Good morning, and welcome to the Polished second quarter earnings conference call. Please note that certain statements made during the call constitute forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These statements and uncertainties are described in the company's financial statement, press release, and its filings with the SEC. The forward-looking statements today are made as of the date of this call, and the company does not undertake any obligation to update the forward-looking statements. I would now like to turn the call over to Polished's CEO, Mr. Rick Bunka, and Polished's CFO, Mr. Bob Barry. Please go ahead, gentlemen.
Good morning. Thank you for joining the call. It hasn't been that long since our last call. We remain committed to regular communication with investors. We wanted to briefly provide some color on the results that we posted last night and give the opportunity to ask some questions. Before I do hand the call off to Bob to discuss the results in greater detail, I'll provide some context on the second quarter results. Similar to the first quarter, the second quarter was characterized by a net sales decline, largely attributed to our core appliance businesses. Unlike the first quarter, though, the second quarter experienced declines in the luxury category that were now comparable to the declines we were seeing in mass appliance. These two categories are the main drivers of our performance at Polished, and both experienced similar headwinds.
Our team continues to focus on stabilizing the business and strengthening the foundation. As with the first quarter, our second quarter results demonstrate that we can deliver more normalized margins and positive EBITDA on reduced volume. I'd like to take a moment to reiterate some of the steps that we spoke of on the last call, and underscore the steps that we are taking and have taken towards those goals. First, we entered into a loan amendment with our banking group, led by Bank of America, under which the bank waived specific technical defaults and reestablished operating conditions for our operating loan. Second, we continue to focus on improving our marketing spend and engaged a leading digital marketing agency to help us improve with our company's performance and return on investment with respect to the advertising and pay-per-click lead generation in particular.
Third, we have continued to enact expense reductions and headcount reductions to, to consolidate our operations and improve efficiencies, including the steps to consolidate our distribution activities into a single warehouse by the end of the year. Fourth, we're in the final phases of implementing new financing options for our customers, including a branded private label private label credit card, and a leasing alternative for customers who do not qualify conventional credit. In addition to some payment processor changes that were we've made to improve additional, improve and provide additional liquidity. Fifth, we're prioritizing the specific categories where, which produce higher margin, including small appliances, as opposed to value-based mass, mass market appliances.
Lastly, we are actively negotiating with our largest vendors to improve terms of several of the terms that we're operating, and we buy and sell products under. Now, with that, I'd like to pass the call over to Bob to give some color on the financial results and, and, talk about the forward projections. Bob?
Thanks, Rick, good morning. For the quarter, sales were $87.8 million, and that compares to $138.5 million in the second quarter of 2022. Our gross profit margin was $19.6 million at a percentage rate of 22.3%, and that compares to gross profit of $23 million and a 16.6% margin in the second quarter of 2022. This over 500 basis point improvement in gross margin is a result of our emphasis on improving profitability versus pursuing revenue growth at any cost. Operating expenses for the quarter were down to $19.5 million, compared to $23.8 million in the second quarter of 2022.
The largest expense items were personnel costs of $6 million, G&A of $4.9 million, advertising of $4.5 million, and bank and credit card fees of $3 million. Net income for the quarter was $1 million, or $0.01 per diluted common shares, per common share, that compares to $4.3 million, or a loss of $0.04 per diluted share for 2022. Adjusted EBITDA was $1.6 million, with a margin of 1.8%. As we look forward, we're reaffirming our full year guidance provided on the last conference call of having revenue between $375 million and $400 million for 2023, and the low single digit EBITDA margins. In making our estimates and our assumptions for the rest of the year, we considered a couple things.
One is Q4 is typically a very big quarter for the company. We rolled out, as Rick mentioned, a store branded credit card. Actually, we rolled that out yesterday. We haven't had one since May, and our Citizens Pay is the card we're using, and they are offering us a special term of no interest rate financing, for 12 months, at the same rate we would pay on a normal credit card charge. That's good for, I believe, 30 days and $5 million. We're expecting improvements in our marketing, results of our marketing consultant. Finally, we are rolling out a, alternative financing for customers through Progressive Leasing that do not qualify for conventional credit. Progressive Leasing will be helping us with the marketing of that product.
With those comments, I'd like to turn it back to the operator for the Q&A.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Again, to ask a question, it is star then one. Our first question will come from Eric Landry with BML Capital. Please go ahead, sir.
Good morning. I'd like to talk about opportunities, if any, for generating cash from the balance sheet. I know there's been some questions in the past about the vendor deposits, and the answers seem to be that there's nothing there that we can do to generate cash. If you could please expand on that and whether or not that's a correct assumption. Thank you.
I'll, I'll handle that question. This is Bob. Actually, Eric, no, we've, we've looked at the balance sheet, and there, we have nothing on the balance sheet that we could do to raise cash, with the exception of closing out our interest rate swap transaction, which is required by the loan agreement. As you mentioned, all the vendor deposit account is pledged to secure our accounts payable at DMI, our primary vendor. There's nothing on the balance sheet that we can use- that we could monetize to use or reduce debt.
Well,
The only color I would give to that, Eric, is that aside from the core of our business is buying and selling inventory, and we will and have been reducing carefully the inventory levels and shortening the lead time of having product and delivering it. That improves turn, and it does free up cash. Over this period, we have done some reduction of inventory, but you're gonna see us become much more efficient at available product. We were housing product last year for sale, and this year it's generally available, so we can narrow the time, and our program will have efficiency of working capital is a priority for the team right now, which naturally provides liquidity.
Okay, the $30 million in vendor deposits, is that a static number, no matter how big your inventory is? Or will that have to go up still with higher inventory, if by some chance you do grow in the future?
That, that number is not related to the inventory. That was our primary vendors, I mentioned, is DMI.
Yep.
we use them. That, that, that $30 million we have there secures the accounts payable with, with them. As we, as, as that balance grows, and it grows by, vendor, by increasing by deposit and rebates that we get from DMI and others, that money is, earmarked just allowing us to, increase the amount of accounts payable we have. To that extent, we are improving our cash flow by not having to come out of pocket for accounts payable, but, that, that is a static number. The inventory. I'll add 1 thing to what Rick mentioned about inventory. We're working with a vendor, that might be able to source some of our product. We would not have to carry it. They would fulfill it from their, facilities.
We're not, we have not signed a contract, but something we're working on, which would enable us to, to free up and reduce our inventory. Inventory is down a little over $2 million from year-end. It is something that we always are looking at as to how we can reduce that number. Our inventory turn, it traditionally runs about 12 times. I'd love to see that in the 15-16 range. There are a couple of things we're working on, but the vendor deposits is one of those things we just simply can't touch. It is, it's contributing to working capital by not having to, you know, pay, make the, pay for the purchases that we get from DMI.
Okay. All right. Well, I know you guys have to be careful about what you say, but here's the deal: At the company's current level of sales and profitability, with the current balance sheet, the equity is worthless, so a lot of work needs to be done over the next two to three quarters in order for shareholders to survive. Is there any way you can go into more detail about how it is that we're gonna survive past the August of next year?
Well, as, as I said on the previous call, and I'd, I'd reiterate it, I think, it's meaningful. We have retained a financial advisor for this specific purpose, to look at every opportunity for the company to become more efficient. This is all about us establishing a EBITDA threshold based on operating results that, that improves the financial standing of the company. Our, our primary focus right now is just that. We have engaged this firm to assist us, and we're going through a process to evaluate all of our operations to become, to improve cash flow. That's, that's our focus, and that's the purpose that will create value, long term to shareholders.
Cool. What's, what's what's gonna be the cost savings of the warehouse consolidation? Do you have any idea how much you'll save once that's all in place?
We are still looking at it. The, the primary savings is again, I think we said the primary savings come from not having to move product between warehouses to ship and not carrying duplicative headcount to do it, and the pace that we can do it is improved. This isn't entirely a expense reduction as it is improved efficiency. We're gonna see both headcount reductions and rental savings.
However, the, the primary objective is we will be next to DMI and we will be able to, to be very efficient in our, our transport, both within our markets in terms of the marketplace in New England and New York, Connecticut, Long Island, New Jersey, will be highly efficient, as well as it will improve the speed that we reach all markets nationwide. All of these are gonna be improved by our ability to operate out of a single facility.
Okay. What, what's a good run rate for professional fees? One without, you know, audit fees and, and one-timers in it. You were at $1.8 million in the June quarter, $1.4 million in the March quarter, but you were only $1.2 million last year in June. What, what is the run rate for professional fees?
That's a very good question. We have a lot of things going on. For the three months, it was, we had a $1.8 million in professional fees for the quarter. I think that number will gradually come down. There are several initiatives that we've got, several things we're working on, that we're winding up, but I would like to see us down to $1 million per quarter. Honestly, I don't think that's in the cards for maybe another two to three, four quarters before we... We'll gradually, I hope, wind down from here from $1.8 million, but we do have several things requiring outside legal assistance that we're working on right now.
Okay. All right. Thank you.
Yeah, yeah. I was gonna say, in the interest of time, too, if we, we can, we want to make sure we address, as many callers as possible.
Again, if you have a question, please press star then one. Our next question will come from Jay Feinberg with Stone Street Partners. Please go ahead.
Good morning, gentlemen. It looks like you've done a great job getting the ship at least going in the right direction. What would it take to get EBITDA margins to say, you know, the mid level, say, 5% by next year?
I, I would say that we achieve the revenue numbers we're looking for, for this year. We're talking about low single digits. I think above that, as we can get more revenue to cover our fixed costs, I would say that the margins, EBITDA margin would improve going forward with more revenue. We, we, we look at our expense structure. For example, when Rick and I arrived in October, we had almost 500 employees. As of right now, we have just slightly under 300. So we are looking at our expenses, and trying to control those, and at the same time, increased revenue will allow us to cover the fixed costs that we have.
I would hope that, that this time next year, we're having a call, we'll be looking at an EBITDA margin in the range that you're talking about in the mid-teens.
And Bob's talking, yeah, and Bob's talking about the expense structure, but, you know, the. I said it at the onset, the primary challenge we have been working through has been our acquisition costs through our digital spend. That process has considerable upside. Our external advice has been that we should see significant improvements, anywhere from 25%-40% improvements in our Google spend and in our overall digital spend. Those are where the gains will occur, because the obviously, the cost of acquiring a customer is meaningful, and, and, and that produces the revenue that we can leverage that Bob's talking about. We have seen, both in the industry and we've experienced, a significant decline in the efficiency of our acquisition cost.
That's been a concern I've, I've talked to now for, eight, nine months now, where that, that you can see that, that spend has not been as productive as it was in years past. That's the primary driver of revenue. Even though you're, you're, gonna look at the marginal cost of the spend, it's really the productivity that, that yields, that this, that this gain will be made. The spend we're, we're making is gonna be an important step in getting there.
Very good. Since the Goedeker acquisition of Appliances Connection, I guess it was completed sometime June or July of 2021, is that where the restatements all went back to, or did it go back even past that?
It was back to, it started in the, June of 2021. We were, the year-end audit 2021, those statements had to be restated. That started with the acquisition. It continued into the Q1 of 2022. That 10-Q had to be restated.
Okay. at the time, the auditors and the investment bank, I guess, ThinkEquity, it was? I'm not really sure of the name.
Yes.
Is there any impropriety in what was done at the time that current management has, you know, noticed or recognized?
I, I really can't get into that. We, we saw things in the financial statements that we felt we needed to correct, and, and we did that this year when we had to do the two -- we had to re-audit 2021, and of course audit 2022. I, I, whether improprieties or not, I, I, I can't get into that. We just, we found-
Well, there were two. The two most, and it's documented, I mean, the two most meaningful adjustments that were made to the fiscal 2021 period, one was a matter of the process, and the other was a matter of hindsight visibility. The first, what I'd call process, was the method of revenue recognition and accounting from it was, we took great scrutiny on and applied the changes that we have made in 2022 back as far as we were able to, and then they audited. The change in 2021 really was to have conformity of the process for revenue recognition, which we employ, which I said on the last call is the standard we should have. That's on shipment. We recognize revenue on delivery.
If, if we're producing goods, we're, we're taking, we're charging credit cards and we're producing revenue on, on shipment of goods, and that's the standard. We, we took that and applied that all the way back, and through testing, found there should be adjustments to that time period.
Okay.
The second was.
Yes.
The second, just so you can see them both. The second was, there -- at the time of the, the first audit, there, there was, no forward visibility of returns. With the, the hindsight of our return %, the process yielded a need for a return reserve. That return reserve was added back on the balance sheet and, again, tried to make it all consistent with, with what we are doing today.
Yeah, from an investor point of view, it seems like the previous management didn't follow the generally accepted accounting principles. If that's the case, you know, they have a fiduciary responsibility to shareholders. Does current management gonna hold them to that? Is there a potential to, you know, file litigation against the people who basically decimated the value of this company?
I, I, I think we hear your question, and I, I don't know that we have a response for that today. There has not been, to date, any steps that this management team has made toward that objective, but we hear your question.
Understood you're hearing it, no offense, you guys have a fiduciary responsibility to shareholders that currently own the stock today, and, you know, since you've taken the position in, you know, in office. If previous management had, you know, essentially not followed the generally accepted accounting principles starting in 2021, when this acquisition occurred, somebody's responsible to shareholders to hold them accountable, and it, it, it falls in your lap. Are you ready to hire a law firm to hold them accountable, the previous management, for the money they received from the secondary, from the secondary offering? The company, you know, basically $200 million disappeared. You know, shareholders deserve, you know, fiduciary responsibility from its management. Is there no... You haven't decided to look into legal representation to hold them accountable? Previous management, that is.
Bob, Bob, you said that a number of things that are hard not to take exception to. How do you, I guess, how do we. We, we didn't say that they weren't following generally accepted accounting practices, Bob. I'm not trying to split hairs with you, but could, I guess, could you clarify that, Bob?
The, you know, if, if the one that Rick mentioned, the returns adjustment, that's a case where hindsight was twenty-twenty. We had a whole year to look back and to see the returns. What was available to them at the time, and some of the other issues, some of these are judgment calls, and I, I, I, I can't answer the question whether we should go sue. We have D&O insurance. They're covered under the D&O insurance, so to what end? I, I don't know. I'm not a lawyer. I don't know the answer to that question. Management, honestly, and I don't want this to sound Pollyannish, but we're not looking back, we're looking forward and trying to. We were handed something, we're working on it, we're trying to make it better, and to go forward from here.
We think that's where the value will come from the stockholders if we can, you know, given the time to right the ship here and to continue to grow business in the midst of a recession. But I'm not, personally, I'm not looking back for retribution or anything. I think of That, that's my view. That's not the board's view, that's not Rick's view, that's my view. I wanna look forward, I don't wanna look back. It is what it is. I can't change it. We've, we've got it right. We're probably, we are following GAAP, but hindsight's 20/20 in some of these reserve adjustments. I mean, the returns reserve was a big number, $7 million-$8 million.
There is an active shareholder action that is, and will be processed and addressed by this team as we go forward. Your, your question was quite specific as to will management be holding them accountable for in the manner you described, and that's why you're seeing us be fairly cautious in how we respond to that, and I hope you can appreciate that.
The next question will come from Steven Taveri with Rivas Capital. Please go ahead.
Yes, hi, and thank you for taking my call. First of all, congratulations, because you guys are, are, are consistently providing evidence that things are kind of-- the intention is kind of turning around, so thank you for that. Also, I do agree that sometimes looking back and engaging on litigation, stuff like that, I mean, essentially, when you wanna grow the head and cut the tail, you gotta be careful with... That is a very costly process. Moving forward, it is something that I applaud on you guys and take a look at. My question is, with everything that you guys are working on, what, what gives you the right to win? You know, there's a lot of competition out there.
This company, honestly, on this process, on getting back on track, a lot of opportunities were missed. There's a lot of, you know, people that step in the market and, and trying to address a lot of people trying to acquire customers through digital, right? What gives you guys the right to win now moving forward? If you guys can summarize that. It's a very simple question.
You know, that's a, that's a great question, I, and I appreciate the question. What, what this company does extremely well, and we don't often talk about it, is educate our consumer and give confidence in a, a very expensive purchase that is quite complicated. With the number of options today, specifically in the appliance industry to outfit your home, the decision can be daunting and the shopping experience is quite difficult. It's very hard to find local, informed people that know product beyond their, the items they're selling. The consumer's constantly challenged with, "Yes, I, I know this vendor, but what other options may I have for my home?" We are that option for them, and we're available. You don't have to hunt through the halls of a big box retailer to find an expert.
We're available, we can coach them through this process. Our, our, our best experience is when we can, we can help someone through that decision process, and, and we have expertise that's immediately available. That's something that our consumers want, it's very important in both their remodel experience as well as their replacement experience. What is shifting in the industry today is a shift from what has been whole kitchen remodel or whole kitchen purchase or back toward the percents that were historically reported on replacement units. The replacement units is as difficult because in, in many cases, those units are discontinued or no longer available. The choice you make within your home to find and meet the criteria you have, is something where you really need an expert that can advise you through the process.
That is what our team is. We have a talented, trained sales force that is available on call, and that is the distinctive asset of the company.
Rick, let me add to that, too, because one thing that the question was: What separates us? The website, our website's won awards, for being the best, website to go to. I think U.S. News & World Report was the last one that, made an award. That, that, that's another distinguishing feature is, is our website.
Yeah, that's a, that's a good point, because, there is a lot of new, I would say a lot of the consumer now is, a lot of the new generation, you know, kind of consumers, where they make 80%, I would say about 80% of the decision online or digital, right? Then execute on the last 20%. If that's where you guys are putting your effort to capture more customers and make it easier, the, also all about the experience, like you explained, I think that, that was the kind of answer I was looking for. Thank you so much for taking my call. Appreciate it.
Thank you for the question.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Rick Bunka for any closing remarks. Please go ahead, sir.
Thank you all for joining the call. We, we truly appreciate all your continued support, and look forward to being on time and timely with our, our next, financials and the results that we'll post at the next quarter. Thank you again.
This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.