NESR - Polished Is On A Knife Edge

2023-07-12 10:32:44 ET

Summary

• Polished, an online supplier of appliances, has until July 31 to provide current financials to the SEC, or its shares could become inaccessible to retail investors due to SEC Rule 15c2-11.
• If Polished misses the deadline, its shares could only be sold, not bought, by retail investors, potentially causing a significant drop in valuation.
• The company's fair value is believed to be above its current price, but without audited financials, it's hard to estimate its value and the delay in releasing financials could be a negative signal.

The clock is ticking. Polished (POL) has until July 31 to provide current financials after an extended delay, this is their SEC filing page to monitor whether they meet the deadline.

If Polished does not meet this deadline, there could be a big problem for retail investors. This is due to SEC Rule 15c2-11 . This is an obscure and recently updated rule, but becomes crucial if Polished misses the SEC's extended deadline to provide current financials.

The rule basically states that brokerages must produce quotes based on current information, as a result, without financials by the end of July deadline, retail investors may be unable to purchase Polished's shares because it moves to an exchange only accessible to funds and sophisticated investors and brokers enforce this (it's called the OTC's Expert Market ). This may create a situation where Polished's shares can only be sold and not bought by retail investors. Also, technically this isn't a necessary direct impact of the text of the SEC's ruling, but de facto how brokerages have responded to it to reduce their legal and compliance risks.

This move will almost certainly pressure Polished's valuation regardless of any sense of 'fair value' to the equity, so it's worth being aware of this risk ahead of time.

The reason why is if the vast majority of holders cannot buy the equity, then there's a much reduced mechanism to support the price. It's nice to think that equity should trade to its fair value naturally over time, and of course that's a tenet of value investing, but without investors able to buy the shares there's a strong headwind against that happening, at least until financials are filed.

NESR As A Case Study

As a mini case study of what might happen, look at National Energy Services Reunited Corp. ( NESR ). They failed to file current financials by the required deadline of April 27, 2023 . As that became apparent to the market, the stock declined sharply. You can also check if you can buy NESR, but if you have a retail brokerage account, I suspect you can't. That's, in part, the problem, though of course the absence of financials may suggest deeper risks too.

Of course, I hope Polished can meet the reporting deadline, and management have expressed confidence that they will, and released some preliminary financials in the process. However, we are now getting too close to the wire at least for my comfort level.

To hypothesize, you would think that any competent management team would build in some buffer with the auditor to create a schedule where they don't just provide audited financials on the last day that the filings are required by the SEC ( July 31 2023 in this case ) but several weeks ahead of time. That's where we are now. Polished has under three weeks at the time of writing to get their audited financials in order. Maybe they'd planned to come in just before the deadline all along, but I believe as the deadline draws nearer, there is a heightened risk that they'll fail to meet it.

I've written previously how Polished is probably cheap on an expected value basis. To summarize, there are multiple scenarios for Polished from an acquisition to bankruptcy and you can estimate approximate values for each. Without current financials, we can only speculate on Polished's profitability, although some unaudited guideposts have been provided by management:

• 20% x $1.84/share (acquisition).
• 20% x $0/share (bankruptcy).
• 30% x $0.525/share (going concern on 2023 guidance).
• 30% x $2/share (going concern reaching prior operating margins).

Please see the prior post for the full valuation detail , but that implies a value north of $1/share (technically $1.12/share on the above calculations, though let's be careful about false precision here), though there is a material chance of wipe-out and arguably that probability is increasing as the company gets closer to the end of the month without updated filings in place.

In fact, we can simplify the above assessment to broadly a $1.40/share value if they hit the deadline and maybe (pessimistically) a $0 valuation if they don't - in practice the shares will trade above that probably on the chance of an even more delayed filing. This analysis might imply a 50%-60% chance they miss the deadline.

If Financials Are Released

If financials are released, there will be a lot of things to unpack. They key is really margins, if there is suggestion that they can chart a path to 6% EBITDA margins, then that's very bullish. However, if margins are closer to 3% then that's less encouraging. It will also be noteworthy how inventory has trended and the overall trajectory for sales and operating cashflow. That said, in the current environment, even the release of mediocre financials could be greeted very positively by the market.

Risks

• The major risk here is that Polished is forced onto the OTC Expert Market. This could cause the shares to decline in value as retail investors can only sell and not buy the shares. I like the company in expected value terms, but if it moves to the expert market that's unlikely to matter given trading dynamics, at least temporarily.
• However, there are risks the other way. Polished could be acquired. Earlier in 2023, it reported unsolicited offers, so maybe the shares are ultimately taken out for a premium. But no deal has happened yet and I believe any deal is unlikely without audited financials. Otherwise, it's a little like buying a used car without an inspection from a mechanic.
• Lastly, without audited financials it's hard to estimate the value of Polished, we must deal in broader ranges. I believe Polished may be inexpensive, but there's a broad range of outcomes until financials are released, and financials may not be released.

Conclusion

I think Polished's fair value is likely above its current price, but if it can't release audited financials very soon it may not really matter. Also, of course, the extended delay in releasing those financials may be a negative signal too.

I am moving to more of a tracking position rather than a material holding in Polished currently. Yes, if they hit the deadline for audited financials there could be a big rally, but if they miss the deadline then the downside could be extreme too as retail investors are potentially only able to sell and not buy the shares. As the filing deadline nears, there is a risk that an investment in Polished is moving to a lot of risk without much reward. Of course, investors should react to news flow and if Polished can release financials before the end of the month, then depending on how those financials look, the company may be cheap, but I increasingly worry we aren't on a path to receiving those financials on time.

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