Open Letter to “Polished.com, Inc” Board of Directors
Date: August 25, 2022
To: Directors of Polished.com, Inc (NYSE: POL, POL.WS)
From: David Bastian
Chief Investment Officer, Kingdom Capital Advisors
Subject: Open Letter Regarding Communication of Recent Whistleblower Allegations
I write to you today to address the recent shareholder communication, or lack thereof, regarding an audit committee investigation into allegations related to the Company’s business operations. The August 15th press release has cratered the Company’s share price, as the lack of detail prompted investors to fear a worst-case scenario. I urge you to take the following steps to rectify the current situation before investor trust is further impaired:
Clarify Statements Regarding Business Operations. There is a growing narrative among investors and observers that the Company’s business practices are fraudulent. Specifically, critics routinely reference past inventory practices, historic revenue recognition, and your relationship with DMI as potential areas for fraud. Releasing an ominous statement regarding an Audit Committee investigation has played directly into this narrative. Given your Form 12b-25, Part IV, Question 3 indicates no need for historical financial restatement, it seems clear this investigation does not relate to any of these speculative critiques. I also assume you would not have updated guidance and provided preliminary estimates if there was any risk of restatement. Further disclosure from the company about what IS and IS NOT being investigated would help quell speculation.
Clarify Cash Balance. Prior to the Q1 earnings release, the Company entered into a new lending agreement with Bank of America for $100m. Cash at the end of Q1-22 was $25.8m, with $55.3m of long-term debt. IF the Company drew the full $100m on the loan, your cash balance disclosure of $44m suggests significant cash burn in Q2. Disclosing how much was drawn and the net debt position at the end of Q2 would relieve fears that cash burn has accelerated.
This point is particularly salient given the Company has posted negative cash flow from operations each quarter since the merger. Positive earnings paired with negative cash flow are classic signs of a retail fraud, which remains an echoed concern regarding the business. We consider these critiques uninformed, as they ignore the significant run-off in legacy Goedeker customer deposits that were disclosed at the time of the merger, and $29m of inventory build in the past three quarters to combat supply chain disruptions. That said, until you provide more clarity on the Q2 cash balances, both advocates and critics will be left guessing.
Clarify Relationship Status with Bank of America. Your lending agreement with Bank of America states you must deliver “satisfactory” financials to remain compliant with loan covenants. I assume Bank of America has not received financials, given the filing of an NT-10Q. I must consider the risk that the loan could be thrown into technical default. Please provide an update on the Company’s relationship status with Bank of America.
Make the Situation Public as Soon as Possible and Buy Back Shares. It remains unclear how long the Board has been aware of the current allegations. Is this investigation the reason for the inexplicable lack of share repurchases in Q2? If so, disclose it. Assuming a growth in the cash position as disclosed in the press release, I expect a full use of the buyback authorization once insiders and the company come out of blackout. The Company, and its insiders, should be buying shares in earnest to restore investor confidence. Whatever potential damage can be done by bringing the investigation public likely pales in comparison to the value that could be added by retiring 30m+ shares below $1 and stabilizing your investor base.
The lack of detailed communication regarding this investigation has caused significant damage, and I implore you to take immediate steps to remedy these errors. I remain ready and willing to discuss the situation.
Sincerely,
David Bastian