NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
NOTE
1—ORGANIZATION AND NATURE OF BUSINESS
1847
Holdings LLC (the “Company”) was formed under the laws of the State of Delaware on January 22, 2013. The Company
is in the business of acquiring small businesses in a variety of different industries.
On
March 3, 2017, the Company’s wholly-owned subsidiary 1847 Neese Inc., a Delaware corporation (“1847 Neese”),
entered into a stock purchase agreement with Neese, Inc., an Iowa corporation (“Neese”), and Alan Neese and Katherine
Neese, pursuant to which 1847 Neese acquired all of the issued and outstanding capital stock of Neese. As a result of this transaction, the Company owns 55% of 1847 Neese, with the remaining 45% held by the
sellers.
On
January 10, 2019, the Company established 1847 Goedeker Inc. (“Goedeker”) as a wholly-owned subsidiary in the State
of Delaware in connection with the proposed acquisition of assets from Goedeker Television Co., Inc., a Missouri corporation (“Goedeker
Television”), described below. On March 20, 2019, the Company established 1847 Goedeker Holdco Inc. (“1847 Holdco”)
as a wholly-owned subsidiary in the State of Delaware and subsequently transferred all of its shares in Goedeker to 1847 Holdco,
such that Goedeker became a wholly-owned subsidiary of 1847 Holdco.
On
January 18, 2019, Goedeker entered into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker,
pursuant to which, on April 5, 2019, Goedeker acquired substantially all of the assets of Goedeker Television used in its retail
appliance and furniture business (see Note 9). As a result of this transaction, the Company owns 70% of 1847 Holdco, with the
remaining 30% held by third-parties. (See Note 17).
The
consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, 1847 Neese, Neese, 1847
Holdco and Goedeker. All significant intercompany balances and transactions have been eliminated in consolidation.
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
financial statements of the Company have been prepared without audit in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) and are presented in US dollars.
In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended September 30, 2019 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2019.
These
unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2018.
Accounting
Basis
The
Company uses the accrual basis of accounting and GAAP. The Company has adopted a calendar year end.
Stock
Splits
On
January 22, 2018, the Company completed a 1-for-5 reverse split of its outstanding common shares. As a result of this stock split,
the Company’s issued and outstanding common shares decreased from 3,115,500 to 623,125 shares.
On
May 10, 2018, the Company completed a 5-for-1 forward stock split of its outstanding common shares. As a result of this stock
split, the Company’s issued and outstanding common shares increased from 623,125 to 3,115,625 shares.
Accordingly,
all share and per share information has been restated to retroactively show the effect of these stock splits.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Segment
Reporting
The
Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 280, Segment
Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to
its stockholders. Beginning with the second quarter of 2019, the Company changed its operating and reportable segments from one
segment to two segments: the Land Management Segment, which is operated by Neese, and the Retail and Appliances Segment, which
is operated by Goedeker.
The
Land Management Segment will be responsible for the activities that provide professional services on waste disposal and land application
services based in Grand Junction, Iowa.
The
Retail and Appliances Segment will be responsible for the activities in e-commerce destination for home furnishings, including
appliances, furniture, bath and kitchen fixtures, décor, lighting and home goods based in St. Louis, Missouri.
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 “Holding Company” below and these include
costs associated with executive management, financing activities and public company compliance.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with the original maturities of three months or less to be cash equivalents.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain
Statements of Operations reclassifications have been made in the presentation of the Company’s prior financial statements
and accompanying notes to conform to the presentation as of and for the three and nine months ended September 30, 2019. The Company
reclassified certain operating expense accounts in the Consolidated Statement of Operations. The reclassification had no impact
on financial position, net income, or shareholder’s equity.
Revenue
Recognition and Cost of Revenue
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts
with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification
(“ASC”) Topic 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized
to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the
nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including
significant judgments. The Company’s adoption of this ASU resulted in no change to the Company’s results of
operations or balance sheet.
Land
Management Segment
Neese’s
payment terms are due on demand from acceptance of delivery. Neese does not incur incremental costs obtaining purchase orders
from customers, however, if Neese did, because all of Neese’s contracts are less than a year in duration, any contract costs
incurred would be expensed rather than capitalized.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
The
revenue that Neese recognizes arises from orders it receives from customers. Neese’s performance obligations under the customer
orders correspond to each service delivery or sale of equipment that Neese makes to customers under the purchase orders; as a
result, each purchase order generally contains only one performance obligation based on the service or equipment sale to be completed.
Control of the delivery transfers to customers when the customer is able to direct the use of, and obtain substantially all of
the benefits from, Neese’s products, which generally occurs at the later of when the customer obtains title to the equipment
or when the customer assumes risk of loss. The transfer of control generally occurs at a point of delivery. Once this occurs,
Neese has satisfied its performance obligation and Neese recognizes revenue.
Neese
also sells equipment by posting it on auction sites specializing in farm equipment. Neese posts the equipment for sale on a “magazine”
site for several weeks before the auction. When Neese decides to sell, it moves the equipment to the auction site. The auctions
are one day. If Neese accepts a bid, the customer pays the bid price and arranges for pick-up of the equipment.
Transaction
Price ‒ Neese agrees with customers on the selling price of each transaction. This transaction price is generally based
on the agreed upon service fee. In Neese’s contracts with customers, it allocates the entire transaction price to the service
fee to the customer, which is the basis for the determination of the relative standalone selling price allocated to each performance
obligation. Any sales tax, value added tax, and other tax Neese collects concurrently with revenue-producing activities are excluded
from revenue.
If
Neese continued to apply legacy revenue recognition guidance for the three and nine months ended September 30, 2019, revenues,
gross margin, and net loss would not have changed.
Substantially
all of Neese’s sales are to businesses, including farmers or municipalities and very little to individuals.
Disaggregated
Revenue ‒ Neese disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how
the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Neese’s
revenue by contract type is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Trucking
|
|
$
|
383,709
|
|
|
$
|
568,004
|
|
|
$
|
1,267,550
|
|
|
$
|
1,580,032
|
|
Waste hauling and pumping
|
|
|
40,781
|
|
|
|
45,349
|
|
|
|
417,138
|
|
|
|
296,891
|
|
Repairs
|
|
|
181,129
|
|
|
|
163,618
|
|
|
|
309,330
|
|
|
|
429,348
|
|
Other
|
|
|
136,422
|
|
|
|
106,489
|
|
|
|
299,747
|
|
|
|
236,816
|
|
Total services
|
|
|
742,041
|
|
|
|
883,460
|
|
|
|
2,293,765
|
|
|
|
2,543,087
|
|
Sales of parts and equipment
|
|
|
670,221
|
|
|
|
583,054
|
|
|
|
1,523,031
|
|
|
|
1,155,668
|
|
Total revenue
|
|
$
|
1,412,262
|
|
|
$
|
1,466,514
|
|
|
$
|
3,816,796
|
|
|
$
|
3,698,755
|
|
Performance
Obligations ‒ Performance obligations for the different types of services are discussed below:
|
●
|
Trucking
‒ Revenues for time and material contracts are recognized when the merchandise
or commodity is delivered to the destination specified in the agreement with the customer.
|
|
●
|
Waste
Hauling and pumping ‒ Revenues for waste hauling and pumping is recognized
when the hauling, pumping, and spreading are complete.
|
|
●
|
Repairs
‒ Revenues for repairs are recognized upon completion of equipment serviced.
|
|
●
|
Sales
of parts and equipment ‒ Revenues for the sale of parts and equipment are recognized
upon the transfer and acceptance by the customer.
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Accounts
Receivable, Net ‒ Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration.
Unbilled receivables of $0 and $139,766 are included in this balance at September 30, 2019 and December 31, 2018, respectively.
The payment of consideration related to these unbilled receivables is subject only to the passage of time.
Neese
reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are
used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net
realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic
conditions, and customer specific information. After Neese has exhausted all collection efforts, the outstanding receivable balance
relating to services provided is written off against the allowance. Additions to the provision for bad debt are charged to expense.
Neese
determined that an allowance for loss of $29,001 was required at September 30, 2019 and December 31, 2018.
Retail
and Appliances Segment
Goedeker
collects the full sales price from the customer at the time the order is placed. Goedeker does not incur incremental costs obtaining
purchase orders from customers, however, if Goedeker did, because all Goedeker’s contracts are less than a year in duration,
any contract costs incurred would be expensed rather than capitalized.
The
revenue that Goedeker recognizes arises from orders it receives from customers. Goedeker’s performance obligations under
the customer orders correspond to each sale of merchandise that it makes to customers under the purchase orders; as a result,
each purchase order generally contains only one performance obligation based on the merchandise sale to be completed. Control
of the delivery transfers to customers when the customer can direct the use of, and obtain substantially all the benefits from,
Goedeker’s products, which generally occurs when the customer assumes the risk of loss. The transfer of control generally
occurs at the point of shipment. Once this occurs, Goedeker has satisfied its performance obligation and Goedeker recognizes revenue.
Revenue from the sale of long-term service warranties are recognized net of costs to sell the contracts to the third-party warranty
service company.
Transaction
Price ‒ Goedeker agrees with customers on the selling price of each transaction. This transaction price is generally based
on the agreed upon sales price. In Goedeker’s contracts with customers, it allocates the entire transaction price to the
sales price, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation.
Any sales tax, value added tax, and other tax Goedeker collects concurrently with revenue-producing activities are excluded from
revenue.
If
Goedeker continued to apply legacy revenue recognition guidance for the three and nine months ended September 30, 2019, revenues,
gross margin, and net loss would not have changed.
Cost
of revenue includes 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.
Substantially
all Goedeker’s sales are to individual retail consumers.
Disaggregated
Revenue ‒ Goedeker disaggregates revenue from contracts with customers by contract type, as it believes it best
depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Goedeker’s
revenue by sales type is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Appliance sales
|
|
$
|
10,086,489
|
|
|
$
|
-
|
|
|
$
|
18,535,801
|
|
|
$
|
-
|
|
Furniture sales
|
|
|
1,398,843
|
|
|
|
-
|
|
|
|
2,969,390
|
|
|
|
-
|
|
Other sales
|
|
|
646,771
|
|
|
|
-
|
|
|
|
1,242,962
|
|
|
|
-
|
|
Total revenue
|
|
$
|
12,132,103
|
|
|
$
|
-
|
|
|
$
|
22,748,153
|
|
|
$
|
-
|
|
Performance
Obligations – Goedeker’s performance obligations include delivery of products and, in some instances, performance
of services such as installation. Revenue for the sale of merchandise is recognized upon shipment to the customer; or in some
instances, upon delivery and installation of the product which typically occur simultaneously.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Receivables
Receivables
consist of credit card transactions in the process of settlement. Vendor rebates receivable represent amounts due from manufactures
from whom the Company purchases products. Rebates receivable are stated at the amount that management expects to collect from
manufacturers, net of accounts payable amounts due the vendor. Rebates are calculated on product and model sales programs from
specific vendors. The rebates are paid at intermittent periods either in cash or through issuance of vendor credit memos, which
can be applied against vendor accounts payable. Based on the Company’s assessment of the credit history with its manufacturers,
it has concluded that there should be no allowance for uncollectible accounts. The Company historically collects substantially
all of its outstanding rebates receivables. Uncollectible balances are expensed in the period it is determined to be uncollectible.
Allowance
for Credit Losses
Provisions
for credit losses are charged to income as losses are estimated to have occurred and in amounts sufficient to maintain an allowance
for credit losses at an adequate level to provide for future losses on the Company’s accounts receivable. The Company charges
credit losses against the allowance and credits subsequent recoveries, if any, to the allowance. Historical loss experience and
contractual delinquency of accounts receivables, and management’s judgment are factors used in assessing the overall adequacy
of the allowance and the resulting provision for credit losses. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio
performance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as
more information becomes available.
The
allowance for credit losses consists of general and specific components. The general component of the allowance estimates credit
losses for groups of accounts receivable on a collective basis and relates to probable incurred losses of unimpaired accounts
receivables. The Company records a general allowance for credit losses that includes forecasted future credit losses.
Inventory
Inventory
consists of finished products acquired for resale and is valued at the lower-of-cost-or-market with cost determined on a specific
item basis for the Neese and of finished products acquired for resale and is valued at the low-of-cost-or-market with cost determined
on a average item basis for Goedeker. The Company periodically evaluates the value of items in inventory and provides write-downs
to inventory based on its estimate of market conditions. The Company estimated an obsolescence allowance of $99,546 at September
30, 2019 and December 31, 2018.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation of furniture, vehicles and equipment is calculated using the straight-line method
over the estimated useful lives as follows:
|
|
Useful Life
(Years)
|
|
Building and Improvements
|
|
4
|
|
Machinery and Equipment
|
|
3-7
|
|
Tractors
|
|
3-7
|
|
Trucks and vehicles
|
|
3-6
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Goodwill
and Intangible Assets
In
applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on
estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are
initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable
intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators
of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually
as of December 1, and whenever indicators of impairment exist. The fair value of intangible assets are compared with their carrying
values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value.
Acquired
identifiable intangible assets are amortized over the following periods:
Acquired intangible Asset
|
|
Amortization Basis
|
|
Expected Life
(years)
|
|
Customer-Related
|
|
Straight-line basis
|
|
5
|
|
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents and amounts due to shareholders. The carrying amount
of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing
market rates unless otherwise disclosed in these financial statements.
Derivative
Instrument Liability
The
Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting
and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in
other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless
of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the
derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At September
30, 2019, the Company classified a warrant issued in conjunction with a term loan as a derivative instrument. (see Note 11).
Income
Taxes
Income
taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and
are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax
assets that, based on available evidence, are not expected to be realized.
Stock-Based
Compensation
Stock-based
compensation is accounted for at fair value in accordance with ASC Topic 718. To date, the Company has not adopted a stock option
plan and has not granted any stock options.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Basic
Income (Loss) Per Share
Basic
income (loss) per share is calculated by dividing the net loss applicable to common shareholders by the weighted average number
of common shares during the period. Diluted earnings per share is calculated by dividing the net income available to common shareholders
by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding
is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. As the Company had a net loss for
the three and nine months ended September 30, 2019, the following 895,565 potentially dilutive securities were excluded from diluted
loss per share: 200,000 for outstanding warrants and 695,565 related to the convertible note payable and accrued interest. There
are no such common share equivalents outstanding as of September 30, 2018.
Going
Concern Assessment
Management
assesses going concern uncertainty in the Company’s 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.
The
Company has generated losses since its inception and has relied on cash on hand, external bank lines of credit and the sale of
a note to support cashflow from operations. As of and for the nine months ended September 30, 2019, the Company had a net loss
attributable to 1847 Holdings shareholders of $1,978,241, negative working capital of $9,612,640 and net cash used in operations
of $954,532. 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 the consolidated financial statements in this Quarterly Report on Form
10-Q, indicate improved operations and the Company’s ability to continue operations as a going concern. The Company has
contingency plans to reduce or defer expenses and cash outlays should operations not improve in the look forward period.
Recent
Accounting Pronouncements
Not
Yet Adopted
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.
To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and
measure impairment based on the excess of a reporting unit’s carrying amount over its fair value. A qualitative assessment may
still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective for
fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company will test goodwill for impairment within one year of the acquisition
or annually as of December 1, and whenever indicators of impairment exist.
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. The Company is currently in the process of evaluating the impact of the adoption of ASU
2016-13 on its consolidated financial statements.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Recently
Adopted
In
February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new leases standard that amends various
aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies
to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.
Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between
finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital
leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December
15, 2018, including interim periods within those fiscal years; and earlier adoption is permitted. In the financial statements
in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period
presented with an adjustment to equity. Practical expedients are available for election as a package and if applied consistently
to all leases. On January 1, 2019, the Company recognized $624,157 of financing lease assets and $624,157 of financing lease liabilities,
including noncurrent financing lease liabilities of $559,972, as a result of adopting this standard. As part of its adoption,
the Company elected the following practical expedients: the Company has not reassessed whether any expired or existing contracts
are or contain leases, the Company has not reassessed lease classification for any expired or existing leases; the Company has
not reassessed initial direct costs for any existing leases; and the Company has not separated lease and non-lease components.
The adoption of the standard did not have a material impact on the Company’s consolidated financial statements and related
disclosures. The comparative periods have not been restated for the adoption of ASU 2016-02.
NOTE
3—BUSINESS SEGMENTS
Summarized
financial information concerning the Company’s reportable segments is presented below:
|
|
For the Nine Months Ended
September 30, 2019
|
|
|
For the Nine Months Ended
September 30, 2018
|
|
|
|
Land Management Services
|
|
|
Retail & Appliances
|
|
|
Corporate Services
|
|
|
Total
|
|
|
Land Management Services
|
|
|
Retail & Appliances
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
2,293,765
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,293,765
|
|
|
$
|
2,543,087
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,543,087
|
|
Sales of parts and equipment
|
|
|
1,523,031
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,523,031
|
|
|
|
1,155,668
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,155,668
|
|
Furniture and appliances revenue
|
|
|
-
|
|
|
|
22,748,153
|
|
|
|
-
|
|
|
|
22,748,153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
3,816,796
|
|
|
|
22,748,153
|
|
|
|
-
|
|
|
|
26,564,949
|
|
|
|
3,698,755
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,698,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
1,369,440
|
|
|
|
18,886,115
|
|
|
|
-
|
|
|
|
20,255,556
|
|
|
|
1,034,786
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,034,786
|
|
Total operating expenses
|
|
|
4,104,427
|
|
|
|
4,765,211
|
|
|
|
119,458
|
|
|
|
8,989,096
|
|
|
|
4,249,254
|
|
|
|
-
|
|
|
|
256,679
|
|
|
|
4,505,933
|
|
Loss from operations
|
|
$
|
(1,657,071
|
)
|
|
$
|
(903,173
|
)
|
|
$
|
(119,458
|
)
|
|
$
|
(2,679,703
|
)
|
|
$
|
(1,585,285
|
)
|
|
$
|
-
|
|
|
$
|
(256,679
|
)
|
|
$
|
(1,841,964
|
)
|
|
|
For the Three Months Ended
September 30, 2019
|
|
|
For the Three Months Ended
September 30, 2018
|
|
|
|
Land Management Services
|
|
|
Retail & Appliances
|
|
|
Corporate Services
|
|
|
Total
|
|
|
Land Management Services
|
|
|
Retail & Appliances
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
742,041
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
742,041
|
|
|
$
|
883,460
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
883,460
|
|
Sales of parts and equipment
|
|
|
670,221
|
|
|
|
-
|
|
|
|
-
|
|
|
|
670,221
|
|
|
|
583,054
|
|
|
|
-
|
|
|
|
-
|
|
|
|
583,054
|
|
Furniture and appliances revenue
|
|
|
-
|
|
|
|
12,132,103
|
|
|
|
-
|
|
|
|
12,132,103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
1,412,262
|
|
|
|
12,132,103
|
|
|
|
-
|
|
|
|
13,544,365
|
|
|
|
1,466,514
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,466,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
596,286
|
|
|
|
10,113,543
|
|
|
|
-
|
|
|
|
10,709,829
|
|
|
|
478,195
|
|
|
|
-
|
|
|
|
-
|
|
|
|
478,195
|
|
Total operating expenses
|
|
|
1,346,937
|
|
|
|
2,571,324
|
|
|
|
39,582
|
|
|
|
3,957,843
|
|
|
|
1,413,428
|
|
|
|
-
|
|
|
|
7,251
|
|
|
|
1,420,679
|
|
Loss from operations
|
|
$
|
(530,961
|
)
|
|
$
|
(552,764
|
)
|
|
$
|
(39,582
|
)
|
|
$
|
(1,123,307
|
)
|
|
$
|
(425,109
|
)
|
|
$
|
|
|
|
$
|
(7,251
|
)
|
|
$
|
(432,360
|
)
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
NOTE
4—RECEIVABLES
At
September 30, 2019 and December 31, 2018, receivables consisted of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Credit card payments in process of settlement
|
|
$
|
490,737
|
|
|
$
|
-
|
|
Vendor rebates receivable
|
|
|
967,565
|
|
|
|
-
|
|
Trade receivables from customers
|
|
|
360,685
|
|
|
|
578,569
|
|
Total receivables
|
|
|
1,818,987
|
|
|
|
578,569
|
|
Allowance for doubtful accounts
|
|
|
(29,001
|
)
|
|
|
(29,001
|
)
|
Accounts receivable, net
|
|
$
|
1,789,986
|
|
|
$
|
549,568
|
|
Following
is a summary of activity in the allowance for doubtful accounts:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Balance at beginning of period
|
|
$
|
29,001
|
|
|
$
|
14,001
|
|
Provisions for losses
|
|
|
-
|
|
|
|
15,000
|
|
Accounts charged-off
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
29,001
|
|
|
$
|
29,001
|
|
NOTE
5—INVENTORIES
At
September 30, 2019 and December 31, 2018, the inventory balances are composed of:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Machinery and Equipment
|
|
$
|
189,452
|
|
|
$
|
427,551
|
|
Parts
|
|
|
155,252
|
|
|
|
159,685
|
|
Appliances
|
|
|
1,979,773
|
|
|
|
-
|
|
Furniture
|
|
|
303,845
|
|
|
|
-
|
|
Other
|
|
|
41,941
|
|
|
|
-
|
|
Subtotal
|
|
|
2,670,263
|
|
|
|
587,236
|
|
Allowance for inventory obsolescence
|
|
|
(99,546
|
)
|
|
|
(99,546
|
)
|
Inventories, net
|
|
$
|
2,570,717
|
|
|
$
|
487,690
|
|
Following
is a summary of transactions in the allowance for inventory obsolescence:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Balance at beginning of period
|
|
$
|
99,546
|
|
|
$
|
70,000
|
|
Provisions for obsolescence
|
|
|
-
|
|
|
|
48,000
|
|
Write-down in inventory value
|
|
|
-
|
|
|
|
(18,454
|
)
|
Balance at end of period
|
|
$
|
99,546
|
|
|
$
|
99,546
|
|
Inventory
and accounts receivable are pledged to secure a loan from Burnley, SBCC and Home State Bank described and defined in the notes
below.
NOTE
6—DEPOSITS WITH VENDORS
Deposits
with vendors represent cash on deposit with one vendor arising from accumulated rebates paid by the vendor. The deposits are used
by the vendor to seek to secure the Company’s purchases. The deposit can be withdrawn at any time up to the amount of the
Company’s credit line with the vendor. Alternatively, the Company could secure their credit line with a floor plan line
from a lender and withdraw all its deposits. The Company has elected to leave the deposits with the vendor on which it earns interest
income. In the acquisition of assets of Goedeker Television, Goedeker Television retained the vendor deposits.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
NOTE
7—PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at September 30, 2019 and December 31, 2018:
Classification
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Buildings and improvements
|
|
$
|
5,338
|
|
|
$
|
5,338
|
|
Equipment and machinery
|
|
|
3,026,541
|
|
|
|
2,943,490
|
|
Tractors
|
|
|
2,834,888
|
|
|
|
2,834,888
|
|
Trucks and other vehicles
|
|
|
1,147,304
|
|
|
|
1,147,304
|
|
Leasehold improvements
|
|
|
117,626
|
|
|
|
-
|
|
Total
|
|
|
7,131,697
|
|
|
|
6,931,020
|
|
Less: Accumulated depreciation
|
|
|
(3,464,590
|
)
|
|
|
(2,439,931
|
)
|
Property and equipment, net
|
|
$
|
3,667,107
|
|
|
$
|
4,491,089
|
|
Depreciation
expense for the nine months ended September 30, 2019 and 2018 was $1,032,143 and $1,054,233, respectively.
All
property and equipment are pledged to secure loans from Burnley, SBCC and Home State Bank as described and defined in the notes
below.
NOTE
8—INTANGIBLE ASSETS
The
following provides a breakdown of identifiable intangible assets as of September 30, 2019 and December 31, 2018:
Customer Relationships
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Identifiable intangible assets, gross
|
|
$
|
34,000
|
|
|
$
|
34,000
|
|
Accumulated amortization
|
|
|
(17,567
|
)
|
|
|
(12,467
|
)
|
Identifiable intangible assets, net
|
|
$
|
16,433
|
|
|
$
|
21,533
|
|
In
connection with the acquisition of Neese, the Company identified intangible assets of $34,000 representing customer relationships.
These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 5 years and amortization
expense amounted to $5,100 for the nine months ended September 30, 2019 and 2018, respectively.
As
of September 30, 2019, the estimated annual amortization expense for each of the next four fiscal years is as follows:
2019 (remainder)
|
|
$
|
1,700
|
|
2020
|
|
|
6,800
|
|
2021
|
|
|
6,800
|
|
2022
|
|
|
1,133
|
|
Total
|
|
$
|
16,433
|
|
NOTE
9—ACQUISITION
On
January 18, 2019, Goedeker entered into an asset purchase agreement with Goedeker Television and Steve Goedeker and Mike Goedeker
(the “Stockholders”), pursuant to which Goedeker agreed to acquire substantially all of the assets of Goedeker Television
used in its retail appliance and furniture business (the “Goedeker Business”).
On
April 5, 2019, Goedeker, 1847 Holdco, and the Stockholders entered into an amendment to the asset purchase agreement
and closing of the acquisition of substantially all of the assets of Goedeker Television used in the Goedeker Business was completed
(the “Acquisition”).
The
aggregate purchase price was $6,200,000 consisting of: (i) $1,500,000 in cash, subject to adjustment; (ii) the issuance of a promissory
note in the principal amount of $4,100,000; and (iii) up to $600,000 in earn out payments (as described below). As additional
consideration, 1847 Holdco agreed to issue to each of the Stockholders a number of shares of its common stock equal to a 11.25%
non-dilutable interest (22.5% total) in all of the issued and outstanding stock of 1847 Holdco as of the closing date.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
The
cash portion was decreased by the amount of outstanding indebtedness of Goedeker Television for borrowed money existing as of
the closing. As a result, the cash portion was adjusted to $478,000. In addition, the cash portion of the purchase price is subject
to a customary post-closing working capital adjustment provision with a target working capital of $(1,802,000) (negative amount).
Pursuant
to the asset purchase agreement, the parties agreed to cooperate in determining a reasonable arrangement designed to provide Goedeker
with the benefits under a digital marketing agreement between Goedeker Television and Power Digital Marketing. In consideration
for Goedeker Television so cooperating, Goedeker agreed to pay to Goedeker Television a total of $20,000, which amount Goedeker
Television will use to pay Power Digital Marketing for amounts due under the digital marketing agreement for services to be rendered
during the months of April 2019 and May 2019. Goedeker Television also agreed to cause the digital marketing agreement to be terminated
as of May 30, 2019 to ensure that Goedeker Television no longer has any obligations under the digital marketing agreement.
Goedeker
Television is also entitled to receive the following earn out payments to the extent the Goedeker Business achieves the applicable
EBITDA (as defined in the asset purchase agreement) targets:
|
1.
|
An
earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing
twelve (12) month period from the closing date is $2,500,000 or greater;
|
|
2.
|
An
earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing
twelve (12) month period from the first anniversary of closing date is $2,500,000 or
greater; and
|
|
3.
|
An
earn out payment of $200,000 if the EBITDA of the Goedeker Business for the trailing
twelve (12) month period from the second anniversary of the closing date is $2,500,000
or greater.
|
To
the extent the EBITDA of the Goedeker Business for any applicable period is less than $2,500,000 but greater than $1,500,000,
Goedeker must pay a partial earn out payment to Goedeker Television in an amount equal to the product determined by multiplying
(i) the EBITDA Achievement Percentage by (ii) the applicable earn out payment for such period, where the “Achievement Percentage”
is the percentage determined by dividing (A) the amount of (i) the EBITDA of the Goedeker Business for the applicable period less
(ii) $1,500,000, by (B) $1,000,000. For avoidance of doubt, no partial earn out payments shall be earned or paid to the extent
the EBITDA of the Goedeker Business for any applicable period is equal or less than $1,500,000.
To
the extent Goedeker Television is entitled to all or a portion of an earn out payment, the applicable earn out payment(s) (or
portion thereof) shall be paid on the date that is three (3) years from the closing date, and shall accrue interest from the date
on which it is determined Goedeker Television is entitled to such earn out payment (or portion thereof) at a rate equal to five
percent (5%) per annum, computed on the basis of a 360 day year for the actual number of days elapsed.
The
rights of Goedeker Television to receive any earn out payment are subordinate to the rights of Burnley and SBCC under separate
subordination agreements that Goedeker Television entered into with them on April 5, 2019 in connection with the Acquisition (see
Notes 10 and 11).
The provisional fair value of the purchase
consideration issued to Goedeker Television was allocated to the net tangible assets acquired. The Company accounted for the Acquisition
as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were
recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value
of the net assets acquired was approximately $535,940. The excess of the aggregate fair value of the net tangible assets has been
allocated to goodwill.
The
Company is currently in the process of completing the preliminary purchase price allocation as an acquisition of certain assets.
The final purchase price allocation for Goedeker will be included in the Company’s financial statements in future periods.
The table below shows preliminary analysis for the Goedeker asset purchase:
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Provisional Purchase Consideration at preliminary fair value:
|
|
|
|
Note payable, net of $215,500 of capitalized financing costs
|
|
$
|
4,484,500
|
|
Financing of acquisition through notes payable,
common stock and warrants (see Note 19)
|
|
|
2,583,000
|
|
Amount of consideration
|
|
$
|
7,067,500
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at preliminary fair value
|
|
|
|
|
Cash
|
|
$
|
1,135,368
|
|
Accounts receivable
|
|
|
792,173
|
|
Inventories
|
|
|
2,516,128
|
|
Working capital adjustment receivable and other assets
|
|
|
554,636
|
|
Property and equipment
|
|
|
206,612
|
|
Accounts payable and accrued expenses
|
|
|
(2,472,568
|
)
|
Customer deposits
|
|
|
(2,196,409
|
)
|
Other liabilities
|
|
|
-
|
|
Net tangible assets acquired
|
|
$
|
535,940
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
535,940
|
|
Consideration paid
|
|
|
7,067,500
|
|
Preliminary goodwill
|
|
$
|
6,531,560
|
|
The
following presents the pro-forma combined results of operations of the Company as if the Acquisition was completed on January
1, 2018 (before non-controlling interest).
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues, net
|
|
$
|
39,511,848
|
|
|
$
|
46,582,000
|
|
Net income (loss) allocable to common shareholders
|
|
$
|
(2,423,507
|
)
|
|
$
|
544,000
|
|
Net loss per share
|
|
$
|
(0.77
|
)
|
|
$
|
0.17
|
|
Weighted average number of shares outstanding
|
|
|
3,165,625
|
|
|
|
3,165,625
|
|
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the Acquisition been completed as of January 1, 2018
or to project potential operating results as of any future date or for any future periods. The revenue and net loss before non-controlling
interest of Goedeker since April 5, 2019 acquisition date through September 30, 2019 included in the consolidated income statement
amounted to approximately $22,748,000 and $1,548,000, respectively.
The
estimated useful life remaining on the property and equipment acquired is 4 to 5 years.
NOTE
10—LINES OF CREDIT
Burnley
Capital LLC
On
April 5, 2019, Goedeker, as borrower, and 1847 Holdco entered into a loan and security agreement with Burnley Capital LLC (“Burnley”)
for revolving loans in an aggregate principal amount that will not exceed the lesser of (i) the borrowing base or (ii) $1,500,000
(provided that such amount may be increased to $3,000,000 in Burnley’s sole discretion) minus reserves established Burnley
at any time in accordance with the loan and security agreement. The “borrowing base” means an amount equal to the
sum of the following: (i) the product of 85% multiplied by the liquidation value of Goedeker’s inventory (net of all liquidation
costs) identified in the most recent inventory appraisal by an appraiser acceptable to Burnley (ii) multiplied by Goedeker’s
eligible inventory (as defined in the loan and security agreement), valued at the lower of cost or market value, determined on
a first-in-first-out basis. In connection with the closing of the Acquisition on April 5, 2019, Goedeker borrowed $744,000 under
the loan and security agreement and issued a revolving note to Burnley in the principal amount of up to $1,500,000. The balance
of the line of credit amounts to $576,962 as of September 30, 2019, comprised of principal of $675,295 and net of unamortized
debt discount of $98,333.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
The
revolving note matures on April 5, 2022, provided that at Burnley’s sole and absolute discretion, it may agree to extend
the maturity date for two successive terms of one year each. The revolving note bears interest at a per annum rate equal to the
greater of (i) the LIBOR Rate (as defined in the loan and security agreement) plus 6.00% or (ii) 8.50%; provided that upon an
event of default (as defined below) all loans, all past due interest and all fees shall bear interest at a per annum rate equal
to the foregoing rate plus 3.00%. Goedeker shall pay interest accrued on the revolving note in arrears on the last day of each
month commencing on April 30, 2019.
Goedeker
may at any time and from time to time prepay the revolving note in whole or in part. If at any time the outstanding principal
balance on the revolving note exceeds the lesser of (i) the difference of the total loan amount minus any reserves and (ii) the
borrowing base, then Goedeker shall immediately prepay the revolving note in an aggregate amount equal to such excess. In addition,
in the event and on each occasion that any net proceeds (as defined in the loan and security agreement) are received by or on
behalf of Goedeker or 1847 Holdco in respect of any prepayment event following the occurrence and during the continuance of an
event of default, Goedeker shall, immediately after such net proceeds are received, prepay the revolving note in an aggregate
amount equal to 100% of such net proceeds. A “prepayment event” means (i) any sale, transfer, merger, liquidation
or other disposition (including pursuant to a sale and leaseback transaction) of any property of Goedeker or 1847 Holdco; (ii)
a change of control (as defined in the loan and security agreement); (iii) any casualty or other insured damage to, or any taking
under power of eminent domain or by condemnation or similar proceeding of, any property of Goedeker or 1847 Holdco with a fair
value immediately prior to such event equal to or greater than $25,000; (iv) the issuance by Goedeker of any capital stock or
the receipt by Goedeker of any capital contribution; or (v) the incurrence by Goedeker or 1847 Holdco of any indebtedness (as
defined in the loan and security agreement), other than indebtedness permitted under the loan and security agreement.
Under
the loan and security agreement, Goedeker is required to pay a number of fees to Burnley, including the following:
|
●
|
a
commitment fee during the period from closing to the earlier of the maturity date or
termination of Burnley’s commitment to make loans under the loan and security agreement,
which shall accrue at the rate of 0.50% per annum on the average daily difference of
the total loan amount then in effect minus the sum of the outstanding principal balance
of the revolving note, which such accrued commitment fees are due and payable in arrears
on the first day of each calendar month and on the date on which Burnley’s commitment
to make loans under the loan and security agreement terminates, commencing on the first
such date to occur after the closing date;
|
|
●
|
an
annual loan facility fee equal to 0.75% of the revolving commitment (i.e., the maximum
amount that Goedeker may borrow under the revolving loan), which is fully earned on the
closing date for the term of the loan (including any extension) but shall be due and
payable on each anniversary of the closing date;
|
|
●
|
a
monthly collateral management fee for monitoring and servicing the revolving loan equal
to $1,700 per month for the term of revolving note, which is fully earned and non-refundable
as of the date of the loan and security agreement, but shall be payable monthly in arrears
on the first day of each calendar month; provided that payment of the collateral management
fee may be made, at the discretion of Burnley, by application of advances under the revolving
loan or directly by Goedeker; and
|
|
●
|
if
the revolving loan is terminated for any reason, including by Burnley following an event
of default, then Goedeker shall pay, as liquidated damages and compensation for the costs
of being prepared to make funds available, an amount equal to the applicable percentage
multiplied by the revolving commitment (i.e., the maximum amount that Goedeker may borrow
under the revolving loan), wherein the term applicable percentage means (i) 3%, in the
case of a termination on or prior to the first anniversary of the closing date, (ii)
2%, in the case of a termination after the first anniversary of the closing date but
on or prior to the second anniversary thereof, and (iii) 0.5%, in the case of a termination
after the second anniversary of the closing date but on or prior to the maturity date.
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
The
loan and security agreement contains customary events of default, including, among others: (i) for failure to pay principal and
interest on the revolving note when due, or to pay any fees due under the loan and security agreement; (ii) if any representation,
warranty or certification in the loan and security agreement or any document delivered in connection therewith is incorrect in
any material respect; (iii) for failure to perform any covenant or agreement contained in the loan and security agreement or any
document delivered in connection therewith; (iv) for the occurrence of any default in respect of any other indebtedness of more
than $100,000; (v) for any voluntary or involuntary bankruptcy, insolvency or dissolution; (vi) for the occurrence of one or more
judgments, non-interlocutory orders, decrees or arbitration awards involving in the aggregate a liability of $25,000 or more;
(vii) if Goedeker or 1847 Holdco, or officer thereof, is charged by a governmental authority, criminally indicted or convicted
of a felony under any law that would reasonably be expected to lead to forfeiture of any material portion of collateral, or such
entity is subject to an injunction restraining it from conducting its business; (viii) if Burnley determines that a material adverse
effect (as defined in the loan and security agreement) has occurred; (ix) if a change of control (as defined in the loan and security
agreement) occurs; (x) if there is any material damage to, loss, theft or destruction of property which causes, for more than
thirty consecutive days beyond the coverage period of any applicable business interruption insurance, the cessation or substantial
curtailment of revenue producing activities; (xi) if there is a loss, suspension or revocation of, or failure to renew any permit
if it could reasonably be expected to have a material adverse effect; and (xii) for the occurrence of any default or event of
default under the term loan with SBCC (as defined below), the 9% subordinated promissory note issued to Goedeker Television, the
secured convertible promissory note issued to Leonite (as defined below) or any other debt that is subordinated to the revolving
loan.
The
loan and security agreement contains customary representations, warranties and affirmative and negative financial and other covenants
for a loan of this type. The revolving note is secured by a first priority security interest in all of the assets of Goedeker
and 1847 Holdco. In connection with such security interest, on April 5, 2019, (i) 1847 Holdco entered into a pledge agreement
with Burnley, pursuant to which 1847 Holdco pledged the shares of Goedeker held by it to Burnley, and (ii) Goedeker entered into
a deposit account control agreement with Burnley, SBCC and Montgomery Bank relating to the security interest in Goedeker’s
bank accounts.
In
addition, on April 5, 2019, the Company entered into a guaranty with Burnley to guaranty the obligations under the loan and security
agreement upon the occurrence of certain prohibited acts described in the guaranty.
The rights of Burnley to receive payments under the revolving note are subordinate to the rights of Northpoint
(as defined below) under a subordination agreement that Burnley entered into with Northpoint.
At
September 30, 2019, Goedeker did not meet certain loan covenants under the loan and security agreement. The agreement requires
compliance with the following ratios as a percentage of earnings before interest, taxes, depreciation, and amortization for the
twelve-month period ended September 30, 2019. The table below shows the required ratio and actual ratio for such period.
Covenant
|
|
Actual Ratio
|
|
Required Ratio
|
Total debt ratio
|
|
(9.6)x
|
|
4.50x
|
Senior debt ratio
|
|
(3.7)x
|
|
1.75x
|
Interest coverage ratio
|
|
(0.7)x
|
|
1.0x
|
In
addition, Goedeker was not in compliance with a requirement with respect to the liquidity ratio, which is the ratio of cash and
available borrowings to customer deposits. At September 30, 2019, the actual ratio was 0.24x compared to a requirement of 0.65x
The
loan and security agreement with SBCC described below contains the same covenants and a cross default provision, whereby a default
under the Burnley loan and security agreement triggers a default under the SBCC loan and security agreement. Accordingly, the
Company is in technical, not payment default, on these loan and security agreements and has classified such debt as a current
liability. The Company has developed plans that will return it to full compliance including a recently received proposal from
a new asset-based lender.
There
are no cross default provisions that would require any other long-term liabilities to be classified as current. Although the 9%
subordinated promissory note described below contains a cross default provision that is triggered by the acceleration of the senior
debt, such cross default provision would only be triggered for a technical default like the one that occurred if the senior lender
accelerated the senior debt, which has not happened.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Northpoint Commercial Finance LLC
On June 24, 2019, Goedeker, as
borrower, entered into a loan and security agreement with Northpoint Commercial Finance LLC (“Northpoint”), which
was amended on August 2, 2019, for revolving loans up to an aggregate maximum loan amount of $1,000,000 for the acquisition,
financing or refinancing by Goedeker of inventory at an interest rate of LIBOR plus 7.99%. The balance of the line of credit
amounts to $736,788 as of September 30, 2019.
Pursuant to the loan and security agreement, Goedeker shall pay the following fees to Northpoint: (i)
an audit fee for each audit conducted as determined by Northpoint, equal to the out-of-pocket expense incurred by Northpoint plus
any minimum audit fee established by Northpoint; (ii) a fee for any returned payments equal to the lesser of the maximum amount
permitted by law or $50; (iii) a late fee for each payment not received by the 25th day of a calendar month, and each
month thereafter until such payment is paid, equal to the greater of 5% of the amount past due or $25; (iv) a billing fee equal
to $250 for any month for which Goedeker requests a paper billing statement; (v) a live check fee equal to $50 for each check that
Goedeker sends to Northpoint for payment of obligations under the loan and security agreement; (vi) processing fees to be determined
by Northpoint; and (vii) any additional fees that Northpoint may implement from time to time.
The loan and security agreement contains customary events of default, including in the event of (i) non-payment,
(ii) a breach by Goedeker of any of its representations, warranties or covenants under the loan and security agreement or any other
agreement entered into with Northpoint, or (iii) the bankruptcy or insolvency of Goedeker. The loan and security agreement
contains customary representations, warranties and affirmative and negative financial and other covenants for a loan of this type.
The Northpoint loans are secured by a security interest in all of the inventory of Goedeker that is manufactured
or sold by vendors identified in the loan and security agreement. In connection with the loan and security agreement, on June 24,
2019, 1847 Holdco entered into a guaranty in favor of Northpoint, to guaranty the obligations of Goedeker under the loan and security
agreement.
NOTE 11—TERM LOANS
SBCC
On April 5, 2019, Goedeker, as borrower,
and 1847 Holdco entered into a loan and security agreement with Small Business Community Capital II, L.P. (“SBCC”)
for a term loan in the principal amount of $1,500,000, pursuant to which Goedeker issued to SBCC a term note in the principal
amount of up to $1,500,000 and a ten-year warrant to purchase shares of the most senior capital stock of Goedeker equal to 5.0%
of the outstanding equity securities of Goedeker on a fully-diluted basis for an aggregate price equal to $100. The balance of
the note amounts to $1,049,186 as of September 30, 2019, comprised of principal of $1,406,250 and net of unamortized debt discount
of $155,750 and unamortized warrant feature of $201,314.
The term note matures on April 5, 2023
and bears interest at the sum of the cash interest rate (defined as 11% per annum) plus the PIK interest rate (defined as 2% per
annum); provided that upon an event of default all principal, past due interest and all fees shall bear interest at a per annum
rate equal to the cash interest rate and the PIK interest rate, in each case plus 3.00%. Interest accrued at the cash interest
rate shall be due and payable in arrears on the last day of each month commencing May 31, 2019. Interest accrued at the PIK interest
rate shall be automatically capitalized, compounded and added to the principal amount of the term note on each last day of each
quarter unless paid in cash on or prior to the last day of each quarter; provided that (i) interest accrued pursuant to an event
of default shall be payable on demand, and (ii) in the event of any repayment or prepayment, accrued interest on the principal
amount repaid or prepaid (including interest accrued at the PIK interest rate and not yet added to the principal amount of term
note) shall be payable on the date of such repayment or prepayment. Notwithstanding the foregoing, all interest on term note, whether
accrued at the cash interest rate or the PIK interest rate, shall be due and payable in cash on the maturity date unless payment
is sooner required by the loan and security agreement.
Goedeker must repay to SBCC on the last
business day of each March, June, September and December, commencing with the last business day of June 2019, an aggregate principal
amount of the term note equal to $93,750, regardless of any prepayments made, and must pay the unpaid principal on the maturity
date unless payment is sooner required by the loan and security agreement.
Goedeker may prepay the term note in whole
or in part from time to time; provided that if such prepayment occurs (i) prior to the first anniversary of the closing date,
Goedeker shall pay SBCC an amount equal to 5.0% of such prepayment, (ii) prior to the second anniversary of the closing date and
on or after the first anniversary of the closing date, Goedeker shall pay SBCC an amount equal to 3.0% of such prepayment, or
(iii) prior to the third anniversary of the closing date and on or after the second anniversary of the closing date, Goedeker
shall pay SBCC an amount equal to 1.0% of such prepayment, in each case as liquidated damages for damages for loss of bargain
to SBCC. In addition, in the event and on each occasion that any net proceeds (as defined in the loan and security agreement)
are received by or on behalf of Goedeker or 1847 Holdco in respect of any prepayment event following the occurrence and during
the continuance of an event of default, Goedeker shall, immediately after such net proceeds are received, prepay the term note
in an aggregate amount equal to 100% of such net proceeds. A “prepayment event” means (i) any sale, transfer, merger,
liquidation or other disposition (including pursuant to a sale and leaseback transaction) of any property of Goedeker or 1847
Holdco; (ii) a change of control (as defined in the loan and security agreement); (iii) any casualty or other insured damage to,
or any taking under power of eminent domain or by condemnation or similar proceeding of, any property of Goedeker or 1847 Holdco
with a fair value immediately prior to such event equal to or greater than $25,000; (iv) the issuance by Goedeker of any capital
stock or the receipt by Goedeker of any capital contribution; or (v) the incurrence by Goedeker or 1847 Holdco of any indebtedness
(as defined in the loan and security agreement), other than indebtedness permitted under the loan and security agreement.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
The loan and security agreement with SBCC
contains the same events of default as the loan and security agreement with Burnley, provided that the reference to the term loan
in the cross-default provision refers instead to the revolving loan.
The loan and security agreement contains
customary representations, warranties and affirmative and negative financial and other covenants for a loan of this type. The term
note is secured by a second priority security interest (subordinate to the revolving loan) in all of the assets of Goedeker and
1847 Holdco. In connection with such security interest, on April 5, 2019, (i) 1847 Holdco entered into a pledge agreement with
SBCC, pursuant to which 1847 Holdco pledged the shares of Goedeker held by it to SBCC, and (ii) Goedeker entered deposit account
control agreement with Burnley, SBCC and Montgomery Bank relating to the security interest in Goedeker’s bank accounts.
In addition, on April 5, 2019, the Company
entered into a guaranty with SBCC to guaranty the obligations under the loan and security agreement upon the occurrence of certain
prohibited acts described in the guaranty.
The rights of SBCC to receive payments under the term note are subordinate to the rights of Northpoint
and Burnley under separate subordination agreements that SBCC entered into with them.
As noted above, the Company is in technical,
not payment default, on this loan and security agreement and has classified such debt as a current liability.
Home State Bank
On June 13, 2018, Neese entered into a
term loan agreement with Home State Bank, pursuant to which Neese issued a promissory note to Home State Bank in the principal
amount of $3,654,074 with an annual interest rate of 6.85% with covenants to maintain a minimum debt coverage ratio of 1.00 to
1.25 measured at December 31, 2019. Pursuant to the terms of the note, Neese will make semi-annual payments of $302,270 beginning
on January 20, 2019 and continuing every six months thereafter until July 20, 2020, the maturity date; provided however, that Neese
will pay the note in full immediately upon demand by Home State Bank. The balance of the note amounts to $3,361,499 as of September
30, 2019, comprised of principal of $3,376,757 and net of unamortized debt discount of $15,258.
The loan agreement contains customary representations
and warranties. Pursuant to the terms of the loan agreement and the note, an “event of default” includes: (i) if Neese
fails to make any payment when due under the note; (ii) if Neese fails to comply with or to perform any other term, obligation,
covenant or condition contained in the note or in any of the related documents or to comply with or to perform any term, obligation,
covenant or condition contained in any other agreement between Home State Bank and Neese; (iii) if Neese defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Home State Bank’s property or Neese’s ability to repay the note or perform
Neese’s obligations under the note or any of the related documents; (iv) if any warranty, representation or statement made
or furnished to Home State Bank by Neese or on Neese’s behalf under the note or the related documents is false or misleading
in any material respect; (v) upon the dissolution or termination of Neese’s existence as a going business, the insolvency
of Neese, the appointment of a receiver for any part of Neese’s property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Neese, (vi)
upon commencement of foreclosure or forfeiture proceedings by any creditor of Neese or by any governmental agency against any collateral
securing the loan; and (vii) if a material adverse change occurs in Neese’s financial condition, or Home State Bank believes
the prospect of payment or performance of the note is impaired. If any event of default occurs, all commitments and obligations
of Home State Bank immediately will terminate and, at Home State Bank’s option, all indebtedness immediately will become
due and payable, all without notice of any kind to Neese. Additionally, upon an event of default, the interest rate on the note
will be increased by 3 percentage points. However, in no event will the interest rate exceed the maximum interest rate limitations
under applicable law.
The loan is secured by inventory, accounts
receivable, and certain fixed assets of Neese. The loan agreement limited the payment of interest on certain promissory notes (See
Note 14) to $40,000 annually or fees to the Company’s manager. The Company continues to accrue interest and management fee
at the contractual amounts. Such accruals (in excess of $40,000 in interest on the promissory notes) are shown as long-term accrued
expenses in the accompanying balance sheet as of June 30, 2019.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
If the Company sells property, plant, and
equipment securing the loan, it must remit the appraised value of the equipment to Home State Bank. During the nine months ended
September 30, 2019, $0 was remitted to Home State Bank pursuant to this requirement. During the three months ended, September 30,
2019, Home State Bank advanced $27,000 against the term loan to pay the annual liability insurance premium.
The Company adopted ASU 2015-03 by deducting
$51,427 of net debt issuance costs from the term loan. Amortization of debt issuance costs totaled $16,210 for the three months
ended September 30, 2019.
Following is a summary of payments due
on the SBCC and Home State Bank terms loan for the succeeding five years:
|
|
Amount
|
|
2019 (remainder)
|
|
$
|
187,500
|
|
2020
|
|
|
3,751,757
|
|
2021
|
|
|
375,000
|
|
2022
|
|
|
375,000
|
|
2023
|
|
|
93,750
|
|
Total payments
|
|
|
4,783,007
|
|
Less current portion of principal payments
|
|
|
4,783,007
|
|
Debt issuance costs, net
|
|
|
(372,322
|
)
|
Long-term portion of principal payments
|
|
$
|
-
|
|
NOTE 12—FLOOR PLAN LOANS PAYABLE
At September 30, 2019, $13,908 of machinery
and equipment inventory was pledged to secure a floor plan loan from a commercial lender. The Company must remit proceeds from
the sale of the secured inventory to the floor plan lender and pays a finance charge that can vary monthly at the option of the
lender. The balance of the floor plan payable as of September 30, 2019 and December 31, 2018 amounted to $13,908 and $109,100,
respectively.
NOTE 13—PROMISSORY NOTES
Secured Convertible Promissory Note
On April 5, 2019, the Company, 1847 Holdco
and Goedeker (collectively, “1847”) entered into a securities purchase agreement with Leonite Capital LLC, a Delaware
limited liability company (“Leonite”), pursuant to which 1847 issued to Leonite a secured convertible promissory note
in the aggregate principal amount of $714,286. As additional consideration for the purchase of the note, (i) the Company issued
to Leonite 50,000 common shares, (ii) the Company issued to Leonite a five-year warrant to purchase 200,000 common shares at an
exercise price of $1.25 per share (subject to adjustment), which may be exercised on a cashless basis, and (iii) 1847 Holdco issued
to Leonite shares of common stock equal to a 7.5% non-dilutable interest in 1847 Holdco.
The note carries an original issue discount
of $64,286 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in
connection with the purchase of the note. Therefore, the purchase price of the note was $650,000. Furthermore, the Company issued
50,000 shares of common stock valued at $137,500 and a debt-discount related to the warrants valued at $292,673. The company amortized
$211,088 of financing costs related to the shares and warrants in the nine months ended September 30, 2019. The remaining net balance
of the note at September 30, 2019 is $456,228, comprised of principal of $714,286 and net of unamortized original issuance discount
interest of $31,473 and financing costs of $76,250 and unamortized debt discount warrant feature of $150,335.
The note bears interest at the rate of
the greater of (i) 12% per annum and (ii) the prime rate as set forth in the Wall Street Journal on April 5, 2019 plus 6.5% guaranteed
over the holding period on the unconverted principal amount, on the terms set forth in the note (the “Stated Rate”).
Any amount of principal or interest on the note which is not paid by the maturity date shall bear interest at the rate at the lesser
of 24% per annum or the maximum legal amount permitted by law (the “Default Interest”).
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Beginning on May 5, 2019 and on the
same day of each and every calendar month thereafter throughout the term of the note, 1847 shall make monthly payments
of interest only due under the note to Leonite at the Stated Rate as set forth above. 1847 shall pay to Leonite on an
accelerated basis any outstanding principal amount of the note, along with accrued, but unpaid interest, from: (i) net proceeds
of any future financings by the Company, but not its subsidiaries, whether debt or equity, or any other financing proceeds, except
any transaction having a specific use of proceeds requirement that such proceeds are to be used exclusively to purchase the assets
or equity of an unaffiliated business and the proceeds are used accordingly; (ii) net proceeds from any sale of assets of 1847
or any of its subsidiaries other than sales of assets in the ordinary course of business or receipt by 1847 or any of its subsidiaries
of any tax credits, subject to rights of Goedeker, or other financing sources of 1847 (including its subsidiaries) existing prior
to the date of the note; and (iii) net proceeds from the sale of any assets outside of the ordinary course of business or securities
in any subsidiary.
The note will mature 12 months from the
issue date, or April 5, 2020, at which time the principal amount and all accrued and unpaid interest, if any, and other fees relating
to the note, will be due and payable. Unless an event of default as set forth in the note has occurred, 1847 has the right to prepay
principal amount of, and any accrued and unpaid interest on, the note at any time prior to the maturity date at 115% of the principal
amount (the “Premium”), provided, however, that if the prepayment is the result of any of the occurrence of any of
the transactions described in subparagraphs (i), (ii) or (iii) above then such prepayment shall be the unpaid principal amount,
plus accrued and unpaid interest and other amounts due but without the Premium.
The note contains customary events of default,
including in the event of (i) non-payment, (ii) a breach by 1847 of its covenants under the securities purchase agreement or any
other agreement entered into in connection with the securities purchase agreement, or a breach of any of representations or warranties
under the note, or (iii) the bankruptcy of 1847. The note also contains a cross default provision, whereby a default by 1847 of
any covenant or other term or condition contained in any of the other financial instrument issued by of 1847 to Leonite or any
other third party after the passage all applicable notice and cure or grace periods that results in a material adverse effect shall,
at Leonite’s option, be considered a default under the note, in which event Leonite shall be entitled to apply all rights
and remedies under the terms of the note.
Under the note, Leonite has the right at
any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest
of the note into fully paid and non-assessable common shares or any shares of capital stock or other securities of the Company
into which such common shares may be changed or reclassified. The number of common shares to be issued upon each conversion of
the note shall be determined by dividing the conversion amount by the applicable conversion price then in effect. The conversion
amount is the sum of: (i) the principal amount of the note to be converted plus (ii) at Leonite’s option, accrued and unpaid
interest, plus (iii) at Leonite’s option, Default Interest, if any, plus (iv) Leonite’s expenses relating to a conversion,
plus (v) at Leonite’s option, any amounts owed to Leonite. The conversion price shall be $1.00 per share (subject to adjustment
as further described in the note for common share distributions and splits, certain fundamental transactions, and anti-dilution
adjustments), provided that at any time after any event of default under the note, the conversion price shall immediately be equal
to the lesser of (i) such conversion price less 40%; and (ii) the lowest weighted average price of the common shares during the
21 consecutive trading day period immediately preceding the trading day that 1847 receives a notice of conversion or (iii) the
discount to market based on subsequent financings with other investors.
Notwithstanding the foregoing, in no event
shall Leonite be entitled to convert any portion of the note in excess of that portion of the note upon conversion of which the
sum of (1) the number of common shares beneficially owned by Leonite and its affiliates (other than common shares which may be
deemed beneficially owned through the ownership of the unconverted portion of the note or the unexercised or unconverted portion
of any other security of the Company subject to a limitation on conversion or exercise analogous to the limitations contained in
the note, and, if applicable, net of any shares that may be deemed to be owned by any person not affiliated with Leonite who has
purchased a portion of the note from Leonite) and (2) the number of common shares issuable upon the conversion of the portion of
the note with respect to which the determination of this proviso is being made, would result in beneficial ownership by Leonite
and its affiliates of more than 4.99% of the outstanding common shares of the Company. Such limitations on conversion may be waived
(up to a maximum of 9.99%) by Leonite upon, at its election, not less than 61 days’ prior notice to the Company, and the
provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by Leonite,
as may be specified in such notice of waiver).
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Concurrently with 1847 and Leonite entering
into the securities purchase agreement and as security for 1847’s obligations thereunder, on April 5, 2019, the Company,
1847 Holdco and Goedeker entered into a security and pledge agreement with Leonite, pursuant to which, in order to secure 1847’s
timely payment of the note and related obligations and the timely performance of each and all of its covenants and obligations
under the securities purchase agreement and related documents, 1847 unconditionally and irrevocably granted, pledged and hypothecated
to Leonite a continuing security interest in and to, a lien upon, assignment of, and right of set-off against, all presently existing
and hereafter acquired or arising assets. Such security interest is a first priority security interest with respect to the securities
that the Company owns in 1847 Holdco and in 1847 Neese, and a third priority security interest with respect to all other assets.
The rights of Leonite to receive
payments under the note are subordinate to the rights of Northpoint, Burnley and SBCC under separate subordination agreements
that Leonite entered into with them.
9% Subordinated Promissory Note
As noted above, a portion of the purchase
price for the Acquisition was paid by the issuance by Goedeker to Steve Goedeker, as representative of Goedeker Television, of
a 9% subordinated promissory note in the principal amount of $4,100,000. The note will accrue interest at 9% per annum, amortized
on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule attached thereto, and mature
on April 5, 2023. Goedeker has the right to redeem all or any portion of the note at any time prior to the maturity date without
premium or penalty of any kind. The note contains customary events of default, including in the event of (i) non-payment, (ii)
a default by Goedeker of any of its covenants under the asset purchase agreement or any other agreement entered into in connection
with the asset purchase agreement, or a breach of any of representations or warranties under such documents, or (iii) the bankruptcy
of Goedeker. The note also contains a cross default provision which provides that if there occurs with respect to the revolving
loan with Burnley or the term loan with SBCC (A) a default with respect to any payment obligation thereunder that entitles the
holder thereof to declare such indebtedness to be due and payable prior to its stated maturity or (B) any other default thereunder
that entitles, and has caused, the holder thereof to declare such indebtedness to be due and payable prior to maturity. Since the
defaults under the loans with Burnley and SBCC are not payment defaults, they fall under clause (B) above and would require Burnley
or SBCC to accelerate the payment of indebtedness under their notes (which they have not done) before the cross default provisions
would result in a default under this note.
The rights of the holder to receive
payments under the note are subordinate to the rights of Northpoint, Burnley and SBCC under separate subordination agreements
that the holder entered into with them.
The remaining balance of the note at September
30, 2019 is $4,274,209, comprised of principal of $4,530,293 and net of unamortized debt discount of $256,084.
8% Vesting Promissory Note
A portion of the purchase price for the
acquisition of Neese was paid by the issuance of a vesting promissory note in the principal amount of $1,875,000 (which was determined
to have no fair value as of September 30, 2019 and December 31, 2018) by 1847 Neese and Neese to the sellers of Neese. Payment
of the principal and accrued interest on the vesting promissory note is subject to vesting and a contingent consideration subject
to fair market valuation adjustment at each reporting period. The vesting promissory note bears interest on the vested portion
of the principal amount at the rate of eight percent (8%) per annum and is due and payable in full on June 30, 2020 (the “Maturity
Date”). The principal of the vesting promissory note vests in accordance with the following formula:
|
●
|
Fiscal Year 2017: If Adjusted EBITDA for the fiscal year ending December 31, 2017, exceeds an Adjusted
EBITDA target of $1,300,000 (the “Adjusted EBITDA Target”), then a portion of the principal amount of the vesting promissory
note that is equal to sixty percent (60%) of such excess shall vest. Interest shall be payable on such vested portion of principal
from January 1, 2017 through the Maturity Date. For the year ended December 31, 2017, Adjusted EBITDA was $788,958, below the threshold
amount of $1,300,000, therefore no portion of the note vested in fiscal year 2017.
|
|
●
|
Fiscal Year 2018: If Adjusted EBITDA for the fiscal year ending December 31, 2018, exceeds the
Adjusted EBITDA Target, then a portion of the principal amount of the vesting promissory note that is equal to sixty percent (60%)
of such excess shall vest. Interest shall be payable on such vested portion of principal from January 1, 2018 through the Maturity
Date. For the year ended December 31, 2018, Adjusted EBITDA was approximately $320,000, below the threshold amount of $1,300,000,
therefore no portion of the note vested in fiscal year 2018.
|
|
●
|
Fiscal Year 2019: If Adjusted EBITDA for the fiscal year ending December 31, 2019, exceeds the
Adjusted EBITDA Target, then a portion of the principal amount of the vesting promissory note that is equal to sixty percent (60%)
of such excess shall vest. Interest shall be payable on such vested portion of principal from January 1, 2019 through the Maturity
Date.
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
For purposes of the vesting promissory
note, “Adjusted EBITDA” means the earnings before interest, taxes, depreciation and amortization expenses, in accordance
with GAAP applied on a basis consistent with the accounting policies, practices and procedures used to prepare the financial statements
of Neese as of the closing date, plus to the extent deducted in calculating such net income: (i) all expenses related to the transactions
contemplated hereby and/or potential or completed future financings or acquisitions, including legal, accounting, due diligence
and investment banking fees and expenses; (ii) all management fees, allocations or corporate overhead (including executive compensation)
or other administrative costs that arise from the ownership of Neese by 1847 Neese including allocations of supervisory, centralized
or other parent-level expense items; (iii) one-time extraordinary expenses or losses; and (iv) any reserves or adjustments to reserves
which are not consistent with GAAP. Additionally, for purposes of calculating Adjusted EBITDA, the purchase and sales prices of
goods and services sold by or purchased by Neese to or from 1847 Neese, its subsidiaries or affiliates shall be adjusted to reflect
the amounts that Neese would have realized or paid if dealing with an independent third-party in an arm’s-length commercial
transaction, and inventory items shall be properly categorized as such and shall not be expenses until such inventory is sold or
consumed.
At June 30, 2018, management made the determination
that the vesting note payable had no value because it estimated that the EBITDA threshold of $1,300,000 for both 2018 and 2019
would be not attained, thus eliminating the requirement for a payment under terms of the note payable.
The vesting promissory note contains customary
events of default, including in the event of: (i) non-payment; (ii) a default by 1847 Neese or Neese of any of their covenants
under the stock purchase agreement, the vesting promissory note, or any other agreement entered into in connection with the stock
purchase agreement, or a breach of any of their representations or warranties under such documents; or (iii) the bankruptcy of
1847 Neese or Neese.
Under terms of the term loan with Home
State Bank described in Note 11, this note may not be paid until the term loan is paid in full.
10% Promissory Note
A portion of the purchase price for the
acquisition of Neese was paid by the issuance of a promissory note in the principal amount of $1,025,000 by 1847 Neese and Neese
to the sellers of Neese. The promissory note bears interest on the outstanding principal amount at the rate of ten percent (10%)
per annum and was due and payable in full on March 3, 2018; provided, however, that the unpaid principal, and all accrued, but
unpaid, interest thereon shall be prepaid if at any time, and from time to time, the cash on hand of 1847 Neese and Neese exceeds
$250,000 and, then, the prepayment shall be equal to the amount of cash in excess of $200,000 until the unpaid principal and accrued,
but unpaid, interest thereon is fully prepaid. The promissory note contains the same events of default as the vesting promissory
note. The promissory note has not been repaid, thus the Company is in default under this note. Under terms of the term loan with
Home State Bank described in Note 11, this note may not be paid until the term loan is paid in full. The payees on the note agreed
to the modification of its terms by signing the loan agreement for the Home State Bank term loan. Accordingly, the loan is shown
as a long-term liability as of June 30, 2019. Additionally, the term loan lender limits the payment of interest on this note to
$40,000 annually. The Company continues to accrue interest at the contract rate; however, given the limitations of the term loan,
all accrued interest in excess of $40,000 is included in long-term accrued expenses.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
NOTE 14—FINANCING LEASES
The cash portion of the purchase price
for the acquisition of Neese was financed under a capital lease transaction for Neese’s equipment with Utica Leaseco, LLC
(“Utica”), pursuant to a master lease agreement, dated March 3, 2017, between Utica, as lessor, and 1847 Neese and
Neese, as co-lessees (collectively, the “Lessee”). Under the master lease agreement, Utica loaned an aggregate of $3,240,000
for certain of Neese’s equipment listed therein, which it leases to the Lessee. The initial term of the master lease agreement
was for 51 months. Under the master lease agreement, the Lessee agreed to pay a monthly rent of $53,000 for the first three (3)
months, with such amount increasing to $85,322 for the remaining forty-eight (48) months.
On June 14, 2017, the parties entered into
a first amendment to lease documents, pursuant to which the parties agreed to, among other things, extend the term of the master
lease agreement from 51 months to 57 months and amend the payments due thereunder. Under the amendment, the Lessee agreed to pay
a monthly rent of $53,000 for the first ten (10) months, with such amount increasing to $85,322 for the remaining forty-seven (47)
months. In connection with the extension of the term of the master lease agreement, the parties also amended the schedule of stipulated
loss values and early termination payment schedule attached thereto. In connection with the amendment, the Lessee agreed to pay
Utica an amendment fee of $2,500.
On October 31, 2017, the parties entered
into a second equipment schedule to the master lease agreement, pursuant to which Utica loaned an aggregate of $980,000 for certain
of Neese’s equipment listed therein. The term of the second equipment schedule is 51 months and agreed monthly payments are
$25,807.
If any rent is not received by Utica within
five (5) calendar days of the due date, the Lessee shall pay a late charge equal to ten (10%) percent of the amount. In addition,
in the event that any payment is not processed or is returned on the basis of insufficient funds, upon demand, the Lessee shall
pay Utica a charge equal to five percent (5%) of the amount of such payment. The Lessee is also required to pay an annual administration
fee of $5,000. Upon the expiration of the term of the master lease agreement, the Lessee is required to pay, together with all
other amounts then due and payable under the master lease agreement, in cash, an end of term buyout price equal to the lesser of:
(a) $162,000 (five percent (5%) of the total invoice cost (as defined in the master lease agreement)); or (b) the fair market value
of the equipment, as determined by Utica. Upon the expiration of the master lease agreement, the Lessee is required to pay, together
with all other amounts then due and payable under the master lease agreement, in cash, an end of term buyout price equal to the
lesser of: (a) $49,000 (five percent (5%) of the total invoice cost); or (b) the fair market value of the equipment, as determined
by Utica.
Provided that no default under the master
lease agreement has occurred and is continuing beyond any applicable grace or cure period, the Lessee has an early buy-out option
with respect to all but not less than all of the equipment, upon the payment of any outstanding rental payments or other fees then
due, plus an additional amount set forth in the master lease agreement, which represents the anticipated fair market value of the
equipment as of the anticipated end date of the master lease agreement. In addition, the Lessee shall pay to Utica an administrative
charge to be determined by Utica to cover its time and expenses incurred in connection with the exercise of the option to purchase,
including, but not limited to, reasonable attorney fees and costs. Furthermore, upon the exercise by the Lessee of this option
to purchase the equipment, the Lessee shall pay all sales and transfer taxes and all fees payable to any governmental authority
as a result of the transfer of title of the equipment to Lessee. The early buy-out option was not available on the second equipment
schedule to the master lease agreement until after December 31, 2018.
In connection with the master lease agreement,
the Lessee granted a security interest on all of its right, title and interest in and to: (i) the equipment, together with all
related software (embedded therein or otherwise) and general intangibles, all additions, attachments, accessories and accessions
thereto whether or not furnished by the supplier; (ii) all accounts, chattel paper, deposit accounts, documents, other equipment,
general intangibles, instruments, inventory, investment property, letter of credit rights and any supporting obligations related
to any of the foregoing; (iii) all books and records pertaining to the foregoing; (iv) all property of such Lessee held by Utica,
including all property of every description, in the custody of or in transit to Utica for any purpose, including safekeeping, collection
or pledge, for the account of such Lessee or as to which such Lessee may have any right or power, including but not limited to
cash; and (v) to the extent not otherwise included, all insurance, substitutions, replacements, exchanges, accessions, proceeds
and products of the foregoing.
On February 1, 2018, Utica agreed to continue
the $53,000 payments for three additional months and extend the maturity of the loan by three months. Additionally, Utica agreed
to defer the February 3, 2018 payment to February 20, 2018. The Company paid one-half the normal late fee, $2,650 for the late
payment. On March 2, 2018, Utica agreed to defer the March 3 payment to March 30, 2018. The Company paid a late payment fee of
$5,300 for the payment deferral.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
On April 18, 2018, Utica, the Lessee, and
Ellery W. Roberts, as guarantor under the master lease agreement, entered into a forbearance agreement relating to the non-payment
of certain rent payments due under the master lease agreement for the months of March 2018 and April 2018. Pursuant to the forbearance
agreement, Utica agreed to forbear from demanding payment in full and exercising its remedies under the master lease agreement
until June 3, 2018. Pursuant to the forbearance agreement, the Lessee agreed to, among other things, (i) make the payments set
forth in the forbearance agreement on or before the dates specified therein, totaling $173,376, (ii) be current on all rent due
under Schedule 1 of the master lease agreement by June 3, 2018 and be current on all rent due under Schedule 2 of the master lease
agreement by May 30, 2018, (ii) reinstate or renew and continue in effect all insurance as required under the master lease agreement
at Lessee’s sole cost and expense, (iv) pay a forbearance fee to Utica totaling $4,500, which shall not be due until termination
of the master lease agreement and (v) execute a surrender agreement with respect to the Lessee’s equipment, which will be
held in escrow by Utica and not deemed effective unless and until the earlier to occur of: (a) the June 3, 2018, provided liabilities
under master lease agreement remain due but unpaid; (b) such time as Utica accelerates due and unpaid liabilities pursuant to the
term of the forbearance agreement and the master lease agreement; or (c) a default occurs under the forbearance agreement or the
master lease agreement.
A portion of the proceeds from the term
loan from Home State Bank (Note 11) were applied to reduce the balance of this lease to $475,000. The lease is payable in 46 payments
of $12,882 beginning July 3, 2018 and an end-of-term buyout of $38,000. As a result, the parties to the forbearance agreement agreed
that the forbearance agreement is terminated and is no longer in effect. In completing the early payout, the Company incurred a
loss of $405,674 plus an additional loss of $95,130 from the write-off of unamortized debt issuance costs. The loss on early extinguishment
of debt arose from the buyout provisions in the lease and because the Company had delayed making the regular payment of $85,322
until May 3, 2018, rather than July 3, 2017 as contemplated in the original master lease agreement. Management chose to close the
term loan because of the much lower interest rate and the loan allows the Company to make payments that match its operating cycle
rather than monthly payments.
If the Company sells equipment or inventory,
it must remit to Utica the amount loaned against the equipment. Such payments are accumulated and applied to the balance at the
end of the lease term. During the three months ended September 30, 2019, $116,067 of payments and $0 of lien release payments were
remitted to Utica.
The assets and liabilities under the master
lease agreement are recorded at the fair value of the assets at the time of acquisition.
The Company adopted ASU 2015-03 by deducting
$28,070 of net debt issuance costs from the long-term portion of the financing lease. Amortization of debt issuance costs totaled
$3,015 for the three months ended September 30, 2019.
At June 30, 2019, annual minimum future
lease payments under this Master Lease Agreement are as follows:
|
|
Amount
|
|
2019 (remainder of year)
|
|
$
|
141,875
|
|
2020
|
|
|
464,269
|
|
2021
|
|
|
464,269
|
|
2022
|
|
|
77,335
|
|
Total minimum lease payments
|
|
|
1,147,748
|
|
Less amount representing interest
|
|
|
240,504
|
|
Present value of minimum lease payments
|
|
|
907,244
|
|
Less current portion of minimum lease
|
|
|
(344,716
|
)
|
Less debt issuance costs, net
|
|
|
(28,070
|
)
|
Less payments to Utica for release of lien
|
|
|
(249,784
|
)
|
Less lease deposits
|
|
|
(38,807
|
)
|
End of lease buyout payments
|
|
|
117,413
|
|
Long-term present value of minimum lease payment
|
|
$
|
363,280
|
|
The interest rate on the capitalized lease
is approximately 15.5%.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
NOTE 15—OPERATING LEASE
On March 3, 2017, Neese entered into an
agreement of lease with K&A Holdings, LLC, a limited liability company that is wholly-owned by officers of Neese. The agreement
of lease is for a term of ten (10) years and provides for a base rent of $8,333 per month. In the event of late payment, interest
shall accrue on the unpaid amount at the rate of eighteen percent (18%) per annum. The agreement of lease contains customary events
of default, including if Neese shall fail to pay rent within five (5) days after the due date, or if Neese shall fail to perform
any other terms, covenants or conditions under the agreement of lease, and other customary representations, warranties and covenants.
Under terms of the term loan agreement with Home State Bank (Note 11), the Company may not pay salary or rent to such officers
of Neese in excess of $100,000 per year beginning on the date of the term loan agreement, June 13, 2018. The Company is accruing
monthly rent, but because of the limitation in the term loan, $183,333 of accrued rent is classified as a long-term accrued liability.
The amount accrued for amounts included
in the measurement of operating lease liabilities was $25,000 for the three months ended September 30, 2019.
Supplemental balance sheet information
related to leases was as follows:
|
|
September 30,
2019
|
|
Operating lease right-of-use lease asset
|
|
$
|
624,157
|
|
Accumulated amortization
|
|
|
(43,928
|
)
|
Net balance
|
|
$
|
580,229
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
62,182
|
|
Lease liability, long term
|
|
|
518,047
|
|
Total operating lease liabilities
|
|
$
|
580,229
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
89 Months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.85
|
%
|
Maturities of the lease liability are as
follows:
|
|
For the Years Ended
|
|
2019 (October to December)
|
|
$
|
25,000
|
|
2020
|
|
|
100,000
|
|
2021
|
|
|
100,000
|
|
2022
|
|
|
100,000
|
|
2023
|
|
|
100,000
|
|
2024
|
|
|
100,000
|
|
Thereafter
|
|
|
216,667
|
|
Total lease payments
|
|
|
741,667
|
|
Less imputed interest
|
|
|
161,437
|
|
Maturities of lease liabilities
|
|
$
|
580,230
|
|
Neese leased a piece of equipment on an
operating lease. The lease originated in May 2014 for a five year term with annual payments of $11,830 with a final payment in
July 2019.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
On April 5, 2019, Goedeker entered into
a lease agreement with S.H.J., L.L.C., a Missouri limited liability company and affiliate of Goedeker. The lease is for a term
five (5) years and provides for a base rent of $45,000 per month. In addition, Goedeker is responsible for all taxes and insurance
premiums during the lease term. In the event of late payment, interest shall accrue on the unpaid amount at the rate of eighteen
percent (18%) per annum. The lease contains customary events of default, including if: (i) Goedeker shall fail to pay rent within
five (5) days after the due date; (ii) any insurance required to be maintained by Goedeker pursuant to the lease shall be canceled,
terminated, expire, reduced, or materially changed; (iii) Goedeker shall fail to comply with any term, provision, or covenant of
the lease and shall not begin and pursue with reasonable diligence the cure of such failure within fifteen (15) days after written
notice thereof to Goedeker; (iv) Goedeker shall become insolvent, make an assignment for the benefit of creditors, or file a petition
under any section or chapter of the Bankruptcy Code, or under any similar law or statute of the United States of America or any
State thereof; or (v) a receiver or trustee shall be appointed for the leased premises or for all or substantially all of the assets
of Goedeker.
Supplemental balance sheet information
related to leases was as follows:
|
|
September 30,
2019
|
|
Operating lease right-of-use lease asset
|
|
$
|
2,300,000
|
|
Accumulated amortization
|
|
|
(197,935
|
)
|
Net balance
|
|
$
|
2,102,065
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
373,860
|
|
Lease liability, long term
|
|
|
1,728,205
|
|
Total operating lease liabilities
|
|
$
|
2,102,065
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
54 Months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.5
|
%
|
Maturities of the lease liability are as
follows:
|
|
For the Years Ended
|
|
2019 (October to December)
|
|
$
|
135,000
|
|
2020
|
|
|
540,000
|
|
2021
|
|
|
540,000
|
|
2022
|
|
|
540,000
|
|
2023
|
|
|
540,000
|
|
2024
|
|
|
135,000
|
|
Total lease payments
|
|
|
2,430,000
|
|
Less imputed interest
|
|
|
(327,935
|
)
|
Maturities of lease liabilities
|
|
$
|
2,102,065
|
|
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
NOTE 16—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% (2.0% annualized) of its adjusted net assets for services performed.
Offsetting Management Services Agreement
- 1847 Neese
On March 3, 2017, 1847 Neese entered into
an offsetting management services agreement with the Manager.
Pursuant to the offsetting management services
agreement, 1847 Neese appointed the Manager to provide certain services to it for a quarterly management fee equal to $62,500 per
quarter; provided, however, that: (i) pro rated payments shall be made in the first quarter and the last quarter of the term; (ii)
if the aggregate amount of management fees paid or to be paid by 1847 Neese, together with all other management fees paid or to
be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal year exceeds, or is expected
to exceed, 9.5% of the Company’s gross income with respect to such fiscal year, then the management fee to be paid by 1847
Neese for any remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the
management fees to be paid to the Manager by all of the subsidiaries of the Company, until the aggregate amount of the management
fee paid or to be paid by 1847 Neese, together with all other management fees paid or to be paid by all other subsidiaries of the
Company to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of the Company’s gross income
with respect to such fiscal year; and (iii) if the aggregate amount of the management fee paid or to be paid by 1847 Neese, together
with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect
to any fiscal quarter exceeds, or is expected to exceed, the aggregate amount of the management fee (before any adjustment thereto)
calculated and payable under the management services agreement (the “Parent Management Fee”) with respect to such fiscal
quarter, then the management fee to be paid by 1847 Neese for such fiscal quarter shall be reduced, on a pro rata basis, until
the aggregate amount of the management fee paid or to be paid by 1847 Neese, together with all other management fees paid or to
be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal quarter, does not exceed
the Parent Management Fee calculated and payable with respect to such fiscal quarter.
1847 Neese shall also reimburse the Manager
for all costs and expenses of 1847 Neese which are specifically approved by the board of directors of 1847 Neese, including all
out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of 1847 Neese in connection
with performing services under the offsetting management services agreement.
The services provided by the Manager include:
conducting general and administrative supervision and oversight of 1847 Neese’s day-to-day business and operations, including,
but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative
policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability
insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses
and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with
respect to 1847 Neese’s business and operational strategies, the implementation of such strategies and the evaluation of
such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions
or dispositions and product or service lines. The Company expensed $187,500 in management fees for the nine months ended September
30, 2019 and 2018, respectively.
Under terms of the term loan from Home
State Bank, no fees may be paid to the Manager without permission of the bank, which the Manager does not expect to be granted
within the forthcoming year. Accordingly, $563,309 due the Manager is classified as a long-term accrued liability.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Offsetting Management Services Agreement
- Goedeker
On April 5, 2019, Goedeker entered into
an offsetting management services agreement with the Manager.
Pursuant to the offsetting management services
agreement, Goedeker appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater
of $62,500 or 2% of adjusted net assets (as defined in the management services agreement); provided, however, that (i) pro rated
payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management fees paid
or to be paid by Goedeker, together with all other management fees paid or to be paid by all other subsidiaries of the Company
to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of the Company’s gross
income with respect to such fiscal year, then the management fee to be paid by Goedeker for any remaining fiscal quarters in such
fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager by all
of the subsidiaries of the Company, until the aggregate amount of the management fee paid or to be paid by Goedeker, together with
all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect
to such fiscal year, does not exceed 9.5% of the Company’s gross income with respect to such fiscal year, and (iii) if the
aggregate amount the management fee paid or to be paid by Goedeker, together with all other management fees paid or to be paid
by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal quarter exceeds, or is expected
to exceed, the aggregate amount of the Parent Management Fee with respect to such fiscal quarter, then the management fee to be
paid by Goedeker for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the management fee
paid or to be paid by Goedeker, together with all other management fees paid or to be paid by all other subsidiaries of the Company
to the Manager, in each case, with respect to such fiscal quarter, does not exceed the Parent Management Fee calculated and payable
with respect to such fiscal quarter.
Notwithstanding the foregoing, payment
of the management fee is subordinated to the payment of interest on the 9% subordinated promissory note (see Note 13), such that
no payment of the management fee may be made if Goedeker is in default under the note with regard to interest payments and, for
the avoidance of doubt, such payment of the management fee will be contingent on Goedeker being in good standing on all associated
loan covenants. In addition, during the period that that any amounts are owed under the 9% subordinated promissory note or the
earn out payments, the annual management fee shall be capped at $250,000.
In addition, the rights of the Manager
to receive payments under the offsetting management services agreement are subordinate to the rights of Burnley and SBCC under
separate subordination agreements that the Manager entered into with Burnley and SBCC on April 5, 2019.
Goedeker shall also reimburse the Manager
for all costs and expenses of Goedeker which are specifically approved by the board of directors of Goedeker, including all out-of-pocket
costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of Goedeker in connection with performing
services under the offsetting management services agreement.
The services provided by the Manager include:
conducting general and administrative supervision and oversight of Goedeker’s day-to-day business and operations, including,
but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative
policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability
insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses
and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with
respect to Goedeker’s business and operational strategies, the implementation of such strategies and the evaluation of such
strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions
or dispositions and product or service lines.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Advances
From time to time, the Company has received
advances from its chief executive officer to meet short-term working capital needs. As of September 30, 2019 and December 31, 2018,
a total of $179,565 advances from related parties are outstanding. These advances are unsecured, bear no interest, and do not have
formal repayment terms or arrangements.
As of September 30, 2019 and December 31,
2018, the Manager has funded the Company $60,732 and $55,500 in related party advances, respectively. These advances are unsecured,
bear no interest, and do not have formal repayment terms or arrangements.
Grid Promissory Note
On January 3, 2018, the Company issued
a grid promissory note to the Manager in the initial principal amount of $50,000. The note provides that the Company may from time
to time request additional advances from the Manager up to an aggregate additional amount of $100,000, which will be added to the
note if the Manager, in its sole discretion, so provides. Interest shall accrue on the unpaid portion of the principal amount and
the unpaid portion of all advances outstanding at a fixed rate of 8% per annum, and along with the outstanding portion of the principal
amount and the outstanding portion of all advances, shall be payable in one lump sum due on the maturity date, which is the first
anniversary of the date of the note. The maturity date of the grid promissory note was extended until January 3, 2021. If all or
a portion of the principal amount or any advance under the note, or any interest payable thereon is not paid when due (whether
at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate of 12% per annum. In the
event the Company completes a financing involving at least $500,000, the Company must, contemporaneously with the closing of such
financing transaction, repay the entire outstanding principal and accrued and unpaid interest on the note. The note is unsecured
and contains customary events of default. As of September 30, 2019 and December 31, 2018, the Manager has advanced $117,000 of
the promissory note and the Company has accrued interest of $14,647 and $7,549, respectively.
Building Lease
On March 3, 2017, Neese entered into an
agreement of lease with K&A Holdings, LLC, a limited liability company that is wholly-owned by officers of Neese. See Note
15 for details regarding this lease.
NOTE 17—SHAREHOLDERS’ DEFICIT
Allocation Shares
As of September 30, 2019 and December 31,
2018, the Company had authorized and outstanding 1,000 allocation shares. These allocation shares do not entitle the holder thereof
to vote on any matter relating to the Company other than in connection with amendments to the Company’s operating agreement
and in connection with certain other corporate transactions as specified in the operating agreement.
The Manager owns 100% of the allocation
shares of the Company, which are a separate class of limited liability company interests that, together with the common shares,
will comprise all of the classes of equity interests of the Company. The Manager received the allocation shares with its initial
capitalization of the Company. The allocation shares generally will entitle the Manager to receive a twenty percent (20%) profit
allocation as a form of incentive designed to align the interests of the Manager with those of the Company’s shareholders.
Profit allocation has two components: an equity-based component and a distribution-based component. The equity-based component
will be paid when the market for the Company’s shares appreciates, subject to certain conditions and adjustments. The distribution-based
component will be paid when the distributions the Company pays to shareholders exceed an annual hurdle rate of eight percent (8.0%),
subject to certain conditions and adjustments. While the equity-based component and distribution-based component are interrelated
in certain respects, each component may independently result in a payment of profit allocation if the relevant conditions to payment
are satisfied.
The 1,000 allocation shares are issued
and outstanding and held by the Manager, which is controlled by Mr. Roberts, the Company’s chief executive officer and controlling
shareholder.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Common Shares
The Company is authorized to issue 500,000,000
common shares as of September 30, 2019 and December 31, 2018. As of September 30, 2019 and December 31, 2018, the Company had 3,165,625
and 3,115,625 common shares issued and outstanding, respectively. The common shares entitle the holder thereof to one vote per
share on all matters coming before the shareholders of the Company for a vote.
On April 5, 2019, the Company, issued 50,000
common shares to Leonite pursuant to the securities purchase agreement (see Note 13).
The Company did not issue any shares in
the nine months ended September 30, 2018.
Warrants
On April 5, 2019, the Company issued a
warrant to purchase 200,000 common shares to Leonite pursuant to the securities purchase agreement (see Note 13). The warrant has
a term of five years, an exercise price of $1.25 per share (subject to adjustment), and may be exercised on a cashless basis.
Accordingly,
a portion of the proceeds was allocated to the warrant based on its relative fair value using the Black Scholes option-pricing
model. The assumptions used in the Black-Scholes model are as follows: (i) dividend yield of 0%; (ii) expected volatility
of 140.3%, (iii) weighted average risk-free interest rate of 2.31%, (iv) expected life of five years, and (v)
estimated fair value of the common shares of $2.75 per share.
The warrant also contains an ownership
limitation. The Company shall not effect any exercise of the warrant, and Leonite shall not have the right to exercise any portion
of the warrant, to the extent that after giving effect to issuance of common shares upon exercise the warrant, Leonite, together
with its affiliates, and any other persons acting as a group together with Leonite 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
issuable upon exercise of the warrant. Upon no fewer than 61 days’ prior notice to the Company, Leonite may increase
or decrease such beneficial ownership limitation provisions and any such increase or decrease will not be effective until the 61st
day after such notice is delivered to the Company.
Noncontrolling Interests
The Company owns 55.0% of 1847 Neese and
70% of 1847 Holdco. For financial interests in which the Company owns a controlling financial interest, the Company applies
the provisions of ASC 810, which are applicable to reporting the equity and net income or loss attributable to noncontrolling interests.
The results of 1847 Neese and 1847 Holdco are included in the consolidated statement of income. The net loss attributable to the
45% non-controlling interest of 1847 Neese amounted to $628,210 and $624,448 for the nine months ended September 30, 2019 and 2018,
respectively. The net loss attributable to the 30% non-controlling interest of 1847 Holdco amounted to $464,518 for the period
from April 5, 2019 (acquisition) to September 30, 2019.
NOTE 18—COMMITMENTS AND CONTINGENCIES
Corporate Office
An office space has been leased on a month-by-month
basis.
The officers and directors are involved
in other business activities and most likely will become involved in other business activities in the future.
1847 HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
NOTE 19—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information
for the nine months ended September 30, 2019 and 2018 were as follows:
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Interest paid
|
|
$
|
815,021
|
|
|
$
|
413,018
|
|
Income tax paid
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Business Combinations:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
3,308,301
|
|
|
$
|
-
|
|
Property and equipment
|
|
|
206,612
|
|
|
|
-
|
|
Working capital adjustment receivable
|
|
|
554,636
|
|
|
|
-
|
|
Assumed liabilities
|
|
|
(4,668,977
|
)
|
|
|
-
|
|
Goodwill
|
|
|
6,531,560
|
|
|
|
-
|
|
Cash acquired in acquisition of Goedeker
|
|
|
1,135,368
|
|
|
|
-
|
|
Financing:
|
|
|
|
|
|
|
|
|
Term Loan
|
|
|
1,500,000
|
|
|
|
-
|
|
Debt discount financing costs
|
|
|
(178,000
|
)
|
|
|
-
|
|
Warrant feature upon issuance of term loan
|
|
|
(229,244
|
)
|
|
|
-
|
|
Term loan, net
|
|
|
1,092,756
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Line of Credit
|
|
|
754,682
|
|
|
|
-
|
|
Debt discount on line of credit
|
|
|
(128,682
|
)
|
|
|
-
|
|
Issuance of common shares on promissory note
|
|
|
(137,500
|
)
|
|
|
-
|
|
Line of Credit, net
|
|
|
488,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory Note
|
|
|
714,286
|
|
|
|
-
|
|
Promissory Note original issue and debt discount
|
|
|
(79,286
|
)
|
|
|
-
|
|
Warrants issued in conjunction with notes payable
|
|
|
(292,673
|
)
|
|
|
-
|
|
Promissory Note, net
|
|
|
342,327
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
9% Subordinated Promissory Note
|
|
|
4,700,000
|
|
|
|
-
|
|
Debt discount financing costs
|
|
|
(215,500
|
)
|
|
|
-
|
|
9% Subordinated Promissory Note, net
|
|
|
4,484,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
229,244
|
|
|
|
-
|
|
Additional Paid in Capital – common shares and warrants issued
|
|
$
|
430,173
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating lease, ROU assets and liabilities
|
|
$
|
3,325,558
|
|
|
$
|
-
|
|
NOTE 20—SUBSEQUENT EVENTS
In accordance with SFAS 165 (ASC 855-10),
the Company has analyzed its operations subsequent to September 30, 2019 to the date these financial statements were issued, and
has determined that it does not have any material subsequent events to disclose in these financial statements.