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The following segment was excerpted from this fund letter.
It would be difficult to describe our investment in Polished as anything other than a disaster up to this point. Polished was our worst performing position during the year. Other than what has been shared in past letters and separate emails with each of you, there is little else to say at this stage other than sometimes the restatement of financials in conjunction with onboarding a new auditor takes considerable time to complete. I’ve lived through similar situations in the past that unfortunately were handled much better than the way Polished has navigated this situation during the past 6-7 months. Fortunately, it seems as though the end is near. The board has targeted the end of Q1’23 to file their long awaited 10K for FY22 as well as get current on their past due financials.
Last quarter I talked about the ongoing internal investigation that was being conducted into claims made by former employees. The company released the results of their investigation in December and among other things put to rest any concerns that fraudulent financial activity was taking place. Chief among the findings included CEO Albert Fouerti expensing less than $1.0mm in personal charges to company accounts along with improper inventory management practices that led to some labor related issues. Both Albert and CFO Maria Johnson have stepped down, clearing the way for interim CEO Rick Bunka to move forward in the role, with a very large success fee if a change of control is executed during his tenure. Albert also personally footed the nearly $4.0mm bill for the investigation.
The original thesis for Polished was that we purchased shares in a better than average, highly profitable appliance business that was growing faster than the industry with a runway to continue taking share, but trading at a distressed valuation given its strange path to IPO, microcap status and macroeconomic concerns. The path to a higher valuation consisted of continued growth in revenues and EBITDA which along with internal improvements in distribution and logistics would reveal a consistent 20-30% top line grower, higher than average margin profile and significant cash flow generation. In terms of the adverse macro environment, I estimated that Polished would have the ability to grow even through a downturn with pricing adjustments, continued share gains and a skew toward luxury appliances while leaning on replacement demand. The company was performing in line with this thesis until the investigation was announced. Currently, because we are operating with limited information and the macro environment has worsened, especially the housing market, that may no longer be the case. The range of outcomes here remains a bit wider than I would typically seek, but a return to normalcy would benefit us immensely and I believe 2023 offers that possibility. I remain confident the business is worth more than $0.50/share, especially to a potential acquirer. As always, I remain flexible and willing to change my mind about our investment upon the receipt of new information.
Update
In late January, a 13D was filed by 5% shareholder Morgan Dempsey Capital Management, increasing their stake to over 8.0%. An explanatory note was included outlining a case to the board for a strategic review and potential sale of the business. Management and the board responded in a shockingly positive way, claiming they welcome the constructive input of investors, and explaining that ‘following the receipt of multiple private expressions of interest in acquiring all or part of the company’ they’ve engaged Jefferies to explore any potential transactions. This was a welcome surprise after the past six months and would at least indicate a path to improved returns is on the horizon. Most importantly, this was the first time in a long time that I’ve felt management and the board were aligned with shareholders. I will be monitoring the situation closely and will provide any updates as necessary.
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Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
