Description

Thesis: A likely for PA only idea due to dried up liquidity in the warrants, but one that can pay out 300-400% in a few weeks with upside to 2000% with downside limited to comission costs/theta drift of 20% or so. Small probability its a donut. There will either be an anticipated deal in next few weeks, or financials will be released and warrants go up, or nothing happens, stock stays at $0.50-$0.60, warrants stay at $0.10ish. Or financials are bad, term loan is called, its a zero. I'll address all this and scenarios below.

Some ground rules. This is absolutely not a great company or a long term hold, and I am not in anyway pounding the table on this (like some still are), so feel free to downvote etc. Don't care. But I like the risk reward here, plus the rights embedded in the warrants. We had hired a securities lawyer to review and they seem to believe that in an event of a transaction, even below strike price, the warrants have good value.

For a full background please read the two published ideas in the last year for GOED (1847 Goedeker) and the comments and since then the company has changed its name to Polished.com (POL ticker). Basically POL is a $500mm~ revenue run rate average appliance e-commerce business, Appliance Connection, that went public via a merger with an absolute crap of a company 1847 Goedeker. As usual in these cases, private company micro cap CEOs (or public for that matter) have no idea how to behave in public markets and screw things up due to hubris/inexperience. A good case study is USAT/Canteloupe of a similar situation .... good business/terrible management. 

While the stock languished post 1Q21 the company was flying high and put out guidance for ~$550mm revs and potentially a 10% EBITDA margin and this is all with the fullfillment rate of 60% due to supply issues versus a historical 80%. Immediately after they announced a $140mm term loan from BofA that usually is the most conservative corporate lender and was getting ready to do a massive buyback of the company that was then trading at maybe $150mm-$200mm market cap. Then all hell broke loose:

- delayed 2Q earnings, lower some guidance

- announced an investigation

- hired outside counsel and management consultants

- put out wild releases on its cash position (last statement was $44mm in cash, but no comment on whether it was gross or net, meaning its likely burning cash to buy up inventory at wrong time, but not necessarily a bad thing, since it was underinvested it seems).

- investigation found founder Albert Fouerti was charging $800k of personal expenses and needed to change 1Q revs by $3-5mm. That's ... fraud-ish, but IMHO does not rise to level of outright fraud. Just "hey I am a founder, I can do what I want" deal. He has left, so did the CFO, immediately, reimbursed $2mm-ish for investigation and got voted off the board. Additionally they were also hiring illegals in warehouses.

- company hired Richard Bunka, a retail CEO, former consultant to company, for a 6 month contract, and highlighted his past experience selling his previous company to private equity and gave him a $2.6mm incentive if the company is sold by 4/14. Additionally hired 1847 Goedeker CAO to be temp CFO (reading between the lines, meaning no financial fraud).

- former auditor quit, as customary in this case. 1847 Goedeker auditor hired. Not the greatest auditor, small company, has some red flags but my read here is ... they were already trying to sell company so hired someone to do books that already knew them to get financials out fast.

- in January, some new board members voted in. They have to be exhausted by now. What didn't pass was an increase in authorized shares from 200mm to 250mm. With 105mm outstanding and 92mm warrants they couldn't hire new management without a substantial option package and the shareholders essentially said: "No sell the company"

- Immediately after, January 27th, they announced the've received "multiple expressions of interest in acquiring all or part of the company" and hired Jefferies to run the process. This was almost 8 weeks ago. Its likely Jefferies was involved before the announcement. My experience in these things is probably from the day Bunka got hired. (A fun read is the anatomy of a deal for Sharps Compliance, SMED, where similar situation of temp CEO joining and meeting with PE guy for lunch same week, got sold for a 230% premium a few months later).

So thats the recent history. From the surface of it it looks not great. I think the market just straight up does not believe this will be sold, or that it has more fraud coming, or BofA will call the term loan and company will declare bankruptcy. I have a different read.

- Most imporant one is the question of what hasn't been filed? Nothing related to the term loan. No modifications, no forebearance, no covenant breaks. Nothing. That's good news. I assume BofA has all their business accounts and can see cash flows in real time. They have no interest in owning this in a forced bankruptcy, and as I touch on later, have a reputational risk and I think they are HODLing hard. I believe there was also a ~$40mm EBITDA covenant in the term loan, but since other things have been broken (like timely filings) doesn't mean this one hasn't been either.

- Looking at traffic data it has remained constant at 2.5mm-2.6mm monthly visits since 1Q21. If they did invest in inventory then there is actually a decent chance their fullfillment rate went up. Again, not in anyway saying this is an amazing long term hold at this point, just saying business hasn't deteriorated worse than the competitors.

- There is A LOT of reputational risk for people involved here. A LOT. Ellery Roberts, CEO of 1847, already has egg on his face. Does he want to do more deals? Need to close this one with a decent price. BofA, Jefferies ... not A+ names, but not B names. They aren't getting involved unless there is some confidence in getting things done. 

- just my experience tells me this isn't fraud, but incompetence. 

Warrant rights

- this is a crappy written warrant agreement but section 4.3 (I posted it in the comments for GOED) essentially says in an event of a material transaction warrants convert into warrants of equity of acquierer. Does not say what happens if acquierer is private. Thats the rub. Some language deep in the doc has some definitions and one of the definitions said in certain events a third party may be hired to value. So realistically they will have to be bought out. 

- If they get bought out they will likely be at "fair value" using Black Sholes model. The stock has a historic vol of 100-120% making them very expensive on that valuation. My worry is that management/etc will use much lower vol or "post deal announcement" vol to value the warrants. The difference is significant. To that effect we've sent an honest, mostly friendly, letter to the CEO reminding him not to screw the warrant holders or we'll go to court/hold up any deal.

Scenarios (my probability estimates):

1. (10%) - No deal, financials delayed again, BofA calls the loan, bankruptcy, warrants zero.

2. (20%) - No deal, crappy financials (revs at mid $400s, EBITDA close to covenant break), stock stays at $0.40-$.60 ... warrants stay at $0.10

3. (40%) - deal, at sub $2/$300mm/loan at $50mm (.6x revs), management screws warrant holders, they get a token $0.30-$.40 to go away. Most warrant holders I've spoken to are pretty dejected and expect this.

4. (20%) - deal, at fair value price of $2.50-$3ish/$450mm/loan at $50mm (.8x revs), management uses 60% vol, warrants are $.80-$1.00

5. (10%) - deal, at a real value price of $4ish/$700mm/loan at $30-40mm (1.3x revs), management uses 100% vol, warrants are $2.00 to $3.00

Risks:

I think I addressed most of these here. Liquidity has dried up since deal announcement, all warrant holders are waiting. In the 7.5 weeks post announcement my loose estimate is that about 5mm have traded. Pre 1/27 avg volume was 1mm+ a day. Management/Board may screw you. Financials suck. More fraud uncovered. 

Catalyst

Announcement of sale of company in next few weeks