving credit facility (the “M&T Revolving Loan”), which revolving credit facility includes a $2.0 million swingline subfacility (the “M&T Swing Line Loan” and together with the M&Tcard accounts receivable.
The Term Loan and the M&T Revolving Loan the “M&T Loans”) and a $2.0 million letter of credit subfacility, in each case, on the terms and conditions contained in the M&T Credit Agreement. On June 2, 2021, the Company borrowed the entire amount of the M&T Term Loan and issued term loan notes to the M&T Lenders in the aggregate principal amount of $60.0 million. As of March 31, 2022, the Company has not borrowed any amounts under the M&T Revolving Loan. As of March 31, 2022, the carrying value of the M&T Term Loan was $53.9 million, comprised of principal of $57 million, net of unamortized loan costs of $3.1 million. The Company classified $7.5 million as a current liability and the balance as a long-term liability.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 AND 2021
(UNAUDITED)
Each of the M&T Loans matures on June 2, 2026. The M&T Loans will bear interest on the unpaid principal amount thereof as follows: (i) if it is a M&T Loanloan bearing interest at a rate determined by the Base Rate, (as defined in the M&T Credit Agreement), then at the Base Rate plus the Applicable Margin (as defined in the M&T Credit Agreement)Rate for such M&T Loan;loan and (ii) if it is a M&T Loanloan bearing interest at a rate determined by the LIBOR Rate (as defined in the M&T Credit Agreement),Term SOFR, then at the LIBOR RateTerm SOFR plus the Applicable MarginRate for such M&T Loan; and (iii) if it is a M&T Swing Line Loan, then at the rate applicable to M&T Loans bearing interest at a rate determined by the Base Rate. The M&T Term Loan initially bears interest at the LIBOR Rate plus Applicable Margin (3.9%), with an initial interest period of six months.loan. The Company may elect to continue or convert the existing interest rate benchmark for the M&T Term Loan from LIBOR RateTerm SOFR to Base Rate, and may elect the interest rate benchmark for future M&T Revolving Loansrevolving loans as either LIBOR RateTerm SOFR or Base Rate (and, with respect to any M&T Loanloan made at the LIBOR Rate,using Term SOFR, may also select the interest period applicable to any such M&T Loan)loan), by notifying M&Tthe Agent and M&Tthe Lenders from time to time in accordance with the provisions of the M&TAmendment and Credit Agreement. The Applicable Rate increased from a high of 1.95% and 0.95%, respectively, for Term SOFR and Base Rate in the Credit Agreement to 4.00% for each of Term SOFR and Base Rate as a result of the Amendment. Interest is payable in arrears on each Interest Payment Date (as defined in the Credit Agreement). Notwithstanding the foregoing, following an event of default, the M&T Loansloans under the Credit Facilities will bear interest at a rate that is 2% per annum higher than the interest rate then in effect for the applicable M&T Loan.loan.
On May 9, 2022, the Company entered into an interest rate swap agreement to reduce its exposure to fluctuations in the floating interest rate tied to SOFR (see Note 9). The initial notional amount of the swap is $100 million with a termination date of May 31, 2027. As a result of the swap, the Company pays interest at a fixed rate of 2.9%, plus applicable margins.
Commencing on September 30, 2023, through and including June 30, 2024, the Borrowers must repay the principal amount of the M&T Term Loan in quarterly installments of $1.5 million$1,875,000 each, payable on the last business day of each March, June, September and December, commencing on September 30, 2021. The remaining unpaid principal amount of the M&T Term Loan must be repaid on the maturity date, unless payment is sooner required by the M&T Credit Agreement. Mandatory repayments of amounts borrowed under the M&T Revolving Loan facility are required only if the amount borrowed at any time exceeds the commitment amount. Amounts borrowed under M&TDecember. Revolving Loans may be repaid and reborrowed at any time until the maturity date.
Maturity Date, subject to the terms and conditions set forth in the Credit Agreement. Mandatory prepayments of Revolving Loans are required if the amount borrowed at any time exceeds the commitment amount. The Company may voluntarily prepay the M&T Loans from time to time in accordance with the provisions of the M&T Credit Agreement, and will be required to prepay the M&T Loans under certain limited circumstances as set forth in the M&T Credit Agreement, including upon receipt of cash proceeds in connection with certain specified asset sales, receipt of insuranceloss or condemnation proceeds or other cash proceeds received other than in the ordinary course of business or upon receipt of cash proceeds from the incurrence of indebtedness that is not permitted under the M&T Credit Agreement, all as more specifically set forth in the M&T Credit Agreement. The Loans may from time to time be further evidenced by separate promissory notes issued by the Borrowers.
UnderAs a result of the M&T Credit Agreement,reduced term, the Company is requiredhas begun discussions with investment bankers to pay certain feesplace financing to M&T, including a commitment feereplace the existing credit agreement by August 31, 2024.
Vehicle Loans
The Company has financed purchases of up to 0.5% per annumtransportation vehicles with respect to the unused portion of the M&T Lenders’ revolving loan commitments, determined as set forth in the M&T Credit Agreement, and certain fees in connection with the issuance of any letters of credit under the M&T Credit Agreement.
The M&T Credit Agreement contains customary representations, warranties, affirmative and negative financial and other covenants, including leverage ratio and fixed charge coverage ratios, and events of default for loans of this type. The M&T Loans are guaranteed by the Guarantors (as defined in the M&T Credit Agreement) andnotes payable, which are secured by a first priority securitythe vehicles purchased. These notes have five-year terms and interest in substantially allrates ranging from 3.8% to 5.7%. As of June 30, 2023, the assetsoutstanding balance of the Company, ACI and the guarantors.these vehicle loans is $0.8 million.
Maturities of the M&T Term Loan are as follows:
| For the years ended December 31, | |||||
| 2022 (remainder of year) | $ | 4,500 | |||
| 2023 | 6,000 | ||||
| 2024 | 6,000 | ||||
| 2025 | 6,000 | ||||
| Thereafter | 33,000 | ||||
| Total | 55,500 | ||||
| Less: Loan costs | (3,501 | ) | |||
| Total | $ | 51,999 | |||
| Amount classified as a current liability | $ | 6,000 | |||
| Amount classified as long-term liability | $ | 45,999 | |||
M&T Loan was paid in full on May 9, 2022 (see Note 13, “Subsequent Events”).
1847 GOEDEKERPOLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCHJune 30, 2023 and 2022 (UNAUDITED)
Maturities of Notes Payable are as follows:
| June 30, | ||||
| For the years ended December 31, | 2023 | |||
| 2023 (Remainder of year) | $ | 3,946 | ||
| 2024 | 91,584 | |||
| 2025 | 201 | |||
| 2026 | 29 | |||
| 2027 | 21 | |||
| Thereafter | - | |||
| Total | 95,781 | |||
| Less: Loan costs | (850 | ) | ||
| Total | $ | 94,931 | ||
| Amount classified as a current liability | $ | 7,866 | ||
| Amount classified as long-term liability | 87,065 | |||
| Total | $ | 94,931 | ||
NOTE 9—DERIVATIVE INSTRUMENTS (INTEREST RATE SWAP):
On May 9, 2022, the Company entered into a Term Loan agreement with Bank of America, N.A. (See Note 11). On the same day, the Company entered into an interest rate swap agreement to reduce its exposure to fluctuations in the floating interest rate tied to SOFR under the Term Loan with a notional amount of $100 million. The interest rate swap became effective on May 9, 2022, and will terminate on May 31, 2027. The Company receives variable interest payments monthly based on a one-month SOFR and pays a fixed rate of 2.93% to the counterparty.
As of June 30, 2023, the fair value of the interest rate swap agreement was $3.8 million and was classified as a derivative asset in our consolidated balance sheet. During the three and six months ended June 30, 2023 the Company recognized a $1.9 million and $0.6 million gain, respectively on the change in fair value of the interest rate swap.
The Company classified the interest rate swap in Level 2 of the fair value hierarchy.
NOTE 10—STOCKHOLDERS' EQUITY
As of June 30, 2023, the Company was authorized to issue 200,000,000 shares of common stock, $0.0001 par value per share, and 20,000,000 shares of “blank check” preferred stock, 0.0001 par value per share. At June 30, 2023 and December 31, 2022, AND 2021there were 105,469,878 and 105,227,876 shares of common stock outstanding, respectively.
(UNAUDITED)
Stock Options
Below is a table summarizing the changes in stock options outstanding during the six months ended June 30, 2023:
| Weighted -Average | ||||||||
| Options | Exercise Price | |||||||
| Outstanding at December 31, 2022 | 37,500 | $ | 3.10 | |||||
| Granted | 86,550 | $ | 0.58 | |||||
| Exercised | ||||||||
| Forfeited | (37,500 | ) | 3.10 | |||||
| Outstanding at June 30, 2023 | 86,550 | $ | 0.58 | |||||
| Exercisable at June 30, 2023 | - | - | ||||||
POLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023 and 2022 (UNAUDITED)
During the six months ended June 30, 2023, 37,500 stock options were forfeited, as a result of employee terminations.
Stock-based compensation expense of $0.2 million was recorded during the Six months ended June 30, 2023. As of June 30, 2023, the remaining unrecognized compensation cost related to non-vested stock options is $0.03 million and is expected to be recognized over 3.5 years. The outstanding stock options have a weighted average remaining contractual life of 9.5 years and a total intrinsic value of $nil.
Warrants
Below is a table summarizing the changes in warrants outstanding during the six months ended June 30, 2023
| Weighted- Average | ||||||||
| Warrants | Exercise Price | |||||||
| Outstanding at December 31, 2022 | 92,514,423 | $ | 2.30 | |||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Forfeited | - | - | ||||||
| Outstanding at June 30, 2023 | 92,514,423 | $ | 2.30 | |||||
| Exercisable at June 30, 2023 | 92,514,423 | $ | 2.30 | |||||
As of June 30, 2023, the outstanding warrants have a weighted average remaining contractual life of 2.9 years and a total intrinsic value of $nil.
NOTE 11—EARNINGS (LOSS) PER SHARE
The computation of weighted average shares outstanding and the basic and diluted earnings (loss) per common share for the following periods consisted of the following (in thousands, except share and per share amounts):
| March 31, | March 31, | |||||||
| 2022 | 2021 | |||||||
| Basic and Diluted Earnings (Loss) Per Share | ||||||||
| 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 | ) | |||
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Basic Earnings (Loss) Per Share | ||||||||||||||||
| Net income (loss) | $ | 1,004 | $ | (4,292 | ) | $ | (1,757 | ) | $ | 1,527 | ||||||
| Basic weighted average common shares outstanding | 105,469,878 | 105,774,197 | 105,425,640 | 106,080,764 | ||||||||||||
| Basic earnings (loss) per share | $ | 0.01 | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.01 | ) | |||||
| Effect of dilutive stock options and warrants | - | - | - | - | ||||||||||||
| Diluted weighted average common shares outstanding | 105,469,878 | 105,774,197 | 105,425,640 | 106,080,764 | ||||||||||||
| Diluted earnings (loss) per share | $ | 0.01 | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.01 | ) | |||||
For the three and six months ended March 31,June 30, 2023 and 2022, there were 92,694,423 potential common share equivalents from stock92,600,973 and 92,664,423, respectively, potentially diluted options and warrants were excluded from the diluted EPS calculations as their effect is anti-dilutive.
For the three months ended March 31, 2021, there were 1,010,560, potential common share equivalents from stock options and warrants excluded from the diluted EPS calculations as their effect is anti-dilutive.
POLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023 and 2022 (UNAUDITED)
NOTE 12—COMMITMENTS AND CONTINGENCIES
Legal Proceedings
At the Company’s annual meeting on December 21, 2021, the stockholders were asked to approve an amendment to the Company’s Amended and Restated Certificate of Incorporation, dated July 30, 2020 (the “Certificate of Incorporation”), increasing the number of authorized shares of the Company’s common stock, par value $0.0001 per share (“Common Stock” and such proposal, the “Share Increase Proposal”) by 50,000,000 shares of Common Stock. As reported in a Form 8-K filing on December 28, 2021, the Share Increase Proposal was adopted and a Certificate of Amendment to the Certificate of Incorporation setting forth the amendment adopted pursuant to the Share Increase Proposal (the “Certificate of Amendment”) was filed with the Secretary of State of the State of Delaware (the “Delaware Secretary of State”). To date, none of these newly authorized shares has actually been issued.
Three purported beneficial owners of Common Stock subsequently expressed concerns about a statement in the Company’s proxy statement related to the Share Increase Proposal, specifically questioning, in light of the proxy statement, the ability of brokerage firms and other custodians to vote shares of Common Stock held by them for the benefit of their customers in the absence of instructions from the beneficial owners. Based on an examination of the situation performed following receipt of these demands, the Company believes that the vote at the annual meeting was properly tabulated and that the proposed amendment was properly adopted in accordance with Delaware law. In light of the demands, however, and to ensure against any future question as to the validity of these newly authorized shares, the Company elected to seek validation of its Certificate of Amendment through a Petition to the Court of Chancery of the State of Delaware (the “Court of Chancery”) pursuant to Section 205 of the Delaware General Corporation Law (the “205 Petition”). The action, styled In re 1847 Goedeker Inc., C.A. 2022-0219-SG seeks(the “Action”), sought entry by the Court of Chancery of an order validating and declaring effective the Certificate of Amendment, and validating the additional shares of Common Stock authorized under the Share Increase Proposal.
1847 GOEDEKER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 AND 2021
(UNAUDITED)
Shortly beforeTwo purported stockholders objected to the 205 PetitionPetition. One such objecting, purported stockholder (the “Stockholder Plaintiff”) filed his own lawsuit (which was filed, one ofthen consolidated with the purported stockholders who had submitted a demand related to adoption of the Share Increase Proposal also has filed a Class Action Complaint in the Court of Chancery against the Company205 Petition) requesting that such relief not be granted and its Board of Directors. That lawsuit, captioned Scot T. Boden v. 1847 Goedeker Inc., et al., C.A. No. 2022-0196-SG (the “Boden Action”), assertsasserting two claims for relief. Therelief: first, is against the Company for alleged violation of the Delaware General Corporation Law Section 225(b) for improper tabulation of the stockholder vote on the Share Increase Proposal. TheProposal; and second, assertsasserting that the Company’s directors breached their fiduciary duties by incorrectly tabulating the stockholder vote, and by causing a purportedly invalid amendment to our Certificate of Incorporation to be filed with the Delaware Secretary of State. The Boden Action has been consolidatedCourt of Chancery held a hearing on May 27, 2022, to consider the Company’s motion for entry of an order under Section 205 and subsequently entered an order denying the motion without prejudice on June 30, 2022. On July 7, 2022, the Company filed a Certificate of Correction with the 205 Petition;Secretary of State of the State of Delaware, voiding the Charter Amendment and for reasons set out incausing the 205 Petition,number of authorized shares of Common Stock to remain at 200,000,000.
On June 12, 2023, the Company and its directors believe the Boden Actionsubmitted to be without merit and intend to defend the claims. Mr. Boden and a second purported stockholder, Robert Corwin, have both filed briefs opposing the 205 Petition. Under a scheduling order issued by the Court of Chancery on May 6, 2022,a Stipulation and [Proposed] Order Regarding Notice and Closing of the Case regarding the Action (the “Dismissal Order”). As stated in the Dismissal Order, the Company intendsand the other parties to filethe Action negotiated at arm’s length and resolved the stockholders’ claims to entitlement to a reply brief in further support ofmootness fee award, and the 205 Petition by May 20, 2022. TheCompany agreed to pay $475,000 for attorneys’ fees and expenses to the stockholders’ counsel (the “Attorneys’ Fees”). Pursuant to Court of Chancery has scheduled a hearing onRules 23(e) and 41(a), the matter for May 27, 2022. The Company cannot predictparties to the outcomeAction stipulated to voluntary dismissal of these proceedings,the Action with prejudice as to the Stockholder Plaintiff and without prejudice as to any actual or the timingpotential claims of any decisionother members of the putative class, and such dismissal was granted by the Court on June 13, 2023. As stipulated in the Dismissal Order, the Company paid the Attorneys’ Fees to the stockholders’ counsel on June 28, 2023 and such payment fully satisfied and resolved the stockholders’ and the stockholders’ counsel’s entitlement to any fees or expenses in the Action.
On October 31, 2022, a putative shareholder class action was filed against Polished.com Inc. (the “Company”) and certain of its current and former officers and directors, as well as certain underwriters of the Company’s 2020 initial public offering (the “IPO”). The action was commenced in the United States District Court for the Eastern District of New York court and is captioned Maschhof v. Polished.com Inc., et al., No. 1:22-cv-06606. The complaint asserts violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as well as Sections 10(b) and Rule 10b-5 promulgated thereunder, and 20(a) of the Securities Exchange Act of 1934 arising from alleged misstatements and omissions made in certain of the Court.Company’s SEC filings made in connection with the IPO. On or about December 20, 2022, plaintiffs filed a motion for the appointment of lead plaintiff and lead counsel. Although that motion is fully briefed, to date, oral argument has yet to be scheduled.
POLISHED.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023 and 2022 (UNAUDITED)
NOTE 13—SUBSEQUENT EVENTSOn January 26, 2023, a derivative stockholder complaint was filed against certain of the Company’s current and former officers and directors, naming the Company as a nominal defendant. The action was commenced in the United States District Court for the Eastern District of New York court and is captioned Wong v. Moore et al., No. 1:23-cv-00559. The complaint asserts violations of Section 14(a) of the Exchange Act, breaches of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets, arising from alleged misstatements and omissions made in certain of the Company’s SEC filings made in connection with the IPO. On or about March 7, 2023, plaintiff filed a stipulation and proposed order to stay proceedings until any motions to dismiss in the related class action (captioned Maschhoff v. Polished.com Inc. et al., No. 1:22-cv-06606) are decided. On March 23, 2023, the stipulation was so-ordered.
On May 9, 2022,February 13, 2023, a derivative stockholder complaint was filed against certain of the Company’s current and former officers and directors as well as the Company’s external manager, naming the Company as a nominal defendant. The action was commenced in the United States District Court for the Eastern District of New York court and ACI (together,is captioned Gossett v. Moore, et al., No. 1:23-cv-1168. The complaint asserts claims for breach of fiduciary duty against the “Borrowers”)former officers and directors and aiding and abetting breaches of fiduciary of duty against the external manager, arising from alleged misstatements and omissions made in certain subsidiaries of the Borrowers, as guarantors, entered into a Credit Agreement (the “New Credit Agreement”) by and among the Borrowers, the guarantors, each of the lenders identified therein (the “Lenders”) and Bank of America, N.A., as administrative agent, swingline lender and letter of credit issuer (the “Agent”), pursuant to which the Lenders have agreed to make available to the Borrowers senior secured credit facilities in the aggregate initial amount of $140,000,000, including (i) a $100,000,000 term loan (the “New Term Loan”) and (ii) a $40,000,000 revolving credit facility (the “New Revolving Loan”), which revolving credit facility includes a $2,000,000 swingline subfacility (the “New Swing Line Loan” and together with the New Term Loan and the New Revolving Loan, the “New Loans”) and a $2,000,000 letter of credit subfacility, in each case, on the terms and conditions contained in the New Credit Agreement. The New Loans may from time to time be further evidenced by separate promissory notes issued by the Borrowers. On May 9, 2022, the Company borrowed the entire amount of the New Term Loan, but no New Revolving Loans have beenCompany’s SEC filings made as of May 16, 2022.
The proceeds of the New Term Loan were applied, among other uses, to prepay the obligations in full under the Borrowers’ existing M&T Credit Agreement. On May 9, 2022, in connection with prepayment of the obligations underIPO. On or about April 24, 2023, plaintiffs filed a joint stipulation and proposed order consolidating the M&T Credit Agreement,related derivative actions and appointing co-lead counsel. To date, the M&T Credit Agreement was terminated.
stipulation has yet to be ordered.
NOTE 14—13—SUPPLIER CONCENTRATION
Significant customers and suppliers are those that account for greater than 10ten percent of the Company’s revenues and purchases.
For the threesix months ended March 31, 2022,June 30, 2023, the Company purchased 77%approximately 65% of finished goodspurchases were made from DMI.
The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive.
NOTE 14—SUBSEQUENT EVENTS
Subsequent to December 31, 2022, the Company signed a letter of intent for a sublease from DMI, a related party for a new warehouse in a building being leased by DMI. The new lease will allow the Company to close its two existing New Jersey warehouses and consolidate operations into one new warehouse. The lease, which is expected to be finalized in the fourth quarter of 2023 or the first quarter of 2025 is for 228,000 square feet for seven years at a cost of approximately $15 per square foot, including common area charges with annual increases of 3.75%.
On July 25, 2023, the Company and Bank of America amended the Credit Agreement (the “Amendment”), in part, to waive events of defaults on its existing credit agreement. The Amendment requires the Company to pay the existing Term Facility and Revolving Facility by August 31, 2024 (the “Maturity Date”). The Revolving Loan decreased to $10,000,000 from and after July 25, 2023. The Letter of Credit commitments decreased to $2,000,000 and the Swing Line Loan was eliminated. The Amendment also establishes a new EBITDA covenant and requires the Company to maintain minimum liquidity of $8.0 million including restricted cash and $3.0 million excluding restricted cash. Liquidity as defined in the Amendment includes Cash and certain qualifying customer and credit card accounts receivable.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Except as otherwise indicated by the context and for the purposes of this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “us,” or “our” refer to 1847 GoedekerPolished.com Inc., a Delaware corporation, and its consolidated subsidiaries, including but not limited to, 1 Stop Electronics Center, Inc., a New York corporation (“1 Stop”), Gold Coast Appliances, Inc., a New York corporation (“Gold Coast”), Superior Deals Inc., a New York corporation (“Superior Deals”), Joe’s Appliances LLC, a New York limited liability company (“Joe’s Appliances”), and YF Logistics LLC, a New Jersey limited liability company (“YF Logistics” and together with 1 Stop, Gold Coast, Superior Deals, and Joe’s Appliances, “Appliances Connection”), Appliances Connection Inc. (“ACI”) and AC Gallery Inc., a Delaware corporation (“AC Gallery”). The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the section “Cautionary Statement Regarding Forward-Looking Statements” and in our Annual Report on Form 10-K for the year ended December 31, 20212022 under the heading Item 1A “Risk Factors.”
Overview
Overview
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto, which are included in Part I, Item 1 of this Form 10-Q.
We operate a content-driven and technology-enabled shopping destination for appliances, furniture and home goods. With warehouse fulfillment centers in the Northeast and Midwest, as well as showrooms in Brooklyn, New York, St. Louis, Missouri and Largo, Florida, weFlorida. We offer one-stop shopping for national and global brands. We carry many household name-brands, including Bosch, Cafe, Frigidaire Pro, Whirlpool, LG, and Samsung, and also carry many major luxury appliance brands such as Miele, Thermador, La Cornue, Dacor, Ilve, Jenn-Air, and Viking, among others. We also sell furniture, fitness equipment, plumbing fixtures, televisions, outdoor appliances, and patio furniture, as well as commercial appliances for builder and business clients.
Recent Developments
NewAmendment of Bank of America Credit Agreement
On May 9, 2022, we entered into a Credit Agreement (the “New Credit Agreement”) by and amongJuly 25, 2023, the Company and ACI, as borrowers, certain of our subsidiaries as guarantors, each of the lenders identified therein (the “Lenders”) and Bank of America N.A., as administrative agent, swingline lender and letter of credit issueramended their Credit Agreement (the “Agent”“Amendment”), pursuantin part, to whichwaive events of defaults on its existing credit agreement. The Amendment requires the Lenders have agreedCompany to make availablepay the existing Term Facility and Revolving Facility by August 31, 2024 (the “Maturity Date”). The Revolving Loan decreased to us senior secured credit facilities$10,000,000 from and after July 25, 2023. The Letter of Credit commitments decreased to $2,000,000 and the Swing Line Loan was eliminated. The Amendment also establishes a new EBITDA covenant and requires the Company to maintain minimum liquidity of $8.0 million including restricted cash and $3.0 million excluding restricted cash. Liquidity as defined in the aggregate initial amount of $140,000,000, including (i) a $100,000,000 term loan (the “New Term Loan”)Amendment includes Cash and (ii) a $40,000,000 revolvingcertain qualifying customer and credit facility (the “New Revolving Loan”), which revolving credit facility includes a $2,000,000 swingline subfacility (the “New Swing Line Loan” and together with the Newcard accounts receivable.
The Term Loan and the New Revolving Loan will bear interest on the “New Loans”)unpaid principal amount thereof as follows: (i) if it is a loan bearing interest at a rate determined by the Base Rate, then at the Base Rate plus the Applicable Rate for such loan and (ii) if it is a $2,000,000 letterloan bearing interest at a rate determined by Term SOFR, then at Term SOFR plus the Applicable Rate for such loan. The Company may elect to continue or convert the existing interest rate benchmark for the Term Loan from Term SOFR to Base Rate, and may elect the interest rate benchmark for future revolving loans as either Term SOFR or Base Rate (and, with respect to any loan made using Term SOFR, may also select the interest period applicable to any such loan), by notifying the Agent and the Lenders from time to time in accordance with the provisions of credit subfacility,the Amendment and Credit Agreement. The Applicable Rate increased from a high of 1.95% and 0.95%, respectively, for Term SOFR and Base Rate in the Credit Agreement to 4.00% for each case,of Term SOFR and Base Rate as a result of the Amendment. Interest is payable in arrears on each Interest Payment Date (as defined in the Credit Agreement). Notwithstanding the foregoing, following an event of default, the loans under the Credit Facilities will bear interest at a rate that is 2% per annum higher than the interest rate then in effect for the applicable loan.
Concurrent with closing of the Bank of America loan, the Company purchased a fixed rate loan swap (See Note 9) capping its interest rate at 2.9%, plus applicable margins.
Commencing on September 30, 2023, through and including June 30, 2024, the Borrowers must repay the principal amount of the Term Loan in quarterly installments of $1,875,000 each, payable on the last business day of each March, June, September and December. Revolving Loans may be repaid and reborrowed at any time until the Maturity Date, subject to the terms and conditions containedset forth in the NewCredit Agreement. Mandatory prepayments of Revolving Loans are required if the amount borrowed at any time exceeds the commitment amount. The Company may voluntarily prepay the Loans from time to time in accordance with the provisions of the Credit Agreement, and will be required to prepay the Loans under certain limited circumstances as set forth in the Credit Agreement, including upon receipt of cash proceeds in connection with certain specified asset sales, receipt of loss or condemnation proceeds or other cash proceeds received other than in the ordinary course of business or upon receipt of cash proceeds from the incurrence of indebtedness that is not permitted under the Credit Agreement, all as more specifically set forth in the Credit Agreement. The New Loans may from time to time be further evidenced by separate promissory notes issued by the borrowers. On May 9, 2022, we borrowed the entire amount of the New Term Loan, but no New Revolving Loans have been made as of May 16, 2022.
The proceeds of the New Term Loan were applied, among other uses, to prepay the obligations in full under the Company’s existing M&T Credit Agreement (as defined below). On May 9, 2022, in connection with prepayment of the obligations under the M&T Credit Agreement, the M&T Credit Agreement was terminated.Borrowers.
New Headquarters
We have transitioned our corporate headquarters to our office space and showroom in Brooklyn, New York. On March 15, 2022, we entered into a lease agreement with 8780 19 Ave LLC, a related party, for additional office space in Brooklyn to expand our headquarter office, currently located in the adjacent building, as we continue scaling our business and consolidating our corporate functions in Brooklyn. The lease expires on December 31, 2026, with an option to extend for an additional five years thereafter.
Share Repurchase Plan
On December 17, 2021, we approved a new share repurchase program under which we may repurchase up to $25.0 million of our outstanding shares of common stock in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our decision to repurchase shares, as well as the timing of such repurchases, will depend on a variety of factors that include ongoing assessments of our capital needs, obtaining requisite senior lender consent, market conditions and the price of our common stock, and other corporate considerations, as determined by our management. The repurchase program may be suspended or discontinued at any time. As of March 31, 2022, no shares have been repurchased.
Ongoing Impact of Coronavirus Pandemic
We are continuing to closely monitor the impact of the COVID-19 pandemic on our business, results of operations and financial results. The situation surrounding the COVID-19 pandemic remains fluid and the full extent of the impact of the COVID-19 pandemic on our business will depend on certain developments including the duration and severity of the pandemic, the emergence of new variants that may continue to prolong the pandemic, the amount of time it will take for normal economic activity to resume, future government actions that may be taken, the impact on consumer activity and behaviors and the effect on our customers, employees, suppliers, partners and stockholders, all of which are uncertain and cannot be predicted. Our focus remains on promoting the health, safety and financial security of our employees and serving our customers. We are dependent upon suppliers to provide us with all of the products that we sell. While the home industry has fared much better during the COVID-19 pandemic than other sectors of the economy, the pandemic has negatively impacted and may continue to negatively impact suppliers, manufacturers and the overall supply chain of our products. As a result, we have faced and may continue to face delays or difficulty sourcing certain products, which could negatively affect our business and financial results. Even if we are able to find alternate sources for such products, they may cost more, which could adversely impact our profitability and financial condition.
The global deterioration in economic conditions, which may have an adverse impact on discretionary consumer spending, could also impact our business. For instance, consumer spending may be negatively impacted by general macroeconomic conditions, including a rise in unemployment, increased inflation, and decreased consumer confidence resulting from the pandemic and other economic conditions. Changing consumer behaviors as a result of the pandemic may also have a material impact on our revenue.reduced term, the Company has begun discussions with investment bankers to place financing to replace the existing credit agreement by August 31, 2024.
As the COVID-19 pandemic remains dynamic and subject to rapid and possibly material change, we will continue to actively monitor the COVID-19 situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our customers, employees, suppliers, partners, stockholders and communities. We cannot predict with any certainty whether and to what degree the disruption caused by the COVID-19 pandemic and reactions thereto will continue, and we expect to face difficulty in accurately forecasting our financial condition and operational results. See also Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information.
Trends and Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
| ● | our ability to acquire new customers or retain existing customers, including those shopping online |
| ● | our ability to offer competitive product pricing; |
| ● | our ability to broaden product offerings; |
| ● | industry demand and competition; |
| ● | market conditions and our market position; and |
| ● | our ability to successfully integrate the operations of Appliances Connection with our business. |
Notably, due to the COVID-19 pandemic and associated supply chain crisis, our freight costs have increased materially as a proportion of sales, putting downward pressure on our gross margins. While our historical freight costs as a percentage of sales decreased from 13.7% for the three months ended March 31, 2021 to 9.6% for the three months ended March 31, 2022 as we brought efficiencies to our pre-Appliances Connection Acquisition fulfillment operations, on a consolidated proforma basis, our freight costs as a percentage of sales increased 220 basis points from the first quarter of 2021. Recent increases in the fuel costs are putting additional downward pressure on our gross margins. Management believes that these trends are temporary in nature, and our margins will continue improving as supply chain stabilizes and fuel costs return back to normal.
Supply chain constraints also impacted our order fulfillment timing, further amplifying order cancellations and refunds caused by the outbreak of the COVID-19 pandemic.
Factors Affecting Comparability of Our Future
Results of Operations to Our Historical Results of Operations
The comparability of our results of operations between the periods discussed below is affected by the acquisitions we have completed during such periods. We may also evaluate and pursue acquisitions in the future, and such acquisitions, if completed, will continue to impact the comparability of our financial results. Our acquisitions may have materially different characteristics than our historical results, and such differences in economics may impact the comparability of our future results of operations to our historical results.
The Company accounted for the above acquisitions using the acquisition method of accounting in accordance with FASB ASC Topic 805 “Business Combinations.” In accordance with ASC 805, the Company used its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
Results of Operations
Comparison of Three Months Ended March 31,June 30, 2023 and 2022 and 2021
The unaudited condensed consolidated operating results presented below for the three months ended March 31, 2022 include the results of Appliances Connection, and, therefore, are not comparable to the consolidated operating results for the three months ended March 31, 2021.
The following table sets forth key components of our results of operations for the three months ended March 31,June 30, 2023 and 2022, and 2021, in thousands and as a percentage of our revenue.
| For the Three Months | For the Three Months | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||
| Ended March 31, 2022 | Ended March 31, 2021 | June 30, 2023 | June 30, 2022 | |||||||||||||||||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||||||||||||||
| Product sales, net | $ | 152,752 | 100.0 | % | $ | 13,697 | 100.0 | % | $ | 87,761 | 100.0 | % | $ | 138,463 | 100.0 | % | ||||||||||||||||
| Cost of goods sold | 116,883 | 76.5 | % | 11,069 | 80.8 | % | 68,181 | 77.7 | % | 115,438 | 83.4 | % | ||||||||||||||||||||
| Gross profit | 35,869 | 23.5 | % | 2,628 | 19.2 | % | 19,580 | 22.3 | % | 23,025 | 16.6 | % | ||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||||||||
| Personnel | 7,046 | 4.6 | % | 1,931 | 14.1 | % | 6,021 | 6.9 | % | 7,402 | 5.3 | % | ||||||||||||||||||||
| Advertising | 4,288 | 2.8 | % | 1,083 | 7.9 | % | 4,512 | 5.1 | % | 5,363 | 3.9 | % | ||||||||||||||||||||
| Bank and credit card fees | 6,167 | 4.0 | % | 533 | 3.9 | % | 3,005 | 3.4 | % | 4,600 | 3.3 | % | ||||||||||||||||||||
| Depreciation and amortization | 2,734 | 1.8 | % | 122 | 0.9 | % | 1,068 | 1.2 | % | 2,887 | 2.1 | % | ||||||||||||||||||||
| General and administrative | 5,567 | 3.6 | % | 2,240 | 16.4 | % | 4,885 | 5.6 | % | 3,563 | 2.6 | % | ||||||||||||||||||||
| Total Operating Expenses | 25,802 | 16.9 | % | 5,909 | 43.1 | % | 19,491 | 22.2 | % | 23,815 | 17.2 | % | ||||||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 10,067 | 6.6 | % | (3,281 | ) | (24.0 | )% | 89 | 0.1 | % | (790 | ) | (0.6 | )% | ||||||||||||||||||
| Other Income (Expenses) | ||||||||||||||||||||||||||||||||
| Interest income | 41 | 0.0 | % | 10 | 0.1 | % | 375 | 0.4 | % | 64 | 0.1 | % | ||||||||||||||||||||
| Adjustment in value of contingency | (2 | ) | (0.0 | )% | - | 0.0 | % | |||||||||||||||||||||||||
| Interest expense | (936 | ) | (0.6 | )% | (232 | ) | (1.7 | )% | (1,053 | ) | (1.2 | )% | (302 | ) | (0.3 | )% | ||||||||||||||||
| Other income | 135 | 0.1 | % | 10 | 0.1 | % | ||||||||||||||||||||||||||
| Gain (loss) on change in fair value of derivative instruments | 1,899 | 2.2 | % | (936 | ) | (0.7) | % | |||||||||||||||||||||||||
| Loss on settlement of debt | - | - | (3,241 | ) | (2.3 | )% | ||||||||||||||||||||||||||
| Other income (expense) | 22 | - | % | (41 | ) | - | % | |||||||||||||||||||||||||
| Total Other Income (Expenses) | (762 | ) | (0.5 | )% | (212 | ) | (1.5 | )% | 1,243 | 1.4 | % | (4,456 | ) | (3.2 | )% | |||||||||||||||||
| NET INCOME (LOSS) BEFORE INCOME TAXES | 9,305 | 6.1 | % | (3,493 | ) | (25.5 | )% | 1,332 | 1.5 | % | (5,246 | ) | (3.8 | )% | ||||||||||||||||||
| INCOME TAX EXPENSE | 3,383 | 2.0 | % | - | 0.0 | % | ||||||||||||||||||||||||||
| INCOME TAX EXPENSE (BENEFIT) | (328 | ) | (0.4 | ) | 954 | 0.7 | % | |||||||||||||||||||||||||
| NET INCOME (LOSS) | $ | 5,922 | 4.0 | % | $ | (3,493 | ) | (25.5 | )% | $ | 1,004 | 1.1 | % | $ | (4,292 | ) | (3.1 | )% | ||||||||||||||
Product sales, net. We generate revenue from the retail sale of appliances, furniture, home goods and related products. Our product sales were $152.8$87.8 million for the three months ended March 31, 2022,June 30, 2023, as compared to $13.7$138.5 million for the three months ended March 31, 2021,June 30, 2022, a decrease of $50.7 million, or 36.6%. The decrease in sales is attributable to several factors including a general slowdown in the economy, inflation, an increase in interest rates which affects the mass market, and a decline in the luxury market, particularly the remodeling business. Also, in 2022, the Company pursued a policy of revenue growth with less emphasis on profitability.
Cost of goods sold. Our costs of goods sold are comprised of product costs and freight costs. Product costs represent the amount we pay the manufacturer for their product. We negotiate special terms and pricing with the manufacturer, which are generally based on the number of products we purchase. Periodically, manufacturers offer special pricing for purchasing a certain volume of products at one time. Funding might also be offered to support our marketing and advertising efforts. Freight is the cost of delivering products to customers. Our cost of goods sold was $68.2 million for the three months ended June 30, 2023, as compared to $115.4 million for the three months ended June 30, 2022, a decrease of $47.3 million, or 40.9%. The decrease is related to reduced sales for the three months ended June 30, 2023.
Gross profit and gross margin. As a result of the foregoing, our gross profit was $19.6 million for the three months ended June 30, 2023, as compared to $23.0 million for the three months ended June 30, 2022, a decrease of $3.4 million, or 15.0%. Our gross margin (gross profit as a percentage of net sales) was 22.3% for the three months ended June 30, 2023and 16.6% for the three months ended June 30, 2022. The improvement in the gross profit percentage is the result of management’s emphasis on profitability as opposed to revenue growth.
Personnel expenses. Personnel expenses include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, training costs and stock compensation expense. Our personnel expenses were $6.0 million for the three months ended June 30, 2023, as compared to $7.4 million for the three months ended June 30, 2022, a decrease of $1.4 million, or 18.7%. As a percentage of net sales, personnel expenses were 6.9% and 5.3% for the three months ended June 30, 2023 and 2022, respectively. In 2023, management made a conscious decision to adjust headcount to match revenue.
Advertising expenses. Advertising expenses include the cost of marketing our products and primarily include online search engine expenses. Our advertising expenses were $4.5 million for the three months ended June 30, 2023, as compared to $5.4 million for the three months ended June 30, 2022, a decrease of $0.9 million, or 15.9%. As a percentage of net sales, advertising expenses were 5.1% and 3.9% for the three months ended June 30, 2023 and 2022, respectively.
Bank and credit card fees. Bank and credit card fees are primarily the fees we pay credit card processors for processing credit card purchases made by customers and to third party sellers on whose websites we sell parts and other small items. Our bank and credit card fees were $3.0 million for the three months ended June 30, 2023, as compared to $4.6 million for the three months ended June 30, 2022, a decrease of $1.6 million, or 34.7%. As a percentage of net sales, bank and credit card fees were 3.4% and 3.3% for the three months ended June 30, 2023 and 2022, respectively. Bank and credit card fees are based on customer orders that are paid with a credit card (substantially all orders), so the decrease was largely due to the decline in sales.
Depreciation and amortization. Depreciation and amortization was $1.1 million, or 1.2% of net sales, for the three months ended June 30, 2023, as compared to $2.9 million, or 2.1% of net sales, for the three months ended June 30, 2022. The decrease is the result of the 2022 impairment charge that reduced the amount of intangible assets to be amortized.
General and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, rent expense, insurance, and other expenses incurred in connection with general operations. Our general and administrative expenses were $4.9 million for the three months ended June 30, 2023, as compared to $3.6 million for the three months ended June 30, 2022, an increase of $139.1$1.3 million, or 1,015.2%37.1%. Such increasesAs a percentage of net sales, general and administrative expenses were 5.6% and 2.6% for the three months ended June 30,2023 and 2022, respectively. The increase results from higher insurance premiums and professional fees, including the necessity to reaudit and restate 2021.
Following is a summary of general and administrative expenses for the three months ended June 30, 2023 and 2022
| Three Months Ended June 30 | ||||||||
| 2023 | 2022 | |||||||
| Professional fees | $ | 1,798 | $ | 1,172 | ||||
| Insurance | 1,153 | 513 | ||||||
| Rent | 1,109 | 1,010 | ||||||
| All other | 825 | 868 | ||||||
| Total | $ | 4,885 | $ | 3,563 | ||||
Total other income (expense). We had $1.2 million in total other income, net, for the three months ended June 30, 2023, as compared to total other expense, net, of $4.5 million for the three months ended June 30, 2022. Total other income, net, for the three months ended June 30, 2023 consisted primarily dueof a gain on the change in fair value of a derivative of $1.9 million and interest income of $0.4 million, offset by interest expense of $1.1 million. Total other expense, net, for the three months ended June 30, 2022 consisted of a loss of $3.2 million on the settlement of a debt obligation, a change in the fair value of a derivative of $0.9 million, and interest expense of $0.3 million offset by interest income of $0.06 million.
Income tax benefit (expense). We had an income tax expense of $0.3 million for the three months ended June 30, 2023, as compared to an income tax benefit of $1.0 million for the impactthree months ended June 30, 2022.
Net income (loss). As a result of the Appliances Connection Acquisition.cumulative effect of the factors described above, we had net income of $1.0 million for the three months ended June 30, 2023, as compared to a net loss of $4.3 million for the three months ended June 30, 2022, an increase of $5.3 million, or 123.4%.
Our product sale, net by type is as follows (in thousands):Comparison of the six months ended June 30, 2023 and 2022
| For the Three Months | For the Three Months | |||||||||||||||
| Ended March 31, 2022 | Ended March 31, 2021 | |||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||
| 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 | % | ||||||||
The following table sets forth key components of our results of operations for the six months ended June 30, 2023 and 2022, in thousands and as a percentage of furniture and other sales declined in the first quarter 2022 period as compared to the first quarter 2021 period as furniture and other sales comprised a lower percentage of Appliances Connection sales.our revenue.
| Six Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2023 | June 30, 2022 | |||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||
| Product sales, net | $ | 183,200 | 100.0 | % | $ | 287,144 | 100.0 | % | ||||||||
| Cost of goods sold | 142,474 | 77.8 | % | 233,357 | 81.3 | % | ||||||||||
| Gross profit | 40,726 | 22.2 | % | 53,787 | 18.7 | % | ||||||||||
| Operating Expenses | ||||||||||||||||
| Personnel | 12,505 | 6.8 | % | 14,048 | 4.9 | % | ||||||||||
| Advertising | 9,633 | 5.3 | % | 10,941 | 3.8 | % | ||||||||||
| Bank and credit card fees | 6,378 | 3.4 | % | 9,189 | 3.2 | % | ||||||||||
| Depreciation and amortization | 2,138 | 1.2 | % | 5,706 | 2.0 | % | ||||||||||
| General and administrative | 9,872 | 5.4 | % | 7,818 | 2.7 | % | ||||||||||
| Total Operating Expenses | 40,526 | 22.1 | % | 47,702 | 16.6 | % | ||||||||||
| INCOME FROM OPERATIONS | 200 | 0.1 | % | 6,085 | 2.1 | % | ||||||||||
| Other Income (Expenses) | ||||||||||||||||
| Interest income | 732 | 0.4 | % | 108 | (0.0 | )% | ||||||||||
| Adjustment in value of contingency | - | - | (2 | ) | (0.0 | )% | ||||||||||
| Interest expense | (2,935 | ) | (1.6 | )% | (1,243 | ) | (0.4 | )% | ||||||||
| Gain (loss) on change in fair value of derivative instruments | 574 | 0.3 | % | (936 | ) | (0.3 | )% | |||||||||
| Loss on settlement of debt | - | - | (3,241 | ) | (1.1 | )% | ||||||||||
| Other income (expense) | 104 | 0.1 | % | (90 | ) | (0.0 | )% | |||||||||
| Total Other Expenses | (1,525 | ) | (0.8 | )% | (5,404 | ) | (1.9 | )% | ||||||||
| NET INCOME (LOSS) BEFORE INCOME TAXES | (1,325 | ) | (0.7 | )% | 681 | 0.2 | % | |||||||||
| INCOME TAX (EXPENSE) BENEFIT | (432 | ) | (0.3 | )% | 846 | 0.3 | % | |||||||||
| NET INCOME (LOSS) | $ | (1,757 | ) | (1.0 | )% | $ | 1,527 | 0.5 | % | |||||||
Product sales, net. We generate revenue from the retail sale of appliances, furniture, home goods and related products. Our product sales were $183.2 million for the six months ended June 30, 2023, as compared to $287.1 million for the six months ended June 30, 2022, a decrease of $103.9 million, or 36.2%. The decrease in sales is attributable to several factors including a general slowdown in the economy, inflation, an increase in interest rates which affects the mass market, and a decline in the luxury market, particularly the remodeling business. Also, in 2022, the Company pursued a policy of revenue growth with less emphasis on profitability.
Cost of goods sold. Our costs of goods sold are comprised of product costs and freight costs. Product costs represent the amount we pay the manufacturer for their product. We negotiate special terms and pricing with the manufacturer, which are generally based on the number of products we purchase. Periodically, manufacturers offer special pricing for purchasing a certain volume of products at one time. Funding might also be offered to support our marketing and advertising efforts. Freight is the cost of delivering products to customers. Our cost of goods sold was $116.9$142.5 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to $11.1$233.4 million for the threesix months ended March 31, 2021, an increaseJune 30, 2022, a decrease of $105.8$90.9 million, or 956.0%, with the increase driven by the impact of the Appliances Connection Acquisition.39.0%.
Our cost of goods sold by type is as follows (in thousands):
| For the Three Months | For the Three Months | |||||||||||||||
| Ended March 31, 2022 | Ended March 31, 2021 | |||||||||||||||
| Amount | % of Net Sales | Amount | % 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. As a result of the foregoing, our gross profit was $35.9$40.7 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to $2.6$53.8 million for the threesix months ended March 31, 2021, an increaseJune 30, 2022, a decrease of $33.2$13.1 million, or 1,264.6%24.3%. Our gross margin (gross profit as a percentage of net sales) was 23.5%22.2% for the threesix months ended March 31, 2022June 30, 2023 and 19.2%18.7% for the threesix months ended March 31, 2021. Such increases were primarily dueJune 30, 2022. The improvement in the gross profit percentage is the result of management’s emphasis on profitability as opposed to revenue growth. The decrease in gross profit results from reduced sales. The increase in gross margin results from management’s emphasis on profitability in the impact of the Appliances Connection Acquisition.current period.
Personnel expenses. Personnel expenses include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, training costs and stock compensation expense. Our personnel expenses were $7.0$12.5 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to $1.9$14.0 million for the threesix months ended March 31, 2021, an increaseJune 30, 2022, a decrease of $5.1$1.5 million, or 264.9%11.0%. As a percentage of net sales, personnel expenses were 4.6%6.8% and 14.1%4.9% for the threesix months ended March 31,June 30, 2023 and 2022, and 2021, respectively. Such changes were primarily dueIn 2023, management made a conscious decision to the impact of the Appliances Connection Acquisition.adjust headcount to match revenue.
Advertising expenses. Advertising expenses include the cost of marketing our products and primarily include online search engine expenses. Our advertising expenses were $4.3$9.6 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to $1.1$10.9 million for the threesix months ended March 31, 2021, an increaseJune 30, 2022, a decrease of $3.2$1.3 million, or 295.9%12.0%. As a percentage of net sales, advertising expenses were 2.8%5.3% and 7.9%3.8% for the threesix months ended March 31,June 30, 2023 and 2022, and 2021, respectively. Such changes were primarily due to the impact of the Appliances Connection Acquisition.
Bank and credit card fees. Bank and credit card fees are primarily the fees we pay credit card processors for processing credit card paymentspurchases made by customers and to third party sellers on whose websites we sell parts and other small items. Our bank and credit card fees were $6.2$6.4 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to $0.5$9.2 million for the threesix months ended March 31, 2021, an increaseJune 30, 2022, a decrease of $5.6$2.8 million, or 1,057.0%30.5%. As a percentage of net sales, bank and credit card fees were 4.0%3.5% and 3.9%3.2% for the threesix months ended March 31,June 30, 2023 and 2022, and 2021, respectively. Bank and credit card fees are based on customer orders that are paid with a credit card (substantially all orders), so the increasedecrease was largely due to the increasedecline in customer orders associated with the Appliances Connection Acquisition.sales.
Depreciation and amortization. Depreciation and amortization was $2.7$2.1 million, or 1.8%1.2% of net sales, for the threesix months ended March 31, 2022,June 30, 2023, as compared to $0.1$5.7 million, or 0.9%2.0% of net sales, for the threesix months ended March 31, 2021.June 30, 2022. The increasedecrease is the result of amortizingthe 2022 impairment charge that reduced the amount of intangible assets acquired in the Appliances Connection Acquisition.to be amortized.
General and administrative expenses. Our general and administrative expenses consist primarily of professional advisor fees, rent expense, insurance, unremitted sales tax, and other expenses incurred in connection with general operations. Our general and administrative expenses were $5.6$9.9 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to $2.2$7.8 million for the threesix months ended March 31, 2021,June 30, 2022, an increase of $3.3$2.1 million, or 148.5%26.3%. As a percentage of net sales, general and administrative expenses were 3.6%5.4% and 16.4%2.7% for the six months ended June 30,2023 and 2022, respectively. The increase results from higher insurance premiums and professional fees, including the necessity to reaudit 2021.
Following is a summary of general and administrative expenses for the three months ended March 31,June 30, 2023 and 2022 and 2021, respectively. Such changes were primarily due to the impact of the Appliances Connection Acquisition.
| Six Months Ended June 30 | ||||||||
| 2023 | 2022 | |||||||
| Professional fees | $ | 3,184 | $ | 2,596 | ||||
| Insurance | 2,523 | 1,682 | ||||||
| Rent | 2,192 | 2,056 | ||||||
| All other | 1,973 | 1,484 | ||||||
| Total | $ | 9,872 | $ | 7,818 | ||||
Total other income (expense). We had $0.8$1.5 million in total other expense, net, for the threesix months ended March 31, 2022,June 30, 2023, as compared to total other expense, net, of $0.2$5.4 million for the threesix months ended March 31, 2021.June 30, 2022. Total other expense, net, for the threesix months ended March 31, 2022June 30, 2023 consisted primarily of interest expense of $0.7$2.9 million, a gain on the change in fair value of a derivative of $0.6 million and financing costsinterest income of $0.2$0.7 million. Total other expense, net, for the threesix months ended March 31, 2021June 30, 2022 consisted primarily of a $3.2 million loss on settlement of a debt obligation, a loss on the fair value of a derivative of $0.9 million, and interest expense of $0.2$1.2 million offset by interest income of $0.1 million.
Income tax benefit (expense). We had an income tax net expense of $3.4$0.4 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to an income tax expensebenefit of $nil$1.0 million for the threesix months ended March 31, 2021. Such change was due to the Company’s profitability, primarily driven by the Appliances Connection Acquisition.June 30, 2022.
Net income (loss). As a result of the cumulative effect of the factors described above, we had net income of $5.9 million for the three months ended March 31, 2022, as compared to a net loss of $3.5$1.8 million for the threesix months ended March 31, 2021, an increaseJune 30, 2023, as compared to net income of $9.4$1.5 million for the six months ended June 30, 2022, a decrease of $3.3 million, or 270.0%215.1%.
Liquidity and Capital Resources
As of March 31, 2022,June 30, 2023, we had cash and cash equivalents of $25.8$13.7 million andincluding restricted cash of $2.6$4.7 million. For the threesix months ended March 31, 2022,June 30, 2023, we had operating income of approximately $10.1$0.2 million, cash flows used in operations of $3.7$3.9 million and working capital of $24.9$22.9 million. As of and for the year ended December 31, 2021,2022, we had an operating loss of $128.3 million (including a non-cash impairment charge of $109.1 million), cash used in operations of $46.7 million, cash and cash equivalents of $25.7$20.5 million andincluding restricted cash of $8.1$0.95 million and working capital of $16.0$25.9 million.
On May 9, 2022, we entered into the New Credit Agreement, borrowed the full amount of the $100 million New Term Loan and used $55.9 million of the proceeds to pay off the M&T Credit Agreement in full. As of May 16, 2022, we have not borrowed any additional funds under $40 million New Revolving Loan available under the New Credit Agreement.
We have previously generated significant losses since our acquisition of Goedeker Television and have relied on cash on hand, external bank lines of credit, proceeds from public offerings, issuance of third-party and related-party debt and the issuance of a note to support cashflow from operations. Notably, we reported positive cash flow from operations in 2020 as money was collected from the customers at the time orders were placed, instead of the time orders were shipped, leading to accumulation of customer deposits. On June 2, 2021, we acquired Appliances Connection, which historicallyManagement has been a profitable company with strong operating cash flow; however due to the ongoing COVID-19 pandemic and resulting supply chain constraints, we refunded to customers $34.0 million in customer deposits throughout 2021, $27.4 million of which was due to order cancellations, leading to a negative operating cash flow in 2021. At this point we have been able to clear the majority of the historical customer deposit balances, and based on current facts and circumstances, we believe that we will have adequate cash flow from operations, external bank lines of credit, and proceeds from any future issuances of debt or equity to fund operations and service debt obligations for at least the next twelve months.
We may, however, in the future require additional cash resources due to changing business conditions, implementation of our strategy to expand our business, or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
We assess liquidity and going concern uncertainty in our unaudited condensed consolidated financial statements to determine whether there are sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, we will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, our ability to delay or curtail expenditures or programs and our ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period.
We have prepared estimates of operations for fiscal years 2022 and 2023 and believe2024 and believes that sufficient funds will be generated from operations to fund ourits operations, and to service ourits debt obligations for one year from the date of the filing of this report. We have considered the impact of COVID-19 on our business in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing on a return to more normal operations.unaudited condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis under which we arethe Company is expected to be able to realize ourits assets and satisfy ourits liabilities in the normal course of business. We believe,Management believes that based on relevant conditions and events that are known and reasonably knowable that ourits forecasts, for one year from the date of the filing of this report,these unaudited condensed consolidated financial statements, indicate improved operations and ourthe Company’s ability to continue operations as a going concern. See Note 3 to the unaudited condensed consolidated financial statements, “Liquidity and Going Concern Assessment.”
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the threesix months ended March 31,June 30, 2023 and 2022 and 2021 (in thousands).
| For the Three Months | Six Months Ended | |||||||||||||||
| Ended March 31, 2021 | June 30, | |||||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| Net cash used in operating activities | $ | (3,747 | ) | $ | (2,808 | ) | $ | (3,928 | ) | $ | (22,190 | ) | ||||
| Net cash used in investing activities | (6 | ) | (126 | ) | (134 | ) | (256 | ) | ||||||||
| Net cash (used in) provided by in financing activities | (1,634 | ) | 4,426 | |||||||||||||
Net cash (used in) provided by financing activities | (2,773 | ) | 37,774 | |||||||||||||
| Net change in cash, cash equivalents, and restricted cash | $ | (5,387 | ) | $ | 1,492 | $ | (6,835 | ) | $ | 15,328 | ||||||
Cashflows used in operating activities. Our net cash used in operating activities was $3.7$3.9 million for the threesix months ended March 31, 2022,June 30, 2023, as compared to net cash used in operating activities of $2.8$22.2 million for the threesix months ended March 31, 2021.June 30, 2022. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
| ● | Net |
| ● | Cash |
| ● | Cash used by vendor deposits was $5.4 million and $5.9 million for the six months ended June 30, 2023 and 2022, respectively |
| ● | Cash |
| ● | Cash used by accounts payable and accrued expenses was $3.2 million and $10.7 million for the |
| ● | Cash used by customer deposits was |
Cashflows used inprovided by investing activities. Our net cash used in investing activities was $0.006 million for the three months ended March 31, 2022, as compared to $0.1 million for the threesix months ended March 31, 2021.June 30, 2023, as compared to $0.3 million for the six months ended June 30, 2022. The cash used in both years was for purchases of property and equipment.
Cashflows (used in) provided by financing activities. Our net cash used in financing activities was $1.6($2.8) million for the threesix months ended March 31, 2022,June 30, 2023, as compared to net cash provided by financing activities of $4.4$37.8 million for the threesix months ended March 31, 2021. June 30, 2022.
Significant changes in financing activities affecting cash flows during these years included:
| ● | Net cash received from notes payable proceeds of |
| ● | Repayments of notes payable of |
| ● | Stock repurchases of $2.0 million for the six months ended June 30, 2022. | |
Credit Facilities
Bank of America Credit Agreement
Debt
New Credit Agreement
On May 9, 2022, the Company and ACI as borrowers and certain of our subsidiaries as guarantors entered into the Newa Credit Agreement by(the “Credit Agreement”) with the lenders identified therein (the “Lenders”) and among the borrowers, the guarantors, the LendersBank of America, N.A., as administrative agent, swingline lender and the Agent,letter of credit issuer (the “Agent”), pursuant to which the Lenders have agreed to make available to the Company and ACIBorrowers senior secured credit facilities in the aggregate initial amount of $140,000,000,$140.0 million, including (i) the $100,000,000 New Term Loana $100.0 million term loan (the “Term Loan”) and (ii) the $40,000,000 New Revolving Loan,a $40.0 million revolving credit facility (the “Revolving Loan”), which revolving credit facility includesincluded a $2.00 million swingline sublimit (the “Swing Line Loan” and together with the $2,000,000 New Swing LineTerm Loan and the Revolving Loan, the “Loans”) and, separately, a $2,000,000$10.0 million letter of credit subfacility,commitment, in each case, on the terms and conditions contained in the New Credit Agreement. The New Loans may from time to time be further evidenced by separate promissory notes issued by the Company and ACI.
On May 9, 2022, the Company borrowed the entire amount of the New Term Loan but no New Revolving Loans have been made asin the aggregate principal amount of May 16, 2022.
The$100.0 million. A portion of the proceeds of the New Term Loan were applied, among other uses, to prepayrepay and terminate the obligations in full under the Company’s existing M&T Credit Agreement. On May 9,Commencing on September 30, 2022, in connection with prepaymentthrough and including June 30, 2023, the Borrowers repaid the principal amount of the obligations underTerm Loan in quarterly installments of $1,250,000 each, payable on the M&Tlast business day of each March, June, September and December.
As of June 30, 2023, the carrying value of the Term Loan was $94.1 million, comprised of principal of $95.0 million, net of unamortized loan costs of $0.9 million.
As a result of our technical non-compliance with specified loan covenants for both the Bank of America Term Loan and Revolving Loan, based in part due to our failure to timely deliver financial statements, Bank of America froze the $40.0 million Revolving Loan before any borrowings had been made against the facility.
On July 25, 2023, the Company and Bank of America amended the Credit Agreement (the “Amendment”), in part, to waive events of defaults on its existing credit agreement. The Amendment requires the M&T Credit Agreement was terminated.
Each ofCompany to pay the New Loans matures on May 9, 2027existing Term Facility and Revolving Facility by August 31, 2024 (the “Maturity Date”). The New LoansRevolving Loan decreased to $10,000,000 from and after July 25, 2023. The Letter of Credit commitments decreased to $2,000,000 and the Swing Line Loan was eliminated. The Amendment also establishes a new EBITDA covenant and requires the Company to maintain minimum liquidity of $8.0 million including restricted cash and $3.0 million excluding restricted cash. Liquidity as defined in the Amendment includes Cash and certain qualifying customer and credit card accounts receivable.
The Term Loan and Revolving Loan will bear interest on the unpaid principal amount thereof as follows: (i) if it is a New Loanloan bearing interest at a rate determined by the Base Rate, (as defined in the New Credit Agreement), then at the Base Rate plus the Applicable Rate (as defined in the Credit New Agreement) for such New Loan;loan and (ii) if it is a New Loanloan bearing interest at a rate determined by Term SOFR, (as defined in the New Credit Agreement), then at Term SOFR plus the Applicable Rate for such New Loan; and (iii) if it is a New Swing Line Loan, then at the rate applicable to New Loans bearing interest at a rate determined by the Base Rate plus the Applicable Rate for such New Loan. The New Term Loan initially bears interest at Term SOFR plus Applicable Rate, with an initial interest period of one month.loan. The Company may elect to continue or convert the existing interest rate benchmark for the New Term Loan from Term SOFR to Base Rate, and may elect the interest rate benchmark for future New Revolving Loansrevolving loans as either Term SOFR or Base Rate (and, with respect to any New Loanloan made using Term SOFR, may also select the interest period applicable to any such New Loan)loan), by notifying the Agent and the Lenders from time to time in accordance with the provisions of the NewAmendment and Credit Agreement. The Applicable Rate increased from a high of 1.95% and 0.95%, respectively, for Term SOFR and Base Rate in the Credit Agreement to 4.00% for each of Term SOFR and Base Rate as a result of the Amendment. Interest is payable in arrears on each Interest Payment Date (as defined in the New Credit Agreement). Notwithstanding the foregoing, following an event of default, the New Loansloans under the Credit Facilities will bear interest at a rate that is 2% per annum higher than the interest rate then in effect for the applicable New Loan.loan.
Commencing on September 30, 2022, through and including June 30, 2023, the borrowers must repay the principal amount of the New Term Loan in quarterly installments of $1,250,000 each, payable on the last business day of each March, June, September and December. Commencing on September 30, 2023, through and including June 30, 2024, the borrowersBorrowers must repay the principal amount of the New Term Loan in quarterly installments of $1,875,000 each, payable on the last business day of each March, June, September and December. Commencing on September 30, 2024, through the Maturity Date, the borrowers must repay the principal amount of the New Term Loan in quarterly installments of $2,500,000 each, payable on the last business day of each March, June, September and December. The remaining unpaid principal amount of the New Term Loan must be repaid on the Maturity Date, unless payment is sooner required by the New Credit Agreement. Mandatory prepayments of New Revolving Loans are required if the amount borrowed at any time exceeds the commitment amount. New Revolving Loans may be repaid and reborrowed at any time until the Maturity Date, subject to the terms and conditions set forth in the New Credit Agreement.
Mandatory prepayments of Revolving Loans are required if the amount borrowed at any time exceeds the commitment amount. The Company may voluntarily prepay the New Loans from time to time in accordance with the provisions of the New Credit Agreement, and will be required to prepay the New Loans under certain limited circumstances as set forth in the New Credit Agreement, including upon receipt of cash proceeds in connection with certain specified asset sales, receipt of loss or condemnation proceeds or other cash proceeds received other than in the ordinary course of business or upon receipt of cash proceeds from the incurrence of indebtedness that is not permitted under the New Credit Agreement, all as more specifically set forth in the New Credit Agreement.
Under the New Credit Agreement, the borrowers are required to pay certain fees to Agent, including, without limitation, a commitment fee of up to 0.25% per annum with respect to the unused portion of the Lenders’ revolving loan commitments, determined as set forth in the New Credit Agreement, and certain fees in connection with the issuance of any letters of credit under the New Credit Agreement.
The New Credit Agreement contains customary events of default, including, among others: (i) for failure to pay principal and interest on any of the New Loans when due, or to pay any fees or other amounts due under the New Credit Agreement; (ii) the occurrence of certain specified defaults under other agreements to which the Company or its subsidiaries is a party; (iii) for the breach of certain specified covenants in the New Credit Agreement: (iv) if any representation, warranty or certification in the New Credit Agreement or any document delivered in connection therewith was incorrect in any material respect as of the date made; (v) in the case of any voluntary or involuntary bankruptcy, insolvency or dissolution; (vi) in the case of the imposition of any money judgment, writ or similar process in an aggregate amount in excess of $4,000,000 (in certain cases, to the extent not covered by insurance); or (vii) if a Change of Control (as defined in the New Credit Agreement) occurs.
The New Credit Agreement contains customary representations, warranties and affirmative and negative financial and other covenants for loans of this type. The closing of the New Loans was subject to customary closing conditions, including delivery of the security documents described below.
The New Loans are guaranteed by the guarantors and are secured by a first priority security interest in substantially all of the assets of the borrowers and the guarantors pursuant to a security and pledge agreement entered into on May 9, 2022 among the borrowers, the guarantors and the Agent, which includes a pledge of all of the outstanding common stock of Appliances Connection and AC Gallery Inc., each of which is held by the Company, and of all of the outstanding equity interests of the remaining guarantors which is held by Appliances Connection.
M&T Credit Agreement - Refinanced
On June 2, 2021, the Company and ACI, as borrowers, entered into a credit and guaranty agreement (the “M&T Credit Agreement”) with Appliances Connection and certain other subsidiaries of the Company party theretomay from time to time as guarantors,be further evidenced by separate promissory notes issued by the financial institutions party thereto from time to time (“M&T Lenders”), and M&T, as sole lead arranger, sole book runner, administrative agent and collateral agent, pursuant to whichBorrowers.
As a result of the M&T Lenders agreed to make available toreduced term, the Company and ACI senior securedhas begun discussions with investment bankers to place financing to replace the existing credit facilities in the aggregate initial amount of $70.0 million, including (i) a $60.0 million term loan (the “M&T Term Loan”) and (ii) a $10.0 million revolving credit facility (the “M&T Revolving Loan”), which revolving credit facility includes a $2.0 million swingline subfacility (the “M&T Swing Line Loan” and together with the M&T Term Loan and the M&T Revolving Loan, the “M&T Loans”) and a $2.0 million letter of credit subfacility, in each case, on the terms and conditions contained in the M&T Credit Agreement. On June 2, 2021, the Company borrowed the entire amount of the M&T Term Loan and issued term loan notes to the M&T Lenders in the aggregate principal amount of $60.0 million.agreement by August 31, 2024.
As of March 31, 2022, the Company had not borrowed any amounts under the M&T Revolving Loan. As of March 31, 2022, the carrying value of the M&T Term Loan was $53.9 million, comprised of principal of $57 million, net of unamortized loan costs of $3.1 million. The Company classified $7.5 million as a current liability and the balance as a long-term liability.
The M&T Credit Agreement provided that each of the M&T Loans would mature on June 2, 2026 and would bear interest on the unpaid principal amount thereof as follows: (i) if it is a M&T Loan bearing interest at a rate determined by the Base Rate (as defined in the M&T Credit Agreement), then at the Base Rate plus the Applicable Margin (as defined in the M&T Credit Agreement) for such M&T Loan; (ii) if it is a M&T Loan bearing interest at a rate determined by the LIBOR Rate (as defined in the M&T Credit Agreement), then at the LIBOR Rate plus the Applicable Margin for such M&T Loan; and (iii) if it is a M&T Swing Line Loan, then at the rate applicable to M&T Loans bearing interest at a rate determined by the Base Rate. The M&T Term Loan initially bore interest at the LIBOR Rate plus Applicable Margin (3.9%), with an initial interest period of six months. The Company had the option to elect to continue or convert the existing interest rate benchmark for the M&T Term Loan from LIBOR Rate to Base Rate, and could elect the interest rate benchmark for future M&T Revolving Loans as either LIBOR Rate or Base Rate (and, with respect to any M&T Loan made at the LIBOR Rate, may also select the interest period applicable to any such M&T Loan), by notifying M&T and M&T Lenders from time to time in accordance with the provisions of the M&T Credit Agreement. Notwithstanding the foregoing, following an event of default, the M&T Loans would bear interest at a rate that is 2% per annum higher than the interest rate then in effect for the applicable M&T Loan.
The M&T Credit Agreement also provided that the Company repay the principal amount of the M&T Term Loan in quarterly installments of $1.5 million each, payable on the last business day of each March, June, September, and December, commencing on September 30, 2021 (the March 2022 payment was in April 2022). The remaining unpaid principal amount of the M&T Term Loan must be repaid on the M&T Term Loan Maturity Date (as defined in the M&T Credit Agreement) unless payment is required sooner by the M&T Credit Agreement. M&T Revolving Loans may be repaid and reborrowed at any time until the M&T Revolving Commitment Termination date (as defined in the M&T Credit Agreement).
The M&T Loans provided for voluntary prepayment from time to time in accordance with the provisions of the M&T Credit Agreement, and required prepayment under certain limited circumstances as set forth in the M&T Credit Agreement, including upon receipt of cash proceeds in connection with certain specified asset sales, receipt of insurance or condemnation proceeds or other cash proceeds received other than in the ordinary course of business or upon receipt of cash proceeds from the incurrence of indebtedness that is not permitted under the M&T Credit Agreement, all as more specifically set forth in the M&T Credit Agreement. Additionally, mandatory repayments of amounts borrowed under the M&T Revolving Loan facility are required if the amount borrowed at any time exceeds the commitment amount.
Under the M&T Credit Agreement, the Company was required to pay certain fees to M&T, including a commitment fee of up to 0.5% per annum with respect to the unused portion of the M&T Lenders’ revolving loan commitments, determined as set forth in the M&T Credit Agreement, and certain fees in connection with the issuance of any letters of credit under the M&T Credit Agreement.
The M&T Credit Agreement contained customary representations, warranties, affirmative and negative financial and other covenants, including leverage ratio and fixed charge coverage ratios, and events of default for loans of this type. The M&T Loans are guaranteed by the guarantors and are secured by a first priority security interest in substantially all of the assets of the Company, ACI and the guarantors.
On May 9, 2022, the Company prepaid its obligations in full under the M&T Credit Agreement, and on May 9, 2022, in connection with the prepayment of the obligations under the M&T Credit Agreement, the M&T Credit Agreement was terminated.
Northpoint Loan
On June 3, 2021, we entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), pursuant to which Northpoint may from time-to-time advance funds for the acquisition, financing and/or refinancing by the Company of inventory purchased from Samsung Electronics America, Inc. and/or affiliates and for such other purposes as are acceptable Northpoint. The loan and security agreement provides that Northpoint may establish a credit limit and may adjust such credit limit from time to time; provided that such credit limit does not constitute a commitment or committed line of credit to Northpoint. As of March 31, 2022, such credit limit is $2.0 million, of which $0.3 million was owed and included in accounts payable.
The applicable per annum interest rates for a loan, including any default rates, will be determined at the time of the loan. The loan and security agreement contains customary events of default and is secured by a security interest in all of the Company’s inventory (i) that is manufactured, distributed, or sold by Samsung Electronics America, Inc. and/or its affiliates and/or (ii) that bears any trade names, trademarks, or logos of Samsung Electronics America, Inc. and/or its affiliates; all returns, repossessions, exchanges, substitutions, replacements, attachments, parts, accessories and accessions of any of the foregoing; all price protection payments, discounts, rebates, credits, factory holdbacks and incentive payments related to any of the foregoing; supporting obligations to any of the foregoing; and products and proceeds in whatever form of any of the foregoing.
Vehicle Loans
The Company has financed purchases of transportation vehicles with notes payable, which are secured by the vehicles purchased. These notes have five-year terms and interest rates ranging from 3.59% to 5.74%. As of March 31, 2022, the outstanding balance of these vehicle loans is $1.2 million.
Management Services Agreement
On April 5, 2019, the Company entered into a management services agreement with 1847 Partners LLC (the “Manager”), a company owned and controlled by Ellery W. Roberts, the Company’s chairman and prior significant stockholder, which was amended effective on August 4, 2020. Pursuant to the offsetting management services agreement, as amended, the Company appointed the Manager to provide certain services to it for a quarterly management fee equal to $62,500; provided, however, that under certain circumstances specified in the management services agreement, the quarterly fee may be reduced if similar fees payable to the Manager by subsidiaries of the Company’s former parent company, 1847 Holdings LLC, exceed a threshold amount.
The Company shall also reimburse the Manager for all costs and expenses of the Company which are specifically approved by the board of directors of the Company, including all out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of the Company in connection with performing services under the management services agreement. The Company did not pay any expenses for the three ended March 31, 2022 and 2021.
The Company expensed management fees of $0.1 million$0.06 and $0.13million for each of the three and six months ended March 31,June 30, 2023 and 2022, and 2021, respectively.
Leases
On April 5, 2019, the Company entered into a lease agreement with S.H.J., L.L.C. for its prior principal office in Ballwin, Missouri. The lease is for a term of five years and provides for a base rent of $45,000 per month. In addition, the Company is responsible for all taxes and insurance premiums during the lease term. The lease agreement contains customary events of default, representations, warranties, and covenants. The termination date of this lease agreement is April 4, 2024.
On May 31, 2019, YF Logistics entered into a sublease agreement with Dynamic Marketing, Inc. (“DMI”) for its warehouse space in Hamilton, NJ. The initial term of the sublease was for a period commencing on June 1, 2019 and terminating on April 30, 2020, with automatic renewals for successive one yearone-year terms until the earlier of (i) termination by either upon thirty days’ prior written notice or (ii) April 30, 2024. The sublease provides for a base rent equal to 71.43% of the base rent paid by DMI under its lease for the premises, plus 71.43% of any taxes, operating expenses, additional charges or any other amounts due by DMI, for a total of $56,250 per month. The initial right-of-use (“ROU”) asset and liability associated with this lease is $3.0 million.
On January 13, 2021, the Company entered into a lease agreement with Westgate 200, LLC, which was amended on March 31, 2021, for its new principal office and showroom in St. Charles, Missouri. The lease terminates on April 30, 2027, with two options to renew for an additional five year periods.five-year period. The base rent is $20,977 per month until September 30, 2021, and increases to $31,465 per month until April 30, 2022, after which time the base rent increases at approximately 2.5% per year thereafter. The Company must also pay its 43.4% pro rata portion of the property taxes, operating expenses and insurance costs and is also responsible to pay for the utilities used on the premises. The lease contains customary events of default. The initial ROU asset and liability associated with this lease is $2.0 million.
On June 2, 2021, 1 Stop entered into a new lease agreement with 1870 Bath Ave. LLC, a related party, for the premises located at 1870 Bath Avenue, Brooklyn, New York. The lease is for a term of ten years and provides for a base rent of $74,263 per month during the first year with annual increases to $96,896 during the last year of the term. 1 Stop is also responsible for all property taxes, insurance costs and the utilities used on the premises. The lease contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018. The initial ROU asset and liability associated with this lease is $8.4 million.
On June 2, 2021, Joe’s Appliances entered into a new lease agreement with 812 5th Ave Realty LLC, a related party, for the premises located at 7812 5th Avenue, Brooklyn, New York. The lease is for a term of ten years and provides for a base rent of $6,365 per month during the first year with annual increases to $8,305 during the last year of the term. Joe’s Appliances is also responsible for all property taxes, insurance costs and the utilities used on the premises. The lease contains customary events of default. This lease replaces the prior lease entered into between the parties on September 1, 2018. The initial ROU asset and liability associated with this lease is $0.7 million.
On June 30, 2021, the Company closed an old warehouse and retail showroom in anticipation of relocating to a new facility. Accordingly, the Company wrote-off $1.4 million representing the remaining ROU asset and related leasehold improvements as of that date.
On July 29, 2021, AC Gallery entered into a lease agreement with Tom’s Flooring, LLC for the showroom and warehouse located in Largo, Florida. The lease is for a term of four months commencing on September 1, 2021 and ending on December 31, 2021 and provides for a base rent of $6,500 per month. The lease is currently month-to-month. AC Gallery must also pay its one-third pro rata portion of the common area maintenance charges, utilities and sales taxes. The lease contains customary events of default. The lease is short term and therefore not recorded as a ROU asset and liability.
On September 9, 2021, the Company entered into a warehouse agreement for a new warehouse in Somerset, New Jersey. The warehouse agreement is for a term of 26 months commencing on October 1, 2021, and ending November 29, 2023, unless the master lease for the premises is terminated earlier. The monthly storage fee is $136,274 for the first year, $140,274$140,362 for the second year, and $144,573 for the last two months. The Company also paid a security deposit of $272,549. The lease agreement contains customary events of default, representations, warranties, and covenants. The initial ROU and liability associated with this operating lease is $3.4 million.
On March 15, 2022, the Company entered into a lease agreementfor additional office space with 8780 19th Ave LLC (“Landlord”), an entity owned by Albert and betweenElie Fouerti, the Company’s former Chief Executive and Chief Operating Officer, respectively. The Company contends that the lease required the Landlord do certain work at Landlord’s expense to improve the building at a cost of approximately $1.2 million. Landlord has refused to pay for this work, contending that this expense was the Company’s responsibility. In addition, the total remaining amount due on the lease at June 30, 2023 is also approximately $1.2 million. Landlord contends that the Company and 8780 19 Ave LLC, a New York limited liability company and related party, for the lease of a new office building locatedis in Brooklyn, New York. The lease commenced on March 1, 2022 and shall expire on December 31, 2026. The Company has the option to extend the termdefault of the lease for one additional term of five years.failing to pay rent. The premisesCompany disagrees that its rent obligations have been triggered and further contends that Landlord has violated the lease by failing to pay for the work. As of the lease contain approximately 5,835 rentable square feet. Under the termsdate of the lease,this report, the Company will leaseand the premises at the monthly rate of $22,000 for the first year, with scheduled annual increases. The Company will receive a four-month rent concession so that its first rental payment shall become due on or before July 1, 2022.Landlord remain in dispute over these issues.
Critical Accounting Policies and Estimates
For information regarding the Company’s Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we are not required to disclose information under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, designed to ensure that information required to be disclosed by a company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Management, with the participation of our Interim Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022.June 30, 2023.
Based on the evaluation performed as of March 31, 2022,June 30, 2023, as a result of the material weaknesses in internal control over financial reporting that are described below, and as further described in Item 9A of our Annual Report on Form 10-K filed with the SEC on MarchJuly 31, 2022,2023, our Interim Chief Executive Officer and Interim Chief Financial Officer determined that our disclosure controls and procedures were not effective as of such date.
Material Weaknesses in Internal Control over Financial Reporting
Management has determined that the Company’s ineffective internal control over financial reporting and resulting material weaknesses, stem primarily from management’s inability to maintain appropriately designed controls, which impacts the control environment, risk assessment procedures and ability to detect or prevent material misstatements to the financial statements. The material weaknesses were attributed to:
| ● | Lack of structure and responsibility, insufficient number of qualified resources and inadequate oversight and accountability over the performance of controls; |
| ● | Ineffective assessment and identification of changes in risk impacting internal control over financial reporting; |
| ● | Inadequate selection and development of effective control activities, general controls over technology and effective policies and procedures; |
| ● | Ineffective evaluation and determination as to whether the components of internal control were present and |
| ● | The lack of an accounting system that is required for a company or our size. |
Management’s Remediation Plans
Management is actively engaged in the implementation of remediation plans to address the controls contributing to the material weaknesses. During the three months ended March 31, 2022, theThe Company has taken, and continues to take, the following remediation actions:
| ● | Enhance reporting structure and increase the number of qualified resources in roles over internal control over financial reporting; |
| ● | Establish formal risk assessment procedures to identify and monitor changes in the organization that could have an impact on internal control over financial reporting; |
| ● | Develop and document policies and procedures, including related business process and technology controls, assess their effectiveness and establish a program for continuous assessment of their |
| ● | Implementation of a new ERP |
We believe these measures will remediate the control deficiencies, but management is assessing the need for any additional steps to remediate the underlying causes that give rise to these material weaknesses. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. There is no assurance that additional remediation steps will not be necessary.
Changes in Internal Control Over Financial Reporting
Except as set forth above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2022June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Derivative Actions
At the Company’s annual meeting on December 21, 2021, the stockholders were asked to approve an amendment to the Company’s Amended and Restated Certificate of Incorporation, dated July 30, 2020 (the “Certificate of Incorporation”), increasing the number of authorized shares of the Company’s common stock, par value $0.0001 per share (“Common Stock” and such proposal, the “Share Increase Proposal”) by 50,000,000 shares of Common Stock. As reported in a Form 8-K filing on December 28, 2021, the Share Increase Proposal was adopted and a Certificate of Amendment to the Certificate of Incorporation setting forth the amendment adopted pursuant to the Share Increase Proposal (the “Certificate of Amendment”) was filed with the Secretary of State of the State of Delaware (the “Delaware Secretary of State”). To date, none of these newly authorized shares has actually been issued.
Three purported beneficial owners of Common Stock subsequently expressed concerns about a statement in the Company’s proxy statement related to the Share Increase Proposal, specifically questioning, in light of the proxy statement, the ability of brokerage firms and other custodians to vote shares of Common Stock held by them for the benefit of their customers in the absence of instructions from the beneficial owners. Based on an examination of the situation performed following receipt of these demands, the Company believes that the vote at the annual meeting was properly tabulated and that the proposed amendment was properly adopted in accordance with Delaware law. In light of the demands, however, and to ensure against any future question as to the validity of these newly authorized shares, the Company elected to seek validation of its Certificate of Amendment through a Petition to the Court of Chancery of the State of Delaware (the “Court of Chancery”) pursuant to Section 205 of the Delaware General Corporation Law (the “205 Petition”), dated as of March 9, 2022.. The action, styled In re 1847 Goedeker Inc., C.A. 2022-0219-SG seeks(the “Action”), sought entry by the Court of Chancery of an order validating and declaring effective the Certificate of Amendment, and validating the additional shares of Common Stock authorized under the Share Increase Proposal.
Shortly beforeTwo purported stockholders objected to the 205 PetitionPetition. One such objecting, purported stockholder (the “Stockholder Plaintiff”) filed his own lawsuit (which was filed, one ofthen consolidated with the purported stockholders who had submitted a demand related to adoption of the Share Increase Proposal also filed a Class Action Complaint in the Court of Chancery against the Company205 Petition) requesting that such relief not be granted and its Board of Directors on March 1, 2022. That lawsuit, captioned Scot T. Boden v. 1847 Goedeker Inc., et al., C.A. No. 2022-0196-SG (the “Boden Action”), assertsasserting two claims for relief. Therelief: first, is against the Company for alleged violation of the Delaware General Corporation Law Section 225(b) for improper tabulation of the stockholder vote on the Share Increase Proposal. TheProposal; and second, assertsasserting that the Company’s directors breached their fiduciary duties by incorrectly tabulating the stockholder vote, and by causing a purportedly invalid amendment to our Certificate of Incorporation to be filed with the Delaware Secretary of State. The Boden Action has been consolidatedCourt of Chancery held a hearing on May 27, 2022, to consider the Company’s motion for entry of an order under Section 205 and subsequently entered an order denying the motion without prejudice on June 30, 2022. On July 7, 2022, the Company filed a Certificate of Correction with the 205 Petition;Secretary of State of the State of Delaware, voiding the Charter Amendment and for reasons set out incausing the 205 Petition,number of authorized shares of Common Stock to remain at 200,000,000.
On June 12, 2023, the Company and its directors believe the Boden Actionsubmitted to be without merit and intend to defend the claims. Mr. Boden and a second purported stockholder, Robert Corwin, have both filed briefs opposing the 205 Petition. Under a scheduling order issued by the Court of Chancery on May 6, 2022,a Stipulation and [Proposed] Order Regarding Notice and Closing of the Case regarding the Action (the “Dismissal Order”). As stated in the Dismissal Order, the Company intendsand the other parties to filethe Action negotiated at arm’s length and resolved the stockholders’ claims to entitlement to a reply brief in further support ofmootness fee award, and the 205 Petition by May 20, 2022. TheCompany agreed to pay $475,000 for attorneys’ fees and expenses to the stockholders’ counsel (the “Attorneys’ Fees”). Pursuant to Court of Chancery has scheduled a hearing onRules 23(e) and 41(a), the matter for May 27, 2022. The Company cannot predictparties to the outcomeAction stipulated to voluntary dismissal of these proceedings,the Action with prejudice as to the Stockholder Plaintiff and without prejudice as to any actual or the timingpotential claims of any decisionother members of the putative class, and such dismissal was granted by the Court on June 13, 2023. As stipulated in the Dismissal Order, the Company paid the Attorneys’ Fees to the stockholders’ counsel on June 28, 2023 and such payment fully satisfied and resolved the stockholders’ and the stockholders’ counsel’s entitlement to any fees or expenses in the Action.
On October 31, 2022, a putative shareholder class action was filed against Polished.com Inc. (the “Company”) and certain of its current and former officers and directors, as well as certain underwriters of the Company’s 2020 initial public offering (the “IPO”). The action was commenced in the United States District Court for the Eastern District of New York court and is captioned Maschhof v. Polished.com Inc., et al., No. 1:22-cv-06606. The complaint asserts violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as well as Sections 10(b) and Rule 10b-5 promulgated thereunder, and 20(a) of the Securities Exchange Act of 1934 arising from alleged misstatements and omissions made in certain of the Court.Company’s SEC filings made in connection with the IPO. On or about December 20, 2022, plaintiffs filed a motion for the appointment of lead plaintiff and lead counsel. Although that motion is fully briefed, to date, oral argument has yet to be scheduled.
On January 26, 2023, a derivative stockholder complaint was filed against certain of the Company’s current and former officers and directors, naming the Company as a nominal defendant. The action was commenced in the United States District Court for the Eastern District of New York court and is captioned Wong v. Moore et al., No. 1:23-cv-00559. The complaint asserts violations of Section 14(a) of the Exchange Act, breaches of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets, arising from alleged misstatements and omissions made in certain of the Company’s SEC filings made in connection with the IPO. On or about March 7, 2023, plaintiff filed a stipulation and proposed order to stay proceedings until any motions to dismiss in the related class action (captioned Maschhoff v. Polished.com Inc. et al., No. 1:22-cv-06606) are decided. On March 23, 2023, the stipulation was so-ordered.
On February 13, 2023, a derivative stockholder complaint was filed against certain of the Company’s current and former officers and directors as well as the Company’s external manager, naming the Company as a nominal defendant. The action was commenced in the United States District Court for the Eastern District of New York court and is captioned Gossett v. Moore, et al., No. 1:23-cv-1168. The complaint asserts claims for breach of fiduciary duty against the former officers and directors and aiding and abetting breaches of fiduciary of duty against the external manager, arising from alleged misstatements and omissions made in certain of the Company’s SEC filings made in connection with the IPO. On or about April 24, 2023, plaintiffs filed a joint stipulation and proposed order consolidating the related derivative actions and appointing co-lead counsel. To date, the stipulation has yet to be ordered.
Action Against Former Employee
On February 22, 2023, the Company filed an action against a former employee asserting a claim for conversion based on the individual’s retention of profits from sales to the Company’s customers. The action was commenced in the Supreme Court of the State of New York, County of Kings and is captioned Polished.com, Inc. v. Naoulo, No. 505712/2023. On March 5, 2023, the defendant filed an answer and asserted counterclaims for breach of contract, breach of implied contract and defamation. On May 25, 2023, the defendant filed an amended answer and added a counterclaim for tortious interference with prospective business relations. On June 14, 2023, the Company moved to dismiss the amended counterclaims. The opposition has not been filed yet.
From time to time, we may be subject to various legal proceedings and claims arising in the ordinary course of business. All other litigation currently pending against the Company relates to matters that have arisen in the ordinary course of business and we believe that such matters will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS.
Factors that could cause our actual results to differ materially from those in this report include the risk factors described in our Annual Report on Form 10-K filed with the SEC on MarchJuly 31, 2022.2023. Any of those factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on MarchJuly 31, 2022, except for the below risk factors.2023. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Increasing tensions between the United States and Russia, and other effects of the ongoing conflict in Ukraine, could negatively impact our business, results of operations, and financial condition.
While we do not operate in Russia or Ukraine, the increasing tensions between the United States and Russia and the other effects of the ongoing conflict in Ukraine, have resulted in many broader economic impacts such as the United States imposing sanctions, bans against Russia and Russian products imported into the United States, and disruption of the production and delivery of products and parts from Ukraine and Russia. Such sanctions, bans and disruptions have affected and may continue to affect commodity pricing such as fuel and energy costs, making it more expensive for us and our partners to deliver products to our customers. Further sanctions, bans, disruptions or other economic actions in response to or because the ongoing conflict in Ukraine could result in an increase in costs, further disruptions to our supply chain, and a lack of consumer confidence resulting in reduced demand. While the extent of such items is not presently known, any of them could negatively affect our business, results of operations, and financial condition.
Numerous economic factors, including inflation, our exposure to the U.S. housing industry, and the potential for a decrease in consumer spending, could adversely affect us.
Economic conditions, including inflation and weakness in the U.S. housing industry, could decrease consumer discretionary spending and adversely affect our financial performance. Consumer prices have experienced their largest percentage increases since 1981, and interest rates have begun to increase. We believe that our sales of home-related products are affected by the strength of the U.S. housing industry. Downturns in the U.S. housing industry could have a material adverse effect on our financial results, business, and prospects. Similarly, a substantial portion of the products and services we offer are products or services that consumers may view as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macroeconomic conditions that affect consumer spending, including discretionary spending. Difficult macroeconomic conditions also affect our customers' ability to obtain consumer credit. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs could reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect consumer spending habits and could have a material adverse effect on our financial results, business, and prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during threethe six months ended March 31, 2022June 30, 2023 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any shares of our common stock during the threesix months ended March 31, 2022.June 30, 2023
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| * | Filed herewith |
| ** | Furnished herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | |||
| /s/ | |||
| Name: | |||
| Title: | Interim Chief Executive Officer | ||
| (Principal Executive Officer) | |||
| /s/ | |||
| Name: | |||
| Title: | Interim Chief Financial Officer, Chief Accounting Officer and Secretary | ||
| (Principal Financial and Accounting Officer) | |||
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