ITEM
1. FINANCIAL STATEMENTS.
1847
HOLDINGS LLC
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1847
HOLDINGS LLC
CONDENSED
CONSOLIDATED BALANCE SHEETS
| |
June
30, 2022 | | |
December 31,
2021 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | |
| |
| |
| | |
| |
Current Assets | |
| | |
| |
Cash and cash
equivalents | |
$ | 1,326,736 | | |
$ | 1,383,533 | |
Investments | |
| 276,956 | | |
| 276,429 | |
Receivables, net | |
| 5,134,926 | | |
| 3,378,996 | |
Contract assets | |
| 79,958 | | |
| 88,466 | |
Inventories, net | |
| 4,995,409 | | |
| 5,427,302 | |
Prepaid
expenses and other current assets | |
| 250,725 | | |
| 582,048 | |
Total
Current Assets | |
| 12,064,710 | | |
| 11,136,774 | |
| |
| | | |
| | |
Property and equipment,
net | |
| 1,924,230 | | |
| 1,695,311 | |
Operating lease right-of-use
assets | |
| 3,219,470 | | |
| 3,192,604 | |
Goodwill | |
| 19,452,270 | | |
| 19,452,270 | |
Intangible assets, net | |
| 10,714,513 | | |
| 11,443,897 | |
Other
long-term assets | |
| 61,266 | | |
| 85,691 | |
TOTAL
ASSETS | |
$ | 47,436,459 | | |
$ | 47,006,547 | |
| |
| | | |
| | |
LIABILITIES, MEZZANINE
EQUITY AND SHAREHOLDERS’ DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable and accrued
expenses | |
$ | 6,888,037 | | |
$ | 4,818,672 | |
Contract liabilities | |
| 1,213,297 | | |
| 2,547,903 | |
Customer deposits | |
| 3,256,404 | | |
| 3,465,259 | |
Due to related parties | |
| 193,762 | | |
| 193,762 | |
Current portion of operating
lease liabilities | |
| 703,112 | | |
| 613,696 | |
Current portion of finance
lease liabilities | |
| 145,874 | | |
| 100,652 | |
Current
portion of notes payable, net | |
| 685,214 | | |
| 692,522 | |
Total
Current Liabilities | |
| 13,085,700 | | |
| 12,432,466 | |
| |
| | | |
| | |
Operating lease liabilities,
net of current portion | |
| 2,598,368 | | |
| 2,607,862 | |
Finance lease liabilities,
net of current portion | |
| 672,714 | | |
| 455,905 | |
Notes payable, net of current
portion | |
| 197,216 | | |
| 251,401 | |
Convertible notes payable,
net of current portion | |
| 27,133,955 | | |
| 26,630,655 | |
Contingent note payable,
net of current portion | |
| 1,001,183 | | |
| 1,001,183 | |
Deferred
tax liability, net | |
| 1,557,000 | | |
| 2,070,000 | |
TOTAL
LIABILITIES | |
| 46,246,136 | | |
| 45,449,472 | |
| |
| | | |
| | |
Mezzanine Equity | |
| | | |
| | |
Series A senior convertible preferred shares, 4,450,460 shares designated; 1,684,849 and 1,818,182 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | |
| 1,415,100 | | |
| 1,655,404 | |
Series B senior convertible preferred shares, 583,334 shares designated; 481,566 and zero shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | |
| 1,257,650 | | |
| - | |
TOTAL
MEZZANINE EQUITY | |
| 2,672,750 | | |
| 1,655,404 | |
| |
| | | |
| | |
Shareholders’ Deficit | |
| | | |
| | |
Allocation shares, 1,000 shares authorized; 1,000 shares issued and outstanding as of June 30, 2022 and December 31, 2021 | |
| 1,000 | | |
| 1,000 | |
Common shares, $0.001 par value, 500,000,000 shares authorized; 1,248,829 and 1,210,733 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | |
| 1,249 | | |
| 1,211 | |
Distribution receivable | |
| (2,000,000 | ) | |
| (2,000,000 | ) |
Additional paid-in capital | |
| 22,007,040 | | |
| 21,723,042 | |
Accumulated
deficit | |
| (22,365,134 | ) | |
| (20,754,394 | ) |
TOTAL 1847 HOLDINGS SHAREHOLDERS’
DEFICIT | |
| (2,355,845 | ) | |
| (1,029,141 | ) |
NON-CONTROLLING
INTERESTS | |
| 873,418 | | |
| 930,812 | |
TOTAL
SHAREHOLDERS’ DEFICIT | |
| (1,482,427 | ) | |
| (98,329 | ) |
TOTAL
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT | |
$ | 47,436,459 | | |
$ | 47,006,547 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
1847 HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
$ | 12,891,243 | | |
$ | 6,647,954 | | |
$ | 24,965,121 | | |
$ | 11,428,229 | |
| |
| | | |
| | | |
| | | |
| | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 8,078,883 | | |
| 4,514,789 | | |
| 15,828,013 | | |
| 7,775,471 | |
Personnel | |
| 1,587,173 | | |
| 836,568 | | |
| 3,164,873 | | |
| 1,321,240 | |
Depreciation and amortization | |
| 498,974 | | |
| 126,072 | | |
| 1,010,345 | | |
| 248,178 | |
General and administrative | |
| 2,380,444 | | |
| 1,350,330 | | |
| 4,546,651 | | |
| 2,674,526 | |
Total Operating Expenses | |
| 12,545,474 | | |
| 6,827,759 | | |
| 24,549,882 | | |
| 12,019,415 | |
| |
| | | |
| | | |
| | | |
| | |
INCOME (LOSS) FROM OPERATIONS | |
| 345,769 | | |
| (179,805 | ) | |
| 415,239 | | |
| (591,186 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| 357 | | |
| (3,539 | ) | |
| 675 | | |
| (3,539 | ) |
Interest expense | |
| (932,123 | ) | |
| (136,512 | ) | |
| (1,838,866 | ) | |
| (181,633 | ) |
Gain on forgiveness of debt | |
| - | | |
| - | | |
| - | | |
| 360,302 | |
Gain (loss) on disposal of property and equipment | |
| (671 | ) | |
| - | | |
| 32,076 | | |
| - | |
Gain on disposition of subsidiary | |
| - | | |
| 3,282,804 | | |
| - | | |
| 3,282,804 | |
Loss on adjustment shares | |
| - | | |
| - | | |
| - | | |
| (757,792 | ) |
Total Other Income (Expense) | |
| (932,437 | ) | |
| 3,142,753 | | |
| (1,806,115 | ) | |
| 2,700,142 | |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | |
| (586,668 | ) | |
| 2,962,948 | | |
| (1,390,876 | ) | |
| 2,108,956 | |
INCOME TAX BENEFIT FROM CONTINUING OPERATIONS | |
| 439,000 | | |
| 21,900 | | |
| 316,000 | | |
| 21,900 | |
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | |
| (147,668 | ) | |
| 2,984,848 | | |
| (1,074,876 | ) | |
| 2,130,856 | |
NET INCOME FROM DISCONTINUED OPERATIONS | |
| - | | |
| 61,895 | | |
| - | | |
| 240,405 | |
NET INCOME (LOSS) | |
$ | (147,668 | ) | |
$ | 3,046,743 | | |
$ | (1,074,876 | ) | |
$ | 2,371,261 | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS FROM CONTINUING OPERATIONS | |
| (3,216 | ) | |
| (16,250 | ) | |
| (57,394 | ) | |
| (41,620 | ) |
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS FROM DISCONTINUED OPERATIONS | |
| - | | |
| 27,853 | | |
| - | | |
| 108,182 | |
NET INCOME (LOSS) ATTRIBUTABLE TO 1847 HOLDINGS | |
$ | (144,452 | ) | |
$ | 3,035,140 | | |
$ | (1,017,482 | ) | |
$ | 2,304,699 | |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO 1847 HOLDINGS | |
| (144,452 | ) | |
| 3,001,098 | | |
| (1,017,482 | ) | |
| 2,172,476 | |
NET INCOME FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO 1847 HOLDINGS | |
| - | | |
| 34,042 | | |
| - | | |
| 132,223 | |
NET INCOME (LOSS) ATTRIBUTABLE TO 1847 HOLDINGS | |
$ | (144,452 | ) | |
$ | 3,035,140 | | |
$ | (1,017,482 | ) | |
$ | 2,304,699 | |
| |
| | | |
| | | |
| | | |
| | |
PREFERRED SHARE DIVIDENDS | |
| (208,281 | ) | |
| (310,679 | ) | |
| (343,496 | ) | |
| (499,388 | ) |
DEEMED DIVIDEND RELATED TO ISSUANCE OF PREFERRED SHARES | |
| - | | |
| - | | |
| - | | |
| (1,527,086 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO 1847 HOLDINGS COMMON SHAREHOLDERS | |
$ | (352,733 | ) | |
$ | 2,724,461 | | |
$ | (1,360,978 | ) | |
$ | 278,225 | |
| |
| | | |
| | | |
| | | |
| | |
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO 1847 HOLDINGS COMMON SHAREHOLDERS | |
| | | |
| | | |
| | | |
| | |
BASIC | |
| | | |
| | | |
| | | |
| | |
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS | |
$ | (0.28 | ) | |
$ | 2.22 | | |
$ | (1.10 | ) | |
$ | 0.13 | |
EARNINGS PER COMMON SHARE FROM DISCONTINUED OPERATIONS | |
| - | | |
| 0.03 | | |
| - | | |
| 0.11 | |
EARNINGS (LOSS) PER COMMON SHARE | |
$ | (0.28 | ) | |
$ | 2.25 | | |
$ | (1.10 | ) | |
$ | 0.24 | |
DILUTED | |
| | | |
| | | |
| | | |
| | |
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS | |
$ | (0.28 | ) | |
$ | 1.68 | | |
$ | (1.10 | ) | |
$ | 0.09 | |
EARNINGS PER COMMON SHARE FROM DISCONTINUED OPERATIONS | |
| - | | |
| 0.02 | | |
| - | | |
| 0.09 | |
EARNINGS (LOSS) PER COMMON SHARE | |
$ | (0.28 | ) | |
$ | 1.70 | | |
$ | (1.10 | ) | |
$ | 0.18 | |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | |
| | | |
| | | |
| | | |
| | |
BASIC | |
| 1,248,829 | | |
| 1,210,733 | | |
| 1,239,093 | | |
| 1,163,908 | |
DILUTED | |
| 1,248,829 | | |
| 1,605,516 | | |
| 1,239,093 | | |
| 1,558,691 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
1847 HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF
MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT
(UNAUDITED)
Three
and Six Months Ended June 30, 2022
| |
Series A Senior Convertible Preferred Shares | | |
Series B Senior Convertible Preferred Shares | | |
Allocation | | |
Common Shares | | |
Distribution | | |
Additional Paid-In | | |
Accumulated | | |
Non- Controlling | | |
Total Shareholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Shares | | |
Amount | | |
Receivable | | |
Capital | | |
Deficit | | |
Interests | | |
(Deficit) | |
Balance at December 31, 2021 | |
| 1,818,182 | | |
$ | 1,655,404 | | |
| - | | |
$ | - | | |
$ | 1,000 | | |
| 1,210,733 | | |
$ | 1,211 | | |
$ | (2,000,000 | ) | |
$ | 21,723,042 | | |
$ | (20,754,394 | ) | |
$ | 930,812 | | |
$ | (98,329 | ) |
Issuance of common shares upon conversion of series A preferred shares | |
| (133,333 | ) | |
| (111,986 | ) | |
| - | | |
| - | | |
| - | | |
| 38,096 | | |
| 38 | | |
| - | | |
| 111,948 | | |
| - | | |
| - | | |
| 111,986 | |
Issuance of series B convertible preferred shares and warrants | |
| - | | |
| - | | |
| 426,999 | | |
| 1,113,650 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 152,350 | | |
| - | | |
| - | | |
| 152,350 | |
Dividends - common shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (249,762 | ) | |
| - | | |
| (249,762 | ) |
Dividends - series A senior convertible preferred shares | |
| - | | |
| (128,318 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (121,455 | ) | |
| - | | |
| (121,455 | ) |
Dividends - series B senior convertible preferred shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (13,760 | ) | |
| - | | |
| (13,760 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (873,030 | ) | |
| (54,178 | ) | |
| (927,208 | ) |
Balance at March 31, 2022 | |
| 1,684,849 | | |
$ | 1,415,100 | | |
| 426,999 | | |
$ | 1,113,650 | | |
$ | 1,000 | | |
| 1,248,829 | | |
$ | 1,249 | | |
$ | (2,000,000 | ) | |
$ | 21,987,340 | | |
$ | (22,012,401 | ) | |
$ | 876,634 | | |
$ | (1,146,178 | ) |
Issuance of series B convertible preferred shares and warrants | |
| - | | |
| - | | |
| 54,567 | | |
| 144,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 19,700 | | |
| - | | |
| - | | |
| 19,700 | |
Dividends - series A senior convertible preferred shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (159,298 | ) | |
| - | | |
| (159,298 | ) |
Dividends - series B senior convertible preferred shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (48,983 | ) | |
| - | | |
| (48,983 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (144,452 | ) | |
| (3,216 | ) | |
| (147,668 | ) |
Balance at June 30, 2022 | |
| 1,684,849 | | |
$ | 1,415,100 | | |
| 481,566 | | |
$ | 1,257,650 | | |
$ | 1,000 | | |
| 1,248,829 | | |
$ | 1,249 | | |
$ | (2,000,000 | ) | |
$ | 22,007,040 | | |
$ | (22,365,134 | ) | |
$ | 873,418 | | |
$ | (1,482,427 | ) |
Three
and Six Months Ended June 30, 2021
| |
Series A Senior Convertible Preferred Shares | | |
Series B Senior Convertible Preferred Shares | | |
Allocation | | |
Common Shares | | |
Distribution | | |
Additional Paid-In | | |
Accumulated | | |
Non- Controlling | | |
Total Shareholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Shares | | |
Amount | | |
Receivable | | |
Capital | | |
Deficit | | |
Interests | | |
(Deficit) | |
Balance at December 31, 2020 | |
| 2,632,278 | | |
$ | 2,971,427 | | |
| - | | |
$ | - | | |
$ | 1,000 | | |
| 1,111,023 | | |
$ | 1,111 | | |
$ | (2,000,000 | ) | |
$ | 17,008,824 | | |
$ | (13,856,973 | ) | |
$ | (879,239 | ) | |
$ | 274,723 | |
Issuance of series A senior convertible preferred shares and warrants | |
| 1,818,182 | | |
| 1,527,086 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,000,000 | | |
| (1,527,086 | ) | |
| - | | |
| 1,472,914 | |
Issuance of common adjustment shares | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 99,710 | | |
| 100 | | |
| - | | |
| 757,692 | | |
| - | | |
| - | | |
| 757,792 | |
Dividends - series A senior convertible preferred shares | |
| - | | |
| 11,759 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (188,709 | ) | |
| - | | |
| (188,709 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (730,441 | ) | |
| 54,959 | | |
| (675,482 | ) |
Balance at March 31, 2021 | |
| 4,450,460 | | |
$ | 4,510,272 | | |
| - | | |
$ | - | | |
$ | 1,000 | | |
| 1,210,733 | | |
$ | 1,211 | | |
$ | (2,000,000 | ) | |
$ | 20,766,516 | | |
$ | (16,303,209 | ) | |
$ | (824,280 | ) | |
$ | 1,641,238 | |
Accrued dividend payable | |
| - | | |
| 121,970 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| | | |
| (310,679 | ) | |
| - | | |
| (310,679 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,035,140 | | |
| 11,603 | | |
| 3,046,743 | |
Balance at June 30, 2021 | |
| 4,450,460 | | |
$ | 4,632,242 | | |
| - | | |
$ | - | | |
$ | 1,000 | | |
| 1,210,733 | | |
$ | 1,211 | | |
$ | (2,000,000 | ) | |
$ | 20,766,516 | | |
| (13,578,748 | ) | |
$ | (812,677 | ) | |
$ | 4,377,302 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
1847 HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
| |
Net income (loss) | |
$ | (1,074,876 | ) | |
$ | 2,371,261 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| | | |
| | |
Income from discontinued operations | |
| - | | |
| (240,405 | ) |
Gain on disposition of subsidiary | |
| - | | |
| (3,282,804 | ) |
Gain on forgiveness of debt | |
| - | | |
| (360,302 | ) |
Gain on disposal of property and equipment | |
| (32,076 | ) | |
| - | |
Loss on adjustment shares | |
| - | | |
| 757,792 | |
Deferred tax asset (liability) | |
| (513,000 | ) | |
| (40,000 | ) |
Depreciation and amortization | |
| 1,010,345 | | |
| 248,179 | |
Amortization of debt discounts | |
| 503,300 | | |
| - | |
Amortization of financing costs | |
| - | | |
| 13,769 | |
Amortization of right-of-use assets | |
| 227,847 | | |
| 50,735 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Receivables | |
| (1,755,930 | ) | |
| 332,719 | |
Contract assets | |
| 8,508 | | |
| - | |
Inventories | |
| 431,893 | | |
| (408,159 | ) |
Prepaid expenses and other current assets | |
| 331,323 | | |
| (207,471 | ) |
Other assets | |
| 24,425 | | |
| - | |
Accounts payable and accrued expenses | |
| 1,941,047 | | |
| 395,334 | |
Contract liabilities | |
| (1,334,606 | ) | |
| (17,563 | ) |
Customer deposits | |
| (208,855 | ) | |
| 373,505 | |
Due to related parties | |
| - | | |
| 3,570 | |
Operating lease liabilities | |
| (174,791 | ) | |
| (50,735 | ) |
Net cash used in operating activities from continuing operations | |
| (615,446 | ) | |
| (60,575 | ) |
Net cash used in operating activities from discontinued operations | |
| - | | |
| (170,580 | ) |
Net cash used in operating activities | |
| (615,446 | ) | |
| (231,155 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Net paid in acquisitions | |
| - | | |
| (5,455,476 | ) |
Proceeds from disposition of subsidiary | |
| - | | |
| 325,000 | |
Purchases of property and equipment | |
| (197,301 | ) | |
| (208,776 | ) |
Proceeds from disposal of property and equipment | |
| 39,998 | | |
| - | |
Investments in certificates of deposit | |
| (527 | ) | |
| - | |
Net cash used in investing activities from continuing operations | |
| (157,830 | ) | |
| (5,339,252 | ) |
Net cash provided by investing activities from discontinued operations | |
| - | | |
| 644,303 | |
Net cash used in investing activities | |
| (157,830 | ) | |
| (4,694,949 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from notes payable | |
| - | | |
| 3,673,405 | |
Net proceeds from issuance of series A senior convertible preferred shares | |
| - | | |
| 3,000,000 | |
Net proceeds from issuance of series B senior convertible preferred shares | |
| 1,429,700 | | |
| - | |
Proceeds from line of credit | |
| - | | |
| 745,228 | |
Repayments of notes payable and finance lease liabilities | |
| (119,963 | ) | |
| (358,922 | ) |
Repayments to sellers | |
| - | | |
| (1,031,821 | ) |
Cash paid for financing costs | |
| - | | |
| (165,230 | ) |
Dividends on series A senior convertible preferred shares | |
| (280,753 | ) | |
| (365,658 | ) |
Dividends on series B senior convertible preferred shares | |
| (62,743 | ) | |
| - | |
Dividends on common shares | |
| (249,762 | ) | |
| - | |
Net cash provided by financing activities from continuing operations | |
| 716,479 | | |
| 5,497,002 | |
Net cash used in financing activities from discontinued operations | |
| - | | |
| (208,693 | ) |
Net cash provided by financing activities | |
| 716,479 | | |
| 5,288,309 | |
| |
| | | |
| | |
NET CHANGE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS | |
| (56,797 | ) | |
| 97,175 | |
NET CHANGE IN CASH AND CASH EQUIVALENT FROM DISCONTINUED OPERATIONS | |
| - | | |
| 265,030 | |
CASH AND CASH EQUIVALENTS AVAILABLE FROM DISCONTINUED OPERATIONS | |
| - | | |
| (265,030 | ) |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS | |
| | | |
| | |
Beginning of the period | |
| 1,383,533 | | |
| 1,380,349 | |
End of the period | |
$ | 1,326,736 | | |
$ | 1,477,524 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |
| | | |
| | |
Cash paid for interest | |
$ | 997,691 | | |
$ | - | |
Cash paid for income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | |
| | | |
| | |
Issuance of common shares upon conversion of series A preferred shares | |
$ | 111,986 | | |
$ | - | |
Financed purchases of property and equipment | |
$ | 328,504 | | |
$ | - | |
Operating lease right-of-use asset and liability remeasurement | |
$ | 254,713 | | |
$ | - | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
NOTE
1—BASIS OF PRESENTATION AND OTHER INFORMATION
The
accompanying unaudited condensed consolidated financial statements of 1847 Holdings LLC (the “Company,” “we,”
“us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They
do not include all information and footnotes required by GAAP for complete financial statements. The December 31, 2021 consolidated balance
sheet data was derived from audited financial statements but do not include all disclosures required by GAAP. However, except as disclosed
herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the
year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission
on March 31, 2022. The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated
financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation
of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and six
months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Reverse
Share Split
On
August 3, 2022, we effected a 1-for-4 reverse split of our outstanding common shares. All outstanding common shares and warrants were
adjusted to reflect the 1-for-4 reverse split, with respective exercise prices of the warrants proportionately increased. The outstanding
convertible notes and series A and B convertible senior preferred shares conversion prices were adjusted to reflect a proportional decrease
in the number of common shares to be issued upon conversion.
All
share and per share data throughout these condensed consolidated financial statements have been retroactively adjusted to reflect the
reverse share split. The total number of authorized common shares did not change. As a result of the reverse common share split, an amount
equal to the decreased value of common shares was reclassified from “Common shares” to “Additional paid-in capital.”
Reclassifications
Certain
reclassifications within property and equipment, notes payable, and preferred shares have been made to prior period’s financial
statements to conform to the current period financial statement presentation. There is no impact in total to the results of operations
and cash flows in all periods presented.
Sequencing
Under
ASC 815-40-35 (“ASC 815”), the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts
from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient
authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the
basis of the earliest maturity date of potentially dilutive instruments first, with the earliest maturity date of grants receiving the
first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees and directors, or to compensate
grantees in a share-based payment arrangement, are not subject to the sequencing policy.
NOTE
2—RECENT ACCOUNTING PRONOUCEMENTS
The
Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting
Standards Board (“FASB”). ASUs not listed below were assessed and determined to be either not applicable or are expected
to have minimal impact on the Company’s condensed consolidated financial statements.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
In
June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces
the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit
losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019.
This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date for entities that qualify as a small reporting
company. The Company has elected this extension and the effective date for the Company to adopt this standard will be for fiscal years
beginning after December 15, 2022. The Company has not completed its assessment of the standard but does not expect the adoption to have
a material impact on our condensed consolidated financial statements.
In
August 2020, the FASB issued ASU 2020-06 Accounting for Convertible Instruments and Contracts In An Entity’s Own Equity. ASU 2020-06
simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion
feature and for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be
reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, ASU 2020-06 amends
the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury
stock method is no longer available. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, ASU 2020-06 is effective
for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted,
but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company
early adopted ASU 2020-06 on January 1, 2022.
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers. This ASU amends ASC 805 to require acquiring entities to apply ASC 606 to recognize and measure contract
assets and contract liabilities in business combinations. The ASU is effective for public entities for fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. This ASU should be applied prospectively to acquisitions occurring on
or after the effective date of December 15, 2022, and early adoption is permitted. The Company adopted this guidance on January 1, 2022.
The adoption of this standard does not have a material impact on our condensed consolidated financial statements.
NOTE
3—LIQUIDITY AND GOING CONCERN ASSESSMENT
Management
assesses liquidity and going concern uncertainty in the Company’s condensed consolidated financial statements to determine whether
there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one
year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward
period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management,
management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing
and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise
additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain
assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable
those implementations can be achieved and management has the proper authority to execute them within the look-forward period.
As
of June 30, 2022, the Company had cash and cash equivalents of $1,326,736. For the six months ended June 30, 2022, the Company incurred operating
income of $415,239 (before deducting losses attributable to non-controlling interests), cash flows used in operations of $615,446, and
negative working capital of $1,020,990. The Company has generated operating losses since its inception and has relied on cash on hand,
sales of securities, external bank lines of credit, and issuance of third-party and related party debt to support cashflow from operations.
Management
has prepared estimates of operations for fiscal year 2022 and 2023 believes that sufficient funds will be generated from operations to
fund its operations and to service its debt obligations for one year from the date of the filing of these condensed consolidated financial
statements, which indicate improved operations and the Company’s ability to continue operations as a going concern. The impact
of COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact
of COVID-19 or its timing on a return to more normal operations.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis under which the Company is expected
to be able to realize its assets and satisfy its liabilities in the normal course of business. Management believes that based on relevant
conditions and events that are known and reasonably knowable that its forecasts for one year from the date of the filing of these condensed
consolidated financial statements. The Company has contingency plans to reduce or defer expenses and cash outlays should operations not
improve in the look forward period.
NOTE
4—DISAGGREGATION OF REVENUES AND SEGMENT REPORTING
The
Company has three reportable segments:
The
Retail and Appliances Segment provides a wide variety of appliance products (laundry, refrigeration, cooking, dishwashers, outdoor, accessories,
parts, and other appliance related products) and services (delivery, installation, service and repair, extended warranties, and financing).
The
Construction Segment provides finished carpentry products and services (door frames, base boards, crown molding, cabinetry, bathroom
sinks and cabinets, bookcases, built-in closets, fireplace mantles, windows, and custom design and build of cabinetry and countertops).
The
Automotive Supplies Segment provides horn and safety products (electric, air, truck, marine, motorcycle, and industrial equipment), and
offers vehicle emergency and safety warning lights for cars, trucks, industrial equipment, and emergency vehicles.
The
Company provides general corporate services to its segments; however, these services are not considered when making operating decisions
and assessing segment performance. These services are reported under “Corporate Services” below and these include costs associated
with executive management, financing activities and public company compliance.
The
Company’s revenues for the three and six months ended June 30, 2022 and 2021 are disaggregated as follows:
| |
Three
Months Ended June 30, 2022 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 2,509,217 | | |
$ | - | | |
$ | - | | |
$ | 2,509,217 | |
Appliance accessories, parts,
and other | |
| 357,794 | | |
| - | | |
| - | | |
| 357,794 | |
Automotive horns | |
| - | | |
| - | | |
| 1,471,923 | | |
| 1,471,923 | |
Automotive lighting | |
| - | | |
| - | | |
| 511,131 | | |
| 511,131 | |
Custom cabinets and countertops | |
| - | | |
| 3,130,143 | | |
| - | | |
| 3,130,143 | |
Finished
carpentry | |
| - | | |
| 4,911,035 | | |
| - | | |
| 4,911,035 | |
Total Revenues | |
$ | 2,867,011 | | |
$ | 8,041,178 | | |
$ | 1,983,054 | | |
$ | 12,891,243 | |
| |
Three
Months Ended June 30, 2021 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 2,943,273 | | |
$ | - | | |
$ | - | | |
$ | 2,943,273 | |
Appliance accessories, parts,
and other | |
| 409,345 | | |
| - | | |
| - | | |
| 409,345 | |
Automotive horns | |
| - | | |
| - | | |
| 1,631,907 | | |
| 1,631,907 | |
Automotive lighting | |
| - | | |
| - | | |
| 348,461 | | |
| 348,461 | |
Custom cabinets and countertops | |
| - | | |
| 1,314,968 | | |
| - | | |
| 1,314,968 | |
Finished
carpentry | |
| - | | |
| - | | |
| - | | |
| - | |
Total Revenues | |
$ | 3,352,618 | | |
$ | 1,314,968 | | |
$ | 1,980,368 | | |
$ | 6,647,954 | |
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
| |
Six
Months Ended June 30, 2022 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 4,713,842 | | |
$ | - | | |
$ | - | | |
$ | 4,713,842 | |
Appliance accessories, parts,
and other | |
| 673,953 | | |
| - | | |
| - | | |
| 673,953 | |
Automotive horns | |
| - | | |
| - | | |
| 2,671,779 | | |
| 2,671,779 | |
Automotive lighting | |
| - | | |
| - | | |
| 953,266 | | |
| 953,266 | |
Custom cabinets and countertops | |
| - | | |
| 7,297,944 | | |
| - | | |
| 7,297,944 | |
Finished
carpentry | |
| - | | |
| 8,654,337 | | |
| - | | |
| 8,654,337 | |
Total Revenues | |
$ | 5,387,795 | | |
$ | 15,952,281 | | |
$ | 3,625,045 | | |
$ | 24,965,121 | |
| |
Six
Months Ended June 30, 2021 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Total | |
Revenues | |
| | |
| | |
| | |
| |
Appliances | |
$ | 5,842,634 | | |
$ | - | | |
$ | - | | |
$ | 5,842,634 | |
Appliance accessories, parts,
and other | |
| 774,350 | | |
| - | | |
| - | | |
| 774,350 | |
Automotive horns | |
| - | | |
| - | | |
| 1,631,907 | | |
| 1,631,907 | |
Automotive lighting | |
| - | | |
| - | | |
| 348,461 | | |
| 348,461 | |
Custom cabinets and countertops | |
| - | | |
| 2,830,877 | | |
| - | | |
| 2,830,877 | |
Finished
carpentry | |
| - | | |
| - | | |
| - | | |
| - | |
Total Revenues | |
$ | 6,616,984 | | |
$ | 2,830,877 | | |
$ | 1,980,368 | | |
$ | 11,428,229 | |
Segment information
for the three and six months ended June 30, 2022 and 2021 is as follows:
| |
Three
Months Ended June 30, 2022 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 2,867,011 | | |
$ | 8,041,178 | | |
$ | 1,983,054 | | |
$ | - | | |
$ | 12,891,243 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 2,179,267 | | |
| 4,771,998 | | |
| 1,127,618 | | |
| - | | |
| 8,078,883 | |
Personnel | |
| 213,736 | | |
| 1,281,293 | | |
| 269,677 | | |
| (177,533 | ) | |
| 1,587,173 | |
Depreciation and amortization | |
| 48,019 | | |
| 399,085 | | |
| 51,870 | | |
| - | | |
| 498,974 | |
General
and administrative | |
| 488,062 | | |
| 1,177,529 | | |
| 451,728 | | |
| 263,125 | | |
| 2,380,444 | |
Total
Operating Expenses | |
| 2,929,084 | | |
| 7,629,905 | | |
| 1,900,893 | | |
| 85,592 | | |
| 12,545,474 | |
Income (Loss) from Operations | |
$ | (62,073 | ) | |
$ | 411,273 | | |
$ | 82,161 | | |
$ | (85,592 | ) | |
$ | 345,769 | |
| |
Three
Months Ended June 30, 2021 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 3,352,618 | | |
$ | 1,314,968 | | |
$ | 1,980,368 | | |
$ | - | | |
$ | 6,647,954 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 2,602,598 | | |
| 720,466 | | |
| 1,191,725 | | |
| - | | |
| 4,514,789 | |
Personnel | |
| 239,167 | | |
| 234,757 | | |
| 362,644 | | |
| - | | |
| 836,568 | |
Depreciation and amortization | |
| 44,003 | | |
| 82,069 | | |
| - | | |
| - | | |
| 126,072 | |
General
and administrative | |
| 396,655 | | |
| 233,961 | | |
| 298,291 | | |
| 421,423 | | |
| 1,350,330 | |
Total
Operating Expenses | |
| 3,282,423 | | |
| 1,271,253 | | |
| 1,852,660 | | |
| 421,423 | | |
| 6,827,759 | |
Income (Loss) from Operations | |
$ | 70,195 | | |
$ | 43,715 | | |
$ | 127,708 | | |
$ | (421,423 | ) | |
$ | (179,805 | ) |
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
| |
Six
Months Ended June 30, 2022 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 5,387,795 | | |
$ | 15,952,281 | | |
$ | 3,625,045 | | |
$ | - | | |
$ | 24,965,121 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 4,050,717 | | |
| 9,651,589 | | |
| 2,125,707 | | |
| - | | |
| 15,828,013 | |
Personnel | |
| 444,124 | | |
| 2,415,503 | | |
| 570,005 | | |
| (264,759 | ) | |
| 3,164,873 | |
Depreciation and amortization | |
| 127,816 | | |
| 778,789 | | |
| 103,740 | | |
| - | | |
| 1,010,345 | |
General
and administrative | |
| 937,556 | | |
| 2,294,087 | | |
| 838,509 | | |
| 476,499 | | |
| 4,546,651 | |
Total
Operating Expenses | |
| 5,560,213 | | |
| 15,139,968 | | |
| 3,637,961 | | |
| 211,740 | | |
| 24,549,882 | |
Income (Loss) from Operations | |
$ | (172,418 | ) | |
$ | 812,313 | | |
$ | (12,916 | ) | |
$ | (211,740 | ) | |
$ | 415,239 | |
| |
Six
Months Ended June 30, 2021 | |
| |
Retail
and Appliances | | |
Construction | | |
Automotive
Supplies | | |
Corporate
Services | | |
Total | |
Revenues | |
$ | 6,616,984 | | |
$ | 2,830,877 | | |
$ | 1,980,368 | | |
$ | - | | |
$ | 11,428,229 | |
Operating expenses | |
| | | |
| | | |
| | | |
| - | | |
| | |
Cost of sales | |
| 5,109,250 | | |
| 1,474,496 | | |
| 1,191,725 | | |
| - | | |
| 7,775,471 | |
Personnel | |
| 492,250 | | |
| 466,346 | | |
| 362,644 | | |
| - | | |
| 1,321,240 | |
Depreciation and amortization | |
| 88,678 | | |
| 159,500 | | |
| - | | |
| - | | |
| 248,178 | |
General
and administrative | |
| 831,242 | | |
| 449,272 | | |
| 896,586 | | |
| 497,426 | | |
| 2,674,526 | |
Total
Operating Expenses | |
| 6,521,420 | | |
| 2,549,614 | | |
| 2,450,955 | | |
| 497,426 | | |
| 12,019,415 | |
Income (Loss) from Operations | |
$ | 95,564 | | |
$ | 281,263 | | |
$ | (470,587 | ) | |
$ | (497,426 | ) | |
$ | (591,186 | ) |
NOTE
5—PROPERTY AND EQUIPMENT
Property
and equipment at June 30, 2022 and December 31, 2021 consisted of the following:
| |
June
30,
2022 | | |
December 31,
2021 | |
Equipment and machinery | |
$ | 1,162,544 | | |
$ | 808,592 | |
Office furniture and equipment | |
| 152,529 | | |
| 105,203 | |
Transportation equipment | |
| 911,426 | | |
| 864,121 | |
Leasehold improvements | |
| 169,143 | | |
| 112,356 | |
Total property and equipment | |
| 2,395,642 | | |
| 1,890,272 | |
Less: Accumulated depreciation | |
| (471,412 | ) | |
| (194,961 | ) |
Property and equipment,
net | |
$ | 1,924,230 | | |
$ | 1,695,311 | |
Depreciation
expense for the three and six months ended June 30, 2022 was $134,282 and $280,961, respectively. Depreciation expense for the three
and six months ended June 30, 2021 was $28,276 and $52,585, respectively.
NOTE
6—INTANGIBLE ASSETS
Intangible
assets at June 30, 2022 and December 31, 2021 consisted of the following:
| |
June
30,
2022 | | |
December 31,
2021 | |
Customer relationships | |
$ | 5,791,000 | | |
$ | 5,791,000 | |
Marketing related | |
| 5,917,000 | | |
| 5,917,000 | |
Technology related | |
| 623,000 | | |
| 623,000 | |
Total intangible assets | |
| 12,331,000 | | |
| 12,331,000 | |
Less: accumulated amortization | |
| (1,616,487 | ) | |
| (887,103 | ) |
Intangible assets, net | |
$ | 10,714,513 | | |
$ | 11,443,897 | |
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Amortization
expense for the three and six months ended June 30, 2022 was $364,692 and $729,384, respectively. Amortization expense for the three
and six months ended June 30, 2021 was $97,797 and $195,594, respectively.
Estimated
amortization expense for intangible assets for the next five years consists of the following as of June 30, 2022:
Year Ending
December 31, | |
Amount | |
2022 – remaining | |
$ | 729,396 | |
2023 | |
| 1,458,780 | |
2024 | |
| 1,458,750 | |
2025 | |
| 1,325,745 | |
2026 | |
| 1,157,523 | |
Thereafter | |
| 4,584,319 | |
Total | |
$ | 10,714,513 | |
NOTE
7—SELECTED ACCOUNT INFORMATION
Receivables
at June 30, 2022 and December 31, 2021 consisted of the following:
| |
June
30,
2022 | | |
December 31,
2021 | |
Trade accounts receivable | |
$ | 5,086,003 | | |
$ | 2,691,702 | |
Vendor rebates receivable | |
| 125,111 | | |
| 126,118 | |
Credit card payments in process of settlement | |
| - | | |
| 116,187 | |
Retainage | |
| 282,812 | | |
| 803,989 | |
Total receivables | |
| 5,493,926 | | |
| 3,737,996 | |
Allowance for doubtful
accounts | |
| (359,000 | ) | |
| (359,000 | ) |
Accounts receivable, net | |
$ | 5,134,926 | | |
$ | 3,378,996 | |
Inventories
at June 30, 2022 and December 31, 2021 consisted of the following:
| |
June
30,
2022 | | |
December 31,
2021 | |
Appliances | |
$ | 2,425,649 | | |
$ | 2,206,336 | |
Automotive | |
| 1,440,082 | | |
| 2,064,834 | |
Construction | |
| 1,517,526 | | |
| 1,543,980 | |
Total inventories | |
| 5,383,257 | | |
| 5,815,150 | |
Less reserve for obsolescence | |
| (387,848 | ) | |
| (387,848 | ) |
Total inventories, net | |
$ | 4,995,409 | | |
$ | 5,427,302 | |
Inventory
balances are composed of finished goods. Raw materials and work in process inventory are immaterial to the condensed consolidated financial
statements.
Accounts
payable and accrued expenses at June 30, 2022 and December 31, 2021 consisted of the following:
| |
June
30,
2022 | | |
December
31,
2021 | |
Trade accounts payable | |
$ | 4,609,126 | | |
$ | 3,117,825 | |
Credit cards payable | |
| 177,306 | | |
| 52,300 | |
Accrued payroll liabilities | |
| 464,190 | | |
| 263,590 | |
Accrued interest | |
| 980,373 | | |
| 711,258 | |
Accrued dividends | |
| 154,239 | | |
| 242,160 | |
Other accrued liabilities | |
| 502,803 | | |
| 431,539 | |
Total accounts payable
and accrued expenses | |
$ | 6,888,037 | | |
$ | 4,818,672 | |
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
NOTE
8—LEASES
Operating
Leases
In
April 2022, the Company entered into a lease amendment to renew their office and warehouse space in the automotive supplies segment,
located in Deer Park, New York. The lease renewal will commence on August 1, 2022 and shall expire on July 31, 2025. Under the terms
of the lease renewal, the Company will lease the premises at the monthly rate of $7,518 for the first year, with scheduled annual increases.
The lease agreement contains customary events of default, representations, warranties, and covenants. The remeasurement of the ROU asset
and liability associated with this operating lease was $254,713.
The
following was included in our condensed consolidated balance sheet at June 30, 2022 and December 31, 2021:
| |
June
30,
2022 | | |
December 31,
2021 | |
Operating lease right-of-use assets | |
$ | 3,219,470 | | |
$ | 3,192,604 | |
Lease liabilities, current portion | |
| 703,112 | | |
| 613,696 | |
Lease liabilities, long-term | |
| 2,598,368 | | |
| 2,607,862 | |
Total operating lease
liabilities | |
$ | 3,301,480 | | |
$ | 3,221,558 | |
Weighted-average remaining lease term (months) | |
| 53 | | |
| 59 | |
Weighted average discount rate | |
| 4.37 | % | |
| 4.29 | % |
Rent
expense for the three and six months ended June 30, 2022 was $290,283 and $525,721, respectively.
As
of June 30, 2022, maturities of operating lease liabilities were as follows:
Year Ending
December 31, | |
Amount | |
2022 – remaining | |
$ | 448,421 | |
2023 | |
| 830,221 | |
2024 | |
| 848,210 | |
2025 | |
| 803,685 | |
2026 | |
| 514,079 | |
Thereafter | |
| 194,495 | |
Total | |
| 3,639,511 | |
Less: imputed interest | |
| (338,031 | ) |
Total operating lease
liabilities | |
$ | 3,301,480 | |
Finance
Leases
On
March 28, 2022, the Company entered an equipment financing lease to purchase machinery and equipment totaling $316,798, maturing in January
2028.
On
April 11, 2022, the Company entered in an equipment financing lease to purchase machinery and equipment totaling $11,706, maturing in
June 2027.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
As
of June 30, 2022, maturities of finance lease liabilities were as follows:
Year Ending
December 31, | |
Amount | |
2022 – remaining | |
$ | 93,270 | |
2023 | |
| 187,291 | |
2024 | |
| 170,835 | |
2025 | |
| 164,067 | |
2026 | |
| 164,027 | |
Thereafter | |
| 167,978 | |
Total payments | |
| 947,508 | |
Less: amount representing
interest | |
| (128,920 | ) |
Present value of minimum
finance lease payments | |
$ | 818,588 | |
As
of June 30, 2022, the weighted-average remaining lease term for all finance leases is 5.20 years.
NOTE
9—ACQUISITIONS
On
March 30, 2021, the Company acquired 100% of the outstanding capital stock of Wolo Mfg. Corp and Wolo Industrial Horn & Signal, Inc.
(“Wolo”) for an aggregate purchase price of $8,344,056.
For
the three and six months ended June 30, 2022, Wolo contributed revenue of $1,983,054 and $3,635,045, respectively, and net loss from
continuing operations of $101,409 and $426,826, respectively, which are included in our condensed consolidated statements of operations
for the three and six months ended June 30, 2022.
On
October 8, 2021, the Company acquired 100% of the outstanding capital stock of High Mountain Door & Trim, Inc. (“High Mountain”)
and Sierra Homes, LLC (“Sierra Homes”) for an aggregate purchase price of $15,441,173.
For
the three and six months ended June 30, 2022, High Mountain and Sierra Homes contributed revenue of $6,500,592 and $12,749,941, respectively,
and net income from continuing operations of $128,502 and a net loss from continuing operations of $143,145, respectively, which are included
in our condensed consolidated statements of operations for the three and six months ended June 30, 2022.
Pro
Forma Information
The
following unaudited pro forma results presented below include the effects of the Wolo, High Mountain and Sierra Homes acquisitions as
if they had been consummated as of January 1, 2021, with adjustments to give effect to pro forma events that are directly attributable
to the acquisitions.
| |
Three Months Ended
June
30, | | |
Six Months Ended
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
$ | 12,891,243 | | |
$ | 12,815,142 | | |
$ | 24,965,121 | | |
$ | 26,189,060 | |
Net income (loss) | |
| (147,668 | ) | |
| 3,789,235 | | |
| (1,074,876 | ) | |
| 4,187,111 | |
Net income (loss) attributable to common shareholders’ | |
| (352,733 | ) | |
| 3,466,953 | | |
| (1,360,978 | ) | |
| 2,094,075 | |
Earnings (loss) per share attributable to common shareholders’: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.28 | ) | |
$ | 2.86 | | |
$ | (1.10 | ) | |
$ | 1.80 | |
Diluted | |
$ | (0.28 | ) | |
$ | 2.16 | | |
$ | (1.10 | ) | |
$ | 1.34 | |
These
unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results
of operations would have been if the acquisitions had occurred at the beginning of the period presented, nor are they indicative of future
results of operations.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
NOTE 10—RELATED
PARTIES
Management
Services Agreement
On
April 15, 2013, the Company and 1847 Partners LLC (the “Manager”) entered into a management services agreement, pursuant
to which the Company is required to pay the Manager a quarterly management fee equal to 0.5% of its adjusted net assets for services
performed (the “Parent Management Fee”). The amount of the Parent Management Fee with respect to any fiscal quarter is (i)
reduced by the aggregate amount of any management fees received by the Manager under any offsetting management services agreements with
respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) Parent Management Fees received
by (or owed to) the Manager as of the end of such fiscal quarter, and (iii) increased by the amount of any outstanding accrued and unpaid
Parent Management Fees. The Company expensed $0 in Parent Management Fees for the three and six months ended June 30, 2022 and $110,00
for the three and six months ended June 30, 2021.
Offsetting
Management Services Agreements
The
Company’s subsidiary 1847 Asien Inc. (“1847 Asien”) entered into an offsetting management services agreement with the
Manager on May 28, 2020, the Company’s subsidiary 1847 Cabinet Inc. (“1847 Cabinet”) entered into an offsetting management
services agreement with the Manager on August 21, 2020 (which was amended and restated on October 8, 2021) and the Company’s subsidiary
1847 Wolo Inc. (“1847 Wolo”) entered into an offsetting management services agreement with the Manager on March 30, 2021.
Pursuant to the offsetting management services agreements, 1847 Asien appointed the Manager to provide certain services to it for a quarterly
management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services agreement), 1847 Cabinet
appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of adjusted
net assets (as defined in the management services agreement), which was increased to $125,000 or 2% of adjusted net assets on October
8, 2021, and 1847 Wolo appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of
$75,000 or 2% of adjusted net assets (as defined in the management services agreement); provided, however, in each case that if the aggregate
amount of management fees paid or to be paid by such entities, together with all other management fees paid or to be paid to the Manager
under other offsetting management services agreements, exceeds, or is expected to exceed, 9.5% of our gross income in any fiscal year
or the Parent Management Fee in any fiscal quarter, then the management fee to be paid by such entities shall be reduced, on a pro rata
basis determined by reference to the other management fees to be paid to the Manager under other offsetting management services agreements.
1847 Asien expensed management fees of $75,000
and $150,000 for the three and six months ended June 30, 2022, respectively, and $75,000 and $150,000 for the three and six months ended
June 30, 2021, respectively.
1847 Cabinet expensed management fees of $125,000
and $250,000 for the three and six months ended June 30, 2022, respectively, and $75,000 and $150,000 for the three and six months ended
June 30, 2021, respectively.
1847 Wolo expensed management fees of $75,000
and $150,000 for the three and six months ended June 30, 2022, respectively, and $75,000 for the three and six months ended June 30, 2021.
On a consolidated basis, the Company expensed
total management fees of $275,000 and $550,000 for the three and six months ended June 30, 2022, respectively, and $225,000 and $375,000
for the three and six months ended June 30, 2021, respectively.
Advances
From
time to time, the Company has received advances from its chief executive officer to meet short-term working capital needs. As of June
30, 2022 and December 31, 2021, a total of $118,834 in advances from related parties are outstanding. These advances are unsecured, bear
no interest, and do not have formal repayment terms or arrangements.
As
of June 30, 2022 and December 31, 2021, the Manager has funded the Company $74,928 in related party advances. These advances are unsecured,
bear no interest, and do not have formal repayment terms or arrangements.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Building
Lease
On
September 1, 2020, Kyle’s entered into an industrial lease agreement with Stephen Mallatt, Jr. and Rita Mallatt, who are officers
of Kyle’s and principal shareholders of the Company. The lease is for a term of five years, with an option for a renewal term of
five years and provides for a base rent of $7,000 per month for the first 12 months, which will increase to $7,210 for months 13-16 and
to $7,426 for months 37-60. In addition, Kyle’s is responsible for all taxes, insurance and certain operating costs during the
lease term.
The total
rent expense under this related party leases was $21,776 and $43,534 for the three and six months ended June 30, 2022.
NOTE 11—MEZZANINE
EQUITY
Series
A Senior Convertible Preferred Shares
On
September 30, 2020, the Company executed a share designation, which was amended on November 20, 2020, March 26, 2021 and September 29,
2021, to designate 4,450,460 of its shares as series A senior convertible preferred shares. Following is a description of the rights
of the series A senior convertible preferred shares.
Ranking.
The series A senior convertible preferred shares rank, with respect to the payment of dividends and the distribution of assets upon
liquidation, (i) senior to all common shares, allocation shares, and each other class or series that is not expressly made senior to
or on parity with the series A senior convertible preferred shares; (ii) on parity with the series B senior convertible preferred shares
and each other class or series that is not expressly subordinated or made senior to the series A senior convertible preferred shares;
and (iii) junior to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and
each other class or series that is expressly made senior to the series A senior convertible preferred shares.
Dividend
Rights. Holders of series A senior convertible preferred shares are entitled to dividends at a rate per annum of 14.0% of the stated
value ($2.00 per share, subject to adjustment). Dividends shall accrue from day to day, whether or not declared, and shall be cumulative.
Dividends shall be payable quarterly in arrears on each dividend payment date in cash or common shares at the Company’s discretion.
Dividends payable in common shares shall be calculated based on a price equal to eighty percent (80%) of the volume weighted average
price for the common shares on the Company’s principal trading market (the “VWAP”) during the five (5) trading days
immediately prior to the applicable dividend payment date; provided, however, that if the common shares are not registered, and Rule
144 rulemaking referred to below is effective on the payment date, the dividends payable in common shares shall be calculated based upon
the fixed price of $1.57; provided further, that the Company may only elect to pay dividends in common shares based upon such fixed price
if the VWAP for the five (5) trading days immediately prior to the applicable dividend payment date is $1.57 or higher.
Liquidation
Rights. Subject to the rights of creditors and the holders of any senior securities or parity securities (in each case, as defined
in the share designation), upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets
of the Company (whether capital or surplus) shall be made to or set apart for the holders of securities that are junior to the series
A senior convertible preferred shares as to the distribution of assets on any liquidation of the Company, including the common shares
and allocation shares, each holder of outstanding series A senior convertible preferred shares shall be entitled to receive an amount
of cash equal to 115% of the stated value plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether
or not declared) to, but not including the date of final distribution to such holders. If, upon any liquidation, the assets, or proceeds
thereof, distributable among the holders of the series A senior convertible preferred shares shall be insufficient to pay in full the
preferential amount payable to the holders of the series A senior convertible preferred shares and liquidating payments on any other
shares of any class or series of parity securities as to the distribution of assets on any liquidation, then such assets, or the proceeds
thereof, shall be distributed among the holders of series A senior convertible preferred shares and any such other parity securities
ratably in accordance with the respective amounts that would be payable on such series A senior convertible preferred shares and any
such other parity securities if all amounts payable thereon were paid in full.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Voting
Rights. The series A senior convertible preferred shares do not have any voting rights; provided that, so long as any series A senior
convertible preferred shares are outstanding, the affirmative vote of holders of a majority of series A senior convertible preferred
shares, which majority must include Leonite Capital LLC so long as it holds any series A senior convertible preferred shares (the “Requisite
Holders”), voting as a separate class, shall be necessary for approving, effecting or validating any amendment, alteration or repeal
of any of the provisions of the share designation. In addition, so long as any series A senior convertible preferred shares are outstanding,
the affirmative vote of the Requisite Holders shall be required prior to the creation or issuance by the Company or by its subsidiaries
Kyle’s Custom Wood Shop, Inc. (“Kyle’s”) and Wolo Mfg. Corp. and Wolo Industrial Horn & Signal, Inc. (together,
“Wolo”) of (i) any parity securities; (ii) any senior securities; and (iii) any new indebtedness other than (A) intercompany
indebtedness by Kyle’s or Wolo in favor of the Company, (B) indebtedness incurred in favor of the sellers of Kyle’s or Wolo
in connection with the acquisition of Kyle’s or Wolo, or (C) indebtedness (or the refinancing of such indebtedness) the proceeds
of which are used to complete the acquisition of Kyle’s or Wolo related expenses or working capital to operate the business of
Kyle’s or Wolo. Notwithstanding the foregoing, this shall not apply to any financing transaction the use of proceeds of which will
be used to redeem the series A senior convertible preferred shares and the warrants issued in connection therewith.
Conversion
Rights. Each series A senior convertible preferred share, plus all accrued and unpaid dividends thereon, shall be convertible, at
the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable common shares determined
by dividing the stated value ($2.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by a conversion price of
$7.00 per share (subject to adjustment); provided that in no event shall the holder of any series A senior convertible preferred shares
be entitled to convert any number of series A senior convertible preferred shares that upon conversion the sum of (i) the number of common
shares beneficially owned by the holder and its affiliates and (ii) the number of common shares issuable upon the conversion of the series
A senior convertible preferred shares with respect to which the determination of this proviso is being made, would result in beneficial
ownership by the holder and its affiliates of more than 4.99% of the then outstanding common shares. This limitation may be waived (up
to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice to the Company.
Redemption
Rights. The Company may redeem in whole, or upon the written consent of the Requisite Holders and in the manner provided for in such
written consent, in part, the series A senior convertible preferred shares by paying in cash therefore a sum equal to 115% of the stated
value plus the amount of accrued and unpaid plus any other amounts due pursuant to the terms of the series A senior convertible preferred
shares. On October 12, 2021, the Company redeemed 2,632,278 series A senior convertible preferred
shares for a total redemption price, including dividends through such date, of $6,395,645.
Adjustments.
The share designation contains standard adjustments to the conversion price in the event of any share splits, share combinations, share
reclassifications, dividends paid in common shares, sales of substantially all of the Company’s assets, mergers, consolidations
or similar transactions. In addition, the share designation provides that if, but only if, the Requisite Holders provide the Company
with at least ten (10) business day’s prior written notice, then, from and after the date of such notice, the stated dividend rate,
the stated value and the conversion price shall automatically adjust as follows:
| ● | On the first day of the 12th month following the issuance date of any series A senior convertible preferred shares, the stated dividend rate shall automatically increase by five percent (5.0%) per annum and the conversion price shall automatically adjust to the lower of the (i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10) trading days immediately preceding such date. |
| ● | On
the first day of the 24th month following the
issuance date of any series A senior convertible preferred shares, the stated dividend
rate shall automatically increase by an additional five percent (5.0%) per annum, the stated
value shall automatically increase by ten percent (10%) and the conversion price shall automatically
adjust to the lower of the (i) initial conversion price and (ii) the price equal to the lowest
VWAP of the ten (10) trading days immediately preceding such date. |
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
| ● | On the first day of the 36th month following the issuance date of any series A senior convertible preferred shares, the stated dividend rate shall automatically increase by an additional five percent (5.0%) per annum, the stated value shall automatically increase by ten percent (10%) and the conversion price shall automatically adjust to the lower of the (i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10) trading days immediately preceding the third adjustment date. |
Notwithstanding
the foregoing, the conversion price for purposes of the adjustments above shall not be adjusted to a number that is below $0.03. In addition,
if any legislation or rules are adopted whereby the holding period of securities for purposes of Rule 144 of the Securities Act of 1933,
as amended, for convertible securities that convert at market-adjusted rates is increased resulting in a longer holding period for convertible
securities like the series A senior convertible preferred shares and the unavailability at the time of conversion of Rule 144, the pricing
provisions that are based upon the lowest VWAP of the previous ten (10) trading days immediately preceding the relevant adjustment date
shall be removed unless the common shares issuable upon conversion are then registered under an effective registration statement.
Additional
Equity Interest. On the third adjustment date set forth above, the Company is required to cause Kyle’s and Wolo to issue to
the holders of series A senior convertible preferred shares, on a pro rata basis, a ten percent (10%) equity stake Kyle’s and/or
Wolo. The holders of series A senior convertible preferred shares issued in connection with the financing to complete the acquisition
of Kyle’s shall receive the equity stake in Kyle’s and the holders of series A senior convertible preferred shares issued
in connection with the financing to complete the acquisition of Wolo shall receive the equity stake in Wolo. The Company is required
to cause Kyle’s and Wolo to grant to the holders of the series A senior convertible preferred shares upon the issuance to them
of such equity interest a right to receive an additional number of shares of common stock of Kyle’s or Wolo if Kyle’s or
Wolo issues to any third-party equity securities at a price below the acquisition price (as defined below). Such additional number of
shares of common stock of Kyle’s or Wolo to be issued in such instance shall be equal to a number of shares of common stock of
Kyle’s or Wolo which, when added to the number of shares of common stock of Kyle’s or Wolo constituting the initial additional
equity interest, would be equal to the total number of shares of common stock which would have been issued to a holder of series A senior
convertible preferred shares if the price per share of common stock of Kyle’s or Wolo was equivalent to the price per equity security
paid by such third-party in Kyle’s or Wolo. For purposes of this provision, “acquisition price” means the price per
share of Kyle’s and Wolo that was paid by the Company upon the acquisition of Kyle’s and Wolo, respectively.
As
of June 30, 2022 and December 31, 2021, the Company had 1,684,849 and 1,818,182 series A senior convertible preferred shares issued and
outstanding, respectively.
During
the three months ended June 30, 2022, the Company accrued dividends attributable to the series A senior convertible preferred shares
in the amount of $159,298 and paid prior period accrued dividends of $159,906. During the six months ended June 30, 2022, the Company
accrued dividends attributable to the series A senior convertible preferred shares in the amount of $280,753 and paid prior period accrued
dividends of $288,224.
On
February 16, 2022, 133,333 shares of series A senior convertible preferred shares were converted into 38,096 common shares.
Series
B Senior Convertible Preferred Shares
On
February 17, 2022, the Company executed a share designation to designate 583,334 of its shares as series B senior convertible preferred
shares. Following is a description of the rights of the series B senior convertible preferred shares.
Ranking.
The series B senior convertible preferred shares rank, with respect to the payment of dividends and the distribution of assets upon
liquidation, (i) senior to all common shares, allocation shares, and each other class or series that is not expressly made senior to
or on parity with the series B senior convertible preferred shares; (ii) on parity with the series A senior convertible preferred shares
and each other class or series that is not expressly subordinated or made senior to the series A senior convertible preferred shares;
and (iii) junior to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and
each other class or series that is expressly made senior to the series B senior convertible preferred shares.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Dividend
Rights. Holders of series B senior convertible preferred shares are entitled to dividends at a rate per annum of 14.0% of the stated
value ($3.00 per share, subject to adjustment). Dividends shall accrue from day to day, whether or not declared, and shall be cumulative.
Dividends shall be payable quarterly in arrears on each dividend payment date in cash or common shares at the Company’s discretion.
Dividends payable in common shares shall be calculated based on a price equal to eighty percent (80%) of the VWAP during the five (5)
trading days immediately prior to the applicable dividend payment date; provided, however, that if the common shares are not registered,
and rulemaking regarding the Rule 144 holding period referred to below is effective on the payment date, the dividends payable in common
shares shall be calculated based upon the fixed price of $2.70; provided further, that the Company may only elect to pay dividends in
common shares based upon such fixed price if the VWAP for the five (5) trading days immediately prior to the applicable dividend payment
date is $2.70 or higher.
Liquidation
Rights. Subject to the rights of creditors and the holders of any senior securities or parity securities (in each case, as defined
in the share designation), upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets
of the Company (whether capital or surplus) shall be made to or set apart for the holders of securities that are junior to the series
B senior convertible preferred shares as to the distribution of assets on any liquidation of the Company, including the common shares
and allocation shares, each holder of outstanding series B senior convertible preferred shares shall be entitled to receive an amount
of cash equal to 115% of the stated value plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether
or not declared) to, but not including the date of final distribution to such holders. If, upon any liquidation, the assets, or proceeds
thereof, distributable among the holders of the series B senior convertible preferred shares shall be insufficient to pay in full the
preferential amount payable to the holders of the series B senior convertible preferred shares and liquidating payments on any other
shares of any class or series of parity securities as to the distribution of assets on any liquidation, then such assets, or the proceeds
thereof, shall be distributed among the holders of series B senior convertible preferred shares and any such other parity securities
ratably in accordance with the respective amounts that would be payable on such series B senior convertible preferred shares and any
such other parity securities if all amounts payable thereon were paid in full.
Voting
Rights. The series B senior convertible preferred shares do not have any voting rights; provided that, so long as any series B senior
convertible preferred shares are outstanding, the affirmative vote of holders of a majority of series B senior convertible preferred
shares, voting as a separate class, shall be necessary for approving, effecting or validating (i) any amendment, alteration or repeal
of any of the provisions of the share designation or (ii) the Company’s creation or issuance of any parity securities or any senior
securities. Notwithstanding the foregoing, such vote of the holders shall not be required in connection with the issuance of parity securities
or senior securities if, and so long as, the proceeds resulting from the issuance of such securities are used to redeem in full the outstanding
series B senior convertible preferred shares.
Conversion
Rights. Each series B senior convertible preferred share, plus all accrued and unpaid dividends thereon, shall be convertible, at
the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable common shares determined
by dividing the stated value ($3.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by the conversion price
of $12.00 per share (subject to adjustments); provided that in no event shall the holder of any series B senior convertible preferred
shares be entitled to convert any number of series B senior convertible preferred shares that upon conversion the sum of (i) the number
of common shares beneficially owned by the holder and its affiliates and (ii) the number of common shares issuable upon the conversion
of the series B senior convertible preferred shares with respect to which the determination of this proviso is being made, would result
in beneficial ownership by the holder and its affiliates of more than 4.99% of the then outstanding common shares. This limitation may
be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice
to the Company.
Redemption
Rights. The Company may redeem in whole (but not in part) the series B senior convertible preferred shares by paying in cash therefore
a sum equal to 115% of the stated value plus the amount of accrued and unpaid dividends and any other amounts due pursuant to the terms
of the series B senior convertible preferred shares.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Adjustments.
The share designation contains standard adjustments to the conversion price in the event of any share splits, share combinations, share
reclassifications, dividends paid in common shares, sales of substantially all of the Company’s assets, mergers, consolidations
or similar transactions. In addition, the share designation provides that the stated dividend rate, the stated value and the conversion
price shall automatically adjust as follows:
| ● | On
the first day of the 12th month following the
issuance of the first series B senior convertible preferred share, the stated dividend
rate shall automatically increase by five percent (5.0%) per annum and the conversion price
shall automatically adjust to the lower of the (i) initial conversion price and (ii) the
price equal to the lowest VWAP of the ten (10) trading days immediately preceding such date. |
| ● | On
the first day of the 24th month following the issuance of the first series B senior
convertible preferred share, the stated dividend rate shall automatically increase by an
additional five percent (5.0%) per annum, the stated value shall automatically increase by
ten percent (10%) and the conversion price shall automatically adjust to the lower of the
(i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10)
trading days immediately preceding such date. |
| ● | On
the first day of the 36th month following the issuance of the first series B senior
convertible preferred share, the stated dividend rate shall automatically increase by an
additional five percent (5.0%) per annum, the stated value shall automatically increase by
ten percent (10%) and the conversion price shall automatically adjust to the lower of the
(i) initial conversion price and (ii) the price equal to the lowest VWAP of the ten (10)
trading days immediately preceding such date. |
Notwithstanding
the foregoing, the conversion price for purposes of the adjustments above shall not be adjusted to a number that is below $0.03 per share
(subject to adjustment for splits or dividends of the common shares). In addition, if any legislation or rules are adopted whereby the
holding period of securities for purposes of Rule 144 of the Securities Act of 1933, as amended, for convertible securities that convert
at market-adjusted rates is increased resulting in a longer holding period for convertible securities like the series B senior convertible
preferred shares and the unavailability at the time of conversion of Rule 144, the pricing provisions that are based upon the lowest
VWAP of the previous ten (10) trading days immediately preceding the relevant adjustment date shall be removed unless the common shares
issuable upon conversion are then registered under an effective registration statement.
From
February 24, 2022 to March 24, 2022, the Company sold an aggregate of 426,999 units, at a price of $3.00 per unit, for aggregate
gross proceeds of $1,281,000. From April 20, 2022 to May 19, 2022, the Company sold an aggregate of 54,567 units to our Chief
Executive Officer, Ellery W. Roberts, for aggregate gross proceeds of $163,700. The Company had total issuance costs relating to
these offerings of approximately $15,000, resulting in net proceeds of $1,429,700.
Each
unit consists of one (1) series B senior convertible preferred share and a three-year warrant to purchase one (1) common share at an
exercise price of $3.00 per common share (subject to adjustment), which may be exercised on a cashless basis under certain circumstances.
The embedded conversion options of the series B senior convertible preferred shares and warrants were clearly and closely related to
the equity host and did not require bifurcation. The $1,429,700 of net proceeds were allocated on a relative fair value basis of $1,257,650
to the series B preferred shares and $172,050 to the warrants. The series B preferred shares fair value was derived using an Option Pricing
Method and the warrants fair value was derived using a Monte Carlo Simulation Model.
As
of June 30, 2022 and December 31, 2021, the Company had 481,566 and 0 series B senior convertible preferred shares issued and outstanding,
respectively.
During
the three months ended June 30, 2022, the Company accrued dividends attributable to the series B senior convertible preferred shares
in the amount of $48,983 and paid prior period accrued dividends of $29,351. During the six months ended June 30, 2022, the Company accrued
dividends attributable to the series B senior convertible preferred shares in the amount of $62,743 and paid prior period accrued dividends
of $29,351.
Mezzanine
Equity Classification
We
applied the guidance in ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives
and Hedging” (“ASC 815”), in order to determine the appropriate classification for both the series A senior convertible
preferred shares and the series B senior convertible preferred shares.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
ASC
480 requires equity instruments to be evaluated on an ongoing basis for mezzanine equity (temporary equity) vs permanent equity classification.
As a result of the maximum number of common shares that may be issuable (upon conversion of the preferred securities) exceeded the number
of authorized but unissued common shares available, temporary equity classification is required. As of June 30, 2022 and December 31,
2021, there were 1,684,849 and 1,818,182 series A senior convertible preferred shares presented in mezzanine equity, respectively. As
of June 30, 2022 and December 31, 2021, there were 481,566 and 0 series B senior convertible preferred shares presented in mezzanine
equity, respectively.
NOTE 12—SHAREHOLDERS’
DEFICIT
Reverse
Stock Split
The
Company’s board of directors approved a 1-for-4 reverse stock split of its issued, outstanding common shares, which became effective
August 3, 2022. See Note 1 for additional information.
Common
Shares
As
of June 30, 2022, the Company was authorized to issue 500,000,000 common shares. As of June 30, 2022 and December 31, 2021, the Company
had 1,248,829 and 1,210,733 common shares issued and outstanding, respectively.
On
February 16, 2022, the Company issued 38,096 common shares upon the conversion of 133,333 series A senior convertible preferred shares.
On
March 23, 2022, the Company declared a common share dividend of $0.05 per share, or $249,762, to shareholders of record as of March 31,
2022. This dividend was paid on April 15, 2022.
Warrants
As
described in Note 11, the Company issued units during the six months ended June 30, 2022, with each unit consisting of one (1) series
B senior convertible preferred share and a three-year warrant to purchase one (1) common share at an exercise price of $12.00 per common
share (subject to adjustment). Accordingly, a portion of the proceeds were allocated to the warrant based on its relative fair value
using the Geometric Brownian Motion Stock Path Monte Carlo Simulation. The assumptions used in the model were as follows: (i) dividend
yield of 0%; (ii) expected volatility of 51.81%; (iii) weighted average risk-free interest rate of 0.31%; (iv) expected life of three
years; (v) estimated fair value of the common shares of $7.76 per share; and (vi) various probability assumptions related to redemption,
calls and price resets. The fair value of the warrants was $428,034, or $0.89 per warrant, resulting in the amount allocated to the warrants,
based on their relative fair of $172,050, which was recorded as additional paid-in capital.
The
warrants allow the holder to purchase one (1) common share at an exercise price of $12.00 per common share (subject to adjustment including
upon any future equity offering with a lower exercise price), which may be exercised on a cashless basis under certain circumstances.
The Company may force the exercise of the warrants at any time after the one year anniversary of the date of the warrants, if (i) the
Company is listed on a national securities exchange or the over-the-counter market, (ii) the underlying common shares are registered
or the holder of the warrant otherwise has the ability to trade the underlying common shares without restriction, (iii) the 30-day volume-weighted
daily average price of the common shares exceeds 200% of the exercise price, as adjusted, and (iv) the average daily trading volume is
at least 100,000 common shares during such 30-day period. The Company may redeem the warrants held by any holder in whole (but not in
part) by paying in cash to such holder as follows: (i) $0.50 per share then underlying the warrant if within the first twelve (12) months
of issuance; (ii) $1.00 per share then underlying the warrant if after the first twelve (12) months, but before twenty-four (24) months
of issuance; and (iii) $1.50 per share then underlying the warrant if after twenty-four months, but before thirty-six (36) months.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Below
is a table summarizing the changes in warrants outstanding during the six months ended June 30, 2022:
| |
Warrants | | |
Weighted-
Average
Exercise Price | |
Outstanding at December 31, 2021 | |
| 1,300,122 | | |
$ | 9.52 | |
Granted | |
| 120,397 | | |
| 12.00 | |
Exercised | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | |
Outstanding at June 30, 2022 | |
| 1,420,519 | | |
$ | 9.73 | |
Exercisable at June 30, 2022 | |
| 1,420,519 | | |
$ | 9.73 | |
As
of June 30, 2022, the outstanding warrants have a weighted average remaining contractual life of 1.93 years and a total intrinsic value
of $447,500.
NOTE 13—EARNINGS
(LOSS) PER SHARE
The
computation of weighted average shares outstanding and the basic and diluted loss per common share attributable to common shareholders
for the three and six months ended June 30, 2022 consisted of the following:
| |
Three
Months Ended June
30, 2022 | | |
Six
Months Ended June
30, 2022 | |
Net loss per common share attributable to common shareholders’ | |
| (352,733 | ) | |
$ | (1,360,978 | ) |
Weighted average common shares outstanding | |
| 1,248,829 | | |
| 1,239,093 | |
Basic and diluted loss per share | |
| (0.28 | ) | |
$ | (1.10 | ) |
For
the three and six months ended June 30, 2022, there were 5,174,416 potential common share equivalents from warrants, convertible debt,
and series A and B convertible preferred shares excluded from the diluted EPS calculations as their effect is anti-dilutive.
For
the three and six months ended June 30, 2021, there were 122,500 potential common share equivalents from warrants excluded from the diluted
EPS calculations as their effect is anti-dilutive.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
NOTE 14—SUBSEQUENT EVENTS
Securities Purchase Agreement
On July 8, 2022, the Company entered into a securities
purchase agreement with Mast Hill Fund, L.P., pursuant to which the Company issued to it a promissory note in the principal amount of
$600,000, which includes an original issue discount in the amount of $60,000, and a five-year warrant for the purchase of 100,000 common
shares of the Company at an exercise price of $6.00 per share (subject to adjustment), which may be exercised on a cashless basis if
the market price of the Company’s common shares is greater than the exercise price, for a total purchase price of $540,000.
The note bears interest at a rate of 12% per
annum and matures on July 8, 2023; provided that any principal amount or interest which is not paid when due shall bear interest at a
rate of the lesser of 16% per annum or the maximum amount permitted by law from the due date thereof until the same is paid. The note
requires monthly payments of $60,000, plus accrued interest, commencing on October 6, 2022. The Company may voluntarily prepay the outstanding
principal amount and accrued interest in whole upon payment of a fee of $750. In addition, if at any time the Company receives cash proceeds
of more than $1 million in the aggregate from any source or series of related or unrelated sources, including, but not limited to, the
issuance of equity or debt, the exercise of outstanding warrants, the issuance of securities pursuant to an equity line of credit (as
defined in the note) or the sale of assets outside of the ordinary course of business, the holder shall have the right in its sole discretion
to require the Company to immediately apply up to 50% of such proceeds in excess of $1 million to repay all or any portion of the outstanding
principal amount and interest then due under the note. The note is convertible into common shares at the option of the holder at any
time on or following the date that an event of default (as defined in the note) occurs under the note at a conversion price of $5.20
(subject to adjustment). The note is unsecured and has priority over all other unsecured indebtedness of the Company. The note contains
customary affirmative and negative covenants and events of default for a loan of this type.
The conversion price of the note and the exercise
price of the warrant are subject to standard adjustments, including a price-based adjustment in the event that the Company issues any
common shares or other securities convertible into or exercisable for common shares at an effective price per share that is lower than
the conversion or exercise price, subject to certain exceptions. In addition, the note and the warrant contain an ownership limitation,
such that the Company shall not effect any conversion or exercise, and the holder shall not have the right to convert or exercise, or
any portion of the note or the warrant to the extent that after giving effect to the issuance of common shares upon conversion or exercise,
the holder, together with its affiliates and any other persons acting as a group together with the holder or any of its affiliates, would
beneficially own in excess of 4.99% of the number of common shares outstanding immediately after giving effect to the issuance of common
shares upon conversion or exercise.
The securities purchase agreement contains a
participation right, which provides that, subject to certain exceptions, until the note is extinguished in its entirety, if the Company
directly or indirectly offers, sells, grants any option to purchase, or otherwise disposes of (or announces any offer, sale, grant or
any option to purchase or other disposition of) any of its debt, equity, or equity equivalent securities, or enters into any definitive
agreement with regard to the foregoing, it must offer to issue and sell to or exchange with the holder securities in such transaction
in an amount up to the original principal amount of the note. The securities purchase agreement also provides the holder with customary
piggy-back registration rights for the common shares underlying the note and the warrant, and contains other customary representations
and warranties and covenants for a transaction of this type.
Underwriting Agreement
On August 2, 2022, the Company entered into an
underwriting agreement with Craft Capital Management LLC and R.F. Lafferty & Co. Inc., as representatives of the underwriters named
on Schedule 1 thereto, relating to the Company’s public offering of common shares. Under the underwriting agreement, the Company
agreed to sell 1,428,572 common shares to the underwriters, at a purchase price per share of $3.948 (the offering price to the public
of $4.20 per share minus the underwriters’ discount), and also agreed to grant to the underwriters a 45-day option to purchase
up to 214,286 additional common shares, solely to cover over-allotments, if any, at the public offering price less the underwriting discounts,
pursuant to the Company’s registration statement on Form S-1 (File No. 333-259011) under the Securities Act of 1933, as amended.
On August 5, 2022, the closing of the public
offering was completed and the Company sold 1,428,572 common shares for total gross proceeds of $6 million. After deducting the underwriting
commission and expenses, the Company received net proceeds of approximately $5.2 million.
1847 HOLDINGS LLC
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Note Conversions
On October 8, 2021, 1847 Cabinet issued 6% subordinated
convertible promissory notes in the aggregate principal amount of $5,880,345 to Steven J. Parkey and Jose D. Garcia-Rendon. On July 26,
2022, the Company and 1847 Cabinet entered into a conversion agreement with Steven J. Parkey and Jose D. Garcia-Rendon, pursuant to which
they agreed to convert an aggregate of $3,360,000 of the notes into a number of common shares of the Company equal to such conversion
amount divided by the price per share of the Company’s common shares sold in the public offering. On August 2, 2022, the Company
issued an aggregate of 800,000 common shares upon conversion of these notes.
On September 30, 2020, 1847 Cabinet Inc. issued
an 8% vesting promissory note in the principal amount of up to $1,260,000 to Stephen Mallatt, Jr. and Rita Mallatt. On July 26, 2022,
the Company and 1847 Cabinet entered into a conversion agreement with Stephen Mallatt, Jr. and Rita Mallatt, pursuant to which they agreed
to convert $797,221 of the note into a number of common shares of the Company equal to such conversion amount divided by the price per
share of the Company’s common shares sold in the public offering. On August 2, 2022, the Company issued 189,815 common shares
upon conversion of this note. In addition, the 8% vesting promissory note was cancelled and 1847 Cabinet agreed to pay a sum of $558,734
to the holders on or prior to October 1, 2022.
On July 26, 2022, the Company also entered into
a conversion agreement with Bevilacqua PLLC, the Company’s outside securities counsel, pursuant to which it agreed to convert $1,197,280
of the accounts payable owed to it into a number of common shares of the Company equal to such conversion amount divided by the price
per share of the Company’s common shares sold in the public offering. On August 2, 2022, the Company issued 285,067 common shares
to Bevilacqua PLLC.
Warrants
As a result of the issuance of the note to Mast
Hill Fund, L.P. on July 8, 2022, the exercise price of certain of the Company’s outstanding warrants and the conversion price of
the Company’s outstanding convertible notes were adjusted to $5.20 pursuant to certain antidilution provisions of such warrants
and convertible notes. In addition, certain of the Company’s outstanding warrants include an “exploding” feature, whereby
the exercise price was reset to $5.20 and the number of shares underlying the warrants was increased in the same proportion as the exercise
price decrease.
As a result of the issuance of the common shares
upon conversion of the notes as described above at a conversion price of $4.20 per share, the exercise price of certain of the Company’s
outstanding warrants and the conversion price of the Company’s outstanding convertible notes were adjusted to $4.20 pursuant to
certain antidilution provisions of such warrants and convertible notes. In addition, certain of the Company’s outstanding warrants
include an “exploding” feature, whereby the exercise price was reset to $4.20 and the number of shares underlying the warrants
was increased in the same proportion as the exercise price decrease.
In July 2022, the Company issued 50,002 common
shares upon cashless exercises of two warrants in which 59,633 common shares underlying the warrants were surrendered to pay the exercise
price.
On August 5, 2022, pursuant to the underwriting
agreement, the Company issued a common share purchase warrant to each representative for the purchase of 35,715 common shares at an exercise
price of $5.25, subject to adjustments. The warrants will be exercisable at
any time and from time to time, in whole or in part, during the period commencing on February 5, 2023 and ending on August 2, 2027 and
may be exercised on a cashless basis under certain circumstances. The warrants provide for registration rights (including a one-time
demand registration right and unlimited piggyback rights) and customary anti-dilution provisions (for share dividends and splits and
recapitalizations) and anti-dilution protection (adjustment in the number and price of such warrants and the shares underlying such warrants)
resulting from corporate events (which would include dividends, reorganization, mergers and similar events).
Following the changes to the Company’s
outstanding warrants, the number of common shares issuable upon exercise of the Company’s outstanding warrants as of the date of
this report is 3,165,319 shares.
Common
Share Dividend
On July 29, 2022, the Company declared a common share dividend of $0.13125 per share to shareholders of record
as of August 4, 2022. This dividend will be paid on August 19, 2022.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion
and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment
and understanding of our plans and financial condition. The following financial information is derived from our financial statements
and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein.
Use of Terms
Except as otherwise indicated by the context
and for the purposes of this report only, references in this report to “we,” “us,” “our” and the
“Company” refer to 1847 Holdings LLC, a Delaware limited liability company, and its consolidated subsidiaries. References
to the “Manager” refer to 1847 Partners LLC, a Delaware limited liability company.
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements
that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than
statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance
and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied
by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | our ability to effectively integrate
and operate the businesses that we acquire; |
| | |
| ● | our ability to successfully identify
and acquire additional businesses; |
| | |
| ● | our organizational structure, which
may limit our ability to meet our dividend and distribution policy; |
| | |
| ● | our ability to service and comply
with the terms of indebtedness; |
| | |
| ● | our cash flow available for distribution
and our ability to make distributions to our common shareholders; |
| | |
| ● | our ability to pay the management
fee, profit allocation and put price to the Manager when due; |
| | |
| ● | labor disputes, strikes or other
employee disputes or grievances; |
| | |
| ● | the regulatory environment in which
our businesses operate under; |
| | |
| ● | trends in the industries in which
our businesses operate; |
| | |
| ● | the competitive environment in which
our businesses operate; |
| | |
| ● | changes in general economic or business
conditions or economic or demographic trends in the United States including changes in interest
rates and inflation; |
| | |
| ● | our and the Manager’s ability
to retain or replace qualified employees of our businesses and the Manager; |
| | |
| ● | casualties, condemnation or catastrophic
failures with respect to any of our business’ facilities; |
| | |
| ● | costs and effects of legal and administrative
proceedings, settlements, investigations and claims; and |
| | |
| ● | extraordinary or force majeure events
affecting the business or operations of our businesses. |
In some cases, you can identify forward-looking
statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,”
“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “project” or “continue” or the negative of these terms or other comparable terminology.
These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and
unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results.
Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under
Item 1A “Risk Factors” included in our annual report on Form 10-K for the year ended December 31, 2021. If one or more of
these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly
from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
In addition, statements that “we believe”
and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available
to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information
may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or
review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not
to unduly rely upon these statements.
The forward-looking statements made in this report
relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by
the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result
of new information, future events, changed circumstances or any other reason.
Overview
We are an acquisition holding company focused
on acquiring and managing a group of small businesses, which we characterize as those that have an enterprise value of less than $50
million, in a variety of different industries headquartered in North America. To date, we have completed six acquisitions and subsequently
spun off two of the acquired companies.
On May 28, 2020, our subsidiary 1847 Asien Inc.
(“1847 Asien”) acquired Asien’s Appliance, Inc., a California corporation (“Asien’s”). Asien’s
has been in business since 1948 serving the North Bay area of Sonoma County, California. It provides a wide variety of appliance services,
including sales, delivery/installation, in-home service and repair, extended warranties, and financing. Its main focus is delivering
personal sales and exceptional service to its customers at competitive prices.
On September 30, 2020, our subsidiary 1847 Cabinet
Inc. (“1847 Cabinet”) acquired Kyle’s Custom Wood Shop, Inc., an Idaho corporation (“Kyle’s”). Kyle’s
is a leading custom cabinetry maker servicing contractors and homeowners since 1976 in Boise, Idaho and the surrounding area. Kyle’s
focuses on designing, building, and installing custom cabinetry primarily for custom and semi-custom builders.
On March 30, 2021, our subsidiary 1847 Wolo Inc.
(“1847 Wolo”) acquired Wolo Mfg. Corp., a New York corporation, and Wolo Industrial Horn & Signal, Inc., a New York corporation
(together, “Wolo”). Headquartered in Deer Park, New York and founded in 1965, Wolo designs and sells horn and safety products
(electric, air, truck, marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for cars,
trucks, industrial equipment and emergency vehicles.
On October 8, 2021, our subsidiary 1847 Cabinet
acquired High Mountain Door & Trim Inc., a Nevada corporation (“High Mountain”), and Sierra Homes, LLC d/b/a Innovative
Cabinets & Design, a Nevada limited liability company (“Innovative Cabinets”). Headquartered in Reno, Nevada and founded
in 2014, High Mountain specializes in all aspects of finished carpentry products and services, including doors, door frames, base boards,
crown molding, cabinetry, bathroom sinks and cabinets, bookcases, built-in closets, and fireplace mantles, among others, working primarily
with large homebuilders of single-family homes and commercial and multi-family developers. Innovative Cabinets is headquartered in Reno,
Nevada and was founded in 2008. It specializes in custom cabinetry and countertops for a client base consisting of single-family homeowners,
builders of multi-family homes, as well as commercial clients.
Our first acquisition was on March 3, 2017, pursuant
to which our subsidiary 1847 Neese Inc. (“1847 Neese”) acquired Neese, Inc., a business specializing in providing a wide
range of land application services and selling equipment and parts in Grand Junction, Iowa. On April 19, 2021, we sold 1847 Neese back
to the original owners.
On April 5, 2019, our subsidiary 1847 Goedeker
Inc. (“1847 Goedeker”) acquired substantially all of the assets of Goedeker Television Co., a one-stop e-commerce destination
for home furnishings, including appliances, furniture, home goods and related products. On October 23, 2020, we distributed all of the
shares of 1847 Goedeker that we held to our shareholders, so we no longer own 1847 Goedeker.
Through our structure, we offer investors an
opportunity to participate in the ownership and growth of a portfolio of businesses that traditionally have been owned and managed by
private equity firms, private individuals or families, financial institutions or large conglomerates. We believe that our management
and acquisition strategies will allow us to achieve our goals to grow regular distributions to our common shareholders and increasing
common shareholder value over time.
We seek to acquire controlling interests in small
businesses that we believe operate in industries with long-term macroeconomic growth opportunities, and that have positive and stable
earnings and cash flows, face minimal threats of technological or competitive obsolescence and have strong management teams largely in
place. We believe that private company operators and corporate parents looking to sell their businesses will consider us to be an attractive
purchaser of their businesses. We make these businesses our majority-owned subsidiaries and actively manage and grow such businesses.
We expect to improve our businesses over the long term through organic growth opportunities, add-on acquisitions and operational improvements.
Recent Developments
Reverse Share Split
On August 3, 2022, we effected a 1-for-4 reverse
split of our outstanding common shares. All share and per share data throughout this report have been retroactively adjusted to reflect
the reverse share split.
Securities Purchase Agreement
On July 8, 2022, we entered into a securities
purchase agreement with Mast Hill Fund, L.P., pursuant to which we issued to it a promissory note in the principal amount of $600,000,
which includes an original issue discount in the amount of $60,000, and a five-year warrant for the purchase of 100,000 common shares
at an exercise price of $6.00 per share (subject to adjustment), which may be exercised on a cashless basis if the market price of our
common shares is greater than the exercise price, for a total purchase price of $540,000.
The note bears interest at a rate of 12% per
annum and matures on July 8, 2023; provided that any principal amount or interest which is not paid when due shall bear interest at a
rate of the lesser of 16% per annum or the maximum amount permitted by law from the due date thereof until the same is paid. The note
requires monthly payments of $60,000, plus accrued interest, commencing on October 6, 2022. We may voluntarily prepay the outstanding
principal amount and accrued interest in whole upon payment of a fee of $750. In addition, if at any time we receive cash proceeds of
more than $1 million in the aggregate from any source or series of related or unrelated sources, including, but not limited to, the issuance
of equity or debt, the exercise of outstanding warrants, the issuance of securities pursuant to an equity line of credit (as defined
in the note) or the sale of assets outside of the ordinary course of business, the holder shall have the right in its sole discretion
to require us to immediately apply up to 50% of such proceeds in excess of $1 million to repay all or any portion of the outstanding
principal amount and interest then due under the note. The note is convertible into common shares at the option of the holder at any
time on or following the date that an event of default (as defined in the note) occurs under the note at a conversion price of $5.20
(subject to adjustment). The note is unsecured and has priority over all of our other unsecured indebtedness. The note contains customary
affirmative and negative covenants and events of default for a loan of this type.
The conversion price of the note and the exercise
price of the warrant are subject to standard adjustments, including a price-based adjustment in the event that we issue any common shares
or other securities convertible into or exercisable for common shares at an effective price per share that is lower than the conversion
or exercise price, subject to certain exceptions. In addition, the note and the warrant contain an ownership limitation, such that we
shall not effect any conversion or exercise, and the holder shall not have the right to convert or exercise, or any portion of the note
or the warrant to the extent that after giving effect to the issuance of common shares upon conversion or exercise, the holder, together
with its affiliates and any other persons acting as a group together with the holder or any of its affiliates, would beneficially own
in excess of 4.99% of the number of common shares outstanding immediately after giving effect to the issuance of common shares upon conversion
or exercise.
The securities purchase agreement contains a
participation right, which provides that, subject to certain exceptions, until the note is extinguished in its entirety, if we directly
or indirectly offer, sell, grant any option to purchase, or otherwise dispose of (or announces any offer, sale, grant or any option to
purchase or other disposition of) any of our debt, equity, or equity equivalent securities, or enter into any definitive agreement with
regard to the foregoing, we must offer to issue and sell to or exchange with the holder securities in such transaction in an amount up
to the original principal amount of the note. The securities purchase agreement also provides the holder with customary piggy-back registration
rights for the common shares underlying the note and the warrant and contains other customary representations and warranties and covenants
for a transaction of this type.
Underwriting Agreement
On August 2, 2022, we entered into an underwriting
agreement with Craft Capital Management LLC and R.F. Lafferty & Co. Inc., as representatives of the underwriters named on Schedule
1 thereto, relating to our public offering of common shares. Under the underwriting agreement, we agreed to sell 1,428,572 common shares
to the underwriters, at a purchase price per share of $3.948 (the offering price to the public of $4.20 per share minus the underwriters’
discount), and also agreed to grant to the underwriters a 45-day option to purchase up to 214,286 additional common shares, solely to
cover over-allotments, if any, at the public offering price less the underwriting discounts, pursuant to our registration statement on
Form S-1 (File No. 333-259011) under the Securities Act of 1933, as amended.
On August 5, 2022, the closing of the public
offering was completed and we sold 1,428,572 common shares for total gross proceeds of $6 million. After deducting the underwriting commission
and expenses, we received net proceeds of approximately $5.2 million.
Note Conversions
On July 26, 2022, the Company and 1847 Cabinet
entered into a conversion agreement with Steven J. Parkey and Jose D. Garcia-Rendon, pursuant to which they agreed to convert an aggregate
of $3,360,000 of the 6% subordinated convertible promissory notes described under “—Liquidity
and Capital Resources” below into a number of common shares equal to such conversion amount divided by the price per share
of the common shares sold in the public offering. On August 2, 2022, we issued an aggregate of 800,000 common shares upon conversion
of these notes.
On July 26, 2022, the Company and 1847 Cabinet
entered into a conversion agreement with Stephen Mallatt, Jr. and Rita Mallatt, pursuant to which they agreed to convert $797,221 of
the 8% vesting promissory note described under “—Liquidity and Capital
Resources” below into a number of common shares equal to such conversion amount divided by the price per share of the common
shares sold in the public offering. On August 2, 2022, we issued 189,815 common shares upon conversion of this note. In addition,
the 8% vesting promissory note was cancelled and 1847 Cabinet agreed to pay a sum of $558,734 to the holders on or prior to October 1,
2022.
On July 26, 2022, the Company also entered into
a conversion agreement with Bevilacqua PLLC, the Company’s outside securities counsel, pursuant to which it agreed to convert $1,197,280
of the accounts payable owed to it into a number of common shares equal to such conversion amount divided by the price per share of the
common shares sold in the public offering. On August 2, 2022, the Company issued 285,067 common shares to Bevilacqua PLLC.
Warrants
As a result of the issuance of the note to Mast
Hill Fund, L.P. on July 8, 2022, the exercise price of certain of our outstanding warrants and the conversion price of our outstanding
convertible notes were adjusted to $5.20 pursuant to certain antidilution provisions of such warrants and convertible notes. In addition,
certain of our outstanding warrants include an “exploding” feature, whereby the exercise price was reset to $5.20 and the
number of shares underlying the warrants was increased in the same proportion as the exercise price decrease.
As a result of the issuance of the common shares
upon conversion of the notes as described above at a conversion price of $4.20 per share, the exercise price of certain of our outstanding
warrants and the conversion price of our outstanding convertible notes were adjusted to $4.20 pursuant to certain antidilution provisions
of such warrants and convertible notes. In addition, certain of our outstanding warrants include an “exploding” feature,
whereby the exercise price was reset to $4.20 and the number of shares underlying the warrants was increased in the same proportion as
the exercise price decrease.
In July 2022, we issued 50,002 common shares
upon cashless exercises of two warrants in which 59,633 common shares underlying the warrants were surrendered to pay the exercise price.
On August 5, 2022, pursuant to the underwriting
agreement, we issued a common share purchase warrant to each representative for the purchase of 35,715 common shares at an exercise price
of $5.25, subject to adjustments. The warrants will be exercisable at any time
and from time to time, in whole or in part, during the period commencing on February 5, 2023 and ending on August 2, 2027 and may be
exercised on a cashless basis under certain circumstances. The warrants provide for registration rights (including a one-time demand
registration right and unlimited piggyback rights) and customary anti-dilution provisions (for share dividends and splits and recapitalizations)
and anti-dilution protection (adjustment in the number and price of such warrants and the shares underlying such warrants) resulting
from corporate events (which would include dividends, reorganization, mergers and similar events).
Following the changes to our outstanding warrants,
the number of common shares issuable upon exercise of our outstanding warrants as of the date of this report is 3,165,319 shares.
Common Share Dividend
On July 29, 2022, the Company declared a common
share dividend of $0.13125 per share to shareholders of record as of August 4, 2022. This dividend will be paid on August 19, 2022.
Impact of Coronavirus Pandemic
Starting
in late 2019, a novel strain of the coronavirus, or COVID-19, began to rapidly spread around the world and every state in the United States.
Most states and cities have at various times instituted quarantines, restrictions on travel, “stay at home” rules,
social distancing measures and restrictions on the types of businesses that could continue to operate, as well as guidance in response
to the pandemic and the need to contain it. At this time, there continues to
be significant volatility and uncertainty relating to the full extent to which the COVID-19 pandemic and the various responses to
it will impact our business, operations and financial results.
Asien’s was qualified as an essential business
and remained open during the pandemic, with certain occupancy restrictions at times, so it did not experience any meaningful business
interruption. However, Asien’s is dependent upon suppliers to provide it with all of the products that its sells. The pandemic
has impacted and may continue to impact suppliers and manufacturers of certain of its products. As a result, Asien’s has faced
and may continue to face delays or difficulty sourcing certain products, which could negatively affect its business and financial results.
Even if Asien’s is able to find alternate sources for such products, they may cost more, which could adversely impact Asien’s
profitability and financial condition.
Kyle’s was also qualified as an essential
business and remained open during the pandemic, with certain occupancy restrictions at times, so it did not experience any meaningful
business interruption. However, certain key customers of Kyle’s elected to either temporarily stop building homes or delayed their
building process, particularly during the second quarter of 2020, which adversely affected Kyle’s sales. Further, early on during
the pandemic, several of Kyle’s employees had taken time off because of medical issues, and some of them did not return to employment.
Kyle’s has been hiring and training new employees to replace lost productivity because of the aforementioned loss of employees.
Kyle’s did not experience any meaningful business interruption related to any of its key suppliers; although recently, potentially
as a result of the pandemic and resulting impact, Kyle’s has seen price increases in certain key raw materials such as wood products
and hardware. These increases may negatively affect Kyle’s profitability and financial condition. If the pace of the pandemic does
not continue to slow, it may continue to negatively affect Kyle’s ability to generate sales opportunities and to hire productive
employees, as well as impact the cost of raw materials. Therefore, Kyle’s business operations may experience further delays and
experience lost sales opportunities and increased costs, which could further adversely impact Kyle’s profitability and financial
condition.
High Mountain was qualified as an essential business
and remained open during the pandemic. As it followed both federal and Nevada state guidelines regarding occupancy restrictions, it did
not experience significant business disruptions, although it did experience some loss of productivity due to employee absences. High
Mountain continues to comply with Nevada state and CDC guidelines regarding workplace safety.
Innovative Cabinets was also qualified as an
essential business and thus remained open during the pandemic, while complying with federal and Nevada state guidelines regarding occupancy
restrictions. However, since a substantive amount of its materials come from Asia, where its manufacturing network is located, Innovative
Cabinets did experience longer supply chain lead-times and higher logistics costs. It has been exploring alternative sourcing opportunities.
Given the prevailing market conditions for building supplies and materials, it may continue to experience supply chain issues and higher
supply costs, which could adversely impact its profitability and financial condition.
Wolo qualified as an essential business and remained
open during the pandemic. At no time during the pandemic did it experience an internal contamination forcing it to stop its business.
The pandemic has had a dramatic impact on Wolo’s supply chain as it has on others in the automotive aftermarket. Approximately
90% of Wolo’s vendor base is located in China. The pandemic issues impacting ports in the U.S. due to lack of personnel has had
a ripple effect on Chinese suppliers. Containers are slow to be emptied in the U.S., causing a backlog of ships waiting to get into ports
and limiting containers and ships returning to China. The lack of containers and available space on ships has escalated shipping costs
by over 300% from 2020. Costs for raw materials have also started to increase due to availability. Wolo cannot absorb these increases
and began passing on a price increase to customers starting June 1, 2021, although the effective date may be later for some customers.
We believe that this is an industry-wide issue and that it should not put Wolo in an unfavorable pricing position.
The spread of COVID-19 has also adversely
impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The
pandemic has resulted, and may continue to result, in a significant disruption of global financial markets, which may reduce our ability
to access capital in the future, which could negatively affect our liquidity.
The extent to which the pandemic may impact
our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this report, including
the effectiveness of vaccines and other treatments for COVID-19, and other new information that may emerge concerning the severity of
the pandemic and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic
and the current financial, economic and capital markets environment, and future developments in the global supply chain and other areas
present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
Management Fees
On April 15, 2013, the Company and the Manager
entered into a management services agreement, pursuant to which the Company is required to pay the Manager a quarterly management fee
equal to 0.5% of its adjusted net assets for services performed (the “Parent Management Fee”). The amount of the Parent Management
Fee with respect to any fiscal quarter is (i) reduced by the aggregate amount of any management fees received by the Manager under any
offsetting management services agreements with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid
(or under-paid) Parent Management Fees received by (or owed to) the Manager as of the end of such fiscal quarter, and (iii) increased
by the amount of any outstanding accrued and unpaid Parent Management Fees. The Company expensed $0 in Parent Management Fees for the
six months ended June 30, 2022 and 2021.
1847 Neese entered into an offsetting management
services agreement with the Manager on March 3, 2017, which is included in discontinued operations, 1847 Asien entered into an offsetting
management services agreement with the Manager on May 28, 2020, 1847 Cabinet entered into an offsetting management services agreement
with the Manager on August 21, 2020 (which was amended and restated on October 8, 2021) and 1847 Wolo entered into an offsetting management
services agreement with the Manager on March 30, 2021. Pursuant to the offsetting management services agreements, 1847 Neese appointed
the Manager to provide certain services to it for a quarterly management fee equal to $62,500, 1847 Asien appointed the Manager to provide
certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the
management services agreement), 1847 Cabinet appointed the Manager to provide certain services to it for a quarterly management fee equal
to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services agreement), which was increased to $125,000
or 2% of adjusted net assets on October 8, 2021, and 1847 Wolo appointed the Manager to provide certain services to it for a quarterly
management fee equal to the greater of $75,000 or 2% of adjusted net assets (as defined in the management services agreement); provided,
however, in each case that if the aggregate amount of management fees paid or to be paid by such entities, together with all other management
fees paid or to be paid to the Manager under other offsetting management services agreements, exceeds, or is expected to exceed, 9.5%
of our gross income in any fiscal year or the Parent Management Fee in any fiscal quarter, then the management fee to be paid by such
entities shall be reduced, on a pro rata basis determined by reference to the other management fees to be paid to the Manager under other
offsetting management services agreements.
Each of these subsidiaries shall also reimburse
the Manager for all of their costs and expenses which are specifically approved by their board of directors, including all out-of-pocket
costs and expenses, which are actually incurred by the Manager or its affiliates on behalf of these subsidiaries in connection with performing
services under the offsetting management services agreements.
1847 Asien expensed management fees of $75,000
and $150,000 for the three and six months ended June 30, 2022, respectively, and $75,000 and $150,000 for the three and six months ended
June 30, 2021, respectively.
1847 Cabinet expensed management fees of $125,000
and $250,000 for the three and six months ended June 30, 2022, respectively, and $75,000 and $150,000 for the three and six months ended
June 30, 2021, respectively.
1847 Wolo expensed management fees of $75,000
and $150,000 for the three and six months ended June 30, 2022, respectively, and $75,000 for the three and six months ended June 30,
2021.
On a consolidated basis, the Company expensed
total management fees of $275,000 and $550,000 for the three and six months ended June 30, 2022, respectively, and $225,000 and $375,000
for the three and six months ended June 30, 2021, respectively.
Segments
The Financial Accounting Standards Board Accounting
Standard Codification Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments
in its financial reports issued to its shareholders. As of June 30, 2022, we have three reportable segments - the retail and appliances
segment, which is operated by Asien’s, the construction segment, which is operated by Kyle’s, High Mountain and Innovative
Cabinets, and the automotive supplies segment, which is operated by Wolo.
The retail and appliances segment is comprised
of the business of Asien’s, which is based in Santa Rosa, California, and provides a wide variety of appliance services including
sales, delivery, installation, service and repair, extended warranties, and financing.
The construction segment is comprised of
the businesses of Kyle’s, High Mountain and Innovative Cabinets. Kyle’s, which is based in Boise, Idaho, provides a wide
variety of construction services including custom design and build of kitchen and bathroom cabinetry, delivery, installation, service
and repair, extended warranties, and financing. High Mountain, which is based in Reno, Nevada, specializes in all aspects of finished
carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks and cabinets, bookcases,
built-in closets, and fireplace mantles, among others, as well as window installation. Innovative Cabinets, also based in Reno, Nevada,
specializes in custom cabinetry and countertops.
The automotive supplies segment is comprised
of the business of Wolo, which is based in Deer Park, New York, and designs and sells horn and safety products (electric, air, truck,
marine, motorcycle and industrial equipment), and offers vehicle emergency and safety warning lights for cars, trucks, industrial equipment
and emergency vehicles.
We provide general corporate services to our
segments; however, these services are not considered when making operating decisions and assessing segment performance. These services
are reported under “Corporate Services” below and these include costs associated with executive management, financing activities
and public company compliance.
Discontinued Operations
On April 19, 2021, we entered into a stock purchase
agreement with Alan Neese and Katherine Neese, pursuant to which they purchased our 55% ownership interest in 1847 Neese for a purchase
price of $325,000 in cash. As a result of this transaction, 1847 Neese is no longer a subsidiary of the Company. All financial information
of 1847 Neese previously presented as part of land management services operations are classified as discontinued operations and not presented
as part of continuing operations for the three and six months ended June 30, 2021.
Results of Operations
Comparison of the Three Months Ended June
30, 2022 and 2021
The following table sets forth key components
of our results of operations during the three months ended June 30, 2022 and 2021, both in dollars and as a percentage of our revenues.
| |
Three Months
Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
%
of
Revenues | | |
Amount | | |
%
of
Revenues | |
Revenues | |
$ | 12,891,243 | | |
| 100.0 | % | |
$ | 6,647,954 | | |
| 100.0 | % |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 8,078,883 | | |
| 62.7 | % | |
| 4,514,789 | | |
| 67.9 | % |
Personnel | |
| 1,587,173 | | |
| 12.3 | % | |
| 836,568 | | |
| 12.6 | % |
Depreciation and amortization | |
| 498,974 | | |
| 3.9 | % | |
| 126,072 | | |
| 1.9 | % |
General and administrative | |
| 2,380,444 | | |
| 18.5 | % | |
| 1,350,330 | | |
| 20.3 | % |
Total Operating Expenses | |
| 12,545,474 | | |
| 97.3 | % | |
| 6,827,759 | | |
| 102.7 | % |
Income (Loss) From Operations | |
| 345,769 | | |
| 2.7 | % | |
| (179,805 | ) | |
| (2.7 | )% |
Other Income (Expenses) | |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| 357 | | |
| 0.0 | % | |
| (3,539 | ) | |
| (0.1 | )% |
Interest expense | |
| (932,123 | ) | |
| (7.2 | )% | |
| (136,512 | ) | |
| (2.1 | )% |
Gain (loss) on sale of property and equipment | |
| (671 | ) | |
| (0.0 | )% | |
| - | | |
| - | |
Gain on disposition of subsidiary | |
| - | | |
| - | | |
| 3,282,804 | | |
| 49.4 | % |
Total Other Income (Expense) | |
| (932,437 | ) | |
| (7.2 | )% | |
| 3,142,753 | | |
| 47.3 | % |
Net Income (Loss) Before Income Taxes | |
| (586,668 | ) | |
| (4.6 | )% | |
| 2,962,948 | | |
| 44.6 | % |
Income tax benefit | |
| 439,000 | | |
| 3.4 | % | |
| 21,900 | | |
| 0.3 | % |
Net Income (Loss) From Continuing Operations | |
$ | (147,668 | ) | |
| (1.1 | )% | |
$ | 2,984,848 | | |
| 44.9 | % |
Revenues. Our total revenues were
$12,891,243 for the three months ended June 30, 2022, as compared to $6,647,954 for the three months ended June 30, 2021.
The retail and appliances segment generates revenue
through the sales of home furnishings, including appliances and related products. Revenues from the retail and appliances segment decreased
by $485,607, or 14.5%, to $2,867,011 for the three months ended June 30, 2022 from $3,352,618 for the three months ended June 30, 2021.
Such decrease was primarily due to ongoing supply chain delays with appliance manufactures and the increased time it takes to receive
products.
The construction segment generates revenue through
the sale of finished carpentry products and services, including doors, door frames, base boards, crown molding, cabinetry, bathroom sinks
and cabinets, bookcases, built-in closets, and fireplace mantles, among others, as well as kitchen countertops. Revenues from the construction
segment increased by $6,726,210, or 511.5%, to $8,041,178 for the three months ended June 30, 2022 from $1,314,968 for the three months
ended June 30, 2021. Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired
in the fourth quarter of 2021. Excluding these acquisitions, revenues from the construction segment increased by $225,618, or 17.2%.
Such increase was primarily due to increases in the average customer contract in the construction segment.
The automotive supplies segment generates revenue
through the design and sale of horn and safety products (electric, air, truck, marine, motorcycle and industrial equipment), including
vehicle emergency and safety warning lights for cars, trucks, industrial equipment and emergency vehicles. Revenues from the automotive
supplies segment increased by $2,686, or 0.1%, to $1,983,054 for the three months ended June 30, 2022 from $1,980,368 for the three months
ended June 30, 2021.
Cost of sales. Our total cost of
sales was $8,078,883 for the three months ended June 30, 2022, as compared to $4,514,789 for the three months ended June 30, 2021.
Cost of sales for the retail and appliances segment
consists of the cost of purchased merchandise plus the cost of delivering merchandise and where applicable installation, net of promotional
rebates and other incentives received from vendors. Cost of sales for the retail and appliances segment decreased by $423,331, or 16.3%,
to $2,179,267 for the three months ended June 30, 2022 from $2,602,598 for the three months ended June 30, 2021. Such decrease was primarily
due to corresponding the decrease in revenues from the retail and appliance segment. As a percentage of retail and appliances revenues,
cost of sales for the retail and appliances segment was 76.0% and 77.6% for the three months ended June 30, 2022 and 2021, respectively.
Cost of sales for the construction segment consists
of finished goods, lumber, hardware and materials and plus direct labor and related costs, net of any material discounts from vendors.
Cost of sales for the construction segment increased by $4,051,532, or 562.3%, to $4,771,998 for the three months ended June 30, 2022
from $720,466 for the three months ended June 30, 2021. Such increase was primarily due to the acquisitions of High Mountain and Innovative
Cabinets, which were acquired in the fourth quarter of 2021. Excluding these acquisitions, cost of sales for the construction segment
increased by $304,660, or 42.3%. Such increase was primarily due to corresponding the increase in revenues from the construction segment,
as well as increased product and delivery costs. As a percentage of construction revenues, cost of sales for the construction segment
was 59.3% and 54.8% for the three months ended June 30, 2022 and 2021, respectively.
Cost of sales for the automotive supplies segment
consists of the costs of purchased finished goods plus freight and tariff costs. Cost of sales for the automotive supplies segment decreased
by $64,107, or 5.4%, to $1,127,618 for the three months ended June 30, 2022 from $1,191,725 for the three months ended June 30, 2021.
Such decrease was primarily due to decreased direct labor costs. As a percentage of automotive supplies revenues, cost of sales for the
automotive supplies segment was 56.9% and 60.2% for the three months ended June 30, 2022 and 2021, respectively.
Personnel costs. Personnel costs
include employee salaries and bonuses plus related payroll taxes. It also includes health insurance premiums, 401(k) contributions, and
training costs. Our total personnel costs were $1,587,173 for the three months ended June 30, 2022, as compared to $836,568 for the three
months ended June 30, 2021.
Personnel costs for the retail and appliances
segment decreased by $25,431, or 10.6%, to $213,736 for the three months ended June 30, 2022 from $239,167 for the three months ended
June 30, 2021. Such decrease was primarily due to decreased employee headcount as a result of decreased operations from the retail and
appliances segment. As a percentage of retail and appliances revenue, personnel costs for the retail and appliances segment were 7.5%
and 7.1% for the three months ended June 30, 2022 and 2021, respectively.
Personnel costs for the construction segment
increased by $1,046,536, or 445.8%, to $1,281,293 for the three months ended June 30, 2022 from $234,757 for the three months ended June
30, 2021. Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth
quarter of 2021. Excluding these acquisitions, personnel costs for the construction segment decreased by $22,322, or 9.5%. Such decrease
was primarily due to decreased office personnel headcount in the construction segment. As a percentage of construction revenue, personnel
costs for the construction segment were 15.9% and 17.9% for the three months ended June 30, 2022 and 2021, respectively.
Personnel costs for the automotive supplies segment
decreased by $92,967, or 25.6%, to $269,677 for the three months ended June 30, 2022 from $362,644 for the three months ended June 30,
2021. Such decrease was primarily due to decreased employee headcount and officer compensation. As a percentage of automotive supplies
revenue, personnel costs for the automotive supplies segment were 13.6% and 18.3% for the three months ended June 30, 2022 and 2021, respectively.
Depreciation and amortization. Our
total depreciation and amortization expense increased by $372,902, or 295.8%, to $498,974 for the three months ended June 30, 2022 from
$126,072 for the three months ended June 30, 2021. Such increase was primarily as a result of the intangible assets and property and equipment
acquired in the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021.
General and administrative expenses.
Our general and administrative expenses consist primarily of professional advisor fees, stock-based compensation, bad debts reserve,
rent expense, advertising, bank fees, and other expenses incurred in connection with general operations. Our total general and administrative
expenses were $2,380,444 for the three months ended June 30, 2022, as compared to $1,350,330 for the three months ended June 30, 2021.
General and administrative expenses for the retail
and appliances segment increased by $91,407, or 23.0%, to $488,062 for the three months ended June 30, 2022 from $396,655 for the three
months ended June 30, 2021. Such increase was primarily due to increased marketing and professional fees. As a percentage of retail and
appliances revenue, general and administrative expenses for the retail and appliances segment were 17.0% and 11.8% for the three months
ended June 30, 2022 and 2021, respectively.
General and administrative expenses for the construction
segment increased by $943,568, or 403.3%, to $1,177,529 for the three months ended June 30, 2022 from $233,961 for the three months ended
June 30, 2021. Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the
fourth quarter of 2021. Excluding these acquisitions, general and administrative expenses for the construction segment increased by $59,191,
or 25.3%. Such increase was primarily due to increased rent from new facility leases, as well as increased professional fees in the construction
segment. As a percentage of construction revenue, general and administrative expenses for the construction segment were 14.6% and 17.8%
for the three months ended June 30, 2022 and 2021, respectively.
General and administrative expenses for the automotive
supplies segment increased by $153,437, or 51.4%, to $451,728 for the three months ended June 30, 2022 from $298,291 for the three months
ended June 30, 2021. Such increase was primarily due to increased marketing and professional fees. As a percentage of automotive supplies
revenue, general and administrative expenses for the automotive supplies segment were 22.8% and 15.1% for the three months ended June
30, 2022 and 2021, respectively.
General and administrative expenses for our
holding company decreased by $158,298, or 37.6%, to $263,125 for the three months ended June 30, 2022 from $421,423 for the three months
ended June 30, 2021. Such decrease was primarily due to more corporate expenses relating to the business segments being allocated directly
to the subsidiaries.
Total other income (expense).
We had $932,437 in total other expense, net, for the three months ended June 30, 2022, as compared to other income, net, of $3,142,753
for the three months ended June 30, 2021. Other expense, net, for the three months ended June 30, 2022 consisted of $932,123 of interest
expense and a gain on disposal of property of equipment of $671, offset by other income of $357, while other income, net, for the three
months ended June 30, 2021 consisted of a gain on the disposition of 1847 Neese of $3,282,804, offset by interest expense of $136,512
and other expense of $3,539. The significant increase in interest expense was primarily a result of convertible debt issuances during
the fourth quarter of 2021 in order to help finance the acquisitions of High Mountain and Innovative Cabinets.
Income tax benefit. We had an income
tax benefit of $439,000 for the three months ended June 30, 2022, as compared to $21,900 for the three months ended June 30, 2021.
Net income (loss) from continuing operations.
As a result of the cumulative effect of the factors described above, our net loss from continuing operations was $147,668 for the three
months ended June 30, 2022, as compared to a net income of $2,984,848 for the three months ended June 30, 2021.
Comparison of the Six Months Ended June
30, 2022 and 2021
The following table sets forth key components
of our results of operations during the six months ended June 30, 2022 and 2021, both in dollars and as a percentage of our revenues.
| |
Six Months
Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
%
of
Revenues | | |
Amount | | |
%
of
Revenues | |
Revenues | |
$ | 24,965,121 | | |
| 100.0 | % | |
$ | 11,428,229 | | |
| 100.0 | % |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 15,828,013 | | |
| 63.4 | % | |
| 7,775,471 | | |
| 68.0 | % |
Personnel | |
| 3,164,873 | | |
| 12.7 | % | |
| 1,321,240 | | |
| 11.6 | % |
Depreciation and amortization | |
| 1,010,345 | | |
| 4.0 | % | |
| 248,178 | | |
| 2.2 | % |
General and administrative | |
| 4,546,651 | | |
| 18.2 | % | |
| 2,674,526 | | |
| 23.4 | % |
Total Operating Expenses | |
| 24,549,882 | | |
| 98.3 | % | |
| 12,019,415 | | |
| 105.2 | % |
Income (Loss) From Operations | |
| 415,239 | | |
| 1.7 | % | |
| (591,186 | ) | |
| (5.2 | )% |
Other Income (Expenses) | |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| 675 | | |
| 0.0 | % | |
| (3,539 | ) | |
| (0.0 | )% |
Interest expense | |
| (1,838,866 | ) | |
| (7.4 | )% | |
| (181,633 | ) | |
| (1.6 | )% |
Gain on forgiveness of debt | |
| - | | |
| - | | |
| 360,302 | | |
| 3.2 | % |
Gain on sale of property and equipment | |
| 32,076 | | |
| 0.1 | % | |
| - | | |
| - | |
Gain on disposition of subsidiary | |
| - | | |
| - | | |
| 3,282,804 | | |
| 28.7 | % |
Loss on adjustment shares | |
| - | | |
| - | | |
| (757,792 | ) | |
| (6.6 | )% |
Total Other Income (Expense) | |
| (1,806,115 | ) | |
| (7.2 | )% | |
| 2,700,142 | | |
| 23.6 | % |
Net Income (Loss) Before Income Taxes | |
| (1,390,876 | ) | |
| (5.6 | )% | |
| 2,108,956 | | |
| 18.5 | % |
Income tax benefit | |
| 316,000 | | |
| 1.3 | % | |
| 21,900 | | |
| 0.2 | % |
Net Income (Loss) From Continuing Operations | |
$ | (1,074,876 | ) | |
| (4.3 | )% | |
$ | 2,130,856 | | |
| 18.6 | % |
Revenues. Our total revenues were
$24,965,121 for the six months ended June 30, 2022, as compared to $11,428,229 for the six months ended June 30, 2021.
Revenues from the retail and appliances segment
decreased by $1,229,189, or 18.6%, to $5,387,795 for the six months ended June 30, 2022 from $6,616,984 for the six months ended June
30, 2021. Such decrease was primarily due to ongoing supply chain delays with appliance manufactures and the increased time it takes
to receive products.
Revenues from the construction segment increased
by $13,121,404, or 463.5%, to $15,952,281 for the six months ended June 30, 2022 from $2,830,877 for the six months ended June 30, 2021.
Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter
of 2021. Excluding these acquisitions, revenues from the construction segment increased by $371,463, or 13.1%. Such increase was primarily
due to increases in the average customer contract in the construction segment.
Revenues from the automotive supplies segment
increased by $1,644,677, or 83.0%, to $3,625,045 for the six months ended June 30, 2022 from $1,980,368 for the six months ended June
30, 2021. Such increase was primarily due to the acquisition of Wolo, which was acquired on March 31, 2021.
Cost of sales. Our total cost of
sales was $15,828,013 for the six months ended June 30, 2022, as compared to $7,775,471 for the six months ended June 30, 2021.
Cost of sales for the retail and appliances segment
decreased by $1,058,533, or 20.7%, to $4,050,717 for the six months ended June 30, 2022 from $5,109,250 for the six months ended June
30, 2021. Such decrease was primarily due to corresponding the decrease in revenues from the retail and appliance segment. As a percentage
of retail and appliances revenues, cost of sales for the retail and appliances segment was 75.2% and 77.2% for the six months ended June
30, 2022 and 2021, respectively.
Cost of sales for the construction segment increased
by $8,177,093, or 554.6%, to $9,651,589 for the six months ended June 30, 2022 from $1,474,496 for the six months ended June 30, 2021.
Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter
of 2021. Excluding these acquisitions, cost of sales for the construction segment increased by $456,010, or 30.9%. Such increase was
primarily due to corresponding the increase in revenues from the construction segment, as well as increased product and delivery costs.
As a percentage of construction revenues, cost of sales for the construction segment was 60.5% and 52.1% for the six months ended June
30, 2022 and 2021, respectively.
Cost of sales for the automotive supplies segment
increased by $933,982, or 78.4%, to $2,125,707 for the six months ended June 30, 2022 from $1,191,725 for the six months ended June 30,
2021. Such increase was primarily due to the acquisition of Wolo, which was acquired on March 31, 2021.
Personnel costs. Our total personnel
costs were $3,164,873 for the six months ended June 30, 2022, as compared to $1,321,240 for the six months ended June 30, 2021.
Personnel costs for the retail and appliances
segment decreased by $48,126, or 9.8%, to $444,124 for the six months ended June 30, 2022 from $492,250 for the six months ended June
30, 2021. Such decrease was primarily due to decreased employee headcount as a result of decreased operations from the retail and appliances
segment. As a percentage of retail and appliances revenue, personnel costs for the retail and appliances segment were 8.2% and 7.4% for
the six months ended June 30, 2022 and 2021, respectively.
Personnel costs for the construction segment
increased by $1,949,157, or 418.0%, to $2,415,503 for the six months ended June 30, 2022 from $466,346 for the six months ended June
30, 2021. Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth
quarter of 2021. Excluding these acquisitions, personnel costs for the construction segment decreased by $48,612, or 10.4%. Such decrease
was primarily due to decreased office personnel headcount in the construction segment. As a percentage of construction revenue, personnel
costs for the construction segment were 15.1% and 16.5% for the six months ended June 30, 2022 and 2021, respectively.
Personnel costs for the automotive supplies segment
increased by $207,361, or 57.2%, to $570,005 for the six months ended June 30, 2022 from $362,644 for the six months ended June 30, 2021.
Such increase was primarily due to the acquisition of Wolo, which was acquired on March 31, 2021.
Depreciation and amortization.
Our total depreciation and amortization expense increased by $762,167, or 307.1%, to $1,010,345 for the six months ended June 30, 2022
from $248,178 for the six months ended June 30, 2021. Such increase was primarily as a result of the intangible assets and property and
equipment acquired in the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the fourth quarter of 2021.
General and administrative expenses.
Our total general and administrative expenses were $4,546,651 for the six months ended June 30, 2022, as compared to $2,674,526 for the
six months ended June 30, 2021.
General and administrative expenses for the retail
and appliances segment increased by $106,314, or 12.8%, to $937,556 for the six months ended June 30, 2022 from $831,242 for the six
months ended June 30, 2021. Such increase was primarily due to increased marketing and professional fees. As a percentage of retail and
appliances revenue, general and administrative expenses for the retail and appliances segment were 17.4% and 12.6% for the six months
ended June 30, 2022 and 2021, respectively.
General and administrative expenses for the construction
segment increased by $1,844,815, or 410.6%, to $2,294,087 for the six months ended June 30, 2022 from $449,272 for the six months ended
June 30, 2021. Such increase was primarily due to the acquisitions of High Mountain and Innovative Cabinets, which were acquired in the
fourth quarter of 2021. Excluding these acquisitions, general and administrative expenses for the construction segment increased by $104,288,
or 23.2%. Such increase was primarily due to increased rent from a new facility lease, as well as increased professional fees in the
construction segment. As a percentage of construction revenue, general and administrative expenses for the construction segment were
14.4% and 15.9% for the six months ended June 30, 2022 and 2021, respectively.
General and administrative expenses for the automotive
supplies segment decreased by $58,077, or 6.5%, to $838,509 for the six months ended June 30, 2022 from $896,586 for the six months ended
June 30, 2021. Such decrease was primarily due no acquisition related costs during the current period. As a percentage of automotive
supplies revenue, general and administrative expenses for the automotive supplies segment were 23.1% and 45.3% for the six months ended
June 30, 2022 and 2021, respectively.
General and administrative expenses for our
holding company decreased by $20,927, or 4.2%, to $476,499 for the six months ended June 30, 2022 from $497,426 for the six months ended
June 30, 2021. Such decrease was primarily due to more corporate expenses relating to the business segments being allocated directly to
the subsidiaries.
Total other income (expense).
We had $1,806,115 in total other expense, net, for the six months ended June 30, 2022, as compared to other income, net, of $2,700,142
for the six months ended June 30, 2021. Other expense, net, for the six months ended June 30, 2022 consisted of $1,838,866 of interest
expense, offset by a gain on disposal of property of equipment of $32,076 and other income of $675, while other income, net, for the
six months ended June 30, 2021 consisted of a gain on the disposition of 1847 Neese of $3,282,804 and a gain on forgiveness of debt of
$360,302, offset by a loss on the issuance of adjustment shares of $757,792 as described below, interest expense of $181,633, and other
expense of $3,539. The significant increase in interest expense was primarily a result of convertible debt issuances during the fourth
quarter of 2021 in order to help finance the acquisitions of High Mountain and Innovative Cabinets.
Income tax benefit. We
had an income tax benefit of $316,000 for the six months ended June 30, 2022, as compared to $21,900 for the six months ended June 30,
2021.
Net income (loss) from continuing operations.
As a result of the cumulative effect of the factors described above, our net loss from continuing operations was $1,074,876 for the six
months ended June 30, 2022, as compared to a net income of $2,130,856 for the six months ended June 30, 2021.
Liquidity and Capital Resources
As of June 30, 2022, we had cash and cash equivalents
of $1,326,736. To date, we have financed our operations primarily through revenue generated from operations, cash proceeds from financing
activities, borrowings, and equity contributions by our shareholders.
Although we do not believe that we will require
additional cash to continue our operations over the next twelve months, we do believe additional funds are required to execute our business
plan and our strategy of acquiring additional businesses. The funds required to execute our business plan will depend on the size, capital
structure and purchase price consideration that the seller of a target business deems acceptable in a given transaction. The amount of
funds needed to execute our business plan also depends on what portion of the purchase price of a target business the seller of that
business is willing to take in the form of seller notes or our equity or equity in one of our subsidiaries. Given these factors, we believe
that the amount of outside additional capital necessary to execute our business plan on the low end (assuming target company sellers
accept a significant portion of the purchase price in the form of seller notes or our equity or equity in one of our subsidiaries) ranges
between $100,000 to $250,000. If, and to the extent, that sellers are unwilling to accept a significant portion of the purchase price
in seller notes and equity, then the cash required to execute our business plan could be as much as $5,000,000. We will seek growth as
funds become available from cash flow, borrowings, additional capital raised privately or publicly, or seller retained financing.
Our primary use of funds will be for future acquisitions,
public company expenses including regular distributions to our shareholders, investments in future acquisitions, payments to the Manager
pursuant to the management services agreement, potential payment of profit allocation to the Manager and potential put price to the Manager
in respect of the allocation shares it owns. The management fee, expenses, potential profit allocation and potential put price are paid
before distributions to shareholders and may be significant and exceed the funds we hold, which may require us to dispose of assets or
incur debt to fund such expenditures. See Item 1. “Business—Our Manager” included in our Annual Report on Form 10-K
for the year ended December 31, 2021 for more information concerning the management fee, the profit allocation and put price.
The amount of management fee paid to the Manager
by us is reduced by the aggregate amount of any offsetting management fees, if any, received by the Manager from any of our businesses.
As a result, the management fee paid to the Manager may fluctuate from quarter to quarter. The amount of management fee paid to the Manager
may represent a significant cash obligation. In this respect, the payment of the management fee will reduce the amount of cash available
for distribution to shareholders.
The Manager, as holder of 100% of our allocation
shares, is entitled to receive a twenty percent (20%) profit allocation as a form of preferred equity distribution, subject to an annual
hurdle rate of eight percent (8%), as follows. Upon the sale of a company subsidiary, the Manager will be paid a profit allocation if
the sum of (i) the excess of the gain on the sale of such subsidiary over a high water mark plus (ii) the subsidiary’s net income
since its acquisition by the Company exceeds the 8% hurdle rate. The 8% hurdle rate is the product of (i) a 2% rate per quarter, multiplied
by (ii) the number of quarters such subsidiary was held by the Company, multiplied by (iii) the subsidiary’s average share (determined
based on gross assets, generally) of our consolidated net equity (determined according to United States generally accepted accounting
principles with certain adjustments). In certain circumstances, after a subsidiary has been held for at least 5 years, the Manager may
also trigger a profit allocation with respect to such subsidiary (determined based solely on the subsidiary’s net income since
its acquisition). The amount of profit allocation may represent a significant cash payment and is senior in right to payments of distributions
to our shareholders. Therefore, the amount of profit allocation paid, when paid, will reduce the amount of cash available to us for our
operating and investing activities, including future acquisitions. See Item 1. “Business—Our Manager—Our Manager as
an Equity Holder—Manager’s Profit Allocation” included in our Annual Report on Form 10-K for the year ended December
31, 2021 for more information on the calculation of the profit allocation.
Our operating agreement also contains a supplemental
put provision, which gives the Manager the right, subject to certain conditions, to cause us to purchase the allocation shares then owned
by the Manager upon termination of the management services agreement. The amount of put price under the supplemental put provision is
determined by assuming all of our subsidiaries are sold at that time for their fair market value and then calculating the amount of profit
allocation would be payable in such a case. If the management services agreement is terminated for any reason other than the Manager’s
resignation, the payment to the Manager could be as much as twice the amount of such hypothetical profit allocation. As is the case with
profit allocation, the calculation of the put price is complex and based on many factors that cannot be predicted with any certainty
at this time. See Item 1. “Business—Our Manager—Our Manager as an Equity Holder—Supplemental Put Provision”
included in our Annual Report on Form 10-K for the year ended December 31, 2021 for more information on the calculation of the put price.
The put price obligation, if the Manager exercises its put right, will represent a significant cash payment and is senior in right to
payments of distributions to our shareholders. Therefore, the amount of put price will reduce the amount of cash available to us for
our operating and investing activities, including future acquisitions.
Summary of Cash Flow
The following table provides detailed information
about our net cash flow for the period indicated:
| |
Six Months
Ended June 30, | |
| |
2022 | | |
2021 | |
Net cash used in operating activities from continuing operations | |
$ | (615,446 | ) | |
$ | (60,575 | ) |
Net cash used in investing activities from continuing operations | |
| (157,830 | ) | |
| (5,339,252 | ) |
Net cash provided by financing activities from continuing operations | |
| 716,479 | | |
| 5,497,002 | |
Net change in cash and cash equivalents from continuing operations | |
| (56,797 | ) | |
| 97,175 | |
Cash and cash equivalents from continuing operations at beginning of period | |
| 1,383,533 | | |
| 1,380,349 | |
Cash and cash equivalents from continuing operations at end of period | |
$ | 1,326,736 | | |
$ | 1,477,524 | |
Net cash used in operating activities from continuing
operations was $615,446 for the six months ended June 30, 2022, as compared to $60,575 for the six months ended June 30, 2021. The increase
in cash used from operating activities during the six months ended June 30, 2022 was primarily a result of increased receivables, decreased
contract liabilities, decreased deferred tax liability, offset by decreased inventories, increased accounts payable and accrued expenses,
and decreased prepaids and other current assets.
Net cash used in investing activities from continuing
operations was $157,830 for the six months ended June 30, 2022, as compared to $5,339,252 for the six months ended June 30, 2021. The
decrease in cash used from investing activities during the six months ended June 30, 2022 was primarily a result of the cash paid in
acquisitions during the comparable period.
Net cash provided by financing activities from
continuing operations was $716,479 for the six months ended June 30, 2022, as compared to $5,497,002 for the six months ended June 30,
2021. The decrease in cash provided from investing activities during the six months ended June 30, 2022 was primarily a result of decreased
proceeds from preferred shares and notes payable issuances and increased dividend payments, offset by decreased notes payable payments.
Series A Unit Offering
On March 26, 2021, we sold an aggregate of 1,818,182
units, at a price of $1.65 per unit, for aggregate gross proceeds of $3,000,000. Each unit consists of one (1) series A senior convertible
preferred share and a three-year warrant to purchase one (1) common share at an exercise price of $10.00 per common share (subject to
adjustment), which may be exercised on a cashless basis under certain circumstances. As described in further detail below, we contributed
to 1847 Wolo the $3,000,000 raised in this offering in exchange for 1,000 shares of 1847 Wolo’s series A preferred stock, at a
price of $3,000 per share, to fund, in part, the planned acquisition of Wolo by 1847 Wolo.
In exchange for the consent of the holders of
our outstanding series A senior convertible preferred shares to the issuance of these units at a lower purchase price than such holders
paid for their shares, we issued an aggregate of 99,710 common shares to such holders.
Series B Unit Offering
From February 24, 2022 to March 24, 2022,
the Company sold an aggregate of 426,999 units, at a price of $3.00 per unit, for aggregate gross proceeds of $1,281,000. From
April 20, 2022 to May 19, 2022, the Company sold an aggregate
of 54,567 units to our Chief Executive Officer, Ellery W. Roberts, for aggregate gross proceeds of $163,700. The
Company had total issuance costs relating to these offerings of approximately $15,000, resulting in net proceeds of $1,429,700. Each
unit consists of one (1) series B senior convertible preferred share and a three-year warrant to purchase one (1) common share at an
exercise price of $12.00 per share (subject to adjustment), which may be exercised on a cashless basis under certain
circumstances.
Subscription Agreement
On March 29, 2021, we entered into a subscription
agreement with 1847 Wolo, pursuant to which 1847 Wolo issued 1,000 shares of its series A preferred stock to us for gross proceeds
to 1847 Wolo of $3,000,000. The series A preferred stock has no voting rights and is not convertible into the common stock or any other
securities of 1847 Wolo. Dividends at the rate per annum of 16.0% of the stated value of $3,000 per share shall accrue on the series
A preferred stock (subject to adjustment) and shall accrue from day to day, whether or not declared, and shall be cumulative. Accruing
dividends are payable quarterly in arrears on each of the following dividend payment dates: January 15, April 15, July 15 and October
15 beginning on April 15, 2021. Upon any liquidation, dissolution or winding up of 1847 Wolo, before any payment shall be made to the
holders of 1847 Wolo’s common stock, the series A preferred stock then outstanding shall be entitled to be paid out of the funds
and assets available for distribution to 1847 Wolo’s stockholders an amount per share equal to the stated value of $3,000 per share,
plus any accrued, but unpaid dividends.
Debt
Secured Convertible
Promissory Notes
On October 8, 2021, we and each of our subsidiaries
1847 Asien, 1847 Wolo, 1847 Cabinet, Asien’s, Wolo, Kyle’s, High Mountain and Innovative Cabinets, entered into a note purchase
agreement with two institutional investors, including Leonite, pursuant to which we issued to these purchasers secured convertible promissory
notes in the aggregate principal amount of $24,860,000. The notes contain an aggregate original issue discount of $497,200. As a result,
the total purchase price was $24,362,800. After payment of expenses of $617,825, we received net proceeds of $23,744,975, of which $10,687,500
was used to fund the cash portion of the purchase price for the acquisition of High Mountain and Innovative Cabinets. In addition, as
consideration for the financing, we granted the financing agent 187,500 warrants with a fair value of $956,526 and 7.5% interest in High
Mountain and Innovative Cabinets which had a fair value of $1,146,803. The agent fees were reflected as a discount against the convertible
note payable with the warrants being included in additional paid in capital and the equity interest being including within noncontrolling
interest on the consolidated balance sheet. The remaining principal balance of the notes at June 30, 2022 is $22,108,707, net of debt
discounts of $2,751,293, and they have accrued interest of $495,200.
The notes bear interest
at a rate per annum equal to the greater of (i) 4.75% plus the U.S. Prime Rate that appears in The Wall Street Journal from time
to time or (ii) 8%; provided that, upon an event of default (as defined in the notes), such rate shall increase to 24% or the maximum
legal rate. Payments of interest only, computed at such rate on the outstanding principal amount, will be due and payable quarterly in
arrears commencing on January 1, 2022 and continuing on the first day of each calendar quarter thereafter through and including the maturity
date, October 8, 2026.
We may voluntarily prepay
the notes in whole or in part upon payment of a prepayment fee in an amount equal to 10% of the principal and interest paid in connection
with such prepayment. In addition, immediately upon receipt by the Company or any subsidiary of any proceeds from any issuance of indebtedness
(other than certain permitted indebtedness), any proceeds of any sale or disposition by the Company or any subsidiary of any of the collateral
or any of its respective assets (other than asset sales or dispositions in the ordinary course of business which are permitted by the
note purchase agreement), or any proceeds from any casualty insurance policies or eminent domain, condemnation or similar proceedings,
we must prepay the notes in an amount equal to all such proceeds, net of reasonable and customary transaction costs, fees and expenses
properly attributable to such transaction and payable by the Company or a subsidiary in connection therewith (in each case, paid to non-affiliates).
The holders of the notes
may, in their sole discretion, elect to convert any outstanding and unpaid principal portion of the notes, and any accrued but unpaid
interest on such portion, into our common shares at a conversion price equal to $10.00 (subject to standard adjustments, including a
full ratchet antidilution adjustment); provided that the notes contain certain beneficial ownership limitations.
Pursuant to the terms
of the notes, until the date that is eighteen (18) months after the issuance date of the notes, the holders shall have the right, but
not the obligation, to participate in any securities offering other than a permitted issuance (as defined in the note purchase agreement)
in an amount of up to the original principal amount of the notes. In addition, the holders shall have the right of first refusal to participate
in any issuance of indebtedness until the notes have been terminated; provided, however, that this right of first refusal shall not apply
to permitted issuances.
The note purchase agreement and the notes contain
customary representations, warranties, affirmative and negative financial and other covenants and events of default for loans of this
type. The notes are guaranteed by each subsidiary and are secured by a first priority security interest in all of the assets of the Company
and its subsidiaries.
6% Subordinated
Convertible Promissory Notes
A portion of the purchase
price for the acquisition of High Mountain and Innovative Cabinets on October 8,
2021 was paid by the issuance of 6% subordinated convertible promissory notes in the aggregate principal amount of $5,880,345
by 1847 Cabinet to the sellers of High Mountain and Innovative Cabinets. The remaining principal balance of the notes at June 30, 2022
is $5,025,248, net of debt discount at $855,098, and they have accrued interest of $285,652.
The notes bear interest
at a rate of six percent (6%) per annum and are due and payable on October 8, 2024; provided that upon an event of default (as defined
in the notes), such interest rate shall increase to ten percent (10%) per annum. 1847 Cabinet may prepay the notes in whole or in part,
without penalty or premium, upon ten (10) business days prior written notice to the holders of the notes.
At any time prior to
October 8, 2022, the holders may, in their sole discretion, elect to convert up to twenty percent (20%) of the original principal amount
of the notes and all accrued, but unpaid, interest into such number of shares of the common stock of 1847 Cabinet determined by dividing
the amount to be converted by a conversion price determined by dividing (i) the fair market value of 1847 Cabinet (determined in accordance
with the notes) by (ii) the number of shares of 1847 Cabinet outstanding on a fully diluted basis. In
addition, on October 8, 2021, we entered into an exchange agreement with the holders, pursuant to which we granted them the right
to exchange all of the principal amount and accrued but unpaid interest under the notes or any portion thereof for a number of our common
shares to be determined by dividing the amount to be converted by an exchange price equal to the higher of (i) the 30-day volume
weighted average price for our common shares on the primary national securities exchange or over-the-counter market on which our
common shares are traded over the thirty (30) trading days immediately prior to the applicable exchange date or (ii) $10.00 (subject
to equitable adjustments for stock splits, stock combinations, recapitalizations and similar transactions).
The notes contain customary
events of default, including in the event of a default under the secured convertible promissory notes described above. The rights of
the holders to receive payments under the notes are subordinated to the rights of the purchasers under secured convertible promissory
notes described above.
6% Amortizing Promissory Note
On July 29, 2020, 1847 Asien entered into a securities
purchase agreement with Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated
May 1, 1992 (the “Asien’s Seller”), pursuant to which the Asien’s Seller sold 103,750 of our common shares to
1847 Asien a purchase price of $10.00 per share. As consideration, 1847 Asien issued to the Asien’s Seller a two-year 6% amortizing
promissory note in the aggregate principal amount of $1,037,500. On October 8, 2021, 1847 Asien and the Asien’s Seller entered
into amendment no. 1 to securities purchase agreement to amend certain terms of the securities purchase agreement and the 6% amortizing
promissory note. Pursuant to the amendment, the repayment terms of the 6% amortizing promissory note were revised so that one-half (50%)
of the outstanding principal amount ($518,750) and all accrued interest thereon shall be amortized on a two-year straight-line basis
and payable quarterly in accordance with the amortization schedule set forth on Exhibit A to the amendment, except for the payments that
were initially scheduled on January 1, 2022 and April 1, 2022, which were paid from the proceeds of the senior convertible promissory
notes described above, and the second-half (50%) of the outstanding principal amount ($518,750) and all accrued, but unpaid interest
thereon shall be paid on the second anniversary of the date of the 6% amortizing promissory note, along with any other unpaid principal
or accrued interest thereon. The note is unsecured and contains customary events of default. The remaining principal balance of the note
at June 30, 2022 was $581,963 and it had accrued interest of $49,707.
Vesting Promissory Note
A portion of the purchase price for the acquisition
of Kyle’s on September 30, 2020 was paid by the issuance of a vesting promissory note by 1847 Cabinet to Stephen Mallatt, Jr. and
Rita Mallatt in the principal amount of $1,050,000, which increased to a principal amount of up to $1,260,000 pursuant to the vested
percentage calculation described below. Payment of the principal and accrued interest on the note is subject to vesting as described
below. The note bears interest on the vested portion of principal amount at the rate of eight percent (8%) per annum. To the extent vested,
the vested portion of the principal and all accrued but unpaid interest on such vested portion of the principal shall be paid in one
lump sum on the last day of the thirty-sixth (36th) month following the date of the note.
The vested principal of the note due at the maturity
date shall be calculated each year based on the average annual consolidated EBITDA (as defined in the note) of 1847 Cabinet for each
of the years ended December 31, 2020, 2021 and 2022. The EBITDA for each year shall be divided by $1.4 million multiplied by 100 to obtain
the vested percentage. The vested principal for each year shall be equal to the vested percentage for that year multiplied by $350,000.
To the extent that the vested percentage for the subject year is less than 80%, no portion of the note for that year shall vest. To the
extent that the vested percentage for the subject year is equal to or greater than 120%, the vested principal shall be equal to $420,000
for that year and no more. For the year ended December 31, 2020, EBITDA of 1847 Cabinet was approximately $1,553,561, resulting in a
vested amount of approximately $388,390. For the year ended December 31, 2021, EBITDA of 1847 Cabinet was approximately $1,642,335, resulting
in an additional vested amount of approximately $410,584. As of June 30, 2022, the outstanding balance on this note was $1,001,183.
1847 Cabinet will have the right to redeem all
but no less than all of the note at any time prior to the maturity date. If 1847 Cabinet elects to redeem the note, the redemption price
will be payable in cash and is equal to the then outstanding vested portion of the principal plus any remaining unvested principal amount
plus accrued but unpaid interest thereon (calculated over 36 months). For purposes of this redemption calculation, the “unvested
principal amount” shall be $350,000 per year.
The note contains customary events of default.
The right of the holders to receive payments under the note is subordinated to all indebtedness of 1847 Cabinet, whether outstanding
as of the closing date or thereafter created, to banks, insurance companies and other financial institutions or funds, and federal or
state taxation authorities.
Financing Leases
On February 14, 2019, High Mountain entered in
an equipment financing lease to purchase a lift truck for $24,337, which matures on January 19, 2024. The balance payable was $8,520
as of June 30, 2022.
On April 10, 2019, High Mountain entered in an
equipment financing lease to purchase equipment for $67,577, which matures on April 1, 2024. The balance payable was $27,473 as of June
30, 2022.
On June 2, 2020, High Mountain entered in an
equipment financing lease to purchase office printers for $9,240, which matures on May 2, 2024. The balance payable was $4,611 as of
June 30, 2022.
On May 6, 2021, Kyle’s entered in an equipment
financing lease to purchase equipment for $276,896, which matures on December 1, 2027. The balance payable was $248,899 as of June 30,
2022.
On October 12, 2021, Kyle’s entered in
an equipment financing lease to purchase equipment for $245,375, which matures on December 1, 2027. The balance payable was $220,409
as of June 30, 2022.
On March 28, 2022, Kyle’s entered in an
equipment financing lease to purchase equipment for $245,395, which matures on January 28, 2028. The balance payable was $230,514 as
of June 30, 2022.
On March 28, 2022, Kyle’s entered in an
equipment financing lease to purchase equipment for $71,403, which matures on January 28, 2028. The balance payable was $66,939 as of
June 30, 2022.
On April 11, 2022, Kyle’s entered in a
financing lease to lease copy machines valued at $11,706, which matures on June 20, 2027. The balance payable was $11,223 as of June
30, 2022.
Vehicle Loans
Asien’s has entered into seven retail installment
sale contracts pursuant to which Asien’s agreed to finance its delivery trucks at rates ranging from 3.74% to 8.72% with an aggregate
remaining principal amount of $127,909 as of June 30, 2022.
Kyle’s has entered into two retail installment
sale contracts pursuant to which Kyle’s agreed to finance its delivery trucks at rates ranging from 5.90% to 6.54% with an aggregate
remaining principal amount of $57,717 as of June 30, 2022.
High Mountain has entered into twelve retail
installment sale contracts pursuant to which it agreed to finance delivery trucks and equipment at rates ranging from 3.74% to 6.34%
with an aggregate remaining principal amount of $97,599 as of June 30, 2022.
Innovative Cabinets has entered into two retail
installment sale contracts pursuant to which it agreed to finance delivery trucks and equipment at rates of 3.74% with an aggregate remaining
principal amount of $17,242 as of June 30, 2022.
Total Debt
The following table shows aggregate figures for
the total debt, net of discounts, described above that is coming due in the short and long term as of June 30, 2022. See the above disclosures
for more details regarding these loans.
| |
Short-Term | | |
Long-Term | | |
Total Debt | |
Secured Convertible Promissory Notes | |
$ | - | | |
$ | 22,108,707 | | |
$ | 22,108,707 | |
6% Subordinated Convertible Promissory Notes | |
| - | | |
| 5,025,248 | | |
| 5,025,248 | |
6% Amortizing Promissory Note | |
| 581,963 | | |
| - | | |
| 581,963 | |
Vesting Promissory Note | |
| - | | |
| 1,001,183 | | |
| 1,001,183 | |
Financing Leases | |
| 145,874 | | |
| 672,714 | | |
| 818,588 | |
Vehicle Loans | |
| 103,251 | | |
| 197,216 | | |
| 300,467 | |
Total | |
$ | 831,088 | | |
$ | 29,005,068 | | |
$ | 29,836,156 | |
Contractual Obligations
Our principal commitments consist mostly of obligations
under the loans described above and other contractual commitments described below.
We have engaged the Manager to manage our day-to-day
operations and affairs. Our relationship with the Manager will be governed principally by the following agreements:
| ● | the management
services agreement and offsetting management services agreements relating to the management
services the Manager will perform for us and the businesses we own and the management fee
to be paid to the Manager in respect thereof; and |
| ● | our operating
agreement setting forth the Manager’s rights with respect to the allocation shares
it owns, including the right to receive profit allocations from us, and the supplemental
put provision relating to the Manager’s right to cause us to purchase the allocation
shares it owns. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated
financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates.
These estimates are based on management’s historical industry experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies
that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could,
if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows,
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission (the
“SEC”) on March 31, 2022.