NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(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 Goedeker”)
as a wholly owned subsidiary in the State of Delaware and subsequently transferred all of its shares in Goedeker to 1847 Goedeker,
such that Goedeker became a wholly-owned subsidiary of 1847 Goedeker.
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 Goedeker, with the
remaining 30% held by third parties. (See Note 9).
The
consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, 1847 Neese, Neese, 1847
Goedeker 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 months March 31, 2020 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2020.
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, 2019.
Accounting
Basis
The
Company uses the accrual basis of accounting and GAAP. The Company has adopted a calendar year end.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(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 Retail and Appliances Segment, which is operated by Goedeker, and the Land Management Segment, which
is operated by Neese.
The Retail
and Appliances Segment is comprised of a retail store and an e-commerce destination for home furnishings, including appliances,
furniture, home goods and related products, based in St. Louis, Missouri.
The
Land Management Services Segment is comprised of professional services for waste disposal and a variety of agricultural services,
wholesaling of agricultural equipment and parts, local trucking services, various shop services, and sales of other products and
services, based in Grand Junction, Iowa.
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 months ended March 31, 2020. 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 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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
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 months ended March 31, 2020, 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 March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Appliance sales
|
|
$
|
8,128,777
|
|
|
$
|
-
|
|
Furniture sales
|
|
|
1,382,365
|
|
|
|
-
|
|
Other sales
|
|
|
166,036
|
|
|
|
-
|
|
Total revenue
|
|
$
|
9,677,178
|
|
|
$
|
-
|
|
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
MARCH
31, 2020
(UNAUDITED)
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.
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 months ended March 31, 2020, 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 March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
Trucking
|
|
$
|
240,763
|
|
|
$
|
372,472
|
|
Waste hauling
|
|
|
117,130
|
|
|
|
104,329
|
|
Repairs
|
|
|
60,684
|
|
|
|
52,928
|
|
Other
|
|
|
27,522
|
|
|
|
45,668
|
|
Total services
|
|
|
446,099
|
|
|
|
575,397
|
|
Sales of parts and equipment
|
|
|
288,071
|
|
|
|
236,974
|
|
Total revenue
|
|
$
|
734,170
|
|
|
$
|
812,371
|
|
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
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.
|
Accounts
Receivable, Net ‒ Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration.
Unbilled receivables of $0 and $121,989 are included in this balance at March 31, 2020 and December 31, 2019, 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 $14,614 and $29,001 was required at March 31, 2020 and December 31, 2019, respectively.
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
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 an 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 $451,546 at March
31, 2020 and December 31, 2019.
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
|
|
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
|
|
|
5-15
|
|
Marketing-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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
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 March
31, 2020, 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.
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 months ended March 31, 2020, 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 March 31, 2019.
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, issuance of third
party and related party debt and the sale of a note to support cashflow from operations. As of and for the three months ended
March 31, 2020, the Company had a net loss attributable to 1847 Holdings’ shareholders of $2,110,482 and net cash
provided by operations of $1,236,777.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
For
the three months ended March 31, 2020, the Company incurred operating losses of $2,110,482 (before deducting losses attributable
to non-controlling interests) and incurred cash flows from operations of $1,236,777 and negative working capital of $13,362,642.
Management believes the Company is owed $809,000 related to a working capital adjustment, which is disputed by Goedeker Television.
This matter is being pursued through a legal process (See Note 9). In addition to the estimates of funds available from operations,
the Company has unpledged assets that it believes could provide for $478,000 of additional borrowings.
Management
has prepared estimates of operations for fiscal year 2020 and believes that sufficient funds will be generated from operations
to fund its operations, and to service its debt obligations for one year from the date of the filing of the consolidated financial
statements in the Company’s Quarterly Report on Form 10-Q, indicate improved operations and the Company’s ability
to continue operations as a going concern.
The
impact of COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know
the full impact of COVID-19 or its timing on a return to more normal operations. Further, the recently enacted stimulus bill provides
for economic assistance loans through the United States Small Business Administration. The Company is actively pursuing the possibility
of obtaining such loans.
The
accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected
to be able to realize its assets and satisfy its liabilities in the normal course of business.
Management
believes that based on relevant conditions and events that are known and reasonably knowable that its forecasts, for one year
from the date of the filing of the financial statements in this registration statement, 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. This pronouncement was amended under ASU 2019-10 to allow an extension
on the adoption date for entities that qualify as a small reporting company. The Company has elected this extension and the effective
date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. The Company has not completed
its assessment of the standard, but does not expect the adoption to have a material impact on the Company's consolidated financial
position, results of operations, or cash flows.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
3—BUSINESS SEGMENTS
Summarized
financial information concerning the Company’s reportable segments is presented below:
|
|
For the Three Months March 31, 2020
|
|
|
For the Three Months Ended March 31, 2019
|
|
|
|
Land Management Services
|
|
|
Retail & Appliances
|
|
|
Corporate Services
|
|
|
Total
|
|
|
Land Management Services
|
|
|
Retail & Appliances
|
|
|
Corporate Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
446,099
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
446,099
|
|
|
$
|
575,397
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
575,397
|
|
Sales of parts and equipment
|
|
|
288,071
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288,071
|
|
|
|
236,974
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236,974
|
|
Furniture and appliances revenue
|
|
|
-
|
|
|
|
9,677,178
|
|
|
|
-
|
|
|
|
9,677,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Revenue
|
|
|
734,170
|
|
|
|
9,677,178
|
|
|
|
-
|
|
|
|
10,411,348
|
|
|
|
812,371
|
|
|
|
-
|
|
|
|
-
|
|
|
|
812,371
|
|
Total cost of sales
|
|
|
255,268
|
|
|
|
8,111,170
|
|
|
|
-
|
|
|
|
8,366,438
|
|
|
|
213,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213,750
|
|
Total operating expenses
|
|
|
1,198,815
|
|
|
|
2,881,140
|
|
|
|
39,284
|
|
|
|
4,119,239
|
|
|
|
1,319,836
|
|
|
|
-
|
|
|
|
40,295
|
|
|
|
1,360,131
|
|
Loss from operations
|
|
$
|
(719,913
|
)
|
|
$
|
(1,315,132
|
)
|
|
$
|
(39,284
|
)
|
|
$
|
(2,074,329
|
)
|
|
$
|
(721,215
|
)
|
|
$
|
|
|
|
$
|
(40,295
|
)
|
|
$
|
(761,510
|
)
|
NOTE
4—RECEIVABLES
At
March 31, 2020 and December 31, 2019, receivables consisted of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Credit card payments in process of settlement
|
|
$
|
312,678
|
|
|
$
|
406,838
|
|
Vendor rebates receivable
|
|
|
1,085,287
|
|
|
|
1,380,369
|
|
Trade receivables from customers
|
|
|
220,383
|
|
|
|
695,249
|
|
Total receivables
|
|
|
1,618,348
|
|
|
|
2,482,456
|
|
Allowance for doubtful accounts
|
|
|
(14,615
|
)
|
|
|
(29,001
|
)
|
Accounts receivable, net
|
|
$
|
1,603,734
|
|
|
$
|
2,453,455
|
|
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
5—INVENTORIES
At
March 31, 2020 and December 31, 2019, the inventory balances are composed of:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Machinery and Equipment
|
|
$
|
206,923
|
|
|
$
|
119,444
|
|
Parts
|
|
|
149,836
|
|
|
|
142,443
|
|
Appliances
|
|
|
1,282,636
|
|
|
|
1,562,359
|
|
Furniture
|
|
|
161,111
|
|
|
|
189,376
|
|
Other
|
|
|
50,712
|
|
|
|
53,356
|
|
Subtotal
|
|
|
1,851,218
|
|
|
|
2,066,978
|
|
Allowance for inventory obsolescence
|
|
|
(451,546
|
)
|
|
|
(451,546
|
)
|
Inventories, net
|
|
$
|
1,399,672
|
|
|
$
|
1,615,432
|
|
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. As of March 31, 2020 and December 31, 2019, deposits with vendors totaled $294,960.
NOTE
7—PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at March 31, 2020 and December 31, 2019:
Classification
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Buildings and improvements
|
|
$
|
5,338
|
|
|
$
|
5,338
|
|
Equipment and machinery
|
|
|
3,120,498
|
|
|
|
3,120,498
|
|
Tractors
|
|
|
2,714,645
|
|
|
|
2,694,888
|
|
Trucks and other vehicles
|
|
|
1,138,304
|
|
|
|
1,138,304
|
|
Leasehold improvements
|
|
|
117,626
|
|
|
|
117,626
|
|
Total
|
|
|
7,096,411
|
|
|
|
7,076,654
|
|
Less: Accumulated depreciation
|
|
|
(4,029,879
|
)
|
|
|
(3,709,227
|
)
|
Property and equipment, net
|
|
$
|
3,066,532
|
|
|
$
|
3,367,427
|
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was $320,653 and $337,122, 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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
8—INTANGIBLE ASSETS
The
following provides a breakdown of identifiable intangible assets as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Customer Relationships
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
$
|
783,000
|
|
|
$
|
783,000
|
|
Accumulated amortization
|
|
|
(70,206
|
)
|
|
|
(56,023
|
)
|
Customer relationship identifiable intangible assets, net
|
|
|
712,794
|
|
|
|
726,977
|
|
Marketing Related
|
|
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
|
1,368,000
|
|
|
|
1,368,000
|
|
Accumulated amortization
|
|
|
(269,800
|
)
|
|
|
(201,400
|
)
|
Marketing related identifiable intangible assets, net
|
|
|
1,098,200
|
|
|
|
1,166,600
|
|
Total Identifiable intangible assets, net
|
|
$
|
1,810,994
|
|
|
$
|
1,893,577
|
|
In
connection with the acquisitions of Goedeker and Neese, the Company identified intangible assets of $2,151,000 and $34,000, respectively,
representing trade names and customer relationships. These assets are being amortized on a straight-line basis over their weighted
average estimated useful life of 7.9 years and amortization expense amounted to $82,583 and $1,700 for the three months ended
March 31, 2020 and 2019, respectively.
As
of March 31, 2020, the estimated annual amortization expense for each of the next five fiscal years is as follows:
2020 (remainder)
|
|
$
|
247,749
|
|
2021
|
|
|
330,332
|
|
2022
|
|
|
324,665
|
|
2023
|
|
|
323,532
|
|
2024
|
|
|
122,132
|
|
Thereafter
|
|
|
462,584
|
|
Total
|
|
$
|
1,810,994
|
|
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 Goedeker, 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 acquisition provided an addition to the Company’s objective of a diversified portfolio of
acquisitions.
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 Goedeker 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 Goedeker as of the closing date.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
The
asset purchase agreement provided for an adjustment to the purchase price based on the difference between actual working capital
at closing and Goedeker Television’s preliminary estimate of closing date working capital. In accordance with the
asset purchase agreement, an independent CPA firm was retained by Goedeker and Goedeker Television to resolve differences in the
working capital amounts. The report issued by that CPA firm determined that Goedeker Television owed Goedeker $809,000,
which Goedeker Television has not paid. On or about March 23, 2020, Goedeker submitted a claim for arbitration to the American
Arbitration Association relating to Goedeker Television’s failure to pay the amount owed. The claim alleges, inter
alia, breach of contract, fraud, indemnification and the breach of the covenant of good faith and fair dealing. Goedeker
is alleging damages in the amount of $809,000, plus attorneys’ fees and costs. The $809,000 is included in other assets
in the accompanying balance sheet as of March 31, 2020.
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 9 and 11). The Company determined the fair value of the earnout on the date of acquisition was $81,494. Such amount was
recorded as a contingent consideration liability within the accounts payable and accrued expense line item on the consolidated
balance sheet and is revalued to fair value each reporting period until settled. The year 1 contingent liability of $32,246 was
written-off in the year ended December 31, 2019 as the target was not met and the balance of the liability at March 31, 2020 is
$49,248.
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 liabilities assumed was approximately $492,601. 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
MARCH
31, 2020
(UNAUDITED)
Purchase
consideration at final fair value:
|
|
|
|
Note payable, net of $462,102 debt discount and $215,500 of capitalized financing costs
|
|
$
|
3,422,398
|
|
Contingent note payable
|
|
|
81,494
|
|
Non-controlling interest
|
|
|
979,523
|
|
Amount of consideration
|
|
$
|
4,483,415
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at fair value
|
|
|
|
|
Accounts receivable
|
|
$
|
334,446
|
|
Inventories
|
|
|
1,851,251
|
|
Working capital adjustment receivable and other assets
|
|
|
1,104,863
|
|
Property and equipment
|
|
|
216,286
|
|
Customer related intangibles
|
|
|
749,000
|
|
Marketing related intangibles
|
|
|
1,368,000
|
|
Accounts payable and accrued expenses
|
|
|
(3,929,876
|
)
|
Customer deposits
|
|
|
(2,308,307
|
)
|
Net tangible assets acquired (liabilities assumed)
|
|
$
|
(614,337
|
)
|
|
|
|
|
|
Total net assets acquired (liabilities assumed)
|
|
$
|
(614,337
|
)
|
Consideration paid
|
|
|
4,483,415
|
|
Goodwill
|
|
$
|
5,097,752
|
|
The
following presents the pro-forma combined results of operations of the Company as if the Acquisition was completed on January
1, 2019 (before non-controlling interest).
|
|
For the Three Months Ended
March 31,
2019
|
|
Revenues, net
|
|
$
|
12,829,584
|
|
Net income (loss) allocable to common shareholders
|
|
$
|
(940,911
|
)
|
Net loss per share
|
|
$
|
(0.30
|
)
|
Weighted average number of shares outstanding
|
|
|
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, 2019
or to project potential operating results as of any future date or for any future periods.
The
estimated useful life remaining on the property and equipment acquired is 4 to 5 years.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
10—LINES OF CREDIT
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 $169,712 as of March 31, 2020.
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
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 Goedeker entered
into a guaranty in favor of Northpoint, to guaranty the obligations of Goedeker under the loan and security agreement.
Burnley
Capital LLC
On
April 5, 2019, Goedeker, as borrower, and 1847 Goedeker 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. There is no
available borrowing base and the balance of the line of credit amounts to $409,642 as of March 31, 2020, comprised of principal
of $488,309 and net of unamortized debt discount of $78,667.
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
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 Goedeker 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 Goedeker; (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 Goedeker 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 Goedeker 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
MARCH
31, 2020
(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 Goedeker, 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 Goedeker. In connection with such security interest, on April 5, 2019, (i) 1847 Goedeker entered into a pledge agreement
with Burnley, pursuant to which 1847 Goedeker 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 under a subordination
agreement that Burnley entered into with Northpoint.
At
March 31, 2020, 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 March 31, 2019. The table below shows the required ratio and actual ratio for such period.
Covenant
|
|
Actual Ratio
|
|
Required Ratio
|
Total debt ratio
|
|
(2.6)x
|
|
4.0x
|
Senior debt ratio
|
|
(0.7)x
|
|
1.5x
|
Interest coverage ratio
|
|
(0.9)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 March 31, 2020, the actual ratio was 0.10x compared to a requirement of 0.35x.
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
11—NOTES PAYABLE
Small
Business Community Capital II, L.P.
On
April 5, 2019, Goedeker, as borrower, and 1847 Goedeker 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 Company classified the warrant as a derivative liability on the balance sheet of $122,344 and subject to remeasurement
on every reporting period. The balance of the note amounts to $940,124 as of March 31, 2020, comprised of principal of $1,218,750,
capitalized PIK interest of $27,473, and net of unamortized debt discount of $133,500 and unamortized warrant feature of $172,599.
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
Paid-in-Kind (“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 Goedeker 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 Goedeker; (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 Goedeker 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 Goedeker of any indebtedness (as defined in the loan and security agreement), other than indebtedness permitted under the
loan and security agreement.
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
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 Goedeker. In connection with such security interest, on April 5, 2019, (i) 1847 Goedeker
entered into a pledge agreement with SBCC, pursuant to which 1847 Goedeker 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. Neese did not comply with this covenant for the year ended
December 31, 2019. Accordingly, because of the violation of this covenant and because the loan matures July 20, 2020, the loan
is classified as a current liability in the balance sheet. 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 $3,000,779
as of March 31, 2020, comprised of principal of $3,005,867 and net of unamortized debt discount of $5,088.
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 to $40,000 annually. The Company continues to accrue interest 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 March 31, 2020.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(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 three months ended March 31, 2020 and 2019, $159,607 and $21,500, respectively, was remitted to Home State
Bank pursuant to this requirement.
The
Company adopted ASU 2015-03 by deducting debt issuance costs from the long-term portion of the loan. Amortization of debt issuance
costs totaled $5,085 for the three months ended March 31, 2020 and 2019.
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. The remaining balance of the note at March 31, 2020 is $3,395,243, comprised of
principal of $3,930,283 and net of unamortized debt discount of $535,050.
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.
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 above, 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 March 31, 2020. 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.
NOTE
12—FLOOR PLAN LOANS PAYABLE
At
March 31, 2020 and December 31, 2019, $10,587 and $10,581, respectively, 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 March 31, 2020 and December 31, 2019 amounted to $10,587 and $10,581, respectively.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
13—CONVERTIBLE PROMISSORY NOTE
On
April 5, 2019, the Company, 1847 Goedeker 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 Goedeker issued to Leonite shares of common stock equal to a 7.5% non-dilutable interest in 1847 Goedeker.
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 $110,894 of financing costs related to the shares and warrants in the three
months ended March 31, 2020. The remaining net balance of the note at March 31, 2020 is $710,286, comprised of principal of $714,288
and unamortized debt discount warrant feature of $3,998.
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”).
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
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).
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 Goedeker 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 Goedeker 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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
14—FINANCING LEASE
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”), which was amended on June 14, 2017.
Under the master lease agreement, as amended, Utica loaned an aggregate of $3,240,000 for certain of Neese’s equipment listed
therein, which it leases to the Lessee. A portion of the proceeds from the term loan from Home State Bank (see 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.
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.
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 March 31, 2020, there were no sales of
equipment or inventory required to be 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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
The
Company adopted ASU 2015-03 by deducting $22,040 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 March 31, 2020 and 2019.
At
March 31, 2020, annual minimum future lease payments under this Master Lease Agreement are as follows:
|
|
Amount
|
|
2020 (remainder of year)
|
|
$
|
490,077
|
|
2021
|
|
|
412,655
|
|
2022
|
|
|
12,882
|
|
Total minimum lease payments
|
|
|
915,614
|
|
Less amount representing interest
|
|
|
164,548
|
|
Present value of minimum lease payments
|
|
|
751,066
|
|
Less current portion of minimum lease
|
|
|
(373,012
|
)
|
Less debt issuance costs, net
|
|
|
(22,040
|
)
|
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
|
|
$
|
184,836
|
|
The
interest rate on the capitalized lease is approximately 15.5%.
NOTE
15—OPERATING LEASES
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, $225,000
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 March
31, 2020.
Supplemental
balance sheet information related to leases was as follows:
|
|
March 31,
2020
|
|
Operating lease right-of-use lease asset
|
|
$
|
624,157
|
|
Accumulated amortization
|
|
|
74,487
|
|
Net balance
|
|
$
|
549,670
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
64,343
|
|
Lease liability, long term
|
|
|
485,327
|
|
Total operating lease liabilities
|
|
$
|
549,670
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
83 months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.85
|
%
|
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
Maturities
of the lease liability are as follows:
|
|
For the Years Ended
|
|
2020 (reminder of year)
|
|
$
|
75,000
|
|
2021
|
|
|
100,000
|
|
2022
|
|
|
100,000
|
|
2023
|
|
|
100,000
|
|
2024
|
|
|
100,000
|
|
Thereafter
|
|
|
216,667
|
|
Total lease payments
|
|
|
691,667
|
|
Less imputed interest
|
|
|
(141,997
|
)
|
Maturities of lease liabilities
|
|
$
|
549,670
|
|
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.
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 Television. 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:
|
|
March 31,
2020
|
|
Operating lease right-of-use lease asset
|
|
$
|
2,300,000
|
|
Accumulated amortization
|
|
|
(402,390
|
)
|
Net balance
|
|
$
|
1,897,610
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
375,885
|
|
Lease liability, long term
|
|
|
1,521,725
|
|
Total operating lease liabilities
|
|
$
|
1,897,610
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
|
48
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.5
|
%
|
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
Maturities
of the lease liability are as follows:
|
|
For the Years Ended
|
|
2020 (remainder of year)
|
|
$
|
405,000
|
|
2021
|
|
|
540,000
|
|
2022
|
|
|
540,000
|
|
2023
|
|
|
540,000
|
|
2024
|
|
|
135,000
|
|
Total lease payments
|
|
|
2,160,000
|
|
Less imputed interest
|
|
|
(262,390
|
)
|
Maturities of lease liabilities
|
|
$
|
1,897,610
|
|
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% of its adjusted net assets for services
performed (the “Parent Management Fee”). The amount of the Parent Management Fee with respect to any fiscal quarter
is (i) reduced by the aggregate amount of any management fees received by the Manager under any offsetting management services
agreements with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) Parent
Management Fees received by (or owed to) the Manager as of the end of such fiscal quarter, and (iii) increased by the amount of
any outstanding accrued and unpaid Parent Management Fees. The Company expensed $0 and $0 in Parent Management Fees for the three
months ended March 31, 2020 and 2019, respectively.
Offsetting
Management Services Agreements
1847
Neese entered into an offsetting management services agreement with the Manager on March 3, 2017 and Goedeker entered into an
offsetting management services agreement with the Manager on April 5, 2019. Pursuant to the offsetting management services agreements,
1847 Neese appointed the Manager to provide certain services to it for a quarterly management fee equal to $62,500 and 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, in each case 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 or 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 1847 Neese or 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 1847 Neese or 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 1847 Neese or 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 Parent Management Fee with respect to such fiscal quarter,
then the management fee to be paid by 1847 Neese or 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 1847 Neese or 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.
Each
of 1847 Neese and Goedeker shall also reimburse the Manager for all of its costs and expenses which are specifically approved
by its board of directors, including all out-of-pocket costs and expenses, which are actually incurred by the Manager or its affiliates
on behalf of 1847 Neese or Goedeker in connection with performing services under the offsetting management services agreements.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
1847
Neese expensed $62,500 in management fees for the three months ended March 31, 2020 and 2019. Under terms of the term loan from
Home State Bank (see Note 11), 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, $513,308 due from 1847 Neese to the Manager is classified as a long-term
accrued liability as of March 31, 2020.
Goedeker
expensed $62,500 in management fees for the three months ended March 31, 2020. Payment of the management fee is subordinated to
the payment of interest on the 9% subordinated promissory note (see Note 11), 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. The rights of the Manager to receive payments under the offsetting management services agreement
with Goedeker are also 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. Accordingly, $126,153 due from Goedeker to the Manager is classified as an
accrued liability as of March 31, 2020.
Advances
From
time to time, the Company has received advances from its chief executive officer to meet short-term working capital needs. As
of March 31, 2020 and December 31, 2019, a total of $118,834 in advances from related parties are outstanding. These advances
are unsecured, bear no interest, and do not have formal repayment terms or arrangements.
As
of March 31, 2020 and December 31, 2019, the Manager has funded the Company $64,284 and $62,499 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, 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 March 31, 2020
and December 31, 2019, the Manager has advanced $119,400 and $119,400 of the promissory note and the Company has accrued interest
of $19,530 and $17,115, 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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
NOTE
17—SHAREHOLDERS’ DEFICIT
Allocation
Shares
As
of March 31, 2020 and December 31, 2019, 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.
Common
Shares
The
Company is authorized to issue 500,000,000 common shares as of March 31, 2020 and December 31, 2019. As of March 31, 2020 and
December 31, 2019, the Company had 3,165,625 common shares issued and outstanding. 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.
The
Company did not issue any equity securities in the three months ended March 31, 2020.
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 in the amount of $292,673. The Company amortized $72,769
of debt discount in the three months ended March 31, 2020.
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.
1847
HOLDINGS LLC
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2020
(UNAUDITED)
Noncontrolling
Interests
The
Company owns 55.0% of 1847 Neese and 70% of 1847 Goedeker. 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 Goedeker are included in the consolidated
statement of income. The net loss attributable to the 45% non-controlling interest of 1847 Neese amount to $352,649 and $266,680
for the three months ended March 31, 2020 and 2019, respectively. The net loss attributable to the 30% non-controlling interest
of 1847 Goedeker amounted to $385,536 for the three months ended March 31, 2020.
NOTE
18—COMMITMENTS AND CONTINGENCIES
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.
On March 27, 2020, the Company and the
Company’s newly-formed wholly-owned subsidiary 1847 Asien Inc. (“1847 Asien”) entered into a Stock Purchase Agreement
(the “Purchase Agreement”) with Asien’s Appliance, Inc. (“Asien’s Appliance”) and Joerg Christian
Wilhelmsen and Susan Kay Wilhelmsen, as trustees of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992, pursuant to which 1847
Asien agreed to acquire all of the issued and outstanding capital stock of Asien’s Appliance for an aggregate purchase price
of $2.5 million, subject to adjustment, consisting of (i) $1,670,000 in cash and (ii) 415,000 common shares of the Company, having
a mutually agreed upon value of $830,000. Closing of the Purchase Agreement is subject to due diligence other customary closing
conditions and is expected to occur during the second quarter of 2020.
NOTE
19—SUBSEQUENT EVENTS
In accordance with ASC 855-10, the
Company has analyzed its operations subsequent to March 31, 2020 to the date these financial statements were issued, and has determined
that, except as set forth below, it does not have any material subsequent events to disclose in these financial statements.
PPP
Loans
On
April 9, 2020 and April 10, 2020, Goedeker and Neese received a $642,600 and $383,600, respectively, in Payroll Protection Program
(“PPP”) loans from the United States Small Business Administration (“SBA”) under provisions of the Coronavirus
Aid, Relief and Economic Security Act (“CARES Act”). The PPP loans have two-year terms and bear interest
at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement.
The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties. The PPP loans contain events of
default and other provisions customary for loans of this type. The PPP provides that the PPP loans may be partially or wholly
forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Goedeker and Neese intend
to use the proceeds from the PPP loans for qualifying expenses and to apply for forgiveness of the PPP loans in accordance with
the terms of the CARES Act. The Company has classified the PPP loans as current liabilities pending SBA clarification of
the final loan terms.
Option
Grants
On May 11, 2020, the Company granted
options to Paul A. Froning and Robert D. Barry to purchase 60,000 and 30,000 common shares, respectively, each at an exercise
price of $2.50 per share. The options vested immediately on the date of grant and terminate on May 11, 2025.
Leonite
Conversion and Amendments
On
May 4, 2020, Leonite converted $100,000 of the outstanding balance of the secured convertible promissory note (see Note 13) into
100,000 common shares.
On
May 11, 2020, 1847 and Leonite entered into a first amendment to secured convertible promissory note, pursuant to which the parties
agreed (i) to extend the maturity date of the note to October 5, 2020, (ii) that 1847’s failure to repay the note on the
original maturity date of April 5, 2020 shall not constitute and event of default under the note and (iii) to increase the principal
amount of the note by $207,145, as a forbearance fee. Notwithstanding the foregoing, in the event that 1847 completes an offering
of debt, equity, or closes on an asset sale (other than in the ordinary course of business), then 1847 agreed to promptly use
the net proceeds of such offering to repay Leonite; provided that, in no event shall this requirement cause 1847 to default on
any of its agreements and obligations that were outstanding at the time of the amendment.
Pursuant to the amendment, 1847 also
agreed that, upon closing of its planned acquisition of Asien’s Appliance described above, Leonite shall be granted a 5%
equity interest in such acquisition. In the event that 1847 does not consummate the acquisition, 1847 and Leonite agreed to negotiate
in good faith to exchange such interest with another asset or other term of that would approximate the economic benefit that would
have been derived by Leonite.
In
connection with the amendment, 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. This warrant has the same terms
as the warrant previously issued to Leonite (see Note 17).