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, 1847 Neese 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,
and 1847 Goedeker owns 100% of Goedeker.
On March 27, 2020, the Company and it’s
wholly owned subsidiary 1847 Asien Inc., a Delaware corporation (“1847 Asien”), entered into a stock purchase agreement
with Asien’s Appliance, Inc. (“Asien’s”) and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees
of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992, as amended, pursuant to which on May 28, 2020, 1847 Asien acquired all
of the issued and outstanding stock of Asien’s (see Note 9). As a result of this transaction, the Company owns 95% of 1847
Asien, with the remaining 5% held by a third party, and 1847 Asien owns 100% of Asien’s.
The consolidated financial statements include
the accounts of the Company and its consolidated subsidiaries, 1847 Neese, Neese, 1847 Goedeker, Goedeker, 1847 Asien and Asien’s.
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 six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ended 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.
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. In May 2020, the Company’s acquisition located in Santa Rosa, California, provides a wide variety
of appliance services including sales, delivery, installation, service and repair, extended warranties, and financing to the North
Bay area.
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 and six months ended June 30, 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.
Retail and Appliances Segment
Goedeker
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 it did, because all of 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 its 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 risk of loss shifts to the customer at different times depending on
the method of delivery. Goedeker delivers products to its customers in three possible ways. The first way is through a shipment
of the products through a third-party carrier from Goedeker’s warehouse to the customer (a “Company Shipment”).
The second way is through a shipment of the products through a third-party carrier from a warehouse other than Goedeker’s
warehouse to the customer (a “Drop Shipment”) and the third way is where Goedeker itself delivers the products to the
customer and often also installs the product (a “Local Delivery”). In the case of a Local Delivery, Goedeker loads
the product on to its own truck and delivers and installs the product at the customer’s location. When a product is delivered
through a Local Delivery, risk of loss passes to the customer at the time of installation and revenue is recognized upon installation
at the customer’s location. In the case of a Company Shipment and a Drop Shipment, the delivery to the customer is made free
on board, or FOB, shipping point (whether from Goedeker’s warehouse or a third party’s warehouse). Therefore, risk
of loss and title transfers to the customer once the products are shipped (i.e., leaves the Goedeker’s warehouse or a third-party’s
warehouse). After shipment and prior to delivery, the customer is able to redirect the product to a different destination, which
demonstrates the customer’s control over the product once shipped. Once the risk of loss has shifted to the customer, Goedeker
has satisfied its performance obligation and recognizes revenue.
Goedeker agrees with customers on the selling
price of each transaction. This transaction price is generally based on the agreed upon sales price. In Goedeker’s contracts
with customers, it allocates the entire transaction price to the sales price, which is the basis for the determination of the relative
standalone selling price allocated to each performance obligation. Any sales tax, value added tax, and other tax Goedeker collects
concurrently with revenue-producing activities are excluded from revenue.
If Goedeker continued to apply legacy revenue
recognition guidance for the three and six months ended June 30, 2020 and 2019, revenues, gross margin, and net loss would not
have changed.
Cost of revenue includes the cost of purchased
merchandise plus the cost of shipping 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.
Shipping and Handling ‒ Goedeker
bills its customers for shipping and handling charges, which are included in net sales for the applicable period, and the corresponding
shipping and handling expense is reported in cost of sales.
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.
Asien’s
Asien’s collects 100% of the payment
for special-order models including tax, and 50% of the payment for non-special orders from the customer at the time the order
is placed. Asien’s does not incur incremental costs obtaining purchase orders from customers; however, if Asien’s
did, because all Asien’s contracts are less than a year in duration, any contract costs incurred would be expensed rather
than capitalized.
Performance Obligations – The revenue
that Asien’s recognizes arises from orders it receives from customers. Asien’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, Asien’s products,
which generally occurs when the customer assumes the risk of loss. The transfer of control generally occurs at the point of pickup,
shipment, or installation. Once this occurs, Asien’s has satisfied its performance obligation and Asien’s recognizes
revenue.
Transaction Price ‒ Asien’s
agrees with customers on the selling price of each transaction. This transaction price is generally based on the agreed upon sales
price. In Asien’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 that Asien’s
collects concurrently with revenue-producing activities are excluded from revenue.
Cost of revenue includes the cost of purchased
merchandise plus freight and any applicable delivery charges from the vendor to the company. Substantially all Asien’s sales
are to individual retail consumers (homeowners), builders and designers. The large majority of customers are homeowners and their
contractors, with the homeowner being key in the final decisions. The Company has a diverse customer base with no one client accounting
for more than 5% of total revenue.
Goedeker’s and Asien’s
disaggregated revenue by sales type for the three and six months ended June 30, 2020 and 2019 is as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Appliance sales
|
|
$
|
13,188,035
|
|
|
$
|
8,759,916
|
|
|
$
|
21,316,809
|
|
|
$
|
8,759,916
|
|
Furniture sales
|
|
|
2,944,013
|
|
|
|
1,702,284
|
|
|
|
4,326,378
|
|
|
|
1,702,284
|
|
Other sales
|
|
|
338,966
|
|
|
|
153,850
|
|
|
|
505,005
|
|
|
|
153,850
|
|
Total revenue
|
|
$
|
16,471,014
|
|
|
$
|
10,616,050
|
|
|
$
|
26,148,192
|
|
|
$
|
10,616,050
|
|
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 and six months ended June 30, 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 disaggregated revenue by
sales type for the three and six months ended June 30, 2020 and 2019 is as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Trucking
|
|
$
|
278,734
|
|
|
$
|
511,369
|
|
|
$
|
519,497
|
|
|
$
|
883,841
|
|
Waste hauling
|
|
|
321,919
|
|
|
|
272,028
|
|
|
|
439,049
|
|
|
|
376,357
|
|
Repairs
|
|
|
45,609
|
|
|
|
84,679
|
|
|
|
106,293
|
|
|
|
137,607
|
|
Other
|
|
|
120,665
|
|
|
|
108,250
|
|
|
|
148,187
|
|
|
|
153,919
|
|
Total services
|
|
|
766,927
|
|
|
|
976,326
|
|
|
|
1,213,026
|
|
|
|
1,551,724
|
|
Sales of parts and equipment
|
|
|
316,976
|
|
|
|
615,836
|
|
|
|
605,047
|
|
|
|
852,810
|
|
Total revenue
|
|
$
|
1,083,903
|
|
|
$
|
1,592,162
|
|
|
$
|
1,818,073
|
|
|
$
|
2,404,534
|
|
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 June 30, 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 June 30, 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.
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. For Asien’s, inventory mainly consists of appliances that are acquired for resale and is valued at the average
cost determined on a specific item basis. Inventory also consists of parts that are used in service and repairs and may or may
not be charged to the customer depending on warranty and contractual relationship 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 $463,687 and $425,000 at June 30, 2020 and December 31, 2019, respectively.
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.
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 June 30, 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
The Company records stock-based compensation
in accordance with ASC 718, Compensation-Stock Compensation. All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the
cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued
and are recognized over the employees required service period, which is generally the vesting period.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated
by dividing the net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted
earnings per share is calculated by dividing the net income available to common shareholders by the diluted weighted average number
of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of
shares adjusted for any potentially dilutive debt or equity. As the Company had a net loss for the three and six months ended June
30, 2020, the following 1,311,437 potentially dilutive securities were excluded from diluted loss per share: 90,000 for stock options,
400,000 for outstanding warrants and 821,437 related to the convertible note payable and accrued interest. As the Company had a
net loss for the three and six months ended June 30, 2019, the following 919,451 potentially dilutive securities were excluded
from diluted loss per share: 200,000 for outstanding warrants and 719,451 related to the convertible note payable and accrued interest.
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. For the six months ended June 30, 2020, the Company incurred operating
losses of $6,922,321 (before deducting losses attributable to non-controlling interests), cash flows from operations of $3,800,759
and negative working capital of $16,392,429. 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 Coronavirus Aid, Relief and Economic Security Act (the
“CARES Act”) provides for economic assistance loans through the United States Small Business Administration (the “SBA”).
On April 8, 2020 and April 10, 2020, and prior to the acquisition on April 28, 2020, Goedeker, Neese and Asien received $642,600,
$383,600 and $357,500, respectively, in Payroll Protection Program (“PPP”) loans from the SBA under the CARES Act.
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 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.
NOTE 3—BUSINESS SEGMENTS
Summarized financial information concerning
the Company’s reportable segments is presented below:
|
|
For
the Six Months ended June 30, 2020
|
|
|
For
the Six Months ended June 30, 2019
|
|
|
|
Retail
&
Appliances
|
|
|
Land
Management Services
|
|
|
Corporate
Services
|
|
|
Total
|
|
|
Retail
&
Appliances
|
|
|
Land
Management
Services
|
|
|
Corporate
Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
-
|
|
|
$
|
1,213,026
|
|
|
$
|
-
|
|
|
$
|
1,213,026
|
|
|
$
|
-
|
|
|
$
|
1,551,724
|
|
|
$
|
-
|
|
|
$
|
1,551,724
|
|
Sales
of parts and equipment
|
|
|
-
|
|
|
|
605,047
|
|
|
|
-
|
|
|
|
605,047
|
|
|
|
-
|
|
|
|
852,810
|
|
|
|
-
|
|
|
|
852,810
|
|
Furniture
and appliances revenue
|
|
|
26,148,192
|
|
|
|
|
|
|
|
-
|
|
|
|
26,148,192
|
|
|
|
10,616,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,616,050
|
|
Total
Revenue
|
|
|
26,148,192
|
|
|
|
1,818,073
|
|
|
|
-
|
|
|
|
27,966,265
|
|
|
|
10,616,050
|
|
|
|
2,404,534
|
|
|
|
-
|
|
|
|
13,020,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of sales
|
|
|
21,720,221
|
|
|
|
528,889
|
|
|
|
-
|
|
|
|
22,249,110
|
|
|
|
8,772,572
|
|
|
|
773,154
|
|
|
|
-
|
|
|
|
9,545,726
|
|
Total
operating expenses
|
|
|
6,431,104
|
|
|
|
2,299,153
|
|
|
|
521,653
|
|
|
|
9,251,910
|
|
|
|
2,193,887
|
|
|
|
2,757,490
|
|
|
|
79,877
|
|
|
|
5,031,254
|
|
Loss
from operations
|
|
$
|
(2,003,125
|
)
|
|
$
|
(1,009,969
|
)
|
|
$
|
(521,653
|
)
|
|
$
|
(3,534,755
|
)
|
|
$
|
(350,409
|
)
|
|
$
|
(1,126,110
|
)
|
|
$
|
(79,877
|
)
|
|
$
|
(1,556,396
|
)
|
|
|
For
the Three Months ended June 30, 2020
|
|
|
For
the Three Months ended June 30, 2019
|
|
|
|
Retail
& Appliances
|
|
|
Land
Management Services
|
|
|
Corporate
Services
|
|
|
Total
|
|
|
Retail
& Appliances
|
|
|
Land
Management Services
|
|
|
Corporate
Services
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
-
|
|
|
$
|
766,927
|
|
|
$
|
-
|
|
|
|
766,927
|
|
|
$
|
-
|
|
|
$
|
976,327
|
|
|
$
|
-
|
|
|
$
|
976,327
|
|
Sales
of parts and equipment
|
|
|
-
|
|
|
|
316,976
|
|
|
|
-
|
|
|
|
316,976
|
|
|
|
-
|
|
|
|
615,836
|
|
|
|
-
|
|
|
|
615,836
|
|
Furniture
and appliances revenue
|
|
|
16,471,014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,471,014
|
|
|
|
10,616,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,616,050
|
|
Total
Revenue
|
|
|
16,471,014
|
|
|
|
1,083,903
|
|
|
|
-
|
|
|
|
17,554,917
|
|
|
|
10,616,050
|
|
|
|
1,592,163
|
|
|
|
-
|
|
|
|
12,208,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of sales
|
|
|
13,609,051
|
|
|
|
273,621
|
|
|
|
-
|
|
|
|
13,882,672
|
|
|
|
8,772,572
|
|
|
|
559,404
|
|
|
|
-
|
|
|
|
9,331,976
|
|
Total
operating expenses
|
|
|
3,549,965
|
|
|
|
1,100,338
|
|
|
|
482,368
|
|
|
|
5,132,671
|
|
|
|
2,193,887
|
|
|
|
1,437,654
|
|
|
|
39,582
|
|
|
|
3,671,123
|
|
Loss
from operations
|
|
$
|
(688,002
|
)
|
|
$
|
(290,056
|
)
|
|
$
|
(482,368
|
)
|
|
$
|
(1,460,426
|
)
|
|
$
|
(350,409
|
)
|
|
$
|
(404,895
|
)
|
|
$
|
(39,582
|
)
|
|
$
|
(794,886
|
)
|
NOTE 4—RECEIVABLES
At June 30, 2020 and December 31, 2019,
receivables consisted of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Credit card payments in process of settlement
|
|
$
|
997,475
|
|
|
$
|
406,838
|
|
Vendor rebates receivable
|
|
|
2,694,078
|
|
|
|
1,380,369
|
|
Trade receivables from customers
|
|
|
172,051
|
|
|
|
695,249
|
|
Total receivables
|
|
|
3,863,604
|
|
|
|
2,482,456
|
|
Allowance for doubtful accounts
|
|
|
(14,614
|
)
|
|
|
(29,001
|
)
|
Accounts receivable, net
|
|
$
|
3,848,990
|
|
|
$
|
2,453,455
|
|
NOTE 5—INVENTORIES
At June 30, 2020 and December 31, 2019,
the inventory balances are composed of:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Machinery and Equipment
|
|
$
|
123,706
|
|
|
$
|
119,444
|
|
Parts
|
|
|
247,702
|
|
|
|
142,443
|
|
Appliances
|
|
|
3,476,039
|
|
|
|
1,562,359
|
|
Furniture
|
|
|
151,490
|
|
|
|
189,376
|
|
Other
|
|
|
51,906
|
|
|
|
53,356
|
|
Subtotal
|
|
|
4,050,843
|
|
|
|
2,066,978
|
|
Allowance for inventory obsolescence
|
|
|
(463,686
|
)
|
|
|
(451,546
|
)
|
Inventories, net
|
|
$
|
3,587,157
|
|
|
$
|
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 June 30, 2020 and December 31, 2019, deposits
with vendors totalled $345,502 and $294,960, respectively.
NOTE 7—PROPERTY AND EQUIPMENT
Property and equipment consist of the following
at June 30, 2020 and December 31, 2019:
Classification
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Buildings and improvements
|
|
$
|
5,338
|
|
|
$
|
5,338
|
|
Equipment and machinery
|
|
|
3,160,298
|
|
|
|
3,120,498
|
|
Tractors
|
|
|
2,723,296
|
|
|
|
2,694,888
|
|
Trucks and other vehicles
|
|
|
1,235,914
|
|
|
|
1,138,304
|
|
Leasehold improvements
|
|
|
117,626
|
|
|
|
117,626
|
|
Total
|
|
|
7,242,472
|
|
|
|
7,076,654
|
|
Less: Accumulated depreciation
|
|
|
(4,311,700
|
)
|
|
|
(3,709,227
|
)
|
Property and equipment, net
|
|
$
|
2,930,772
|
|
|
$
|
3,367,427
|
|
Depreciation expense for the six months
ended June 30, 2020 and 2019 was $645,979 and $684,686, respectively.
All property and equipment are pledged
to secure loans from Burnley, SBCC and Home State Bank as described and defined in the notes below.
NOTE 8—INTANGIBLE ASSETS
The following
provides a breakdown of identifiable intangible assets as of June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Customer Relationships
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
$
|
783,000
|
|
|
$
|
783,000
|
|
Accumulated amortization
|
|
|
(84,393
|
)
|
|
|
(56,023
|
)
|
Customer relationship identifiable intangible assets, net
|
|
|
698,607
|
|
|
|
726,977
|
|
Marketing Related
|
|
|
|
|
|
|
|
|
Identifiable intangible assets, gross
|
|
|
1,368,000
|
|
|
|
1,368,000
|
|
Accumulated amortization
|
|
|
(338,196
|
)
|
|
|
(201,400
|
)
|
Marketing related identifiable intangible assets, net
|
|
|
1,029,804
|
|
|
|
1,166,600
|
|
Total Identifiable intangible assets, net
|
|
$
|
1,728,411
|
|
|
$
|
1,893,577
|
|
In connection with the acquisitions of Goedeker and Neese, the
Company identified intangible assets of $2,117,000 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 7.8 years and amortization
expense amounted to $165,166 and $3,400 for the six months ended June 30, 2020 and 2019, respectively.
As of June 30,
2020, the estimated annual amortization expense for each of the next five fiscal years is as follows:
2020 (remainder)
|
|
$
|
165,166
|
|
2021
|
|
|
330,332
|
|
2022
|
|
|
324,665
|
|
2023
|
|
|
323,532
|
|
2024
|
|
|
122,132
|
|
Thereafter
|
|
|
462,584
|
|
Total
|
|
$
|
1,728,411
|
|
NOTE 9—ACQUISITIONS
Goedeker
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 “Goedeker Acquisition”).
The aggregate purchase price was $6,200,000
consisting of: (i) $1,500,000 in cash, subject to adjustment; (ii) the issuance of a promissory note in the principal amount of
$4,100,000; and (iii) up to $600,000 in earn out payments (as described below). As additional consideration, 1847 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.
The cash portion was decreased by the amount
of outstanding indebtedness of Goedeker Television for borrowed money existing as of the closing. As a result, the cash portion
was adjusted to $478,000.
The asset purchase agreement also 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 December 31, 2019.
On June 1, 2020, Goedeker entered into
a settlement agreement with Goedeker Television, Steve Goedeker, Mike Goedeker and 1847 Goedeker. The settlement agreement and
the related transaction documents that are exhibits to the settlement agreement were all signed on June 1, 2020 but will only become
effective upon the closing of Goedeker’s initial public offering (the “IPO”), which has not yet occurred. Pursuant
to the settlement agreement, the parties entered into an amendment and restatement of the 9% subordinated promissory note described
below (see Note 11). In addition, the parties agreed that the arbitration action described above would be settled effective upon
the closing of the IPO and that each party to such arbitration action would release all claims that it has against the other parties
to such action. As part of the settlement of the arbitration action, Goedeker agreed that the sellers will not have to pay the
$809,000 working capital adjustment amount resulting in a loss on the acquisition receivable in the period ending June 30, 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. For the trailing twelve (12) month period from the closing date, EBITDA
for the Goedeker Business was $(2,825,000), so Goedeker Television is not entitled to an earn our payment for that period.
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 June 30, 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 Goedeker
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 $614,337. The excess of the aggregate fair value of the net tangible
assets has been allocated to goodwill.
The table below shows the analysis for
the Goedeker asset purchase:
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 estimated useful life remaining on the property and equipment
acquired is 4 to 5 years.
Asien’s
On March 27, 2020, the Company and 1847
Asien entered into a stock purchase agreement with Asien’s and Joerg Christian Wilhelmsen and Susan Kay Wilhelmsen, as trustees
of the Wilhelmsen Family Trust, U/D/T Dated May 1, 1992 (the “Seller”), pursuant to which 1847 Asien agreed to acquire
all of the issued and outstanding capital stock of Asien’s.
On May 28, 2020, the Company,
1847 Asien, Asien’s and the Seller entered into an amendment to the stock purchase agreement and closing of the acquisition
of all of the issued and outstanding capital stock of Asien’s was completed (the “Asien’s Acquisition”).
The aggregate purchase price was $1,918,000 consisting of: (i)
$233,000 in cash, subject to adjustment; (ii) the issuance of an amortizing promissory note in the principal amount of $200,000;
(iii) the issuance of a demand promissory note in the principal amount of $655,000; and (iv) 415,000 common shares of the Company,
having a fair value of $1,037,500 (the “Shares”), which may be repurchased by the Company for a period of one year
following the closing at a purchase price of $2.50 per share.
The purchase price is subject to a post-closing
working capital adjustment provision based on the difference between actual working capital at closing and Goedeker Television’s
preliminary estimate of closing date working capital. If the final working capital exceeds the preliminary working capital
estimate, 1847 Asien must pay to the Seller an amount of cash that is equal to such excess. If the preliminary working capital
estimate exceeds the final working capital, the Seller must pay to 1847 Asien an amount in cash equal to such excess, provided,
however, that the Seller may, at its option, in lieu of paying such excess in cash, deliver and transfer to 1847 Asien a number
of Shares that is equal to such excess divided by $2.00.
The provisional fair value of the purchase consideration issued
to the Seller was allocated to the net tangible assets acquired. The Company accounted for the Asien’s Acquisition as the
purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded
as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net
assets acquired was approximately $162,272. 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 Asien’s will be included in the Company’s financial statements in future periods. The table below shows preliminary
analysis for the Asien’s Acquisition:
Provisional Purchase Consideration at preliminary fair value:
|
|
|
|
Common stock
|
|
$
|
1,037,500
|
|
Notes payable
|
|
|
855,000
|
|
Cash
|
|
|
233,000
|
|
Amount of consideration
|
|
$
|
2,125,500
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at preliminary fair value
|
|
|
|
|
Cash
|
|
$
|
1,501,285
|
|
Accounts receivable
|
|
|
235,746
|
|
Inventories
|
|
|
1,457,489
|
|
Other current assets
|
|
|
41,427
|
|
Property and equipment
|
|
|
157,052
|
|
Accounts payable and accrued expenses
|
|
|
(280,752
|
)
|
Customer deposits
|
|
|
(2,405,703
|
)
|
Notes payable
|
|
|
(509,272
|
)
|
Deferred tax liability
|
|
|
(35,000
|
)
|
Net tangible assets acquired
|
|
$
|
162,272
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
162,272
|
|
Consideration paid
|
|
|
2,125,500
|
|
Preliminary goodwill
|
|
$
|
1,963,228
|
|
The estimated useful life remaining on
the property and equipment acquired is 5 to 13 years.
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 Goedeker and Asien’s Acquisitions been completed as of January 1, 2019 or to project
potential operating results as of any future date or for any future periods. The revenue and net loss before non-controlling interest
of Asien since May 28, 2020 acquisition date through June 30, 2020 included in the consolidated income statement amounted to approximately
$1,185,980 and $188,781, respectively.
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues, net
|
|
$
|
33,759,878
|
|
|
$
|
19,360,577
|
|
Net loss allocable to common shareholders
|
|
$
|
(4,353,514
|
)
|
|
$
|
(759,928
|
)
|
Net loss per share
|
|
$
|
(1.26
|
)
|
|
$
|
(0.22
|
)
|
Weighted average number of shares outstanding
|
|
|
3,460,158
|
|
|
|
3,530,625
|
|
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%. There is no outstanding balance on the line of credit as of June
30, 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 $456,104 as of June 30, 2020, comprised of principal of $524,938 and net of unamortized
debt discount of $68,834.
The revolving note matures on April 5,
2022, provided that at Burnley’s sole and absolute discretion, it may agree to extend the maturity date for two successive
terms of one year each. The revolving note bears interest at a per annum rate equal to the greater of (i) the LIBOR Rate (as defined
in the loan and security agreement) plus 6.00% or (ii) 8.50%; provided that upon an event of default (as defined below) all loans,
all past due interest and all fees shall bear interest at a per annum rate equal to the foregoing rate plus 3.00%. Goedeker shall
pay interest accrued on the revolving note in arrears on the last day of each month commencing on April 30, 2019.
Goedeker may at any time and from time
to time prepay the revolving note in whole or in part. If at any time the outstanding principal balance on the revolving note exceeds
the lesser of (i) the difference of the total loan amount minus any reserves and (ii) the borrowing base, then Goedeker
shall immediately prepay the revolving note in an aggregate amount equal to such excess. In addition, in the event and on each
occasion that any net proceeds (as defined in the loan and security agreement) are received by or on behalf of Goedeker or 1847
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.
|
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 June 30, 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 June 30, 2020.
The table below shows the required ratio and actual ratio for such period.
Covenant
|
|
Actual Ratio
|
|
Required Ratio
|
Total debt ratio
|
|
(2.9)x
|
|
4.0x
|
Senior debt ratio
|
|
(0.7)x
|
|
1.5x
|
Interest coverage ratio
|
|
(1.2)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 June 30, 2020, the actual ratio was 0.36x 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.
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 term note amounts to
$877,604 as of June 30, 2020, comprised of principal of $1,130,826, capitalized PIK interest of $27,473, and net of unamortized
debt discount of $122,375 and unamortized warrant feature of $158,321.
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.
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 matured 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 principal balance of the note amounts to $2,953,867 as of June 30, 2020.
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 June 30, 2020.
On July 30, 2020, Home State Bank renewed
this loan to July 30, 2022. See Footnote 20, Subsequent Events.
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 six months ended June 30, 2020 and
2019, $145,690 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 $10,173 and $16,200 for the six months ended
June 30, 2020 and 2019, respectively.
9% Subordinated Promissory Note
A portion of the purchase price for the Goedeker 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 June 30, 2020 is $3,395,243, comprised of principal of $3,930,293 and net of unamortized debt discount of
$535,050.
Pursuant to the settlement agreement described
above (see Note 9), the parties entered into an amendment and restatement of the note that will become effective as of the closing
of the IPO, pursuant to which (i) the principal amount of the existing note shall be increased by $250,0000, (ii) upon the closing
of the IPO, Goedeker agreed to make all payments of principal and interest due under the note through the date of the closing,
and (iii) from and after the closing, the interest rate of the note shall be increased from 8% to 12%. Goedeker also agreed to
grant to the sellers, Goedeker Television, Steve Goedeker and Mike Goedeker, a security interest in all of the assets of Goedeker
to secure its obligations under the amended and restated note and entered into a security agreement with them that will become
effective upon the closing of the IPO.
At the closing of the IPO, Goedeker agreed to pay $516,301 to
the sellers, which is equal to the principal due and owing for quarters 2, 3 and 4 under the note plus accrued interest thereon,
which is equal to $324,672 as of June 1, 2020 and will accrue at a rate of $984 per day thereafter.
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 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 note contains customary events of default,
including in the event of: (i) non-payment; (ii) a default by 1847 Neese or Neese of any of their covenants under the stock purchase
agreement or any other agreement entered into in connection with the stock purchase agreement, or a breach of any of their representations
or warranties under such documents; or (iii) the bankruptcy of 1847 Neese or Neese.
The 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 June 30, 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.
8% Subordinated Amortizing Promissory
Note
A portion of the purchase price for acquisition of Asien’s
was paid by the issuance of an 8% subordinated amortizing promissory note in the principal amount of $200,000 by 1847 Asien to
the Seller. Interest on the outstanding principal amount will be payable quarterly at the rate of eight percent (8%) per annum.
The outstanding principal amount of the note will amortize on a one-year straight-line basis in accordance with a specified amortization
schedule, with all unpaid principal and accrued, but unpaid interest being fully due and payable on May 28, 2021. The remaining
balance of the note at June 30, 2020 is $201,447, comprised of principal of $200,000 and accrued interest of $1,447.
The note contains customary events of default,
including in the event of (i) non-payment, (ii) a default by 1847 Asien of any of its covenants under the stock purchase agreement,
the note, or any other agreement entered into in connection with the stock purchase agreement, or a breach of any of its representations
or warranties under such documents, or (iii) the bankruptcy of 1847 Asien.
The right of the Seller to receive payments
under the note is subordinated to all indebtedness of 1847 Asien to banks, insurance companies and other financial institutions
or funds, and federal or state taxation authorities.
Demand Promissory Note
A portion of the purchase price for acquisition
of Asien’s was paid by the issuance of demand promissory note in the principal amount of $655,000 by 1847 Asien to the Seller.
The note accrues interest at a rate of one percent (1%) computed on the basis of a 360-day year. Principal and accrued interest
on the note shall be payable 24 hours after written demand by the Seller. The note was repaid in June 2020.
PPP Loans
On April 8, 2020, April 10, 2020 and prior to the acquisition
on April 28, 2020, Goedeker, Neese and Asien received $642,600, $383,600 and $357,500, 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, Neese and Asien 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 $612,417 of the PPP loans as current liabilities and $771,283 as long-term
liabilities pending SBA clarification of the final loan terms.
TVT Direct Funding LLC
On May 28, 2020, 1847 Asien and Asien’s
entered into an agreement of sale of future receipts with TVT Direct Funding LLC (“TVT”), pursuant to which 1847 Asien
and Asien’s agreed to sell future receivables with a value of $685,000 to TVT for a purchase price of $500,000. 1847 Asien
and Asien’s agreed to deliver to TVT 20% of its weekly future receipts, or approximately $23,300, over the course of an estimated
seven-month term, or such date when the above amount of receivables has been delivered to TVT. 1847 Asien used the proceeds from
this sale to finance the Asien’s Acquisition. In addition to all other sums due to TVT under this agreement, 1847 Asien and
Asien’s agreed to pay to TVT certain additional fees, including a one-time origination fees of $25,000, as reimbursement
of costs incurred by TVT for financial and legal due diligence. The future payments under the TVT agreement are secured by a subordinated
security interest in all of the tangible and intangible assets of 1847 Asien and Asien’s. The remaining balance of the note
at June 30, 2020 is $410,374, comprised of principal of $591,803 and net of unamortized debt discount of $181,429.
The agreement with TVT contains customary
events of default, including the occurrence of the following: (i) a violation by 1847 Asien or Asien’s of any term, condition
or covenant in the agreement other than as the result of Asien’s business to ceases its operations, (ii) any representation
or warranty made by 1847 Asien or Asien’s is proven to have been incorrect, false or misleading in any material respect when
made, and (iii) a default by 1847 Asien or Asien’s under any of the terms, covenants and conditions of any other agreement
with TVT, if any.
4.5% Unsecured Promissory Note
On October 30, 2017, the Asien entered
into a stock repurchase agreement with Paul A. Gwilliam and Terri L. Gwilliam, co-trustees of the Gwilliam Family Trust (Paul and
Terri) pursuant to which Asien’s Appliance, Inc. issued to Paul and Terri a unsecured promissory note in the aggregate principal
amount of $540,000 for a term of 5 years or 60 months. The note bears interest at the rate of the 4.25% per annum. The balance
on the note is $65,374 as of June 30, 2020.
Loans on Vehicles
The Company entered into a three Retail
Installment Sale contracts used as company’s delivery trucks pursuant to which Asien’s Appliance, Inc. agreed to finance
at rates ranging 3.98% to 6.99% with an aggregate remaining principal amount of $79,498 as of June 30, 2020.
NOTE 12—FLOOR PLAN LOANS PAYABLE
At June 30, 2020 and December 31, 2019,
$0 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 June 30, 2020 and December 31, 2019 amounted
to $0 and $10,581, respectively. The balance of the floor plan payable was repaid in the six months ended June 30, 2020.
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 due April 5, 2020. 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. 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 $129,343 of financing costs related to the shares
and warrants in the six months ended June 30, 2020.
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.
In connection with the amendment, (i) the
Company issued to Leonite another 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 (ii) upon closing of the Asien’s Acquisition, 1847 Asien issued
to Leonite shares of common stock equal to a 5% interest in 1847 Asien. The amendment represented a prepayments of principal and
accrued interest resulting in a loss on extinguishment of debt of $773,856.
On May 4, 2020, Leonite converted $100,000
of the outstanding balance of the note into 100,000 common shares resulting is a loss on conversion of debt of $175,000. The remaining
net principal balance of the note is $821,437 at June 30, 2020.
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.
Unless an event of default as set forth
in the note has occurred, 1847 has the right to prepay principal amount of, and any accrued and unpaid interest on, the note at
any time prior to the maturity date at 115% of the principal amount (the “Premium”), provided, however, that if the
prepayment is the result of any of the occurrence of any of the transactions described in subparagraphs (i), (ii) or (iii) above
then such prepayment shall be the unpaid principal amount, plus accrued and unpaid interest and other amounts due but without the
Premium.
The note contains customary events of default, including in
the event of (i) non-payment, (ii) a breach by 1847 of its covenants under the securities purchase agreement or any other agreement
entered into in connection with the securities purchase agreement, or a breach of any of representations or warranties under the
note, or (iii) the bankruptcy of 1847. The note also contains a cross default provision, whereby a default by 1847 of any covenant
or other term or condition contained in any of the other financial instrument issued by of 1847 to Leonite or any other third party
after the passage all applicable notice and cure or grace periods that results in a material adverse effect shall, at Leonite’s
option, be considered a default under the note, in which event Leonite shall be entitled to apply all rights and remedies under
the terms of the note.
Under the note, Leonite has the right at
any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest
of the note into fully paid and non-assessable common shares or any shares of capital stock or other securities of the Company
into which such common shares may be changed or reclassified. The number of common shares to be issued upon each conversion of
the note shall be determined by dividing the conversion amount by the applicable conversion price then in effect. The conversion
amount is the sum of: (i) the principal amount of the note to be converted plus (ii) at Leonite’s option, accrued and unpaid
interest, plus (iii) at Leonite’s option, Default Interest, if any, plus (iv) Leonite’s expenses relating to a conversion,
plus (v) at Leonite’s option, any amounts owed to Leonite. The conversion price shall be $1.00 per share (subject to adjustment
as further described in the note for common share distributions and splits, certain fundamental transactions, and anti-dilution
adjustments), provided that at any time after any event of default under the note, the conversion price shall immediately be equal
to the lesser of (i) such conversion price less 40%; and (ii) the lowest weighted average price of the common shares during the
21 consecutive trading day period immediately preceding the trading day that 1847 receives a notice of conversion or (iii) the
discount to market based on subsequent financings with other investors.
Notwithstanding the foregoing, in no event
shall Leonite be entitled to convert any portion of the note in excess of that portion of the note upon conversion of which the
sum of (1) the number of common shares beneficially owned by Leonite and its affiliates (other than common shares which may be
deemed beneficially owned through the ownership of the unconverted portion of the note or the unexercised or unconverted portion
of any other security of the Company subject to a limitation on conversion or exercise analogous to the limitations contained in
the note, and, if applicable, net of any shares that may be deemed to be owned by any person not affiliated with Leonite who has
purchased a portion of the note from Leonite) and (2) the number of common shares issuable upon the conversion of the portion of
the note with respect to which the determination of this proviso is being made, would result in beneficial ownership by Leonite
and its affiliates of more than 4.99% of the outstanding common shares of the Company. Such limitations on conversion may be waived
(up to a maximum of 9.99%) by Leonite upon, at its election, not less than 61 days’ prior notice to the Company, and the
provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by Leonite,
as may be specified in such notice of waiver).
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.
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 June 30, 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.
The Company adopted ASU 2015-03 by deducting
$22,060 of net debt issuance costs from the long-term portion of the financing lease. Amortization of debt issuance costs totaled
$6,030 and $8,100 for the three months ended June 30, 2020 and 2019, respectively.
At June 30, 2020, annual minimum future
lease payments under this Master Lease Agreement are as follows:
|
|
Amount
|
|
2020 (remainder of year)
|
|
$
|
257,942
|
|
2021
|
|
|
464,269
|
|
2022
|
|
|
77,335
|
|
Total minimum lease payments
|
|
|
799,546
|
|
Less amount representing interest
|
|
|
131,299
|
|
Present value of minimum lease payments
|
|
|
668,247
|
|
Less current portion of minimum lease
|
|
|
(388,023
|
)
|
Less debt issuance costs, net
|
|
|
(19,025
|
)
|
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
|
|
$
|
90,021
|
|
The interest rate on the capitalized lease
is approximately 15.7%.
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, $250,000 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 June 30, 2020.
Supplemental balance sheet information
related to leases was as follows:
|
|
June 30,
2020
|
|
Operating lease right-of-use lease asset
|
|
$
|
624,157
|
|
Accumulated amortization
|
|
|
90,164
|
|
Net balance
|
|
$
|
533,993
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
65,451
|
|
Lease liability, long term
|
|
|
468,542
|
|
Total operating lease liabilities
|
|
$
|
533,993
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
80 months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.85
|
%
|
Maturities of the lease liability are as
follows:
|
|
For the Years
Ended
|
|
2020 (reminder of year)
|
|
$
|
50,000
|
|
2021
|
|
|
100,000
|
|
2022
|
|
|
100,000
|
|
2023
|
|
|
100,000
|
|
2024
|
|
|
100,000
|
|
Thereafter
|
|
|
216,667
|
|
Total lease payments
|
|
|
666,667
|
|
Less imputed interest
|
|
|
(132,674
|
)
|
Maturities of lease liabilities
|
|
$
|
533,993
|
|
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:
|
|
June 30,
2020
|
|
Operating lease right-of-use lease asset
|
|
$
|
2,300,000
|
|
Accumulated amortization
|
|
|
507,128
|
|
Net balance
|
|
$
|
1,792,872
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
375,885
|
|
Lease liability, long term
|
|
|
1,416,987
|
|
Total operating lease liabilities
|
|
$
|
1,792,872
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term - operating leases
|
|
45 months
|
|
|
|
|
|
|
Weighted Average Discount Rate - operating leases
|
|
|
6.5
|
%
|
Maturities of the lease liability are as
follows:
|
|
For the Years
Ended
|
|
2020 (remainder of year)
|
|
$
|
270,000
|
|
2021
|
|
|
540,000
|
|
2022
|
|
|
540,000
|
|
2023
|
|
|
540,000
|
|
2024
|
|
|
135,000
|
|
Total lease payments
|
|
|
2,025,000
|
|
Less imputed interest
|
|
|
(232,128
|
)
|
Maturities of lease liabilities
|
|
$
|
1,792,872
|
|
Asien Office Lease
The company has an office and showroom
space that has been leased on a month-by-month basis. The Company elected the following practical expedients: the Company has not
reassessed whether any expired or existing contracts are or contain leases, the Company has not reassessed lease classification
for any expired or existing leases; the Company has not reassessed initial direct costs for any existing leases; and the Company
has not separated lease and non-lease components. The Company’s adoption of this ASU resulted in no change to the Company’s
results of operations or balance sheet.
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 in Parent Management Fees for the six months ended June 30, 2020 and 2019.
Offsetting Management Services Agreements
1847 Neese entered into an offsetting management
services agreement with the Manager on March 3, 2017, Goedeker entered into an offsetting management services agreement with the
Manager on April 5, 2019 and 1847 Asien entered into an offsetting management services agreement with the Manager on May 28, 2020.
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, 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) and 1847 Asien
appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of
adjusted net assets (as defined in the management services agreement); 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, Goedeker or 1847 Asien, 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, Goedeker or 1847 Asien 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, Goedeker or 1847 Asien, 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,
Goedeker or 1847 Asien, 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, Goedeker or 1847 Asien 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, Goedeker
or 1847 Asien, 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, Goedeker or 1847 Asien
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, Goedeker
or 1847 Asien in connection with performing services under the offsetting management services agreements.
1847 Neese expensed $125,000 in management
fees for the six months ended June 30, 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, $575,808 due from 1847 Neese to the Manager is classified as a long-term accrued liability as of June 30, 2020.
Goedeker expensed $125,000 and $58,790
in management fees for the six months ended June 30, 2020 and 2019, respectively. 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, $188,653 due from Goedeker to the Manager is classified as an accrued
liability as of June 30, 2020.
1847 Asien expensed $28,022 in management
fees for the six months ended June 30, 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 June 30, 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 June 30, 2020 and December 31, 2019,
the Manager has funded the Company $65,844 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 June 30, 2020 and December 31, 2019, the Manager has advanced $119,400
of the note and the Company has accrued interest of $21,944 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.
NOTE 17—SHAREHOLDERS’ DEFICIT
Allocation Shares
As of June 30, 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 June 30, 2020 and December 31, 2019. As of June 30, 2020 and December 31, 2019, the Company had 3,780,625 and
3,165,625 common shares issued and outstanding, respectively. The common shares entitle the holder thereof to one vote per share
on all matters coming before the shareholders of the Company for a vote.
On April 5, 2019, the Company issued 50,000
common shares to Leonite pursuant to the securities purchase agreement (see Note 13).
On May 4, 2020, the Company issued 100,000
common shares to Leonite upon conversion of $100,000 of the outstanding balance of the secured convertible promissory note resulting
is a loss on conversion of debt of $175,000 (see Note 13).
On May 28, 2020, the Company issued 415,000
common shares, having a fair value of $1,037,500, to the Seller in connection with the Asien’s Acquisition (see Note 9).
On June 4, 2020, the Company issued 100,000
common shares to a service provider for services provided to the Company. The fair market value of the services amounted to $245,000.
Options
On May 11, 2020, the Company granted options
to directors 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.
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Contractual
Term in Years
|
|
Outstanding at January 1, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
90,000
|
|
|
$
|
2.50
|
|
|
|
5.0
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2020
|
|
|
90,000
|
|
|
$
|
2.50
|
|
|
|
4.9
|
|
Exercisable at June 30, 2020
|
|
|
90,000
|
|
|
$
|
2.50
|
|
|
|
4.9
|
|
As of June 30, 2020, vested outstanding
stock options had no intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock.
The Company recognizes compensation expense
for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally
the vesting period. The following assumptions were used to calculate share-based compensation expense for the six months ended
June 30, 2020:
Volatility
|
|
|
128.52
|
%
|
Risk-free interest rate
|
|
|
0.36
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected term
|
|
|
5 years
|
|
Warrants
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Intrinsic
|
|
|
|
of
|
|
|
average
|
|
|
average
|
|
|
value
|
|
|
|
Common Stock
|
|
|
exercise
|
|
|
life
|
|
|
of
|
|
|
|
Warrants
|
|
|
price
|
|
|
(years)
|
|
|
Warrants
|
|
Outstanding, January 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
200,000
|
|
|
|
1.25
|
|
|
|
5.00
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
200,000
|
|
|
|
1.25
|
|
|
|
4.26
|
|
|
|
|
|
Granted
|
|
|
200,000
|
|
|
|
1.25
|
|
|
|
5.00
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding, June 30, 2020
|
|
|
400,000
|
|
|
$
|
1.25
|
|
|
|
4.32
|
|
|
$
|
808,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2020
|
|
|
400,000
|
|
|
$
|
1.25
|
|
|
|
4.32
|
|
|
$
|
808,000
|
|
On April 5, 2019, the Company issued a
warrant to purchase 200,000 common shares to Leonite pursuant to the securities purchase agreement. On May 11, 2020, the Company
issued another warrant to purchase 200,000 common shares to Leonite pursuant to an amendment to the securities purchase agreement.
The warrants have a term of five years, an exercise price of $1.25 per share (subject to adjustment), and may be exercised on a
cashless basis (see Note 13).
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 128.52%, (iii) weighted average risk-free interest rate of 0.36%, (iv) expected life of five years, and
(v) estimated fair value of the common shares of $2.50 per share in the amount of $448,211 and recorded as part of the Loss on
Extinguishment of Debt in the six months ended June 30, 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.
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. At June 30, 2020
and December 31, 2019 the warrants were valued at $2,250,000 and $122,344, respectively.
In connection with the amendment, (i) the Company
issued to Leonite another 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 (ii) upon closing of the Asien’s Acquisition, 1847 Asien issued
to Leonite shares of common stock equal to a 5% interest in 1847 Asien. At June 30, 2020 the warrants were valued at $118,500.
Noncontrolling Interests
The Company owns 55.0% of 1847 Neese, 70%
of 1847 Goedeker and 95% of 1847 Asien. 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, 1847 Goedeker and 1847 Asien are included in the consolidated statement
of income. The net loss attributable to the 45% non-controlling interest of 1847 Neese amount to $407,299 and $501,647 for the
six months ended June 30, 2020 and 2019, respectively. The net loss attributable to the 30% non-controlling interest of 1847 Goedeker
amounted to $1,590,584 for the six months ended June 30, 2020 and $195,822 for the period from April 5, 2019 (acquisition) to June
30, 2019. The net loss attributable to the 5% non-controlling interest of 1847 Asien amounted to $9,439 for the period from May
29, 2020 to June 30, 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.
NOTE 19—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information
for the six months ended June 30, 2020 and 2019 were as follows:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Interest paid
|
|
$
|
243,063
|
|
|
$
|
423,539
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Business Combinations:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
1,734,663
|
|
|
$
|
3,308,301
|
|
Property and equipment
|
|
$
|
157,052
|
|
|
$
|
207,604
|
|
Working capital adjustment receivable
|
|
$
|
-
|
|
|
$
|
553,643
|
|
Assumed liabilities
|
|
$
|
(3,195,726
|
)
|
|
$
|
(4,668,977
|
)
|
Goodwill
|
|
$
|
1,720,726
|
|
|
$
|
6,381,715
|
|
Net cash acquired in acquisition of Goedeker
|
|
$
|
1,501,285
|
|
|
$
|
1,285,214
|
|
Financing:
|
|
|
|
|
|
|
|
|
Due to seller (cash paid to seller day after closing)
|
|
$
|
233,000
|
|
|
|
-
|
|
Term Loan
|
|
$
|
-
|
|
|
$
|
1,500,000
|
|
Debt discount financing costs
|
|
|
-
|
|
|
|
(178,000
|
)
|
Warrant feature upon issuance of term loan
|
|
|
-
|
|
|
|
(229,244
|
)
|
Term loan, net
|
|
$
|
-
|
|
|
$
|
1,092,756
|
|
|
|
|
|
|
|
|
|
|
Line of Credit
|
|
$
|
-
|
|
|
$
|
754,682
|
|
Debt discount on line of credit
|
|
|
-
|
|
|
|
(128,682
|
)
|
Issuance of common shares on promissory note
|
|
|
-
|
|
|
|
(137,500
|
)
|
Line of Credit, net
|
|
$
|
-
|
|
|
$
|
488,500
|
|
|
|
|
|
|
|
|
|
|
Promissory Notes
|
|
$
|
855,000
|
|
|
$
|
714,286
|
|
Promissory Note original issue and debt discount
|
|
|
-
|
|
|
|
(79,286
|
)
|
Warrants issued in conjunction with notes payable
|
|
|
|
|
|
|
(292,673
|
)
|
Promissory Note, net
|
|
$
|
855,000
|
|
|
$
|
342,327
|
|
|
|
|
|
|
|
|
|
|
9% Subordinated Promissory Note
|
|
$
|
-
|
|
|
$
|
4,700,000
|
|
Debt discount financing costs
|
|
|
-
|
|
|
|
(215,500
|
)
|
9% Subordinated Promissory Note, net
|
|
$
|
-
|
|
|
$
|
4,484,500
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
229,244
|
|
Common stock
|
|
|
415
|
|
|
|
-
|
|
Additional Paid in Capital
|
|
$
|
829,585
|
|
|
$
|
430,173
|
|
NOTE 20—SUBSEQUENT EVENTS
In accordance with ASC 855-10, the Company
has analyzed its operations subsequent to June 30, 2020 to the date these financial statements were issued and has determined that
it does not have any material subsequent events to disclose in these financial statements, except as set forth below.
Underwriting Agreement, Representative’s
Warrants and Closing of IPO
On July 30, 2020, Goedeker entered into an
underwriting agreement (the “Underwriting Agreement”) with ThinkEquity, a division of Fordham Financial Management,
Inc., (the “Representative”), as representative of the underwriters set forth on Schedule 1 thereto (collectively,
the “Underwriters”), relating to the IPO. Under the Underwriting Agreement, Goedeker agreed to sell 1,111,200 shares
of common stock to the Underwriters, and also agreed to grant the Underwriters’ a 45-day over-allotment option to purchase
an additional 166,577 shares of common stock, at a purchase price per share of $8.325 (the offering price to the public of $9.00
per share minus the underwriters’ discount).
Pursuant to the Underwriting Agreement, Goedeker
also agreed to issue to the Representative and/or its affiliates warrants to purchase a number of shares of common stock equal
in the aggregate to 5% of the total shares sold. The warrants will be exercisable at any time and from time to time, in whole or
in part, beginning on January 26, 2021 until July 30, 2025, at a per share exercise price equal to $11.25 (125% of the public offering
price per share).
On August 4, 2020, Goedeker sold 1,111,200
shares of its common stock to the Underwriters for total gross proceeds of $10,000,800. After deducting the underwriting commission
and expenses, Goedeker received net proceeds of approximately $8,992,029. Goedeker also issued warrants for the purchase of 55,560
shares of common stock to affiliates of the Representative.
Repayment of Northpoint Loan
The Northpoint loan was terminated on May
18, 2020 and there is no outstanding balance as of June 30, 2020.
Repayment of Burnley Loan
On August 4, 2020, Goedeker used a portion
of the proceeds from the IPO to repay the loan from Burnley (Note 9). The total payoff amount was $118,194, consisting of principal
of $32,350 interest of $42 and prepayment, legal, and other fees of $85,802
Repayment of SBCC Loan
On August 4, 2020, Goedeker used a portion of the proceeds from
the IPO to repay the loan from SBCC (Note 10). The total payoff amount was $1,122,412 consisting of principal of $1,066,640, interest
of $11,773 and prepayment, legal, and other fees of $43,999.
Leonite Conversion and Repayment
On July 21, 2020, Leonite converted $50,000
of the outstanding balance of the secured convertible promissory note (Note 12) into 50,000 common shares of 1847 Holdings.
On August 4, 2020, Goedeker used a portion
of the proceeds from the IPO to repay the secured convertible promissory note. The total payoff amount was $780,653, consisting
of principal of $771,431 and interest of $9,222.
Payment on Subordinated Promissory
Note
In accordance with the terms of the amended
and restated note that became effective upon closing of the IPO on August 4, 2020 (Note 11), Goedeker used a portion of the proceeds
from the IPO to pay $1,083,842 of the balance of the note.
Renewal of Home State Bank loan
As previously disclosed, Neese, a subsidiary
of 1847 Holdings LLC, entered into a business loan agreement (the “Loan Agreement”) with Home State Bank (the “Lender”)
on June 13, 2018 for a revolving line of credit, pursuant to which Neese issued a revolving promissory note to the Lender in the
principal amount of $3,654,074 with an annual interest rate of 6.85% (the “Note”), which matured on July 20, 2020.
Neese also entered into a commercial security agreement (the “Security Agreement”) with the Lender, pursuant to which
the Note was secured by a security interest in certain assets of Neese.
On July 30, 2020, Neese entered into a
change in terms agreement (the “Amendment”) with the Lender, pursuant to which: (i) the maturity date was extended
to July 30, 2022; (ii) the interest rate was changed to 5.50%; (iii) Neese agreed to pay accrued interest in the amount of $95,970.42;
(iv) Neese agreed to make payments of $30,000.00 beginning on September 30, 2020 and continuing thereafter on a monthly basis until
maturity at which time a final interest payment is due; (v) Neese agreed to make a payment of $260,000.00 on December 30, 2020
and December 30, 2021; (vi) Neese agreed to make two new advances under the Note in the amounts $51,068.19 and $517,528.86
to repay in full Neese’s capital lease transactions due to Utica Leaseco LLC; (vii) Neese agreed to pay a loan fee of $17,500.00
at the time of signing the Amendment; and (viii) the Lender agreed to make a loan advance to checking for $17,500.00.
Except for the foregoing amendments, the
terms of the Loan Agreement, the Note and the Security Agreement remain unchanged and in full force and effect.
Asien Promissory Note
On July 29, 2020, 1847 Asien executed a
securities purchase agreement with the Wilhelmsen Family Trust, (the “Asien’s Seller”. Pursuant to the agreement,
the Asien’s Seller sold to the 1847 Asien, 415,000 common shares of 1847 Holdings LLC at a purchase price of $2.50 per share.
As consideration, 1847 Asien issued to the Asien’s Seller a two-year, 6% amortizing promissory note in the aggregate principal
amount of $1,037,500.
One-half (50%) of the outstanding principal
amount of this Note ($518,750) and all accrued interest thereon will be amortized on a two-year straight-line basis and is payable
quarterly. The second-half (50%) of the outstanding principal amount of this Note ($518,750) with all accrued, but unpaid interest
thereon is due on the second anniversary of the note, along with any other unpaid principal or accrued interest.
Arvest Promissory Note and Security
Agreement
On July 19, 2020, Asien’s entered
into a Promissory Note and Security Agreement with Arvest Bank dated July 10, 2020 (the “Arvest Loan Agreement”), pursuant
to which Arvest Bank will provide to Asien’s a revolving loan for up to $400,000 (the “Arvest Loan”). The term
of the Arvest Loan is one year. Interest will accrue on the Arvest Loan at a rate of 5.25%, subject to change in accordance with
the Variable Rate (as defined in the Arvest Loan Agreement), the calculation for which is the U.S. Prime Rate plus 2%. Asien’s
will pay accrued interest on the outstanding balance of the Arvest Loan in regular monthly payments beginning on August 10, 2020.
A final payment of the entire unpaid outstanding principal and interest is due on July 10, 2021. Asien’s may prepay the Arvest
Loan in full or in part at any time.
Pursuant to the terms of the arvest Loan
Agreement, Asien’s has granted to Arvest Bank a security interest in its inventory and equipment, accounts and other rights
of payments, and general intangibles, as such terms are defined in the Uniform Commercial Code. The Arvest Loan Agreement contains
customary events of default, including the occurrence of the following: (i) a failure to make a payment in full when due; (ii)
insolvency or bankruptcy; (iii) a merger, dissolution, reorganization of Asien’s; (iv) a consolidation with, or the acquisition
of substantially all of the assets of, another entity; and (v) a violation by Asien of any term, condition or covenant in the Arvest
Loan Agreement. The Arvest Loan Agreement contains customary representations, warranties, and affirmative and negative covenants
for a loan of this type.